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Intel sees chip surplus, price cuts

The chipmaking giant is facing cancellation of notebook PC processor orders, boding ill for sales in this segment, according to an industry analyst.

Intel (INTC) is facing cancellation of notebook PC processor orders, boding ill for processor sales in this segment.

Intel has an inventory of about 3 million in unsold processors, due to "massive cancellations of notebook chips," according to Ashok Kumar, an analyst at Loewenbaum & Company. He cites the sluggish Asian market, particularly Japan, as one of the reasons for the notebook chip stockpile.

"Japan has been in a severe recession," Kumar said, against a backdrop of the overall economic turmoil in Asia. Japan, the second-largest computer market in the world and a huge consumer of Intel notebook chips, proportionately sells more notebook PCs than other markets.

An Intel spokesperson says that the Japanese market has been down for some time, however, and that "expectations haven't really changed over there." Intel also stated that the "Tillamook" notebook chip--the fastest of its notebook processors--is selling well. (Intel is an investor in CNET: The Computer Network.)

But Kumar sees bulging inventories. "Due to the shortfall in shipments relative to forecast, we expect the company to exit the quarter with about 3 million in finished goods inventory. Weakness in [Asia] with the exception of [China] has contributed to the bulk of the shipment shortfall. Also, the significant buildup of notebook inventory, both at the [PC manufacturers] and the channel, has resulted in large cancellations," Kumar noted.

Kumar added that about half of the inventory is notebook chips, which is unusually high.

An upcoming Intel price cut may help move chips, however. Intel is slated to cut prices on processors January 25, according to the Intel spokesperson. At this time, the price for the 300-MHz Pentium II, Intel's top-of-the-line chip, is expected to fall to $525, while the 266-MHz Pentium II will drop to about $375, according to Kumar.

Other price cuts include the 200-MHz MMX Pentium descending to about $115 and the 166-MHz Pentium chip dipping to about $90, Kumar said.

Kumar claims that Intel has already begun price cuts for major PC vendors. "They started this on January 1. These cuts are already available to vendors," he said. Intel denies this, saying pricing will not be available to manufacturers until January 25.

On the upside, Kumar says Intel is seeing a recovery in the average selling price (ASP) of Intel processors.

"Aided by a recovery in microprocessor ASPs, we expect overall revenues to have grown 13 percent [from the previous quarter] and 8 percent from the year-ago period to about $7 billion in the fourth quarter of 1997," Kumar predicted.

"We forecast microprocessor units to have grown about 5 percent sequentially and 14 percent from the year-ago period to 22.8 million. Microprocessor ASPs are expected to have recovered from the depressed level of $215 in the third quarter to about $240 in the December quarter."

But Kumar qualifies this saying: "We are currently forecasting minimal sequential microprocessor unit growth until the third quarter of 1998. The significant buildup of microprocessor inventory is expected to have negative repercussions on short-term [prices]."

Intel is an investor in CNET: The Computer Network.