How long? That's the question haunting chief executives, investors, employees, and policymakers as they ponder the severe high-tech downturn now under way. Cisco Systems Inc. CEO John T. Chambers' announcement of a 30% drop in first-quarter sales is shocking enough, but the real concern is that the shakeout in high tech could take two more years and be much worse than anticipated. The Federal Reserve's dramatic inter-meeting interest-rate cut on Apr. 18 was motivated by fear that severe weakness in capital spending, plus lower corporate profits and equity wealth, may be pushing the economy into dangerous territory. Last month, Fed Chairman Alan Greenspan was still unsure just how bad the tech downturn would be. Now he appears to believe it will be at the lower end of expectations. The Fed is moving fast to address the problems of overcapacity and debt overhang choking the high-tech sector. Congress should quickly follow and pass a retroactive tax cut.
It is now clear that U.S. companies vastly overspent on high-tech capacity. Blame it on young dot-commers splurging on servers with generous venture-capital funding, telecoms buying optic fiber and routers with lots of junk-bond debt, or big Old Economy corporations purchasing computers and software with easy-to-get loans to stem the phantom Y2K threat. By any historical standard, capacity growth was unusually high in the late '90s. By 1999, high-tech capacity was growing at an unsustainable 50% annual rate.
The big question now is how fast capacity can be worked off. One problem is that for months, high-tech CEOs have been in denial. Even as some of their biggest customers, the dot-coms and telecoms, sank before their eyes, these CEOs continued to insist they could make the 20% to 30% annual earnings promised to Wall Street. When they couldn't, they blamed anyone but themselves--Greenspan, their customers, or energy prices. It's time for them to end the blame game and act, taking big charges for excess inventory and restructuring while cutting prices on their products to move them out the door. Many are in the process of doing so; others are just beginning. The faster, the sooner, the better.
Ditto for the heavy debt overhang choking high tech. Supplier financing and fancy accounting hyped up revenues, reported profits, and stock prices in the late '90s. It's time to clean up the books. Accounting firms could burnish their tarnished reputations by hanging tough. And there should be no extraordinary attempts by banks to rescue troubled high-tech companies. Bankruptcies are an efficient way of disposing assets and facilitating consolidation.
Innovation could play a key role in ending the high-tech downturn. Productivity-enhancing, profit-producing products can prompt a burst of new spending by businesses and consumers alike. Faster Pentium chips, new operating systems from Microsoft Corp. and Apple Computer Inc., and new handheld devices are on the way. Wireless Internet and broadband are crucial. Obsolescence is one simple way of cutting overcapacity rapidly.
Speed is important in flushing out excess high-tech capacity and regenerating economic growth. The gains of the '90s--the wealth, the job opportunities, the reform of welfare, the reduction in crime, the cleaning up of our cities--all will be jeopardized if it takes years to get back to "go." The Fed is acting fast. Congress is not.