Economic fears dragging on tech spending
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The technology industry's outlook for 2008 looks worse than it did just two months ago, when fears of a U.S. recession already were leading analysts to predict a slowdown in purchases of computers, software and tech services.
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Industry superpowers are left scrambling to keep up with a fast-changing tech world that is seemingly  about to leave them behind.
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(InfoWorld) - News coming out the chip sector has been great so far this week, but analysts warn that economic woes such as the housing mess might still spoil the party. The consensus among analysts appears to be that corporate and personal spending on technology products will be hurt by the housing issues in the U.S., but nobody knows how bad the impact will be, according to Peter Sutton, head of research at CLSA Asia-Pacific Markets in Taipei. Demand for technology products, especially computers and mobile phones, in the rest of the world is going strong, he said, but even that demand could pull back in the event of a U.S. slowdown because many developing countries depend on exports to the U.S. for income. By the end of this year, people should know how bad the loan and home foreclosure situation will be, according to Sutton. The housing market in the U.S., he said, is expected to bottom in the first quarter of next year. The fear is that the housing issues could hurt consumer spending at some point later this year, but so far the technology industry isn't showing any signs of trouble. The flow of good news started in Asia on Monday with the world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co. (TSMC), reporting record high sales in August and revising up its third quarter financial guidance. The company, considered a bellwether for the overall tech industry because of the variety of gadgets it makes chips for, said consolidated sales in August rose 10 percent year-over-year to NT$30.02 billion (US$907.0 million), beating its previous record of NT$27.96 billion from July of last year. TSMC also predicted its third quarter revenue will likely hit between NT$87 billion to NT$89 billion, higher than a previous forecast of NT$85 billion to NT$87 billion, and said its gross margin would come out at the top end of expectations. Some customers asked TSMC to ship some chips earlier than expected, a spokesman for the company said, but the company won't comment on how that might impact the fourth quarter. Taiwanese chip designer MediaTek followed up TSMC's news, announcing an agreement to buy certain telecommunications chips products from Analog Devices Inc., of Norwood, Massachusetts, for US$350 million in cash. The deal itself isn't huge, but merger and acquisition activity normally takes place when companies see bright prospects for the future, and MediaTek is looking to use the acquisition as part of its mobile phone chip strategy. Among the products the company acquired is a chipset used in TD-SCDMA (Time Division-Synchronous Code Division Multiple Access) basebands and radio receiver products, which will help it increase its presence in its main market, China. TD-SCDMA is the 3G (third-generation) telecommunications standard being pursued in China. Positive corporate news for chip makers didn't stop in Asia. As the work day opened in the U.S., technology industry watchers were treated to theÂ long-awaited launch of Barcelona, the new quad-core processors from Advanced Micro Devices. The Sunnyvale, California company announced a number of companies are already using the chips, including IBM, Sun Microsystems, Dell, and Gateway. The world's largest chip maker capped Monday with the biggest news of the day.Â Intel raised its third quarter revenue forecastÂ to between US$9.4 billion and US$9.8 billion from a previous range of US$9.0 billion and US$9.6 billion, and said its gross margin would be at the upper end of guidance due to stronger than expected global demand for computing products. Despite the strong chip news and outlook for the current quarter, which ends Sept. 30, the future remains uncertain. "Near term data shows little evidence of order cutbacks in the tech supply chain," said Warren Lau, chip analyst at Macquarie Research Equities. "But having said that, the question remains: will the sky come crashing down because of the meltdown in the U.S. subprime markets?"
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Business & money: Fears grow of market turbulence stunting global growth.
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Intel Corp.&#39;s forecast of faltering demand for electronics such as personal computers and mobile phones heightened concern that consumer spending is declining.
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The report comes amid rising investor concern about the impact of a possible slowdown in computer spending during the first half of the year.
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Cisco Systems warns that a slowdown in technology spending will dent future sales growth.
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Interest rate fears add to jitters in financial markets.
