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NEWS ANALYSIS

Recovery Elusive for Tech Sector

Economy: Analysts see few signs of a rebound in the industry before next year, although there are a few bright spots.

September 23, 2002|ALEX PHAM | TIMES STAFF WRITER

Talk of war, consumer anxiety and a swooning stock market have pushed prospects of a technology sector recovery deep into next year as analysts see little lined up this holiday season to rescue the industry from a lackluster year.

"Technology has yet to emerge from its slump," said Richard DeKaser, chief economist at National City Corp., a Cleveland-based financial institution. "Telecommunications continues to reel. Computer makers are barely getting on their feet. Same thing for semiconductors."

Only six months ago, economists widely projected a technology rebound by the end of the year. But recent signs suggest that it's going to take a lot longer for the sector to stage a comeback.

On Sunday, San Diego-based Peregrine Systems Inc. filed for Bankruptcy Court protection, becoming the latest victim of the technology meltdown. The move followed a rash of technology stock selling that forced several issues to multiyear lows on Friday, including Texas Instruments Inc., IBM Corp., Intel Corp. and Micron Technology Inc.

Also last week, database software maker Oracle Corp. posted a 33% drop in its first-quarter profit and projected that its full-year earnings could stagnate, portending continued weakness in software spending. Among hardware makers, North American semiconductor equipment suppliers saw orders fall in August from July as chip companies throttled back capital spending.

Even computer services, an area that seemed rock steady as more companies hand over the care of their computer systems to specialized firms, is starting to flag. Electronics Data Systems Corp., the largest provider of technology services, on Wednesday said a paucity of orders from existing and new customers would erase more than 60 cents a share off its third-quarter earnings forecast of 74 cents.

"In general, capital spending booms and busts are mirror images of each other," said Fred Breimyer, chief economist at State Street Corp. in Boston. "They take awhile to develop, and they take awhile to correct. We just aren't used to seeing this in our lifetimes. It's a 19th century phenomenon, where there were many such booms and busts in such industries as steel and railroads."

Not all is grim, to be sure. Many large corporations continue to invest in technology, albeit at a much slower pace than during the late 1990s. Intel two weeks ago said it is buying 28,000 computers for its employees this year after purchasing none last year. Laptops also continue to move briskly, and sales are projected to rise 11% this year, according to Framingham, Mass., research firm IDC.

Entertainment has also been a boon. Film and television studios are expanding their use of digital equipment to shoot a growing number of TV shows and movies. And video game companies are projecting record sales this coming holiday period, thanks in large part to new game consoles.

Still, the overall picture for tech remains decidedly weak.

The glare of corporate accounting scandals, analysts say, is making many companies afraid to take new risks. And that, in turn, has caused them to postpone purchases for such items as new PCs, which were last replaced en masse in 1999 in preparation for the Y2K conversion.

Moreover, the rush to build Web-based businesses has cooled, with established brick-and-mortar companies making do with existing equipment and many pure-play e-commerce companies going under entirely.

The upshot: Sales of more expensive and more powerful server computers have fallen for six straight quarters, according to IDC.

Until recently, consumers have propped up sales of everything from cell phones and DVD players to personal computers and laptops. "The consumer held up surprisingly well against all economic odds," said Fred Hickey, editor of the High Tech Strategist newsletter in Nashua, N.H.

But they, too, may be running out of steam. "That's because lower interest rates have led people to take on as much debt as they could possibly gorge," Hickey said. "Unfortunately, they may be stuffed so full with debt that they'll now sink to the bottom of the ocean. They can't just keep consuming because it's all debt spending."

One sign of a slowdown among consumers came last month when electronics retail giant Best Buy Co. reported across-the-board weakness in sales. The company projected that as a result, profits could drop by about a third in the current quarter from a year ago.

For their part, PC makers typically enjoy a boost from back-to-school sales. But this year, it was barely perceptible. PC shipments worldwide are now expected to increase an anemic 1.1% for all of 2002, according to IDC, not the 4.7% projected in June.

Many technology companies also look to the holiday season for a lift. Expectations are more subdued this year, however.

"The holidays have been a clear bump for the tech sector the past 15 years or more," said Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay, Calif. "This year, it's not going to be a boomer, because nobody's building inventory. That's because no one wants to end up with a lot of unsold goods on their hands. So we expect it to be up this holiday, but only moderately so."

Further tempering both business and consumer spending, say analysts, is the possibility of a war between the United States and Iraq. "Iraq increases uncertainty across the board," State Street's Breimyer said, "and not just from a potential spike in oil prices. It also causes corporations and individuals to put things on hold.

"It makes planning difficult. And that alone will retard even further whatever recovery might be out there."

Times reporters David Colker, Jon Healey, P.J. Huffstutter and Joseph Menn contributed to this report.

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