BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE
COVER STORY Who May Prosper Despite the Fall Despite the gloom gathering over high-tech, Commerce One Inc. (CMRC) CEO Mark B. Hoffman isn't losing sleep. Why should he? In 1990, the last time the technology industry cratered, Hoffman was running fast--building database-software maker Sybase Inc. While the rest of the sector saw timid 10% growth for two straight years, revenues at Sybase (SYBS) jumped 160%. Now, he's counting on the same boost for Commerce One, an e-business software maker. Little wonder. When corporate profits get squeezed, high-end software that can automate complex processes heats up. In fact, any spending on tech equipment or services that cut costs and improve efficiency can rapidly change from being a pesky expense item to a downright necessity. Consider it the silver lining in the tech-spending cloud: From contract manufacturers and software makers to purveyors of used computer equipment, some sectors flourish when the rest of the info-tech industry turns down. GATHERING STEAM. That shift has already begun. On Dec. 6, wireless giant Motorola Inc. (MOT) announced that to cut costs, it will outsource the manufacturing of more than $1 billion worth of communications gear, such as handsets. That trend is likely to gather steam. Indeed, while PC makers, chipmakers, and telecom-equipment manufacturers have announced disappointing quarters, few high-end software companies, contract manufacturers, or the analysts who follow them have expressed earnings concerns. They won't, if past downturns are any guide. Back in 1985, the nascent days of the PC business, dozens of PC manufacturers existed. Two years later, many of them were gone. Despite the contraction, bargain hunters kept technology auction houses such as DoveBid Inc. going like gangbusters. In 1984 and 1985, it sold at least 50,000 computers made by now-defunct companies. These days, the fire sales are picking up again, says CEO Ross Dove. He just banked $750,000 by selling off the PCs, furniture, and other assets of now-defunct Petstore.com and Productopia.com. If anything, high-end software makers look even better positioned to flourish. In 1990 and 1991, while the national economy bottomed out, the three biggest independent makers of databases saw, on average, 30% annual growth. Customers believed they could save money by taking information off old, expensive mainframes and moving it onto the more flexible software sold by the young database companies. Will the same thing happen for new e-business software makers? Ariba Inc. (ARBA) CEO Keith J. Krach hopes so. Ariba makes software for business-to-business marketplaces and online-procurement systems that can save a customer up to 20% a year on purchases of necessities such as office supplies. Says Kimberly Knickle, an analyst at Advanced Manufacturing Research Inc. in Boston: ''IT project managers are going to have to produce a cost-benefit report to demonstrate that they need the technology,'' and e-biz software is a proven way to do so. That's why most Wall Street analysts expect the market for customer-management software, dominated by Siebel Systems Inc. (SEBL), to continue to grow at a 70% clip next year. The market for software that automates supply chains should boast gains of about 50%. OUTSOURCER BOOST. Likewise, researcher Technology Forecasters expects the market for contract manufacturers to keep growing at this year's 28% clip. And despite its otherwise bearish outlook on the tech sector, Merrill Lynch & Co. thinks outsourcers such as Solectron Corp. (SLR) in Milpitas, Calif., which makes everything from cell phones to computer networking equipment, will still prosper. ''When things slow down, the first thing people look to do is cut costs--and getting rid of factories is a great way to do it,'' says Michael E. Marks, CEO of contract manufacturer Flextronics International (FLEX). Even these downturn-resilient categories aren't immune. ''I don't see any sign that [software sales] will slow down. If anything, they are accelerating,'' says analyst Knickle. ''But people are kidding themselves if they think they're recession-proof.'' A backlash against free trade, for example, could cripple contract manufacturers, who often rely on cheap foreign labor. Hoffman concurs: ''I worry, still, that anything from the election to the oil situation to any number of things globally could squelch the economy and lead to a downturn.'' And if that should turn into a recession, the troubles that are plaguing the rest of the industry won't leave even the most defensive players unscathed. By Jim Kerstetter, with Peter Burrows, in San Mateo, Calif., and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Tech Slump COVER IMAGE: The Tech Slump CHART: Tech Spending Slowdown TABLE: Angst in the Air Who May Prosper Despite the Fall TABLE: Recession-Resistant Commentary: Tech Leads--Both Up and Down TABLE: Technology Booms and Busts Commentary: Greenspan: This Is Your Captain Speaking... More Bad News for the Naz CHART: Valuations Remain Sky-High Asian Electronics: Who Pulled the Plug? (int'l edition) CHART: Cooling Down INTERACT E-Mail to Business Week Online

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