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Some tech groups are beginning to worry that major IT industry priorities, including patent reform, may lose out to other priorities in the U.S. Congress this year.In the last couple of weeks, large tech companies have renewed their push for patent reform legislation in the U.S. Congress, despite opposition from U.S. President George Bush&#39;s administration and some labor unions.The Computing Technology Industry Association (CompTIA) is concerned that a congressional debate over an economic stimulus package, plus typical election-year gridlock, could hurt the prospects for patent reform and other tech priorities, said Michael Wendy, a spokesman for the trade group.The House of Representatives&#39; economic stimulus package includes tax write-offs for small business purchase of equipment, which could include computers, Wendy said. That&#39;s a good move, but patent reform, a research and development tax credit, H-1B visa reform, and other issues remain undone, he said.&quot;We hope that Congress -- assuming they pass an [economic stimulus] package -- doesn&#39;t just say, &#39;Well, we gave you some favorable tax provisions that will help boost industry activity and have a long-tail effect on the economy, so that should be enough for you guys this session,&#39;&quot; Wendy said last week. &quot;One thing we&#39;re concerned about is that the economic stimulus bill may be seen by Congress as a &#39;get out of jail free&#39; card when it comes to other of our tech policy agenda.&quot;The House in September passed a patent reform bill -- supported by many large tech vendors, but&#160;opposed by several small tech companies&#160;-- but similar legislation has been stalled in the Senate. Large tech vendors, including Microsoft, IBM, and Symantec, have&#160;called for patent reform, saying it&#39;s too easy for companies with no intention of creating products to buy up patents and file multimillion-dollar infringement lawsuits against other companies.On Jan. 22, Senate Majority Leader Harry Reid, a Nevada Democrat, said patent reform was a priority, but it was in a line behind several other bills, including an economic stimulus package and a government surveillance authorization bill. The Senate would turn to patent reform, &quot;time permitting,&quot; he said then.&quot;On patent reform, we must carefully strike the right balance with a bill that promotes rather than blocks innovation from enterprising entrepreneurs,&quot; Reid added.The Senate Judiciary Committee approved its version of the Patent Reform Act on Jan. 24, and the bill is awaiting action in the full Senate.But earlier this week, the U.S. Department of Commerce sent a letter to the Senate Judiciary Committee raising concerns about the bill. The letter, outlining the Bush administration&#39;s views, focused on a section of the bill that would apportion infringement damages in a new way. Currently, courts generally consider the value of the entire product when a small piece of the product infringes a patent; the bill would allow courts to base damages only on the value of the infringing piece.The wide-ranging bill would also allow a new way to challenge patents after they are issued.That provision would &quot;create more problems than it solves,&quot; said the Commerce Department letter, signed by Nathaniel Wienecke, the agency&#39;s assistant secretary for legislative and intergovernmental affairs. &quot;The administration believes that such a dramatic change from current jurisprudence may have the unintended consequence of reducing the rewards of innovation and encouraging patent infringement,&quot; Wienecke wrote.Both sides can still work out their differences, Wienecke added.In addition, 14 labor unions, including the United Steelworkers, the Patent Office Professional Association and the Communications Workers of America, sent a letter to Senators Wednesday, saying they were concerned about the patent bill. &quot;Key parts of the proposed legislation may have the effect of increasing the likelihood of American inventions being stolen by our international competitors and, consequently, inhibiting sorely needed new investment in domestic manufacturing,&quot; the letter said.Still, some representatives of the tech industry say they&#39;re hopeful that patent reform can move forward.Senators, representatives of the Bush administration and other interested parties have been meeting regularly &quot;to find balanced solutions on all the issues,&quot; said Mark Isakowitz, spokesman for the Coalition for Patent Fairness, a group representing several large tech companies. &quot;We respectfully disagree [with the Bush administration] on damages, but we are confident ... we can work through concerns and achieve broad consensus on the bill, which would be a victory for the administration, the Congress and our economy,&quot; he added.
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It's beginning to look like 2001 in the general economy, with consumers tightening their purse strings and businesses shedding jobs. But in the technology business, which suffered more than any other in the last meltdown, there are fewer signs of strain this time around.
