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Intel warning could portend PC slowdown

The question on the lips of investors and analysts alike is whether the PC market will start to falter because of shifts in the global economy, different customer buying patterns and other changes.

Intel's warning yesterday of a sales slowdown could be a sign that the PC market is hitting a wall.

Although PC sales are expected to increase by double digits again this year, many analysts say, the concern is over the rate of that growth. Since 1995, PC shipments have grown between 15 percent and 20 percent per year, according to a recent report from Morgan Stanley Dean Witter.

The question is whether the PC market, which has thundered ahead regardless of what was happening in the rest of the world, will start to dip below its historical percentages because of shifts in the global economy, different customer buying patterns and other changes. Intel is universally viewed as a key barometer for entire industries ranging from hardware to software because its chips are used in the overwhelming majority of desktop computers.

The chipmaker is saying that just one issue--sluggish sales in Europe--will cause it to miss expectations for the third quarter. Some analysts believe that the root of the problem could be much deeper, however.

"We've been hearing from Taiwan that there has been a slowdown in motherboard shipments for like a month now," said Linley Gwennap, an analyst with The Linley Group. "I have a hard time believing it's all a problem with Europe...If Intel looks around, they're probably going to find some softness other places."

Roger Kay, an analyst at International Data Corp., agreed. "Something in the cards says it has got to be more than Western Europe," he said.

Analysts had held out hope that this year's sales could again reach historical norms, but they have grown increasingly pessimistic because of various factors. In particular, they are concerned about numbers in their most important regions.

Demand this year, for example, has been fueled largely by sales in Asia and Latin America, not the core markets of Europe and the United States. Latin America and Asia will see 30 percent annual growth, said Charles Smulders, an analyst at Dataquest. By contrast, North American sales will grow only by 13.1 percent, while Europe will see growth of 8.4 percent.

"For major accounts, we believe that markets in the U.S. and Europe are saturated. There is a PC for every person who needs one," Smulders said. "We think that is having a big effect."

The European PC market actually has two sectors, one stalled and the other growing, Fujitsu Siemens Computers said today, according to the Reuters press agency. The mammoth computer maker said it does not expect the European corporate computer market to strengthen in the final quarter of this year, but added that the consumer market is growing strongly, according to the report.

The consumer market "seems to be going from strength to strength," Fujitsu Siemens' director of corporate relations, Judith Grindal, told Reuters. "In August alone we are looking at around 50 percent growth year-on-year."

In its warning, Intel said sales will grow by only 3 to 5 percent over the second quarter, lower than the 12 percent seasonal jump many analysts had expected. Before yesterday's announcement, other analysts noted that demand forecasts depended on strong sales in September, particularly the last two weeks of the month.

"Demand hardly ever looks good exiting the summer and usually improves as September goes on," said Dan Niles, an analyst with Lehman Brothers. Typically, 45 to 50 percent of PC sales in the third quarter come in September, according to Niles.

Although Niles indicated that PC demand appears on track, he said in an interview a few hours before Intel's warning that European sales looked weak. "We're not out of the woods yet," he added.

This is not to say, of course, that the PC industry is facing a complete reversal. "When you look over the course of the year, we're (still) going to see double-digit growth," Gwennap said. "It's way too early to decide the fourth quarter is going to be a disaster."

Smulders said PC shipments worldwide will grow 17.4 percent. Estimates from other analysts before Intel's warning fell generally in the range of 15 to 17 percent. If the reasons behind Intel's forecast are traced beyond Europe, those numbers could be in jeopardy, however.

Not everyone is willing to bet that it is the beginning of the end. The PC industry has escaped predictions of doom for years, often saved by some new or unforeseen factors.

In the mid-'90s, the growth of the Internet led to resurgent sales. In 1997, PCs sales soared as prices dropped below the $1,000 barrier. Last year, $400 rebates from Internet service providers spurred unusually strong sales early in the year.

The growth of e-commerce and the Internet also has led to an explosion in demand for servers based on PC technology as well as for storage systems, which has fattened the profit margins of manufacturers like Dell Computer and Hewlett-Packard.

Reuters contributed to this report.