PURCHASING HOTLINE

By Staff -- Purchasing, 5/18/2000

ECONOMY

- Consumers continue to flout the Fed's careful crafting of a gentle economic slowdown. First-quarter numbers from the Bureau of Economic Analysis (BEA) show individual shoppers logging their biggest quarterly spending increase since 1983. Consumers-who account for about two-thirds of total GDP-boosted spending at an annual rate of 8.3%, driving real GDP growth to a 5.4% annual growth rate in first quarter 2000. Of note: 3.5%-4% is considered to be maximum rate at which GDP can grow without sparking inflation.

- More bad inflation news. The closely watched GDP price deflator rose at an annual rate of 2.7% in first quarter 2000, up substantially from a 1.9% rate in fourth quarter 1999. The U.S. Employment Cost Index (ECI) shot up 1.4% in first quarter 2000, the highest increase in a decade. A big factor in the ECI gain was a rise in benefit costs driven mostly by higher premiums for health insurance. Sixty-five percent of industrial buyers surveyed this month by Purchasing Magazine say industrial prices are generally climbing; 58% say prices are rising slowly while 8% classify the price advance as rapid.

- Even the doviest' fomc voter, Dallas Fed President Robert McTeer, has acknowledged publicly that the inflation threat is rising. At a recent press conference, this stalwart proponent of the idea that productivity growth allows for a higher sustainable rate of economic growth said "the numbers on inflation are not so good."

- Word on the street says the stumbling Nasdaq could drive wage costs higher in coming months. Reason: Dot.com stock options suddenly seem less alluring. Many analysts think talented professionals are going to start seeking better traditional salaries, forcing labor-starved companies to ante up.

- There are two lonely pieces of evidence that economic growth may have, at the very least, peaked. Housing starts fell more than 11% in March. At the same time, the Housing Market Index (HMI) reported by the National Association of Home Builders' fell to 61, a 26-month low point. In April, the HMI edged up only a point to 62. While still high relative to pre-1999 years, nahb blames the downturn on rising mortgage rates.

- Attention economic forecasters! Transitional technical difficulties (Don't ask!) will make it impossible for Purchasing Magazine to accept Crystal Ball contest entries via the Web this year. That means snail mail is your only option for 2000. Official Crystal Ball entry coupon appears on page 28 of our May 4 issue. You can also download a .PDF version of the coupon at www.purchasing.com. Deadline for mailing entries is June 30, 2000. Grand prize is $2,500 cash.

PRICES

- Intel has slashed prices for its most widely used microprocessors. The company cut its 566-MHz Celeron 38% to $103 and the 533-MHz Celeron 27% to $93. It also dropped tags for Pentium III processors used in more expensive desktop computers 4%-26% depending on speed. Tags for 733-MHz and 677 Pentium III processors were both reduced 26%. The 733-MHz part is $337 and the 667-MHz device is $251.

- IBM cut prices on TFT flat-panel monitors. Market prices for the monitors now range from $979-$3,199, a sign that the flat-panel market has recovered from supply shortages that caused prices to skyrocket late last year, according to International Data Corp. analyst Bob O'Donnell. TFTs made up 6% (6.6 million units shipped) of the global monitor market in 1999. O'Donnell projects that TFT market share will increase to 15% (21.8 million units) by 2003 as a result of falling prices.

- Despite a vicious price war, personal-computer sales to businesses have been less than spectacular. Still, market conditions are poised to change, suggests analyst Gillian Munson of Morgan Stanley Dean Witter, who notes that sales are perking up. An estimated 50% of PCs in the North American commercial market may be sold directly from manufacturers to customers-rather than through distributors or dealers-by the end of this year. That should cause PC pricing to at least stabilize, some analysts suggest.

- Cost of using wireless phones remained steady in March, averaging $41.56 for a range of pricing plans, according to a survey by Econ One. In most markets, prices have dropped since Econ One began its monthly surveys last June.

- Slack demand and rising capacity have triggered a slump in prices of ultra-pure wet chemicals. North American and Asian semiconductor companies use wet chemicals in quarter-micron processing. However, analysts and suppliers alike now believe that supply excess will prevent prices for ultra-pure grades from rebounding significantly when demand begins to pick up this year.

