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Tech Industry

HP, Motorola face critical test

How they deal with economic uncertainties could provide others with a roadmap for how--or how not--to react to market forces.

    Hewlett-Packard and Motorola, two technology industry titans, continue to struggle with the impact of economic uncertainty in Asia. How they deal with those uncertainties could provide others with a roadmap for how--or how not--to react to market forces.

    With the heavy erosion of information technology spending in the Asian/Pacific economies this year, these bellwether technology companies are continuing to take drastic measures to control costs and stabilize revenues.

    HP said yesterday it would lay off more workers and sell some chipmaking technology, while Motorola said it was postponing construction of a $3 billion chipmaking plant amidst continuing concerns about when the Asian economic situation will improve.

    "The biggest surprise is that Japan is in a major recession, and now you are talking about an economy that's a huge economy...Malaysia or Thailand, those are small economies and small markets," said Richard O'Brien, corporate economist for HP.

    The impact of Japan's recession doubles when measured in U.S. dollars, meaning Asian companies have significantly less money to spend on products and services. For instance, capital spending in Japan during the second quarter was down 10 percent in yen, but in dollar terms the number is 25 percent, O'Brien said.

    Revenues from Asian markets accounted for 16 percent of overall revenues in 1997, according to HP. For HP, the downturn in Asian economies has translated into significant effects on almost every aspect of its business.

    HP's Test and Measurement operations have been hit particularly hard, experiencing a 10 percent decline in revenue for the quarterly results posted on August 17, although the unit was still profitable. The Test and Measurement division produces a wide range of equipment for testing electronic systems, including wireless and cable networks, factories, even processors and circuit boards.

    In the printer realm, where HP is a market leader, a regional decline in spending of about 25 percent in 1998 from the year before is expected, according to a recent Dataquest report. Higher-cost server computers are taking a hit too, with revenues dropping 20 percent during the first half of the year, according to International Data Corporation. The upshot here is that this translates to slow revenue growth.

    In response to a challenging market, HP will engage in further cost cutting and the sale of some non-essential operations. In Singapore, chairman Lewis Platt today said the computing giant will cut some jobs as part of a pending restructuring operation. The company had suggested in its most recent quarterly conference call that there would be "focused" restructuring likely to take place in its Asian operations. (See related story).

    In the U.S., the company said it was selling its photomask manufacturing organization, which is part of the Integrated Circuit Business Division, to DuPont PhotoMasks (DPI). Photomasks are used in the manufacture of semiconductors.

    Larry Borgman, managing director at Josephthal & Co, said: "Their product mix has really changed. When you talk about printers and PCs you have to operate on lower gross margins than they did with test equipment, so they are trying to get their overhead in line."

    Telecommunications equipment giant Motorola is another company that says it has suffered from its exposure to the Asian market, with sales of semiconductors dropping 11 percent from the same period a year ago to $1.81 billion, and sales falling 35 percent from the 1997 quarter--though some analysts doubt whether Asia is really the culprit.

    Motorola's semiconductor products segment contributed roughly 21 percent of the company's total sales in 1997. Motorola is the largest supplier of microcontrollers and microprocessors for embedded applications such as cars and cell phones.

    The company said today it is suspending construction of a $3 billion chip manufacturing plant in Virginia because of weak demand for semiconductors, with Asia cited as the main reason. (See related story)

    "Semiconductor demand is in an unprecedented downturn largely because of a downturn in the global economy," said Scott Stevens, a Motorola spokesman at the Richmond, Virginia, site of Motorola's planned facility.

    The plant was supposed to make chips for cellular phones, automobiles and a variety of other devices and was slated to make advanced copper-based chips.

    "I'm not sure why the Asian financial crisis is being named as the reason [for the postponement]," said Tom Starnes, director and principal analyst of embedded microcomponents at Dataquest. While they have significant business in Asia, Starnes thinks the company's restructuring has played a role in the decision to keep the plant offline.

    The Motorola Richmond facility "was originally intended to build the PowerPC chip, but it was built too late and demand for it evaporated just as Apple crashed a few years ago together with the cyclical downturn in the industry," according to Danny Lam, a principal with Fisher-Holstein, a consulting firm.

    "Key preparatory steps like Motorola's [chip] program with Siemens for technology development, is going right on schedule. In other words, the program can be restarted with hardly a hitch once the picture improves," he added.

    "As far as our restructuring, we stated a year ago that the [semiconductor unit] was becoming more market focused and that we were pruning our portfolio of products. As we figure out these markets we want to play in, we won't try to keep production facilities on full tilt," said Motorola's Stephens.

    Many chip companies are short of cash now, and investing $3 billion in a new plant when demand is uncertain and there is excess capacity would require a "leap of faith" that the company decided not to take, he noted.