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Friday April 20 11:25 AM ET

U.S. Tech Wreck Spreads to Europe

By HANS GREIMEL, AP Business Writer

FRANKFURT, Germany (AP) - After savaging American bellwethers Cisco, Hewlett-Packard and Intel, market forces are now taking aim at Europe, as the continent's high-tech sector cracks under the pressure of plunging profits and wilting demand.

Europe now appears on a collision course with an unfolding global tech wreck. And the spreading gloom is sapping confidence in a regional economy that had until recently boasted immunity from the U.S. slowdown.

``I don't think the tech problems are over,'' said David van Hoytema, an industry analyst with ABN Amro in London. ``European companies are not necessarily driven by European sales, and the world economic slowdown is now causing pain in Europe.''

Things unraveled this week, when Dutch electronics giant Philips posted a 90 percent drop in quarterly profits and said it would layoff up to 7,000 workers. Philips placed the blame squarely on the slower U.S. economy, saying it had to scale back production to cut inventory.

On Friday, Swedish mobile phone giant Ericsson (news - web sites) posted a $500 million pretax loss for the first quarter and said it would shed another 12,000 jobs. Its Finish rival Nokia (news - web sites), however, announced a 15 percent rise in its first-quarter profit and forecast 20 percent sales growth for the rest of the year.

That follows 2,000 job cuts by Germany's Siemens and 3,000 layoffs at British telecom equipment maker Marconi PLC.

There have been recent layoff announcements at Cisco and Hewlett-Packard and an 82 percent plunge in first-quarter profit at Intel, the world's leading microchip maker.

Part of the problem are high-tech customers struggling to protect their own bottom lines, often by postponing or canceling plans to buy new computers, software and telephone systems.

``There comes a point when firms realize it's not their top priority right now to buy the latest technology,'' said Vladimir Lopez, a technology analyst with the Paris-based Organization for Economic Cooperation and Development.

In Europe, market growth for those products is expected to fall to 8.9 percent next year after peaking at 13.3 percent in 2000, according to the European Information Technology Observatory.

That has been especially hard on smaller players, such as Dublin-based Baltimore Technologies, a maker of Internet security software for firms such as Deutsche Bank and Visa.

After issuing a revenue warning earlier this month, Baltimore took another hit when customers postponed orders worth nearly 5 million pounds ($7.2 million) on concern about the company's long-term outlook.

``Cash is king and everybody's trying to conserve it. Most customers are looking very carefully at every little investment,'' said chief executive Fran Rooney.

That trend seemed true even for SAP of Germany, the continent's No. 1 software company, which pleased investors Thursday when it announced a doubling of first-quarter profits.

But even SAP was bitten by the U.S. slowdown. Software sales in the United States rose only 7 percent, compared with 25 percent growth in Europe and 47 percent growth in Asia.

Such figures undermine the insistence of some European politicians and economists, including the European Central Bank, that the region's economy can weather the U.S. slowdown.

Critics say the ECB is making matters worse by refusing to spur the economy with an interest rate cut, especially after the U.S. Federal Reserve (news - web sites) cut borrowing costs Wednesday for the fourth time this year.

The Fed's surprise rate cut immediately pushed the tech-heavy Nasdaq stock index up 8.1 percent. The Neuer Markt, the Nasdaq's German counterpart, also got a boost but still languishes more than 70 percent below a high last May.

``The ECB has to be very aware of what's happening in the United States, where the Fed was almost too slow in reacting to a potential recession,'' Baltimore's Rooney said. ``It's so easy to see how the whole fabric of an economy can be destroyed.''

Still, analysts say it is too early to write off Europe's high-tech sector, pointing out that the region is still far from recession.

A tech downturn in the United States, where the industry accounts for 5.4 percent of the economy, has helped fuel the economic woes there. But in Europe the industry accounts for only 2.7 of economic output.

Analysts also point out that the extraordinary growth in U.S. tech stocks set them up for a harder fall than in Europe.

``We didn't climb so high on the plus side and I don't think we'll fall so far,'' said David Clayton, a tech analyst with Credit Suisse First Boston in London.

