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Tech companies can agree on one thing: Good riddance to 2001. They were mauled last year by overcapacity, weak demand, and the economic fallout after September 11. But the news has been good lately. Manufacturing orders for computers and electronic gear rose a surprising 20% in the fourth quarter compared to the third -- the first sequential uptick in a year and a half. Stronger-than-expected consumer demand over the holidays boosted revenues for PC makers such as Hewlett-Packard (HWP
) and Dell Computer (DELL
). Plus, semiconductor companies, memory-chip suppliers, and software makers all saw firmer prices on their products, suggesting renewed demand.
So why aren't tech chieftains smiling? Because nearly all the encouraging news is coming from the wrong place. Strong consumer buying is always welcome, of course. But consumers account for only 6% of U.S. technology purchases, and they can't be counted on to extend their holiday buying spree. Government spending, which is expected to be strong this year, is also just 6% of sales. With education and other categories chipping in a measly 4%, that means corporate customers account for 84% of tech spending. And businesses have yet to pry open their wallets.
That's why a close look at the fourth-quarter numbers tells two stories. Business spending on computers and peripherals rose an impressive 40.4% over a miserable third quarter, according to the latest gross domestic product sales figures. But they're still down 9% vs. the fourth quarter of 2000, which was itself quite weak. Worse, overall information-technology spending by business is 11% below year-ago levels.
WAITING GAME. These sobering statistics recently led Microsoft (MSFT
) Chairman William H. Gates III and Texas Instruments (TXN
) Chief Executive Thomas J. Engibous to join a chorus of execs in saying a dark cloud remains over the industry. "I don't see any big uptick," Gates said on Feb. 3 at the World Economic Forum in New York.
Many tech chieftains now say they don't expect positive growth until at least the second half of 2002. And others aren't counting on tech to be out of its sickbed until at least 2003, when corporate customers set new annual capital-spending plans.
In the meantime, a host of tech companies is taking their cue from corporate customers, the vast majority of whom are exhibiting a wait-and-see attitude until the economy turns stronger. "I don't see companies today so confident of a recovery that they have become more aggressive in their spending," says PeopleSoft (PSFT
) CEO Craig A. Conway. Indeed, many U.S. corporations say for now they'll simply hold the line on purchases of everything from software to computers to wireless devices. "Frugality is us," says one UAL exec.
PENNY WRINGERS. Other indicators certainly aren't encouraging. The big hurdle tech companies face in making sales is made clear in the "Enterprise Technology Trends" survey completed by research firm IDC on Jan. 31. Only 28% of U.S. corporations in the sample of 1,400 expect their fortunes to pick up in the next six months. As a result, "Business will follow more slowly in recovering this time around," says IDC analyst Lucie Draper.
So what are companies willing to buy? Much what corporations are spending on tech goes to replacement computers and cost-saving hardware and software. Even though Delta Air Lines (DAL
) lost $1.2 billion last year, the carrier says it'll hike its tech spending this year by $20 million, to $240 million. It will purchase revenue-management software and handheld scanners to wring savings from better tracking of its parts inventory. Likewise, Levi Strauss & Co. plans to spend as much as $70 million this year on supply-chain-management systems, up from $22 million in 2001.
All of which leaves tech at the mercy of corporate buying -- even more so than usual. "There is no question in talking to customers that there is pent-up demand" to replace aging PCs, says Compaq Computer (CPQ
) Chief Executive Michael D. Capellas. The question now: When will it be economically feasible for companies to start relieving that pressure by laying out big bucks for new orders? It could take longer than expected.
By Cliff Edwards in San Mateo, Calif., with bureau reports Edited by Douglas Harbrecht
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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