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Wednesday, 18 April, 2001, 10:31 GMT 11:31 UK
Hard times for tech firms

With dramatic profit falls announced almost daily by high-tech firms, BBC News Online's Mike Verdin looks at what has gone wrong with the new economy.

Just one year ago, European technology companies were rushing to list on the US Nasdaq stock market.

Technology's bad news tour
Apr 10: Germany's Siemens cuts 2,000 jobs
Apr 10: UK's Marconi says to cut 3,000 jobs
Apr 11: Motorola reveals $206m losses
Apr 12: Ireland's Baltimore Technologies issues second warning in three weeks
Apr 16: Cisco warns of 30% sales slump
Apr 17: Sprint says profits down 72%
Apr 17: Philips, of Holland, reveals 90% earnings drop
Apr 17: Intel unveils 64% slide in profits
Apr 18: Hewlett-Packard says to cut up to 3,000 jobs
It was an "important milestone" for Marconi, chief executive Lord Simpson said, when the firm won its Nasdaq place.

Geographically, a listing on the US-based exchange demonstrated Marconi's commitment to an American market presenting "great opportunity".

And by placing itself among the Microsofts and Oracles for which Nasdaq has become famous, Marconi was trumpeting its rebirth as an icon of the new economy.

The firm's roots, after all, were in the lumbering old technology giant GEC, which boasted the government, particularly military and postal divisions, as its major customer.

Slump

Six months on, the milestone looks more like a high-water mark.

Lord Simpson, chief executive, Marconi
Lord Simpson: "Important milestone"
Marconi's share price has been caught in the Nasdaq whirlpool, plunging by almost two thirds since the stock's 17 October debut on the exchange.

And the US economy is feared to be on the verge of recession, with the technology sector among the worst affected, as a series of company announcements reveal.

Meanwhile, the defence sector Marconi was so keen to quit in favour of high-tech optical switch and networking markets has proved resilient to the downturn.

The share price of BAE Systems, to which Marconi sold its defence interests three years ago, has dropped less than 5% since October.

Job cuts

So it was perhaps little surprise when Marconi last Tuesday announced 3,000 job cuts.

The firm is in good company. Philips Electronics, which on Tuesday revealed plans to axe more than 6,000 posts, is Europe's largest maker of consumer electronics and lighting equipment.

And Cisco Systems, the network specialist which on Monday revealed it is to cut one quarter of its workforce, has touted itself as the US's fastest growing computer firm, and the quickest company of any sector to reach a stock market capitalisation of $500bn.

Now Cisco is finding that the superlatives are turning against it.

"The business environment out segment of the IT industry is facing has never been more challenging," chief executive John Chambers said.

"In fact, this may be the fastest any industry our size has ever decelerated."

'Safe bet'

The question observers are asking themselves is, why?

John Chambers, chief executive, Cisco
John Chambers: "Challenging business environment"
While pure internet firms were widely acknowledged as speculative punts, the technology companies which served them - in essence the businesses which sold shovels in the dot.com gold rush - were viewed as safe investment bets.

The infrastructure they were providing was supposed, like roads or hospitals, to be in demand even in a downturn.

The likes of Ericsson, Marconi and Motorola have found, however, that the appetite for their products is satiable, or at least deferrable.

Telecoms debt

Certainly they have been hit, as might have been expected, by the decline of the dot.coms, whose equipment budgets have shrunk in proportion to their share prices.

For the likes of Cisco and Lucent, internet firms have represented not just customers but targets for billions of dollars in investment, injected in an effort to support the market.

But dot.com turmoil has been compounded by hardships in other sectors.

Telecoms firms, laden with debts incurred buying airwave licences for new-technology 3G phones, are now starting to pinch the pennies and cents.

Firms such as British Telecom have sought partners to share the cost of unrolling 3G networks.

Delays pay?

And, across the broader business spectrum, firms have delayed or cancelled technology upgrades in response to the general economic downturn.

"A technology buyer in a small or medium sized enterprise is going to ask themselves 'why bother to place my order now when I can wait and see how the market develops?'," an analyst at investment bank Beeson Gregory said.

The slump in demand, occurring at a time when firms such as Cisco have run up large product stockpiles, could at least prompt price cuts.

