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The slowdown in computer sales has been most devastating for the semiconductor industry. When the market was strong, computer firms were all wildly optimistic in placing their microchip orders. Says Ken McKenzie, an associate director of the Dataquest research firm in Sunnyvale, Calif.: "Every company that produced a clone of the IBM Personal Computer expected to get 22% of the market, and there were 60 of those companies." When computer makers realized that their sales would not come close to expectations, they started canceling chip orders, leaving the semiconductor companies to sit on mountains of inventories. The glut of chips drove prices down almost to giveaway levels. The cost of a 256K RAM memory chip, for example, plunged from near $40 to as little as $5.
As chip prices dipped, profits in much of the semiconductor industry all but disappeared. In the first three months of this year, Texas Instruments' earnings fell 89%, to $9 million, and the company has laid off about 2,000 of its 85,000 employees since December. Mostek, the chipmaking division of United Technologies, lost more than $40 million in the first quarter. It said last week that it would furlough 1,600 of the 4,800 workers at its Carrollton, Texas, plant. National Semiconductor of Santa Clara, Calif., shut down most of its plants for two weeks in February and is currently imposing a six-month pay freeze and a four-day work week.
One of the few major parts of the computer business with continued strong sales is the software industry, which develops the programs that tell the machines what to do. Because 18 million personal computers are already in use, software manufacturers can prosper merely by selling new programs to old customers. Software sales jumped 36% last year, to 62 million programs. Even so, stiff competition has given the industry a high mortality rate. In the past two years the number of major software producers has shrunk from more than 200 to about 50.
Sales of both hardware and software will undoubtedly go on growing, and the industry is expecting a rapid recovery in 1985, but the ranks of the competitors are likely to keep dwindling. History shows that many new industries go through an exuberant expansion phase followed by a shakeout. In the early 1920s, there were at least 300 automobile companies in the U.S., but by 1960 the industry had consolidated into four big firms. If that pattern repeats in computers, only the savviest of the industry's current whiz kids will survive.
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