PURCHASING HOTLINE

By Staff -- PURCHASING, 4/20/2000

ECONOMY

All evidence points to strong consumer spending in first quarter 2000. Monthly data for real (inflation-adjusted) consumer spending show growth from fourth quarter 1999 when consumers upped spending at an annual rate of 5.9%. As consumer spending makes up two-thirds of GDP, this bodes for a big first-quarter economic growth figure. Confirming this view, anecdotal reports from Market News Service (MNS) show strong recent activity at both retail stores and auto dealerships. "Retailers say higher gasoline prices and interest rates are having no discernable impact on people's spending habits," MNS reports. Meantime, MNS says auto dealers report "another strong month in March," albeit with "enough spotty moments to likely prevent a repeat of February's breathtaking results."

There are tiny signs to suggest that the Fed's campaign to slow the economy may be taking root. Evidence: New home sales fell half a percentage point in February. U.S. durable goods orders fell 2.3% in February, representing a second consecutive monthly decline. The Housing Market Index (HMI) from the National Association of Home Builders (nahb) fell eight points in March to its lowest reading in 25 months (61). And the Conference Board (CB) reports that its consumer confidence index (CCI) dipped a couple of points in March on a decline in future expectations. While the CCI remains near its record high point, CB also reports slight declines in consumers' future plans to buy autos, homes and major appliances.

Despite minor evidence that economic growth may be faltering, some Fed policymakers are pushing for more decisive interest-rate moves. According to minutes from the fomc's February meeting, "A few members expressed a preference for an increase of 50 basis points in the federal funds rate in order to provide greater assurance against a buildup of inflationary expectations and inflation over coming months." The minutes also note that "Other members acknowledged that the Committee might need to move more aggressively at a later meeting should imbalances continue to build and inflation and inflation expectations clearly begin to pick up."

Asia's back with a vengeance, economically speaking. Analyst Stephen Roach of Morgan Stanley Dean Witter (msdw) describes the region as being in the "early stages of a powerful cyclical boom." Latest forecast from msdw places growth in non-Japan Asia at an average 6.7% for 2000-2001. Roach classifies the outlook as "a stunning snapback from the crisis-induced outcome of +2.0% in 1998." What's more, he opines that "the risks remain decidedly on the upside," meaning that growth in Asia is more likely to exceed rather than fall short of the standing forecast.

Turn to page 30 to see who won Purchasing's 1999 Crystal Ball economic forecasting contest. An entry coupon for the 2000 contest appears on page 31. Eligible contestants can also submit their forecasts at Purchasing Online (www.purchasing.com).

There's a bit of good news on the inflation front. Future Inflation Gauge (usfig) from the Economic Cycle Research Institute in New York dipped slightly in February to 122.8 from 122.9 in January. The smoothed annual growth rate slipped to 14.6% from 16.4% on a "slight easing in the growth rates of real-estate loans and industrial materials prices, along with a marginal dip in the percentage of purchasing managers reporting slower deliveries." Nonetheless, ecri warns that, "After five months of significant back-to-back increases, underlying inflationary pressures remain in a strong cyclical upswing."

Final revision to GDP estimates for fourth quarter 2000 put the annualized economic growth figure at 7.3%, up from a preliminary (second) estimate of 6.9%. The upward revision is due mostly to a reduction in the net trade deficit (exports figures were revised up while import totals were revised down). Business investment was also revised upward slightly as spending on information technology rose at a 12.5% annualized rate (up from 9.8%).

PRICES

Microprocessor tags will fall throughout the year. While MPU unit shipments increased 21% in January, average prices fell 11%. Intel, which owns about 80% of the processor market, is feeling heat at the high end from AMD, which makes the Athlon processor, a rival to Intel's Pentium III. Look for Intel to keep pressure on AMD by lowering tags throughout 2000.

Buyers can expect to pay more for flash memory this year. Reason: Demand is outstripping supply. Market leaders Intel and AMD are adding flash capacity, but the market is expected to grow more than 100% this year. That means prices will rise and flash will remain in tight supply. Average selling prices will rise from $3.74 in 1999 to $5.25 in 2000, according to IC Insights. Cell phones, digital cameras and MP3 players are driving flash demand.

