Cisco freezes hiring

Chambers: Regrets the Fed did not take faster action on interest rates

By BBC News Online's Steve Schifferes in Silicon Valley

Silicon Valley's biggest company says it will stop recruiting new staff, in a sign that the US economic slowdown is hitting the once fast-growing high-tech sector ever harder.

John Chambers, the boss of Cisco Systems, told the BBC that a temporary freeze had been put in place since the beginning of this year after the company discovered that orders for its products were dropping fast.

Factory production and inventories have also been slashed.

In contrast, Cisco nearly tripled its workforce in the past two years, adding 30,000 workers worldwide, and is still planning on building a new campus just south of Silicon Valley to accommodate 20,000 more.

Mr Chambers also said that he regretted that the US Federal Reserve had not taken action earlier to cut interest rates, and he was worried that if the US slowdown lasted more than six months it would have a significant knock-on effect on Europe and Asia.

Confidence in Bush

He said that many manufacturing companies who are Cisco customers had already made their decisions to scale back capital spending by the end of December, before the Fed's two interest rate cuts in January.

Briefing journalists at the company's headquarters in San Jose, California, Mr Chambers expressed confidence in the Bush administration's grasp of the new economy, but said that passing the tax cut was vital for recovery.

And he said that the collapse of stock prices presented Cisco with some opportunities to acquire companies it wanted to buy more cheaply - and that he still planned to spend up to $10bn this year on acquisitions.

But he would be cautious about buying companies that added large numbers of workers to his headcount.

Cisco's decision to freeze hiring will have an impact across Silicon Valley. With each worker commanding an average salary of more than $100,000, the company has been receiving 25,000 jobs applications each month - and each new worker hired creates a further demand for local services.

Long term optimism

Cisco is the world's leading manufacturers of switches and routers that direct traffic for telecoms and internet providers, and Mr Chambers re-affirmed his belief that this was a strong market that would grow by 30-50% yearly in the medium term.

But he admitted that market conditions were now "very challenging" especially for their internet and dot.com customers.

Nevertheless, Mr Chambers said that Cisco aimed to capitalise on that growing market, and that the current downturn would just be a "speed-bump" that temporarily slowed down its momentum.

He said that the productivity gains for companies and countries which adopt broadband technology and the internet are so great that no one will want to be left behind.

And he claimed that it was the rapid adaptation of IT technology by US companies that was behind the surge in productivity that had underpinned the US economic boom.

Booms and busts

However, Stephen Levy, the director of the Centre for the Study of the California Economy, said that booms and busts were common in the high-tech sector which supplied capital equipment to industry, as company investment decisions were dramatically influenced by the economic cycle.

Cisco recently disappointed the stock market when it announced that its quarterly profits figure for November-January were virtually unchanged from the previous quarter at $1.3bn, after several years of spectacular growth.

Although Cisco's stock has fallen by more than half since the Nasdaq crash in April, the company is still valued by the market at more than $200bn.

And Mr Chambers pointed out that it was still worth more on the stock market than all its main competitors combined.