- Strong demand and firm prices are expected to continue for telecommunications chips, flash memory and digital signal processors. Memory-the weakest segment of the market-has fallen back near marginal production costs. Sales are rebounding for commodity chips, but economist Wes Basel says capacity expansions and technology gains will crimp future pricing for dram.

- Power supplies for PCs may fall below 10¢/watt, says analyst Linnea Brush at Darnell Group. The analyst notes that all major sellers of PC power supplies are striving to increase automation to boost production volumes and reduce per-unit costs. Along with falling prices, she says, buyers should see more wattage increases. Note: A 200-watt unit that cost $85 in 1990 is $25 today. Worldwide, merchant OEM power supply sales are projected to rise 8.6% to $7.69 billion this year from $7.08 billion in 1999, according to Micro-Tech Consultants. For 2001, the forecast calls for 8.4% growth to $8.33 billion.

- The most popular LCD modules for notebook PCs and desktop monitors are entering a period of oversupply, bringing lower prices, says DisplaySearch analyst Ross Young. Flush with cash following more than a year of rising price tags, LCD vendors will pour $5 billion into new manufacturing capacity this year, he says. Upshot: Soaring capacity at companies in Japan, Korea and Taiwan will push prices toward a mid-2001 trough, with OEMs enjoying maximum sequential quarterly price cuts of 15%.

- Expect a price war in the asymmetric digital subscriber line (adsl) chip market. Reason: SBC Communications and Cisco Systems have formed an alliance to acquire adsl equipment and modems. This alliance will boost deployment of adsl services, which will drive down chip prices, according to analyst Ernie Rapiere at VisionQuest 2000. Average selling price for an adsl chip is expected to drop from between $30 and $40 this year to $20-$25 in 2001 and less than $20 in 2002, Rapiere says.

- The computer distribution channel's price war has ended. After months of irrational pricing behavior, commercial distributors are boosting their asking prices. Merisel started price hikes in first quarter 2000. Ingram Micro and Tech Data recently followed suit. The distributors believe that market demand is strong enough to support the price hikes, which they are blaming on rising costs for components.

- Inkjet printer pricing is expected to remain competitive despite what one analyst describes as strong underlying demand. Reason: Consumer demand is stronger than corporate demand, forcing such suppliers as Hewlett-Packard and Lexmark to discount inkjets. Laser printer pricing is less competitive, notes CS First Boston Analyst Gibboney Huske.

- Sales of programmable logic devices may be skyrocketing, but prices are diving. In fact, analysts see no end in sight to the market that has cut PLD prices by up to 50% over the past year. Industry pundits say the PLD industry will grow at a 30%-plus annual clip from customers primarily in data processing, communications and networking industries. Since major suppliers are few, analysts such as Mark Edelstone of Morgan Stanley see firms such as Altera and Xilinx fighting for market share.

MARKETS

- Rambus dram buyers should keep a close eye on supply in second half 2000. Reason: Rising demand and lack of investment in new fabs is expected to crimp overall dram supply. rdram is likely to be especially hard hit because this is the newest dram architecture and manufacturers are unsure how much demand there will be this year. If PC manufacturers build more high-end PCs with faster processors, they'll use more rdram, which could result in demand outpacing supply.

- Expect leadtimes for resistors to remain long through year-end. Leadtimes for parts in 0603 and 0605 sizes have stretched from three up to five weeks because of unexpected demand. Chip resistor leadtimes are over 20 weeks. Leads will remain long because demand, especially from the telecommunications industry, will continue to rise and resistor manufacturers say they're already near 100% capacity. While manufacturers are expanding capacity, it may not be enough to meet growing demand.

- AMD will soon begin shipping a new family of processors targeted at small-business and home-PC users. AMD Duron is aimed at the same segment as Intel's Celeron processors. The AMD Duron processor is derived from AMD's Athlon processor core and has on-chip L2 cache memory, a 200-MHz front-side system bus and enhanced 3DNow technology. AMD plans to ship the processors in June.

- Intel has begun shipping sample 32-MB flash memory devices manufactured on 0.18-micron process technology. The chip will be widely used in digital cellular phones and Internet appliances. Production volumes will ship in the fall. Moving flash production to 0.18 micron from 0.25 micron will result in more product availability as more chips will be made per wafer.

