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November 22, 1993

DIPLOMA’s CHIP BUSINESSES BOOM, BUT THE BAD ASPECTS OF BOOM TIMES ARE SHOWING

By CBR Staff Writer

Diploma Plc, the electronics to bricks holding company saw its computer-related business boom this year. Businesses from the Macro Group, Nortronic and Wakefield reported turnover up 33.8% at UKP104.1m, accounting for 66% of Diploma’s sales. Profit in the same companies grew by 54%, reaching UKP12.9m. In addition, last years figures encompassed a 53-week period. A turbulent year for Macro’s component distribution operations have made conditions just like old times, including one of its less pleasing characteristics, that of demand being over-stimulated by fear of product shortages says chairman Christopher Thomas. He believes that purchasers have been over-buying components and double-ordering in some cases, with the result that the silicon industry’s book-to-bill ratio will go negative imminently as buyers attempt to ease their bulging warehouses. Imminent in this case means some time in the New Year, though Thomas acknowledges that he was predicting a fall into the red this autumn earlier on this year. On the face of it this should spell bad news for Diploma in the next financial year.

Over-buying is in evidence

However Thomas is pinning his hopes on order books that reach well into 1994 and a belief that his customers would have avoided over-ordering because of their faith in Macro’s ability to deliver in the first place. It was between May and August that the industry really started to bubble. Thomas says that his suppliers began greatly to lengthen their lead times and stated delivery dates at exactly the same time as his buyers became nervous and began to stock up. None of it was helped by the scare over epoxy resin shortages affecting memory chip productions. The markets are now back to a simmer he believes: signs are al-ready in existence that the artificial level of demand will decline and a more orderly market will exist. Together, the two companies that make up the Macro Group, Macro and Anzac, saw turnover up 35% and profit up 50%. Activity in the passive, electromechanical and communications sectors served by Nortronic was described a less hectic than on the semiconductor side, however here sales grew by 20% and net profits by 70% – once again over-buying is in evidence, which Thomas sees dropping off in the coming year. Nortronic says it has also benefited from a trend among its customers to reduce the number of suppliers used. Faced with competition from distributors that supply a wider range of products, Macro and Nortronic are having to team together to provide selected customers a wider spectrum of products. The one division that Diploma does not give separate figures for also happens to be the one in the doldrums: Wakefield, which now trades as Southern Hills Datacomm, concentrates on networking component sales; an earlier decline in domestic US sales has been arrested, the company says and the average value per order has begun to grow. Turnover this year was UKP19m with profits of UKP2.5m. With the boom in local networks, it would have seemed to be an area with much potential, but Thomas says that the small ‘Mom ‘n Pop’ businesses that might buy small networks from a catalogue tend to buy them from a local installer. As a result, the company has given up on the small business market and is concentrating on larger firms. Costs were absorbed above the line for the closure of the division’s plant in Rochester, Minnesota, and the operation has moved to Pittsburgh. It says costs are now substantially fixed and that South Hill’s gross margins are expected to improve.

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