Wednesday, February 16, 2005
Technology the herald?
Posted by David Smith at 08:00 PM
Category: David Smith' s magazine articles

For the technology sector the past few years have been like the proverbial rollercoaster. The upward climb during the 1990s was dizzying, the subsequent drop both nerve-racking and sickening.

Technology has been through a torrid time, the bursting of the internet bubble being followed by a post-millennium (Y2K) downturn in investment and a US/world recession that began in 2001 and was not really shrugged off until last year. Pride came before a long fall. The Nasdaq’s rise and fall – even now it is at barely 40 per cent of its spring 2000 peak – tells the story.

Those in the sector could be forgiven for thinking this is the way it always has to be. They, in other words, are doomed to experience a much more volatile cycle than the rest of the economy. It can be exhilarating, but it can also be damaging and dispiriting.

In fact, there are reasons to think the current upturn in the technology sector is more durable than its predecessor in the 1990s. Carly Fiorina, the then chairman and chief executive of Hewlett Packard, said at last month’s World Economic Forum in Davos that she expected turnover this year to rise at twice the rate of gross domestic product. That may be a pale shadow of the performance of HP and other companies in the late 1990s, when turnover rose at five times the rate of GDP, but it looks rather more sustainable.

To put that in perspective, US and world GDP will rise by 3-4 per cent this year. And to achieve a turnover gain of double that, HP has to offset annual price deflation of between 20 and 30 per cent. That means pumping through a lot more volume.

Technology, according to Rob Lloyd, European president of Cisco Systems, is benefiting from a number of forces. The first is that the replacement cycle is kicking in, particularly when it comes to corporate investment, the last good year for which was 2001.

Second, businesses are upgrading and improving systems, not least to guard against online security threats. The battle to keep ahead of the internet vandals and their increasingly sophisticated viruses is an ongoing one.

Third, firms are increasingly using IT as a tool for raising productivity, whether it is through improving internal processes, or via outsourcing. And fourth, particularly for firms like Cisco, important new markets are opening up in fields like education. This is not just in the advanced economies. Countries like Jordan and Egypt in the Middle East, and Hungary and the Czech Republic in Eastern Europe are realising that IT is the quickest route to catching up when it comes to education and skills.

Tie this is to the fact that we are in an interesting phase of the consumer product cycle, with huge demand not only for the latest generation of mobile phones and Ipods, but also for Blackberry-style mobile devices. This has a lot further to run.

What does the technology upturn tell us about the economic outlook more generally? It tells us that business optimism is in pretty good shape, and indeed this was the message emerging from the Davos forum. It also tells us that business investment is picking up, and that this recovery will probably last. It is also a vote of confidence in firms that have continued to innovate even during a period of relatively weak demand.

The news on technology combines with another optimistic pointer for Britain’s economy. Michael Saunders, an economist with Citigroup, has looked in detail at some data from Eurostat, the European Commission’s statistical agency. They show that so- called knowledge-intensive sectors account for 41% of employment in Britain, higher than in France, Germany, Italy and Spain and well above the EU average of 33%. This is fascinating, and runs against the usual perception that we have too many workers stuck in low-value areas.

These knowledge-intensive sectors include computing, telecoms, financial and business services as well as legal and technical services, education and healthcare. They tend to be the parts of the economy growing fastest. The fact that Britain has a higher proportion of people in these areas is, says Saunders, one reason why economic growth in Britain has exceeded that in the eurozone for 11 consecutive years.

The message that has been drummed into us for many years is that the only way economies like Britain can compete with the emerging giants of China and India is to move up the value chain. That, it seems, is precisely what the UK has been quietly achieving for some time. The technology upturn is good news and it is not the only bit of good news around just now. Let us hope it lasts.

From The Manufacturer, February 2005