Rough holiday season ahead for PCs
It’s going to be a frightful holiday season for PC sales, no matter what.
That was the hidden message Intel (INTC) executives delivered in an earnings conference call with analysts Tuesday afternoon after reporting better-than-expected quarterly profits but disappointing sales. They also said Intel is better off than competitors because of its streamlined workforce, world-class manufacturing operation, popular new Atom chip and rebounding profit margins. But tucked into that happier talk was the harsh reality that it’s getting ugly out there.
How ugly? That’s the $800 million question.
Looking ahead to the typically jubilant holiday quarter, Intel expects sales somewhere between $10.1 billion and $10.9 billion. In other words, Intel’s worst case imagines fourth quarter sales that are actually lower than third quarter sales – a “Grinch steals Christmas” scenario. And the best case? That has sales up less than 2 percent from last year – a “coal in the stocking” scenario that Intel said is “at the lower end of seasonal patterns.” Neither possibility spreads a lot of cheer.
The reason for the bad tidings, of course, is the global credit crisis. Not only has the turmoil sapped the spending power from the financial services industry, but it has spread to the broader business and consumer markets, too.
Why? If companies have trouble borrowing money, they’ll be less likely to buy PCs and servers that use Intel chips. And if consumers can’t tap into their home equity and are afraid of losing their jobs, they’ll think twice before shelling out hundreds (or thousands) of dollars for a new laptop.
Intel CEO Paul Otellini said the credit headaches didn’t have much impact on the third quarter. Intel reported net income of $2 billion, or 35 cents a share, on sales of $10.2 billion. Sales were lower than analysts expected, but earnings per share were higher, thanks to a tax break from overseas losses. (Intel had expected an effective tax rate of 33%, which would have brought EPS down a penny; instead, it got 28.9%.) Intel shares gained more than 4% after hours to $16.66.
The current quarter is a different story. Business so far has been good – executives are confident that profit margins will hold steady at 59% plus or minus a couple of points — but Intel is getting mixed signals from its contacts on what will happen next. “Some customers and channels are seeing little to no impact, and some are worried,” Otellini said. “As we add it all up, we don’t know how much of that worry will manifest itself into reality.”
Don’t expect the PC makers who buy from Intel to clear things up anytime soon. Hewlett-Packard (HPQ) and Dell (DELL) aren’t scheduled to give updates to Wall Street until the second half of November. And Apple (AAPL), the fast-growing computer maker, sounded optimistic when it unveiled new laptops Tuesday – but CEO Steve Jobs also announced that he’ll start buying some key components from Nvidia (NVDA), which will mean less money in Intel’s coffers at a time when every dollar counts.
Even so, Otellini had some encouraging words about Silicon Valley’s prospects. This downturn, he predicted, won’t be as bad as the dot-com crash.
“One of the things I recall vividly in that one was that people stopped buying computers, principally because there were so many available on eBay (EBAY) from companies that melted down. That skewed demand in ‘99, ‘00, and ‘01 as a result,” he said. Intel isn’t seeing the same fire sales — at least not yet — and growing markets like China are still important, according to Otellini. ”Right now, I’m of the opinion that technology will do well during a downturn, because of the simple fact that we sell tools of productivity.”
We won’t have to wait long to see whether that optimism sticks: In an unusual move for Intel, executives said Tuesday they will update investors a week after Thanksgiving. By then, they should have a better sense of whether investors should expect the Grinch, or the coal in the stocking.
“To say that the Chinese government artificially supplies cheap labour is somehow not very to the point.”
Actually, that is *exactly* the point. The Chinese government’s artificial suppression of its own currency is what enables labor to be cheap relative to the rest of the world. It is a government-designed strategic advantage, not a natural consequence of free market dynamics.
“If you meant Chinese labour moving to America, then its even more ridiculous. Immigration policies as barriers? Then Americans will be complaining because literally they’ll see Chinese taking their jobs everywhere.”