Compaq has introduced a notebook PC for $1,099. Complementing the Compaq Notebook 100 is a suite of Compaq Online Services-a set of tools, hardware, and e-commerce services. These tools include Windows 98 SE operating system, full virus protection with Norton AntiVirus, and Adobe Acrobat Reader. The Notebook 100 is configured with a 475MHz AMD K6-2 processor with 3DNow! technology, choice of 12.1 inch SVGA HPA or TFT display, 2X AGP graphics with 4MB or 8MB SDRAM, 24X MAX CD-ROM, 5.0 GB hard drive and modem.

Dell has cut prices on its new Precision Workstation 220, 420 and 620 by up to 13%. The 220 with a Pentium III processor at 600MHz and the 820 chipset, 256 MB PC 800 ECC RDRAM, 10.2 GB IDE 7200 hard disk drive, 48X max IDE CD-ROM drive, Windows NT 4.0 and a Diamond Viper V770D 32MB video card is priced at $2,121, a 12.9% reduction. Analysts suggest this pricing action is just the latest in a series of "relentless price cuts" that have triggered a continuous slide in pricing for all computer products.

The Federal Trade Commission is examining business-to-business (B2B) electronic commerce marketplaces over concerns about possible price collusion and restraint of competition for manufactured products. Several industry analysts and House Commerce Committee Chairman Tom Bliley (R-Va.) believe the FTC should establish oversight of burgeoning B2B marketplaces. They are especially skeptical about the agreement between Ford Motor, General Motors and DaimlerChrysler to create a single automotive-parts purchasing exchange. "There have to be some sort of guidelines," suggests analyst Kevin Prouty at AMR Research, who fears a worst-case scenario of the Big Three using their collective purchasing clout to set pricing structures for suppliers, thus fixing prices for the entire marketplace.

Buyers of process control instruments may see additional price hikes ahead, says Cahners In-Stat. Suppliers continue to argue that fourth quarter 1999 and first quarter 2000 hikes still aren't covering recent increases in production costs. Exceptionally strong growth in the end markets that buy electrical-measuring instruments suggests that buyers of integrating meters, oscilloscopes and other equipment might be at risk for sharply higher prices in the months ahead.

A new series of low-end chips from Intel and AMD will mean several price cuts on desktop and notebook PCs over the next few months, says analyst Nathan Brookwood at Insight 64. Intel is unveiling a family of Celeron processors for inexpensive computers running from 566MHz to 700MHz, while AMD is replacing its K6-2 chips for budget desktop PCs with Spitfire, a scaled-down version of the Athlon chip. AMD also has a new, cheaper notebook-oriented chip coming out soon.

AMD has lopped $100 off its volume price for 950MHz and 900MHz Athlon processors, dropping the chips to $899 and $799, respectively, in 1,000-lot quantities. Pricing on the AMD 1GHz chip remains at $1,299. Pricing for other Athlons also remains unchanged.

Prices for solid state disk (SSD) drives should decline to $4/megabyte by 2002, according to Peripheral Research Corp. Prices of both solid state and flash memory are now at levels that make them more attractive as memory options, the research house says. This has made SSD storage far more feasible for applications such as redundant array of independent disks (raid) systems and cache memory for Internet servers.

Micron Technology confirms that average selling prices for its memory chips dropped 20% in the second fiscal quarter, ended March 2. The company has declined to forecast pricing for its third fiscal quarter, saying only "increased worldwide dram production could lead to further declines in average selling prices for memory products."

Most popular LCD modules for notebook PCs and desktop monitors are entering a period of oversupply, driving down prices for OEMs. Flush with cash following more than a year of rising pricetags, LCD sellers will pour $5 billion into new manufacturing capacity this year, about as much as the industry spent in the past three years combined, according to DisplaySearch, a research house. Research firm Stanford Resources, which also predicts oversupply in 2000, says that 15.1-inch displays, used primarily in desktop monitors, dropped $20 from December to January and are expected to continue falling. DisplaySearch projects a 5%-10% LCD surplus into 2001 and lower prices as suppliers attempt to maintain high utilization rates at their plants. The price of a 15.1-inch display will drop below $600 this quarter and near $350 by third quarter 2001, DisplaySearch predicts.

MARKETS

Qualcomm and Motorola have agreed to dismiss all lawsuits against each other over the design of mobile phones that use Qualcomm's wireless technology format. The deal ends a series of patent infringement claims the companies have leveled against each other since March 1997. The dispute included a claim that Qualcomm illegally copied the look of Motorola's popular StarTac model for Qualcomm's five-ounce "Q" phones. The two companies also have agreed to a three-year moratorium on patent infringement lawsuits related to the fast-growing Qualcomm technology known as cdma, or code division multiple access.

