News April 15, 2009, 4:19PM EST

Tech Sector: A Battle-Scarred Edge

The recent thriftiness and insistence on lean inventories could keep tech companies well-positioned when the economy starts to heal

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After bearing the brunt of the economic downturn at the beginning of this decade, the technology sector looks as if it may be among the best positioned to benefit when the global economy recovers from the current recession.

Of course, that's partly because it's not tech's bubble that burst this time. Real estate and finance have that distinction. Yet tech companies also appear to have learned tough lessons from the Internet bust that have helped them manage through the latest slump. Many cut costs and made other hard choices early on, and now look poised to profit if corporate and consumer demand begin to climb. "Have we learned from previous mistakes? Absolutely," says Niklas Savander, executive vice-president at phone giant Nokia (NOK). "Not everyone has managed perfectly, but I would say the tech industry has managed it better than others."

Investors are betting that's the case. The tech-heavy Nasdaq has rallied in the past month and is up 5% for the year, while the Standard & Poor's 500-stock index and Dow Jones industrial average are down. Shares in Cisco Systems (CSCO), IBM (IBM), Research In Motion (RIMM), and Apple (AAPL) have risen at least 10% in 2009. "Right now, the stocks are on the bargain table," says Jerome I. Dodson, CEO of Parnassus Investments. "If there is even a small increase in demand, I suspect that tech stocks will take off."

These could be misplaced hopes. If the economy continues to slide, tech companies won't see much benefit from their belt-tightening and other moves. And the economic outlook remains cloudy. Tech retail sales, for example, slid 10% in March, according to government data, far worse than the 4.1% drop in February. "It's still pretty ugly," says Bill Whyman, senior managing director at International Strategy & Investment.

Cisco's Inventory Vigilance

Tech companies have taken a number of steps to position themselves for a recovery. They've laid off workers, closed facilities, and outsourced even more of their production. Many companies have also hoarded cash for years, even in the face of investor complaints. Now as other companies scramble for financing, tech giants such as Cisco, Apple, IBM, and Microsoft (MSFT) have billions on hand for acquisitions, research and development, and other long-term plans.

Perhaps most important is how aggressively tech companies have managed production and inventories. Whyman figures that while hardware sales fell 5.8% from the third to fourth quarter of last year, inventories dropped even faster, by about 9%. It's a sign tech companies quickly throttled back on making new PCs, mobile phones, and chips in anticipation of weak demand, saving themselves from having to write off excess inventory, as they had to do in years past.

Take Cisco. In April 2001 the networking giant made one of the more painful confessions of the Internet bust: It had let so much networking gear pile up in inventory that it had to take a $2.5 billion charge for equipment no one would ever buy. Ever since, it's been working to make sure such a thing never happened again. Supply chain chief Angel Mendez is grilled at monthly reviews by CEO John T. Chambers and other top brass, and Cisco has half the inventory it did in 2001 even though it is twice as big. "It didn't take John eight years to start asking questions [about inventory levels]," says Mendez. "He asks about every eight minutes."