That is exactly what I mean. Of course, people will complain, including free marketeers because it eliminates their source of ridiculously cheap labor. I brought it up not because I support this idea, but to demonstrate that outsourcing companies are *not* capitalizing on free trade. They are capitalizing on *government interference* in free trade that happens to favor them (immigration barriers as well as artificially devaluing currency, in China’s case).
The very existence of huge wage disparities is proof that the market is neither free nor efficient. People should stop justifying outsourcing as if it was a natural outcome of free market dynamics because it is obviously not. It’s primarily an artificial outcome of government policies.
I have a Dell. Working just swell for nearly 10 years. Fast, still has a ton of storage left. Knock on wood. I’ll save my X-mas shopping for something else other than new electronics. I have a new MacBook pro laptop for work, and don’t know if I’d recommend it to buy, but if you’re into Macs it’s a moot point and you’re gong to get the latest and greatest, economy be damned.
Quoted Leo form Portland. “For a Communist country, providing cheap labor is not a problem. You simply take land from a few thousand peasants, forcibly relocate them to an industrial city, and tell them “You live here now.” What’s free market about that?”
I’m not sure if you really understand what’s going on. The Chinese government is still called the communist party but there’s no “taking land away and relocating” people.
These workers who come from around China make more as a worker in the industrialized cities. Maybe the situation you’re talking about applies in the 60s and 70s but it’s the 21st century.
The avg. wage has increased 2-3 times in parts of China and partly due to the fact that the Government has set up worker protection policies such as OT pay. To say that the Chinese government artificially supplies cheap labour is somehow not very to the point.
I dont really get what you mean by the Chinese moving to where wages are higher? are you talking about the US or other developed countries or just within China? Generally movement within the country is not restricted and do you think that businesses arent smart enough to move to places where labour is cheaper?
If you meant Chinese labour moving to America, then its even more ridiculous. Immigration policies as barriers? Then Americans will be complaining because literally they’ll see Chinese taking their jobs everywhere.
“I will not be buying a new PC until there’s an alternative to the execrable Windows Vista.”
Posted By Jon Risseeuw, Boone IA
You have alternatives: buy a Mac or install Linux. I say, buy a Mac.
Another amazing thing is how every computer blogs always has at least one macolyte trying to turn this into a windows v apple blog. Vista is awesome but if you hate go to distrowatch.com and download the os of your choice or buy a mac shut up and blog elsewhere
What really amazes ME is the fact that in an article that deals with the economic impact the current downturn is having on the computer market no one, and I mean not one blogger has commented on the article. Either focus people or get back to work, your boss is looking over your shoulder.
It always amazes me how no matter what the topic is, no matter what blog story I’m on, the readers always seems to consist of nothing but experts on the subject.
I’m guessing by the tone of the posts that everyone who jumped on Will is an economist or at the very least has a complete and thorough understanding of global economics. I somehow doubt it.
Everyone is running around spewing half cocked perceptions that they have convinced themselves are true, when in fact the only person who got it right in my opinion was Leo from Portland.
“So I’m sorry to say this Anti-Free trade idea is completely stupid. If you know anything, you know that freedom of trade and more competition only increases economic benefit.”
Actually, the reason why Chinese labor is so cheap has little to do with free trade ideology and everything to do with government manipulation of the market.
It should not be a surprise that the Chinese government, the largest Communist government in the world, is not a proponent of free market ideology. Chinese labor is absurdly cheap because the Chinese government artificially suppresses the value of its own currency, giving it a huge artificial advantage in the export market.
It should also not surprise you that the Chinese government gives gigantic tax breaks and other economic perks to foreign companies. For a Communist country, providing cheap labor is not a problem. You simply take land from a few thousand peasants, forcibly relocate them to an industrial city, and tell them “You live here now.” What’s free market about that?
The huge wage disparity between Chinese and American labor could not exist in a real free market. In a free market, Chinese people would simply move to where the wages are higher, and cheap labor would disappear. The real origin of cheap labor is in fact *not* created by the free market, but by government *interference* in the free market.