"Some firms are even getting calls saying 'why should I risk dealing with you when I don't know if you will even be around in a few months?'," the analyst told BBC News Online.

Follow-on effect

Companies such as Baltimore Technologies have found that by warning of difficult business conditions, as it has done twice in three weeks, it has only accelerated the decline in sales growth, as more firms postponed their orders.

"With Baltimore, they have in essence said that their first profits warning caused their second," the Beeson Gregory analyst said.

The size of the revisions also raises questions about the forecasting techniques on which firms are basing company strategy.

"The companies have been dealing with rapid market growth. You have to ask how robust their models are for dealing with such a change in market conditions."

Diverse sector

But limited analysis may be a fault not just of companies, but pundits too.


Look beneath, and you can see good individual reasons why each company has acted the way it has

Robin Birchall, Brown Shipley Securities
While it is convenient to treat technology, media and telecoms companies as a single, struggling sector, the curse of the TMT label conceals a wealth of differences between individual firms.

Intel's profits, while down 64%, were better than analysts had expected.

And although Cisco's share price has plunged, the firm is still worth about $125bn (87bn), Robin Birchall, technology analyst at Brown Shipley Securities, pointed out.

"That's not bad," he said. Indeed, Cisco's market value is about 10 times that of Marconi, and above all but the biggest of UK firms.

Philips, Cisco and Motorola may have shared headlines to articles on job cuts in the technology sector.

"But look beneath, and you can see good individual reasons why each company has acted the way it has," Mr Birchall told BBC News Online.

Product limitations

Motorola has been failed by, for instance, its "approach to handsets", he said.

Motorola mobile phone
Motorola phone: "Buttons everywhere"
"Compare a Motorola and a Nokia phone - the Nokia is far better. The Motorola is like an American car - it has buttons everywhere you do not know what to do with."

Philips has, despite efforts to focus its business, remained worryingly diverse.

The Dutch-based firm, while famous for its consumer electronics, also boasts lighting, semiconductor and medical systems divisions, and even in Tuesday's profits statement admitted to a "miscellaneous" section.

"There comes a time when businesses within a group are so diverse that it is impossible to reap synergies," Mr Birchall said. "You have to ask yourself why they remain in the same group."

Cisco, meanwhile, may be struggling merely because it is coming to the end of a business cycle.

"People upgrade to the latest equipment, and then feel they have spent enough. These kinds of cycles happen."

Technology winners

Not all technology firms are even struggling. UK chipmaker Arm Holdings signally failed last week to accompany a results statement with an announcement of mass job cuts.

This is not just because the firm employs less than 700 staff. Arm, which develops technology for use in products such as games consoles and mobile phones, has forecast continued strong demand for products and services.

"It produces low power computer processors for use in small devices, your Palm Pilot type products, which represent an area which is going to show firm growth," Mr Birchall said.

Spin-offs

Ironically, the firm, launched by Acorn and Apple computer groups in 1990, also owes its existence largely to a downturn.

Palm products
Mini computers: a growing market?
"In those days, companies were looking to see what functions they could spin off in order to keep costs down," the Beeson Gregory analyst said.

Many outsourced research and development operations, forming partnerships similar to those that exist between biotechnology companies and pharmaceutical firms.

It is a trend which is being repeated in the current downturn, although this time firms are looking to shed production lines rather than laboratories.

Outsourcing

Ericsson, the world's third biggest supplier of mobile phones, is transferring much of its production to Swedish-based Flextronics.

Marconi is outsourcing manufacturing work, and 2,900 jobs, to US-based Jabil Circuit.

Jabil reports that "the trend toward external manufacturing continues to grow as companies look for additional ways to reduce costs".

Indeed, the firm was able two weeks ago to report revenue up almost 44% between December and February, just as Cisco was encountering its record deceleration.

When the next technology gold rush hits town, maybe it will be the likes of Jabil Circuit and Flextronics which will control the market for prospectors' shovels.

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See also:

26 Mar 01 | Business
Cisco sees downturn continuing
09 Mar 01 | Business
Silicon Valley giant cuts jobs
11 Apr 01 | Business
Motorola's results shock
10 Apr 01 | Business
Marconi to axe 1,500 UK jobs
10 Apr 01 | Business
Siemens cuts 2,000 jobs
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