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Mixed economic news and forecasts of weak IT spending for at least the beginning of next year caused IT investor confidence to waver this week, though upbeat analyst presentations from Cisco and AT&amp;T and online e-commerce figures brought some cheer to the holiday season.Macroeconomic news is making technology investors uneasy. Wednesday morning, the U.S. Federal Reserve Board cut its federal funds rate in an attempt to allay fears that turmoil in the housing market would wreak further havoc in financial markets. But the move (a cut of 25 basis points) was not as great as some market observers hoped for and sent the tech-heavy Nasdaq Composite Index into a decline.Uncertainty in the U.S. is depressing IT spending forecasts. &quot;The economic slowdown we see happening in the U.S. will in fact translate over to slower growth in the U.S. IT spending market,&quot; said Andrew Bartels, principal analyst at Forrester Research, on a Thursday conference call with media and analysts.The good news, Bartels said, is that globally, IT capital spending should remain strong, U.S. spending should pick up again by the fourth quarter of 2008, and a real recession will likely be avoided.ComScore, meanwhile, had good news about online spending. Almost $19 billion was spent online during the holiday season up to midweek, an 18 percent increase compared to the same period in 2006, the market research company said.Companies that appear ready to supply the infrastructure for e-commerce and Web 2.0 multimedia services gave investors something to cheer about this week.AT&amp;T, which is melding the telecom services and infrastructure of the former SB Communications, BellSouth, and the old AT&amp;T, gave a presentation that impressed analysts Tuesday, convincing many that the communications giant is poised to leverage a wide range of assets.In a research note, Christopher King of investment firm Stifel Nicolaus said that AT&amp;T has &quot;the premier set of assets in the telecom industry.&quot; Independent analyst Jeff Kagan noted in an e-mail report that &quot;10 years ago, the company was only into the local phone business and was just getting into long distance and DSL. Today, it is a full featured company offering local and long-distance telephone, wireless, high-speed internet, and even television.&quot;The presentation came a day after AT&amp;T announced that it has expanded its 40G IP/MPLS backbone network to more than 50,000 miles in the U.S.AT&amp;T shares closed at $39.46 Tuesday, up by $1.56, and continued to move up over the next few days.Cisco&#39;s analyst presentation on Tuesday also drew good reviews. The company has a good track record of predicting trends and executing product strategy accordingly. The company announced, for example, that&#160;it will debut next year its Entertainment Operating System (EOS), a platform for multimedia content for online communities. Its unified communications product strategy and expected enhancements to its software offerings should also make its product suite more central to the corporate data center.Lehman Brothers sent out a research note saying that the company is well-positioned to offer products supporting the new generation of Web technologies. Cisco shares rose $0.46 to close at $28.08 Tuesday, and continued to move up during the week.In a shaky economy not all companies and sectors will perform well, and big questions surrounded chip maker AMD at its analyst presentation Thursday. The problematic launch of its Barcelona quad-core chips, which are still experiencing production delays, has shaken confidence that the company can make an effective counterpunch against Intel.Company CEO Hector Ruiz said that the company should break even by the second quarter of 2008, helped by -- among other things -- new graphics chips. But analysts are worried that may be too little, too late, to stop a market share slide. With product sales in doubt, the promise of cost controls was not enough to win over investors. AMD shares declined by $0.13 to close at $8.84 Thursday.
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A Forrester Research study finds that corporate users are becoming increasingly frustrated with the license and maintenance costs of enterprise applications.
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Three more Taiwanese chip makers plan to&#160;spend significantly less money on new factories and equipment&#160;this year as a DRAM (dynamic RAM) glut and uncertainty about the global economy weigh.Lower capital spending forecasts in the chip industry are a sign the global IT industry is on edge about future demand. Analysts have expected DRAM makers to cut back on spending for a long time due to&#160;falling chip prices. Prices for mainstream DDR2 (double data rate, second generation) chips remain below production costs, and most DRAM makers have reported losses for the fourth quarter.Powerchip Semiconductor, Taiwan&#39;s largest memory chip maker, Wednesday said it plans to spend NT$35.1 billion (US$1.09 billion) on new chip factories, technology and production line equipment this year, less than half the NT$86.3 billion it spent last year.Powerchip&#39;s smaller rival on the island, ProMOS Technologies, also more than halved its projected 2008 capital spending to US$800 million, down from US$1.84 billion last year. The company also put the expansion of its fourth 12-inch factory on hold pending a rebound in the DRAM market.United Microelectronics (UMC), the world&#39;s second largest contract chip maker, forecast its 2008 capital spending at US$500 million to US$700 million, down from US$900 million last year.The company&#39;s customers have turned cautious due to global economic worries, said Jackson Hu, CEO of UMC, at an investors&#39; conference in Taipei on Wednesday. The company forecast its chip shipments will decline as much as 15 percent in the first quarter, compared to the fourth quarter of last year as chip demand weakens, particularly for communications chips.Global semiconductor equipment spending is forecast to fall 9.9 percent to US$40.3 billion this year, from US$44.8 billion last year, according to Gartner. The market researcher blamed over-investment by DRAM makers in 2007 for the cutback in semiconductor capital spending this year. Concerns about a U.S. economic recession have also put chip makers in a cautious mood, Gartner said in a report published early this month.&#160;
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Investors, already concerned about technology spending after Cisco Systemsâ dreary outlook, winced at gloomy sales reports from the nationâs major retailers.
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Despite financial market volatility, U.S. technology companies had a strong 2007. The rising cost of energy, fears of recession, and forecasts of a slowdown in IT spending, however, point to a rocky 2008.
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With the robust economy, tax revenues are pouring in. But rising costs lie ahead.
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Earnings reports from IBM, Intel, and AMD and acquisition news from Oracle and Sun did nothing to calm IT investor fears about an uncertain U.S. economy this week.