Will, welcome to the world. It’s called globalization and outsourcing. without Intel outsourcing do you think you can afford such inexpensive computers?
If you are to blame Intel, go blame Walmart too, they’re the biggest seller/importer of foreign goods. Oh btw, just to let you know, you would probably be able to afford half what you currently can if you also keep production of your kettle, your toaster or your microwave in the states.
It’s all about production costs and eventually the reduced costs gets reflected into the price…which you pay less!
That’s what happens, it’s called comparative advantage if you’ve learned some economics. Welcome again to the world of survival of the fittest. I guess you have no clue.
And maybe we’d all like to be paying $6,900 for that computer and $240 for that pair of Nike shoes, etc.
I don’t like it either, but it isn’t that simple. I thought it was interesting how many of my union brothers and sisters here were vocal about protecting our jobs here, and after work they climb into their Hyundai, Toyota and Kia cars, which they (like the rest of the population) promptly drive over to Wal-Mart so they can purchase the finest selection of CHEAP Chinese made goods of all descriptions.
It always seems to be the fault of an “evil corporation” or the government, but it comes down to what the INDIVIDUAL consumer chooses to buy…
Got it?
Hey Will – Intel is a global company now that serves global markets – it is not only hiring people in those countries it is serving (as Toyota does here) it is also shipping more products to those countries and bringing more profits home to the US.
Got it?
If you have to dip into your home equity to buy a computer…maybe you shouldn’t be buying a new computer in the first place
Maybe Intel is being pulled down by its attachment to a garbage operating system.
Maybe if Americans were willing to work for less money or pay more for a similar American product they wouldn’t ship jobs oversees. Broad generalizations that oversimplify help nobody.
I will not be buying a new PC until there’s an alternative to the execrable Windows Vista.
“Maybe if companies such as Intel would stop shipping American jobs to countries like India and China, then perhaps Americans would still be able to afford new PCs.
Got it?”
No because thats a false statement. If Americans didn’t ship jobs to India and China the workers would have to be payed significantly much more. Thus making PC’s significantly more expensive for the average consumer due to the added overhead of much higher labor.
This is a global economy, hiding from it will only ruin the U.S. not “make it better”
So I’m sorry to say this Anti-Free trade idea is completely stupid. If you know anything, you know that freedom of trade and more competition only increases economic benefit.
So please stop spreading unintelligent ideas supported by Barrack Obama.
Will, there’s always twp sides. If Intel didn’t ship jobs to India and China, Americans wouldn’t be able to afford PCs because they would be too expensive.
Fool, the increased costs of NOT SHIPPING the jobs overseas would only raise the sales price of the PCs, making them even less affordable.
Sorry, Bill from Reno, but if Intel didn’t produce it’s parts as economically as it could, ALL PCs would be more expensive, so while those people who retained their jobs might be more able to afford a new PC, EVERYONE else would be less able to do so.
They can aford PCs BECAUSE they are made in India and China. Can you imagine what a PC would cost i fmade here with all the OUTRAGEOUS Union wages workers make. That laptop would be $10,000.
Is it really considered news that sales may be down from Q4 last year?… Duh, right?
Maybe if companies such as Intel would stop shipping American jobs to countries like India and China, then perhaps Americans would still be able to afford new PCs.
Got it?
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A senior writer for Fortune, Jon Fortt focuses on technology and innovation in Silicon Valley - a subject he's been reporting on since his days as a rookie reporter for the Lexington (Ky.) Herald-Leader. Before joining Fortune in 2007, Jon had reporting and editing stints at Business 2.0 magazine, and the San Jose (Calif.) Mercury News, Silicon Valley's hometown newspaper.
Otellini’s comment that demand for PC’s suffered in ‘99, ‘00 due to firesales on eBay as a result of the dot com crash is pure wrong !!
Demand for PC’s went through the roof in ‘99 and ‘00. I worked for Intc at the time and their stock price hit an all time high in Q3 ‘00 – it tanked when they announced their profit warning in Sept’00 and led the way down for the rest of tech.