Despite body blows, infotech still growing

Summary:Layoffs, slowing demand, poor financials -- it was the sort of news guaranteed to set teeth on edge at chambers of commerce around Silicon Valley and other tech centers.Over the last couple of weeks the proof was seemingly undeniable that a long-overdue industry correction was at hand.

Layoffs, slowing demand, poor financials -- it was the sort of news guaranteed to set teeth on edge at chambers of commerce around Silicon Valley and other tech centers.

Over the last couple of weeks the proof was seemingly undeniable that a long-overdue industry correction was at hand. For doomsayers, here was the bill of particulars:

* National Semiconductor (NSM) eliminated 1,400 positions.
* Intel (INTC) eliminated 3,000 positions.
* Compaq (CPQ) saw Q1 earnings plummet and warned of tough times in Q2.
* IBM's (IBM) profit fell 13 percent in Q1 as its PC business got hurt by a price war

Bad news indeed -- except many analysts and industry executives still say the computer industry's unrivaled run of luck in the 1990s will continue unabated.



Are recent tech troubles a sign of worse things to come? Add your comments to the bottom of this story.





Indeed, one day after National dropped its bombshell, Microsoft Corp. (MSFT) and Gateway Inc. (GTW) came in with strong earnings reports that were better than expected.

In fact, many of the bellwether companies in the computer business have met or exceeded Wall Street's expectations this quarter -- and that has many executives dismissing talk of an imminent slowdown.

'The ones that are proactive in making these changes survive; those that can't, don't.'
-- Marimba CEO Kim Polese

They contend that while problem pockets exist, the weakness does not extend up and down the entire industry food chain.

"I believe that these recent events are due to the dynamics of each sector and the inevitable cycles and evolution of the industry as old pricing and business models are forced to change," said Marimba Inc. CEO Kim Polese.

Under pressure
Bigger companies are under pressure to remain nimble and make adjustments in the way they run their businesses, she added.

"The ones that are proactive in making these changes survive; those that can't, don't," Polese said.

One of the biggest changes concerns the emergence of low-end microprocessors and sub-$1,000 PCs. Their growing popularity has presented semiconductor makers and computer companies with new challenges to stretch their margins.

But executives nonetheless caution against making broad-brush generalizations about the industry because of current problems affecting some chip and computer companies.

Tech transforming the economy
"It was easier to generalize when the information industry was about 1 percent of the United States' gross domestic product," said Gary Rieschel, a venture capitalist with Softbank Technology Ventures. (Softbank owns Ziff-Davis, the publisher of ZDNet News.)

Rieschel said that increasing importance of the information technology industry is transforming the economy.

"Back then, you could lump things together," he continued. "Now, [IT] is about 8 percent of the entire economy. So you have to break things down and look at the entire value chain from silicon to services. Are there going to be some bumps along the way? Absolutely -- but it will be temporary."

Earlier this month, the U.S. Commerce Department issued a report showing that the information technology industry now accounts for 7.4 million jobs and about one-fourth of the economy's growth. In presenting the report, William Daley, the commerce secretary, said the digital economy "is alive and well and growing."

Pockets of turbulence
Rieschel and other venture capitalists agree.

"There's some possibility that certain sectors are getting hit hard but it's unlikely that there's generalized weakness," said Dick Snyder of Avalon Investments, who used to be the No. 2 executive at Gateway. "This is most likely a company-specific issue, and I'm still bullish."

Despite a slowdown in demand for high-tech products from Asia, Latin America is booming while Europe is picking up, according to analysts. Meanwhile, they point out that Internet traffic is doubling every 100 days. What's more, of the approximately 100 million people who use the Internet, about 62 million of them live in the U.S.

Still, thousands of people are getting pink slips as some companies chuck overly ambitious sales forecasts out the door.

One Microsoft executive, who asked to remain unidentified, acknowledged that when business is good, overstaffing remains an ever-present temptation.

Wood shavings
"In good times, you can engage in some efforts which aren't core, which use a fair number of resources, and then one day you wake up," said the official. "Some companies will try to live with it -- which they can do if they are very profitable -- some will reassign them, some will do a layoff."

"One of the things that happens in times of growth is that you hire like crazy and then one day, it's like `Jeez, time to get rid of some of the wood around here' when projects don't work out," said Chris LeTocq, an analyst with Dataquest. "My feeling is that with the job market around here, those people are likely to be employed within two seconds."

Topics: Microsoft, Hardware, IBM, Intel, IT Employment, PCs, Start-Ups

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