Hardware's Awkward Stage - Industry Trend or Event

Industry Standard, The, April 2, 2001 by David Lake

PC and server sates are slow but still growing.

What with all those nosediving earnings estimates from the likes of Intel and Dell and missed projections from powerhouses like Cisco, you'd think the high-tech hardware business was about to go up in smoke.

To be sure, the news has been particularly rotten lately, both in the consumer sector and in business information technology. (Sales are split about evenly between the two.)

A look at the numbers, though, shows a hardware industry that's less on its deathbed than one that's going through an awkward stage of adolescence.

Last year global business spending for personal computers and servers grew 8 percent, down from 12 percent in 1999, according to the Gartner Group. And retail sales of PCs in the United States saw a meager 1 percent growth in 2000, says PC Data.

But why? Hardware manufacturers and retailers blame their woes on a slowing U.S. economy and a consequent decline in consumer confidence. Furthermore, manufacturers in the business sector are getting a smaller slice of the information technology pie, which also includes software, communications and other IT services. This relative slowdown has them antsy. Last year, according to the Gartner Group, hardware spending accounted for 19 percent of total IT spending. By 2003, that proportion will drop to 17 percent.

But growth in total IT spending has historically outpaced growth in hardware spending. Even during 1999, as firms rushed to upgrade computers and networks in preparation for Y2K, global hardware spending grew 12 percent, to $416 billion, while services and communications spending grew 15 percent and 19 percent, respectively. Still, the total IT pie is getting bigger.

Because hardware penetration rates are already high in U.S. firms, manufacturers can expect the rate of growth to continue to slow. Even rapidly growing business markets like Japan and Taiwan will soon see decreased growth in spending on computers and servers. According to the Gartner Group, most regions will see growth rates of 6 percent to 7 percent in the next few years.

The consumer market seems to be experiencing the same growing pains.

"Household penetration rates [for PCs] are about 52 percent, and that hasn't changed much since 1999," says IDC senior analyst Anne Bui. "I expect PC penetration rates to be only around mid-60 percent by the end of the decade."

Hardware vendors are already watching unsold inventory gather dust. An inventory-to-sales analysis by The Standard shows a nearly 1 percent increase in unsold inventories since 1999. That's not good, but doomsayers should keep in mind that 1999 saw a huge spike in growth. The current level is the rule, not the exception.

                   Overall IT Spending Outpaces Hardware
                    GLOBAL GROWTH FORECAST BY CATEGORY
     OVERALL HARD- SOFT- COMMUNI-
          IT  WARE  WARE  CATIONS SERVICES
1995     20%   30%   14%      27%       9%
1997      6%    7%    5%      13%       5%
1999     15%   12%   13%      15%      19%
2001     10%    7%   15%      12%      11%
2003     10%    7%   15%       6%      11%
SOURCE: VBS WARBURG, FEBRUARY, 2001
                 Hardware Spending Will Level Out Globally
           GROWTH IN GLOBAL BUSINESS HARDWARE SPENDING BY REGION
                            1999  2000  2001  2002 2003
North America               5.1% 10.7%  7.5%  7.7% 6.9%
South, Central America [*]  1.6% 20.0% 10.6%  6.9% 3.8%
Western Europe             -1.9%  7.1%  7.9%  4.8% 6.0%
Central, Eastern Europe    -2.5%  1.7%  1.3%  5.4% 6.2%
Japan                      21.6% 11.1%  5.2%  7.7% 7.2%
Asia-Pacific               19.1% 25.5% 15.0% 11.2% 8.2%
Rest of world              -7.6% 14.5%  8.1%  5.4% 3.0%
(*.)INCLUDES MEXICO AND THE CARIBBEAN.
SOURCE: GARTNER GROUP, OCTOBER 2000
                      Slow Growth Ahead for Hardware
                   GLOBAL BUSINESS SPENDING BY CATEGORY
                   1999     2000     2001     2002     2003
Hardware         $415.5   $463.4   $501.2   $537.2   $572.5
Software         $159.3   $187.6   $225.4   $264.1   $315.8
Communications $1,081.3 $1,196.4 $1,313.6 $1,431.5 $1,560.6
Services         $475.0   $541.3   $625.4   $726.2   $839.0
Total          $2,131.1 $2,388.7 $2,665.6 $2,959.0 $3,287.9
IN BILLIONS.
SOURCE: GARTNER GROUP, OCTOBER 2000
                     Inventory Starts Collecting Dust
                       INVENTORY-TO-SALES RATIO [*]
                         FOR 15 HARDWARE COMPANIES
     15-company avg.
1996           9.31%
1997           9.40%
1998           7.20%
1999           6.27%
2000           7.16%
(*.)INVENTORY EXPRESSED AS A PERCENTAGE
OF SALES. COMPANIES INCLUDE MAKERS
OF PCS, SERVERS AND CHIPS.
SOURCE: THE STANDARD FROM
BLOOMBERG AND SEC FILINGS
                            Computer Sales Grew
                            in 2000, but Barely
                            U.S. RETAIL PC UNIT
                          SALES TREND BY QUARTER
     Retail PC units
1Q97             0.9
1Q98             1.8
1Q99             2.0
4Q99             2.5
1Q00             2.4
4Q00             2.1
IN MILLIONS.
SOURCE: PC DATA, MARCH 2001
                            The U.S. Will Still
                           Lead in PC Shipments
                            WORLDWIDE QUARTERLY
                           PC SHIPMENT FORECAST
              1Q98 4Q98 1Q99 4Q99 1Q00 4Q00 1Q01 4Q01
Asia-Pacific   2.3  2.9  2.9  4.0  4.2  5.4  4.9  6.6
Japan          2.0  2.0  2.7  2.9  3.7  3.4  4.2  4.2
Rest of world  2.9  3.9  3.1  4.7  4.0  5.4  4.5  6.3
U.S.           7.8 10.5  9.7 12.2 11.3 11.9 10.8 13.0
W. Europe      5.3  7.9  6.3  8.9  6.8  9.3  7.4 10.6
Total         20.4 27.2 24.7 32.7 30.0 35.4 31.8 40.8
IN MILLIONS.
SOURCE: IDC, MARCH 2001