Asian crisis crosses the Pacific

The Asian financial crisis may be one year old, but its impact on the computer industry is just beginning to hit here in the United States in the form of reduced revenues at bellwether technology companies such as Motorola.

Although there may be reduced service levels from financially struggling vendors, the ripple effect of lower component prices and competition may actually be beneficial to IT buyers, experts say.

"You really started seeing the Asian flu showing up in financial statements over here in the fourth quarter of 1997 and especially in the first quarter 1998," said Kevin Hause, a senior analyst at International Data Corp., in Mountain View, Calif. "Before that it was more like a coming tsunami that everyone saw on the horizon, but the beach town was still intact until mid-fourth quarter when it came crashing through."

Asia's currency devaluation continues to lower prices for PC components that are manufactured there. That, in turn, can lead to savings for users.

"I don't want to sound like I'm gloating over the Asian crisis," said Michael Prince, CIO at the Burlington Coat Factory, in Burlington, N.J. "But in retrospect over the past 12 months, if we look at the value that we have today in terms of the equipment we buy, the bargains are spectacular."

On the negative side, major hardware and software vendors have counted on rapidly growing Asian sales for revenue growth, which in turn help fund such customer-oriented programs as sales and support, and research and development.

Last week Motorola reported that its second-quarter earnings for 1998 plummeted to $6 million from $392 million in the same quarter of last year. Motorola CEO Christopher B. Galvin said the financial turmoil in Asia has been a major contributor to its woes.

"The negative impact on our business is likely to continue for at least the remainder of the year," Galvin said. The company will lay off 10 percent of its workforce, but will not have to delay product delivery plans.

Motorola is far from alone. Last week, the Semiconductor Industry Association (SIA) said worldwide chip sales in May fell 13 percent from the year-earlier period. It predicts that chip sales this year will drop 1.8 percent, compared to the 17 percent growth last year, due in large part to the slump in Asia.

Chip vendor Advanced Micro Devices last week reported a net loss on lower sales for its second quarter. Sales declined by 3 percent from the previous quarter, and by 11 percent from the second quarter of 1997. AMD blamed problems on the weakening demand in the worldwide semiconductor industry and slow growth in communications infrastructure improvements in Asia.

In addition to the chip industry, companies heavily exposed in Asia include 3Com, IBM, Microsoft, and Sun Microsystems.

"Asia continues to face economic uncertainty, and does not represent the growth opportunity that it did in past years," said 3Com Chairman and CEO Eric Benhamou in statements regarding his company's fourth-quarter results. "It is unclear when this will change."

IBM, which entered its "quiet" period last week prior to announcing second-quarter results, cautioned financial analysts in April that currency weaknesses in Asia were adversely impacting revenues. Microsoft, which will announce its quarterly results this week, has warned for the past several quarters that Asian woes will contribute to flat revenues.

And John B. Jones, Jr., a Wall Street analyst at Salomon Smith Barney, in San Francisco, downgraded Sun's stock last week primarily because the outlook in Asia, where Sun earns roughly 20 percent of its revenues, still looks bad.

Other vendors that expected to be hit are the Asian/Japanese PC manufacturers such as NEC, Toshiba, Fujitsu, and Samsung.

To date, computer companies have largely offset the revenue losses and increased competition in Asia with growth in the United States and Europe. But the mitigating factors are not likely to help much longer.

"Companies have invested a lot of resources in developing those markets. The rug's been pulled out from under them, and it's going to be that way for a while," said Thomas P. Mottley, an international trade specialist at the U.S. Department of Commerce, in New York.

In particular, PC manufacturers may begin to feel price pressures from inexpensive imports.

"The Asia/Pacific is very intensive in trade, we import a lot of their goods," said Mary Olsson, an analyst at Dataquest, in San Jose, Calif. "So companies like Compaq are going to have to compete with goods coming in at a lower price point from Toshiba, for example. Compaq may have to lower their prices or change the direction of their products."

Still, some experts believe companies may be using the Asian crisis as a scapegoat. For instance, analysts said Motorola may have made errors in its semiconductor and cellular business, misjudging timing and demand. Another expert believes the crisis may be receiving magnified attention because of Asia's high profile.

"The Asia downturn is great, but there has always been a soft spot somewhere in the world," said Chris Nicoll, an analyst at Current Analysis, in Sterling, Va.

"The industry overall is getting such fantastic growth right now, it just exacerbates how low Asia has gotten," Nicoll said.