The Federal Reserve, trying to preserve calm, has referred to what ails the U.S. economy as an "inventory correction." In one sense, at least, this euphemism fills the bill. Sales of used and refurbished high-tech equipment are through the roof.
In the real-estate bear market of the early 1990's, salvage teams repriced and rehabilitated surplus office buildings. So now in the techno-busc Enterprising people are creating a new market in previously owned PCs, file server, routers and other furniture of the new Economy. The buildings lasted, whereas the equipment won't. However, the marginal shift in demand away from brand-new, high-margin produces in favor of the re-used and "de-installed" promises continuing profit pressures for the PC and teleco-equipment producers. "The more customers we pick up, the more repeat business we get." On secondhand entrepreneur tells Robert Tracy, analyst at GrantsInvestor.com, "Because once people try used equipment and they are happy with is, why would they do anything else?"
It's no news that Silicon Valley has an inventory problem or that many of Silicon Valley's customers have a cash-flow problem. Nor is it anyone's trade secret that the new-equipment makers are operating sideline businesses in their own excess merchandise. With the Nasdaq down by 66% from the peak and with the decline and fall of Cisco Systems providing the grist fro a three-part series in the Financial Times, bearish news it - almost - no news.
However, as colleague Tracy observes, the likely consequences of the used-equipment boom for the margins and growth of the hardware companies is a new subject. When the boom was on and money was no object, the PC and telco manufacturers competed mainly with other new -equipment manufacturers. Now, at the margin, they also compete with themselves - i.e., with surplus inventory they produced for customers who don't exist anymore - and with the fast-growing resale industry. Somcra Communications (SMRA), Santa Barbara, Calif.; Asset Recovery Center, Eaton, N.J. and Western Data Transfer, Los Lunas, N.M., are among the shining lights of what we at Gran's hereby christen the New New Economy. They New New Economy deals in the detritus of the New Economy.
The price trajectory of this merchandise bears a close resemblance to the stock prices of the companies that make it. Thus, a refurbished Cisco AS5248 access server - last offered new on Dec. 18 1999, at $23,000 - was quoted only nine months ago at $5,500. It's offered today at $3,495.
To read about some of the formidable competition that Cisco Systems, For instance, is facing, log on to the "refurbished equipment" comer of the Cisco Web site: "Recognizing that some customers have limited budgets or have networks which do not require the latest and greatest technology," says the text, "Cisco Systems capital now offers refurbished Cisco equipment, but at a lower price."
Thus, Cisco is today in competition with Cisco. Similarly, Sun Microsystems competes with Sun and Dell Computer with Dell. To be sure, the market in refurbished or "remanufactured" systems was not invented yesterday. What is new, however, is its blooming good health. For this the secondhand trade can thank the stock-market bubble (for financing the white elephants) and the myth of the new Economy (for propagating the idea that a wired world would not miscalculate its inventory and investment levels so badly as it has).
The size of the high-tech hardware flood is unquantifiable, but the voices of the people who describe it are full of amazement. According to Mark Magee, part owner of Asset Recovery Center (www.assetrecovery.com), telecommunications equipment is in particular oversupply. "I can buy the equipment for 10 cents on the dollar and turn around and sell it for 30 cents on the dollar…" says Magee. "The stuff that we are seeing right now is very often less than a year old and still under warranty."
So with PCs: " I have several hundred Pentium III PCs in my warehouse that came in with the file servers that I will sell for probably $500 a system.