Cisco Systems has unveiled a new office telephone system aimed at meeting the desire to integrate voice and computer communications over a single network, using the standard language of the Internet. The new Cisco product line, including two office phone models and a "media convergence" server, transmit telephone calls using the Web format known as Internet Protocol, or IP for short. Additions to Cisco's dominant line of computer network gear come amid growing competition with Lucent Technologies and Nortel Networks. Both rivals, longtime leaders in telephone technology, are also trying to become one-stop shops for expertise in voice and data traffic.

instantme, Novell's entry into the instant messaging arena, is targeted to enterprise and corporate users. It is a Windows-based system allowing users to view online status of partners or associates and send and receive real-time messages. Because information is centralized, users are able to move from computer to computer without losing stored information, such as Buddy Lists. Additional features of instantme include group "chat," enabling communication among several users in real-time plus the ability to send photos and documents.

E.piphany and Octane Software, makers of tools that manage business and customer e-commerce interactions, have agreed to join forces. Octane's software provides real-time services during e-commerce transactions; E.piphany's software tracks customer's purchasing habits. Integration of the two applications will expand E.piphany's service offerings and client base.

The unified messaging marketplace is quickly expanding beyond e-mail and should reach $3.7 million in 2003, says analyst Greg Vogel at Banc of America Securities. Unified messaging is a single point of storage and access for all message types, including e-mail, voice mail and faxes. "There soon will be rapid growth in other technologies, including IP voice mail and wireless short messaging," Vogel says, because "bandwidth availability continues to increase and technology is improving to meet customer demand."

Internet giants that made fortunes building consumer e-commerce are expanding into the booming market for business-to-business (B2B) e-commerce. Yahoo has created an e-business portal aimed at small businesses, providing links to marketplaces that connect buyers and sellers for commercial supplies and industrial goods. AOL is partnering with B2B specialist PurchasePro.com to help small businesses build marketplaces or join existing ones. eBay, the auctioneer, will target the business market with a service called eBay Business Exchange. And, Priceline.com soon will offer business services. "Now that you have consumer companies jumping into this space, it is the pinnacle, the peak of B2B hype," says analyst Alan Mak at Argus Research. "With these big firms buying into it, it could even squash smaller, underfunded players in the B2B sector."

A fifth consecutive monthly rise in equipment orders (to $1.606 million in February) signals continued aggressive capacity expansion and retooling in the semiconductor industry, according to analyst Wes Basel of the Dismal Scientist online news service. "Nearly all major chip producers will be moving to larger wafer sizes, finer densities and copper interconnects over the next two years," he says. Data from the Semiconductor Equipment Manufacturing Institute (semi) shows a 1.41 book-to-bill ratio for February, the highest in months.

Intel has caught the Internet bug. The microprocessor giant just spent almost $2 billion to acquire Basic Communications, giga and Dialogic. Basic Communications designs and sells advanced semiconductors and related products used in the equipment that directs traffic across the Internet and corporate networks. It also sells software and network processors used in local area networks (LANs), which are targeted at home office and small and medium-sized businesses. giga specializes in advanced high-speed communications chips that are used in optical networking and communications products, which in turn direct traffic over the Internet and corporate networks. Dialogic's products are used for voice, fax, data, speech recognition and synthesis, call center management and Internet Protocol (IP) telephony applications.

The market for universal serial bus-enabled PCs will grow to 700 million by the end of 2003, predicts Dataquest. USB microcontroller chips connect PCs and their peripherals with plug-and-play simplicity and compatibility. USB peripherals range from low-speed devices such as mice, keyboards, and joysticks, to full-speed hubs, to high-speed modems, scanners and digital cameras.

"The next sea change in micro-chip technology will be silicon-on-insulator (SOI) microprocessors," suggests Michael O'Brien, managing director of investment banking firm Wit Soundview. "The constant challenge for the chip industry is to design chips that are faster, consume less power and are smaller," he says. SOI technology is attractive because of its relative simplicity in fabricating scaled cmos devices and its improvements in circuit performance and density. He notes that IBM is already broadly adopting SOI technology for its next-generation microprocessors.

IBM will soon be selling its NetVista line of simplified computers and Internet "appliances" for consumers and businesses. NetVista is geared toward computer buyers who want easy connections to the Web and other networks. The line includes the NetVista All-in-One desktop computer, the NetVista Internet Appliance, the NetVista Legacy-Free PC and the NetVista Zero-Footprint Thin Client.