PC firms give opinions on Olivetti loan

Date: 25/07/1996

COMPUTER-makers are submitting comments to the European Commission concerning the granting of a 37-million-ecu soft loan by the Italian authorities to information technology giant Olivetti SpA.

As a result, say industry officials, Competiton Commissioner Karel Van Miert should be in a position to take a final decision on the case in the early autumn.

At the end of April, the Commission formally announced that it had “serious doubts” about whether a loan made to Olivetti by the Italian authorities at below market returns could be allowed under the Union's state aid rules.

The loan was intended to help finance the development of portable multi-media personal computers (PCs), an area of the market where all major computer manufacturers are seeking to win a significant share.

This is especially important to Olivetti, given its reported loss of 820 million ecu last year and its relaunch as a broad-based information technology and telecoms company. This involved raising 1.2 billion ecu from shareholders with the issue of new stock.

Maintaining the confidence of shareholders is crucial to chief executive Carlo De Benedetti.

Although he has said that for Olivetti not to make PCs would be like asking Fiat not to make cars, De Benedetti has warned that the PC arm of the company - which accounts for 20&percent; of group sales and just managed to break even in 1995 - must do so again this year if it is to survive.

It has already been through a major restructuring. At the end of 1995, Olivetti replaced its top management and reorganised its distribution operations. Staff numbers were cut by 60&percent; to 1,750, with the intention of turning it into a separate but wholly owned firm in January.

Getting into new segments of the market is central to its plans, something the soft loan is intended to facilitate. Moving from a concentration on low-cost PCs in the past, Olivetti is now using the latest Pentium chip technology to manufacture note-books, desktop PCs and servers, and hopes to sell 900,000 personal computers this year.

But the Commission believes that the research and development work being undertaken by Olivetti using the loan funds would have been carried out anyway.

“This is a vital part of the market that the company needed to get into,” said a source. “Are you really telling me that a market that looks like netting 4 billion ecu by the end of the decade is not attractive to one of the biggest PC-makers in the world?”

Rome continues to argue that this fails to take account of the volatility of the industry. They say this is just the kind of investment that requires topping-up with non-risk money to make it worthwhile to a company.

“They believe the loan should be considered under the R&D state aid rules, which are less stringent,” said an industry official.