INDUSTRY VIEWPOINT - Oversupply will be a bad memory

Martin Mulligan, managing director of Datrontech, comments on Datrontech Group's profit warning on 12 August and James Wickes' reaction to it (PC Dealer, 2 September).

They say all publicity is good publicity. But I had to think twice when Datrontech Group hit the headlines over its profit warning. With regard to the Industry Viewpoint by James Wickes, managing director of Ideal Hardware, one of the things that must be remembered is that the financial aspects of our company are all relative. Datrontech Group includes a host of companies and divisions, including Datrontech. And the group is still a highly profitable company. A profit warning does not necessarily mean a loss, just the revision of an original statement about anticipated profit figures.

However, as Datrontech Group is a public limited company, it has a legal obligation to forewarn the City and its shareholders of any changes.

Around April and May, I think most distributors were going through a tough time on the hardware side. And as Wickes mentioned, it has been an especially bad season for memory distribution.

In the early part of the year, sales were pretty buoyant. But by May, the situation had become pretty severe, not just from our viewpoint but, I believe, for most of our competitors too.

I agree with Wickes when he says one of the problems hindering sales is the fear of the millennium bug. Instead of buying hardware, at present corporations are still investing in the software skillset.

People are going through the software to check there are no problems.

Between the first and second quarter of this year, there was a 40 per cent drop in memory price, which means distributors had to ship a substantial number of extra units simply to stay linear. It is difficult to survive a 40 per cent drop in prices, especially when the market is not growing at anywhere near the same rate.

Memory prices are flat at the moment - they have hit rock bottom. However, in my opinion, this will change in 1999. It will be a year of excessive allocation. Although this may seem like a contradiction in terms, it is my belief that by the end of the year, there will not be enough product to satisfy demand. This includes memory. I believe we will really start to see the effect in the second half of next year.

I think next year will see hardware sales take off. This will concern companies, in particular SMEs, that at present lack either the time or the resources to go through with the necessary checks and corrections.

But by 1999, I think SMEs will realise that the problem can no longer be ignored and needs to be averted quickly. By then, they will have no time to correct any faults and will have to rush out and buy new kit.

The result of this will be a supply shortage. We need to get the message across to people that they should react sooner rather than later because the supply of components will be limited.

Factors such as the plants closing in Scotland and Tyneside show there is oversupply. But closing production in these factories will definitely have an impact. They have been shut because of the sheer cost. No one who manufactures memory is making money at the moment, so companies obviously believe their money could be put to better use elsewhere.

But this means fewer people will be producing. So, sooner or later, we will hit that magical moment when demand meets supply. Then the allocation will happen.