-- (M@rket.trends), April 20, 2001

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Friday April 20, 7:50 pm Eastern Time

TheStandard.com

The Fed's Tech Headache

By Eric J. Savitz

John Chambers of Cisco, Alan Greenspan feels your pain. That was one of the more intriguing implications of the statement that accompanied the Federal Reserve's surprise short-term interest rate cut last week. The worries that trouble Silicon Valley the most - slowing capital spending, plunging stock prices, weakening economies abroad - now gnaw at the Fed. While cutting interest rates will no doubt help some parts of the economy, like the financial sector, it's not clear that they will have any real effect on the underlying problems dogging tech.

Make no mistake, technology remains in a deep funk. Yes, a few earnings reports last week offered words of optimism. [See "Another Rate Cut, Another Rally."] But on balance, the fundamentals remain grim. Among last week's casualties were wireless broadband company Winstar, which filed for bankruptcy protection from creditors, and content site Quokka Sports, which was on the verge of a similar fate.

Most significant, revenues have declined in shocking fashion at tech keystones like Cisco and Intel. True, Intel last week made mildly positive comments about its second-half outlook, which contributed to the general stock market euphoria. But the numbers are sobering: Analysts' estimates for earnings and revenue for 2001 and 2002 are lower than what Intel produced in 2000 - hardly the usual pattern for what is supposed to be a growth stock.

The news from Cisco Systems was equally disturbing. The company said its revenues would be 30 percent below last quarter's number, announced plans to lay off 8,500 workers and warned of a $2.5 billion charge for excess inventory this quarter. "This may be the fastest any industry our size has ever decelerated," said CEO Chambers.

Such comments have hit home at the Fed, which last week was working to boost confidence in the economy and the markets. In announcing the rate cuts, it cited softening capital spending and "persistent erosion" in profits. Other worries are "the possible effects of earlier reductions in equity wealth on consumption" and "the risk of slower growth abroad." It's a laundry list of what ails tech.

But can Greenspan supply a cure? Carl Weinberg, an economist with High Frequency Economics in Valhalla, N.Y., thinks not. Weinberg warns that technology industries have problems, even after last week's cuts. "We are unlikely to have a resurgence, not in the near term," he says. "There's still overcapacity and overinvestment in the sector." And lower rates, he adds, won't cure those particular ills.

Mark Zandi, chief economist at consulting firm Economy.com, believes the tech sector's ills - and its influence on the broader economy - were the trigger for last week's Fed move. "They apparently felt the IT sector was caving, not only putting the expansion at risk, but also the economy's longer-term performance," says Zandi. "If businesses stopped investing, then productivity growth would quickly decelerate."

Zandi notes the Fed's move could help by boosting investor confidence and by providing relief to debt-ridden companies, including many in the tech and telecom sectors. "Bankers are knocking on the door and saying, 'I want a plan to be assured I get paid back,'" he says. Zandi explains that the rates on many credit lines are tied to the prime rate - the rate banks charge their best customers - which fell after the Fed acted. Other companies, he adds, benefit from reduced rates on commercial paper, short-term debt often purchased by money market funds and institutional investors.

But Zandi warns that rate cuts are no cure-all. "The problem," he says, "is that if you are awash in inventory and overcapacity, then low rates aren't going to help you that much, at least in the short run."

Bill Whyman, an analyst with the Precursor Group, contends growth in spending on technology and telecom goods will grow just 5 percent this year, down from a 20 percent average over the past three years. Next year, he says, spending on technology should revert to the long- term average growth rate, slightly above 10 percent.

"I'm continuing to fight this notion that somehow you get this snapback to the way it was," he says. "There is no way that happens." Spending in the past three years benefited from a flood of cash from venture capital funds and IPOs, combined with a strong economy, Y2K- related spending and a rush of purchasing by old-line companies trying to avoid getting "Amazoned" by Web-based startups. None of these is going to repeat itself, notes Whyman.

Then there's another factor that lower rates can't combat: budgetary pressures at a time when many companies are unhappy with the payoff from recent IT spending. Last week, Mercer Management Consulting unveiled a survey of corporate executives that found about two-thirds disappointed with the returns on their IT spending.

Adrian Slywotzky, senior partner at Mercer, notes that a lot of that stems from their spending as a response to the "dot-com challenge," which for many companies turned out to be a phantom menace. To make things a tad more worrisome, three-quarters of the execs still expect a recession. If Greenspan intends to shake the tech sector out of its funk, he's got a long way to go.

-- (M@rket.trends), April 21, 2001.