- Personal-computer manufacturers are still having trouble getting the parts needed to keep pace with current demand. The two biggest chipmakers, Intel and Advanced Micro Devices, say they were caught off guard by a first-quarter demand surge of 17.5%. Intel, in particular, has had trouble producing adequate supplies of microprocessors. The unexpected uptick in PC demand has both AMD and Intel juggling their manufacturing capacity to boost component supplies.

- World sales of mobile phones that can access the Internet are projected to grow more than 900% by 2005 to $7.8 billion, suggests a study by Strategis Group. A separate study by Semico Research says Web-capable phones will become the dominant means of accessing the Internet by 2004. Unit volume of Web-capable phones will grow at a compound annual growth rate of 288%, Semico says, from 800,000 last year to 703 million in 2004.

- North American semiconductor equipment makers saw orders rise for a fifth straight month in March. Semiconductor Equipment and Materials International (semi) says shipments rose in March to $1.7 billion, 6% above the February 2000 level and 79% above March 1999. The three-month bookings average rose to $2.45 billion, 7% above month ago and 95% above the year-ago level.

- Global microchip sales volume slipped slightly in early 2000 as a plunge in spot prices for memory and microprocessors offset strong per-unit prices for telecommunications products, flash memory and digital signal processors. Still, dollar volume remains 34% above depressed year-ago levels. Mobile phones and other data or communications appliances are the strongest underlying drivers. Demand for personal-computer chips is improving and prices look to be rising, however, as PC manufacturers expect accelerated business spending in May and June.

- World cellular equipment and related services sales will grow nearly 30-fold to $4.5 billion in 2002 from $160 million in 1998, projects Marconi of London. Equipment-maker Marconi was part of the former GEC before that firm sold its defense divisions to BAE Systems.

- Xerox sold more than twice as many black-and-white digital copiers as its nearest competitor in 1999. CAP Ventures, a market research firm, says Xerox held 37% of the market, Sharp took 19%, and Canon took 10%. Xerox attributes marketing success to its broad copier line-ranging from personal copiers that produce six pages per minute (ppm) to high-end systems at 135 ppm.

- Rising demand in the U.S. and Asia led to a 17.5% surge in first-quarter personal-computer sales. Research groups Dataquest and International Data Corp., in separate reports, estimate that makers shipped 30 million PCs in the period ending March 31. Dataquest estimates that 11.1 million PCs were sold in the U.S. while IDC says U.S. sales were 11.6 million. In fourth quarter 1999, U.S. PC sales totaled 9.6 million.

- Daido Steel of Japan has developed high-speed light-emitting diodes and will enter the optical communications market. The maker of specialty steel products says the diodes are used for plastic optical fiber and wireless information transmission systems. The equipment will be used to transmit digital data at speeds of 500 megabits per second, 10 times faster than the conventional 50 megabits per second now used for optical fiber networks.

- The drive to conduct business online will help boost the share of small businesses with Internet access to more than 70% by 2003, according to International Data Corp. The research house says 52% of small businesses with fewer than 100 employees already have some form of Internet access. An estimated 2.1 million (28%) currently have Web sites to promote their businesses. IDC expects the number of small businesses with their own sites to grow by some 30% to 2.7 million this year alone.

- Business-to-business e-commerce in the U.S. will reach nearly $2.78 trillion by 2004, says researcher Jon Derome at Yankee Group of Boston. He says three types of electronic exchanges will be dominant: business-to-business e-commerce marketplaces (with revenues of $850 billion), electronic data interchange (EDI) and direct corporate sales. He also says maintenance, repair and operations (MRO) and office products will be dominant markets in 2004 for B2B e-commerce.

- The number of people using cell phones for wireless data will skyrocket from 3% of the U.S. online population to 78% by next spring, a new survey says. Main reason for the increase is that employers are starting to pay for these services, according to a survey by New York-based Cap Gemini America and Corechange, a wireless-portal provider based in Boston. Currently, 33% of the U.S. online population uses cell phones for business purposes. However, only 11%-or 3% of the total online population-use them for data applications such as e-mail and news, the companies say. In 12 months, 78% of the U.S. online population will be using cell phones for data.

- Motorola will spend $2 billion over the next five years to buy and refurbish a Scottish semiconductor factory that will produce chips for mobile phones and other wireless communications appliances. The world's No. 2 mobile-phone maker will buy the 150-acre site in Dunfermline, Scotland, from Hyundai, which decided to shrink its worldwide operations. Motorola will use the facility to make Digitaidna chips.