Tech Sector: A Battle-Scarred Edge

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Nokia, Intel (INTC), and others also slowed production last fall within weeks or even days of seeing demand slide. They brought supply chains—often involving dozens of companies—to near hibernation. A few shut down. David Yoffie, a vice-president at server maker Rackable Systems (RACK), sent an e-mail to hundreds of partners last November telling them to stop all production immediately. "Customers had hit the brakes hard," he says.

Smartphones, the Smart Bet

It takes more than a wary eye to pull off such feats. Robert B. Carter, chief information officer at FedEx (FDX), says high-tech and life sciences companies have "the most advanced supply chains of any industry," thanks to investments in new technologies and talent. Just as Apple customers can go online to track exactly where their new iPhone is en route to their door, tech companies and their suppliers, manufacturers, and distributors typically share the same real-time view of actual demand.

That's led to other innovations. In the past, companies only air-freighted goods when inventories of a hot product ran out. Now, that's become quite common for small, light, high-end products. Although air mail is 10 times more expensive than shipping by boat, the products arrive in a day or two instead of three weeks, so they can be shipped after a customer places an order rather than in anticipation of demand. "If there is a spike in demand we can increase production. If not, we don't overbuild," says Liam Casey, CEO of PCH International, which helps Western companies produce and distribute products from China.

Still, even the leanest companies need growth to turn investors' heads. Research In Motion's shares have risen more than 50% this year in part because of strong revenue growth in the latest quarter. And because it cut inventory so drastically, the outlook for both sales and profits is promising. Some big phone companies have no more BlackBerrys on hand for their subscribers, says Neil Mawston, an analyst at Strategy Analytics in London. "Because of the de-stocking, there's going to be a restocking," he says.

Some see signs of better times in even the most savaged segments of tech. Take chips, where many companies took a huge hit by cutting production to less than 50% of capacity, vs. 80% in flush times. "A lot of them over-corrected in the fourth quarter," says Wedbush Morgan analyst Patrick Wang. But having taken that tough medicine, they're now positioned to sell the latest chips when big customers begin to rebuild their own stocks.

And yet the cautious optimism about the economy in recent days could well prove false. Wang says most companies admit they can safely forecast just a month into the future now, as opposed to four months in normal times. Companies such as Intel have stopped forecasting their revenue because of the lack of visibility. "There are lots of signs that things are getting less bad," says Whyman. "But we're not out of this yet."

With Dexter Roberts in Beijing.
Burrows is a senior writer for BusinessWeek, based in Silicon Valley.