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IBM’s Job Cuts Focus Attention on Computer Slump With BC-Computer Slump-Cuts

December 6, 1989

NEW YORK (AP) _ The glamour is fading from the computer industry at the close of the 1980s, tarnishing one of the most remarkable success stories of American business.

The computer industry has behaved more like the auto or steel businesses this year, with numerous layoffs and other job reductions. While sales continue to rise, the single-digit growth is a comedown for an industry that was accustomed to bounding gains in the early 1980s.

The latest evidence came Tuesday, when International Business Machines Corp. announced it would cut 10,000 U.S. jobs without layoffs because of slow growth in its home market.

IBM and independent analysts cite several reasons for the troubles, including an economic slowdown and sluggish capital spending by American companies.

But one of the biggest factors is that computer makers have worked their way out of sales. They have made machines so cheap and powerful that customers no longer need to shell out millions of dollars to get a job done. They can get by with spending a tenth or a hundredth as much.

There are some winners in this transformation: the makers of personal computers and engineering workstations, such as Compaq Computer Corp., Apple Computer Inc. and Sun Microsystems Inc.

The losers are companies that get most of their profit from bigger, costlier computers, including IBM, Digital Equipment Corp., Unisys Corp., Control Data Corp., Amdahl Corp., Bull HN Information Systems Inc., Wang Laboratories Inc. and Prime Computer Inc.

All those companies have cut jobs this year, through layoffs or voluntary resignations and retirements. Their machines can’t match personal computers for the combination of low price and high speed.

Personal computers won’t take over entirely. Big mainframe computers remain irreplaceable for jobs such as controlling access to vast reservoirs of data and handling complex computing jobs that can’t be split up among several smaller machines. Minicomputers, which lie between mainframes and personal computers, also have a valuable role in many corporations.

But more and more, personal computers are doing jobs that once were the exclusive reserve of bigger machines.

″The little guys are just creeping up everywhere and they’re stealing their way into niches all over the place,″ said Doug Crook, a Dataquest Inc. analyst.

All this is good for customers but bad for traditional computer makers. IBM is a major factor in the personal computer market but makes very thin profit margins in that business, in contrast to its fat profits from its dominant market position in mainframe computers.

Digital Equipment is in a similar bind. This year it introduced a speedy computer workstation to compete with companies like Sun Microsystems. The machine is so fast that it threatens to cannibalize Digital’s own sales of its bread-and-butter Vax large-computer line.

The danger to mainframes and minicomputers was obscured early in the decade by the overall growth in the industry. With growth slowing, the threat from personal computers is clearly delineated.

IBM said Tuesday that its business was stronger in Europe and Asia than in the United States. One reason may be that personal computers are not as popular abroad. Once PCs catch on there, they may sap strength from those markets for bigger computers the same way they did in the United States, said Don Bellomy, an International Data Corp. analyst.

Bellomy’s company is projecting an 8 percent increase in U.S. sales of computers next year, about even with 7 percent this year but far less than the growth of 30 percent a year in 1982 through 1984.

International Data projects the strongest growth in PCs and workstations, 11 percent; and the weakest in mainframes, up less than 1 percent.

Cahners Publishing Co., which publishes several trade magazines, is more pessimistic. It projects overall industry growth of 2.7 percent this year and less than 2 percent in 1990.

The scope of the industry’s difficulties is reflected in job figures. According to the Bureau of Labor Statistics, computer industry employment in September was just under 420,000. While that is about even with the last several years, it is down sharply from 471,000 in September 1984, the industry’s last boom year.

In its announcement Tuesday, IBM said that in addition to cutting 10,000 jobs through retirement and separation incentives, it would buy back an additional $4 billion of its own stock.

The world’s biggest computer company also said it would set aside $2.3 billion from its pre-tax profit to pay for the job cuts and related steps. That will guarantee a decline in 1989 earnings compared to 1988.

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