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May 1, 2002

6 Min Read
Market Snapshot: Computers and business equipment

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Lexmark International beat out rival Hewlett-Packard with the introduction of two new printers that represent a first for the industry. The printers, which began shipping in March, offer 3600x1200 dpi resolution and 4800x1200 dpi resolution on multiple paper types. Several models are available, including the top-of-the-line Z65 Color Jetprinter (shown above), which retails for about $199. The Z65n ($229) features an integrated Ethernet network adapter.

During the 1990s, computer and business equipment OEMs couldn't make products fast enough, which was a boon for molders serving those market segments. Unfortunately, in 2001, the bottom dropped out. High inventories, low demand for products, and global economic gloom put the computer and business equipment market in the tank.

Business Week's Corporate Scoreboard of Feb. 25 showed that the Business Machines & Services sector's sales dropped during Q4 2001 by 17 percent from the 2000 fourth quarter sales. Ditto for the Computers & Peripherals sector. In fact, a perusal through the listing of companies reveals a lot of minus signs in both sales and profits.

Apple Computer's sales for 2001 were down 14 percent. High-flying Dell Computer's sales were up 6 percent for the year. Hewlett-Packard's sales were off only 7 percent. And that was the good news. Gateway's sales plummeted 37 percent during 2001. Palm's sales dropped 26 percent. Compaq Computer saw sales drop by 21 percent in 2001. Overall, it is not a pretty picture.

Where peripheral equipment is concerned, Lexmark reported that its Q4 2001 revenue was up 5 percent from the same period in 2000. Full year revenue for 2001 increased 9 percent. Paul J. Curlander, chairman and ceo of Lexmark, says, "Lexmark continues to gain market share, fueling our supplies-driven business model. This makes us one of only a handful of technology companies to consistently grow revenue and generate profit in each quarter of 2001."

IDC, a unit of International Data Group (Boston, MA), forecasts worldwide PC sales of 125.5 million units in 2002, a 3 percent increase. IDC's December forecast showed only a 1.8 percent increase. However, even a 3 percent increase won't be enough to lift the industry out of the doldrums. It does, however, show a slight recovery from last year's decline in PC sales of 5.2 percent.

U.S. PC sales are expected to account for much of the improvement in the industry, with IDC forecasting sales to grow by 9.3 percent this year, which is considerably better than an earlier IDC forecast of a 1.9 percent sales decrease in the U.S.

Tough Market for Molders
The Northwest, a hotbed of molding for the computer peripheral market segment with companies such as Hewlett-Packard, Tektronix, and Epson Printer, has watched helplessly as that market migrated to the low-cost manufacturing meccas of Mexico and Asia. Several molders, including Puget Plastics, SPM, and The Tech Group—once stalwarts in the region—have pulled the plug there.

John Normandin, senior vp of Vision Plastics Inc. (Wilsonville, OR), notes that the departure of HP, Epson, and Tektronix "made a big hole" for molders. "We geared up for a big printer program for Tektronix, and then they decided to take it to Malaysia even before the tools were done," says Normandin. "We've had to look at other markets and diversify our customer base, and our business is quite healthy because of that." Vision operates 42 presses, and now is the largest custom molder in the area.

Henry Beck, president of Tessy Plastics Corp. (Elbridge, NY), says that company has also felt the pain of the slowdown in business equipment. Xerox, a major customer of Tessy, pulled the plug on its inkjet printer business, leaving Tessy with plants in Ireland and China that were once dedicated to the manufacture of that product.

"Consequently, we've closed the plant in Ireland

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Table 1. Business equipment shipments, million units (U.S. markets)

and are finding new customers for the plant in China," says Beck, adding that Tessy continues to do business with Xerox.

Still, Beck isn't hopeful about the state of the business equipment market. "There's possibly some light at the end of the tunnel," he notes. "We're getting some work from OEMs that can't make parts profitably in their own molding facilities, but new work from computer and business machine markets is still kind of sketchy."

It looks like this uncertainty will continue. IDC is forecasting a slight downturn in unit shipments of printers in 2002 from last year, while multifunction printers including fax machines will see an uptick. Shipments of scanners are expected to decrease slightly and copier shipments will remain steady (see Table 1).

Contract Manufacturers Also Feel the Heat
If molders have it bad, contract manufacturers (CMs), once on the fast track to supply to computer and peripheral equipment makers worldwide, are not faring much better. Jabil Circuit's fiscal second quarter net earnings plummeted 91 percent. The company reported a net income of $3.7 million for the quarter ended Feb. 28, down from $40.7 million for the same period a year earlier. Revenue fell 32 percent. The St. Petersburg, FL-based company reported that it is moving fast to diversify its high-tech customer base to include automotive and medical-instrumentation sectors. Jabil makes equipment for companies such as Cisco Systems Inc. and HP.

Better news came from Flextronics International Ltd., which reported that its fiscal third quarter net income rose 21 percent despite the technology downturn. The CM is shifting its strategy to focus more on increasing profits than on increasing revenues, and is reportedly moving away from its practice of purchasing and expanding molding plants worldwide. Flextronics' latest numbers pushed the company to the lead position in the CM business, ahead of Solectron.

Flextronics, Solectron, and others are also reporting the closing of North American plants and a shift of work to lower-wage locations prompted by the actions of major OEMs. However, some analysts are projecting that the economic slowdown might actually help CMs, as more OEMs seek to off-load manufacturing and facilities to subcontractors in an effort to improve their own bottom lines.

That could also be a boon for molders that have geared up to the CM level and can supply a full range of services. Bob Alvarez, vp of application engineering for United Plastics Group, told molders attending the IMM Management Conference at Plastec West in February that "molding is not a molding business anymore, but a technology business. Contract manufacturing will dominate. There will be no more squirt and squeeze, because all the profit is in value-added activities."

Most molders remain cautiously optimistic, recognizing that the flight of the computer and business equipment industries to low-cost manufacturing sites around the globe hasn't slowed yet. Vision Plastics' Normandin probably sums it up best: "It's not a pretty picture out there."

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