smh.com.au
The real tech crash is still on the way
Feeding the hungry during
the Great Depression ...
venture capital starvation
could see leading-edge
Internet companies tumble.
April's rout was just a
start. Paul Sheehan
explains.
A year ago dot com
companies were raising
tens of millions of dollars on
the basis of blue-sky
business plans. Today they
are culturally passe.
No wonder. Look at the carnage in the IT sector in Australia. Look
at the Nasdaq. Look at the great totem, Amazon, which managed
to go from a market capitalisation of $US48 billion to $US8 billion
($15.3 billion) in less than a year.
Now comes Michael Mandel, a Harvard PhD and economics
editor of Business Week, who has written The Coming Internet
Depression. He doesn't muck around:
"Rather than suffer a single sharp crash, the market will sour over
time. The leading-edge Internet companies will tumble even farther
than they did in the spring of 2000," Mandel writes.
"Initial public offerings will come to a dead halt and the downdraft
will spread to technology stocks, which accounted for roughly 45
per cent of the gain in market value during the New Economy
boom. Attempts by investors to pull their money out of the
stockmarket will drive down prices even further."
The key element in the long American market boom, argues
Mandel, is the same key element that turns the bull into a bear:
venture capital. The US venture capital sector was way ahead of
the rest of the world and was vital in the emergence of the US as
the dominant high-tech power.
"Why did the New Economy start in the US, rather than in Japan or
Europe?" Mandel asks. "After all, Japan and Germany began the
1990s with almost as a good a technology base ... and in some
areas better. They invested more in civilian R&D as a share of GDP
than the US did ... Moreover, the US was the least globalised of all
the major industrial countries."
America's edge was its dynamic venture capital sector. Even in
1988, VC was still relatively minor in the US economy (and
minuscule elsewhere). America invested $US5 billion in VC,
compared to total US spending on R&D of $US134 billion.
Fast forward to 1999: the VC sector provided $US48 billion for
start-ups and in the first quarter of this year VC spending equalled
one-third of the money spent on R&D in the quarter.
The competition posed by start-up companies (mostly New
Economy) forced the mainstream (Old Economy) to not only speed
up innovation but to restrain prices. This flowed through to
increased productivity and lower inflation. But this virtuous circle
can turn into a vicious cycle, argues Mandel:
"When the economy and the stockmarket slide, so does the funding
for innovative new businesses - and not by a small amount. In the
aftermath of the 1987 crash, venture capital halved, from $US5.2
billion in 1987 to $US2.6 billion in 1991. A 50 per cent fall today
would send investment funding plunging from roughly $US50 billion
in 1999 to $US25 billion or less."
Since 1995 the information technology sector has accounted for
roughly 25 per cent of total GDP growth in the US. In the year to
June 30, 2000, computers, semiconductors and communications
equipment accounted for roughly 75 per cent of the growth in US
manufacturing production.
Just four companies - Intel, Microsoft, Cisco and America Online -
were responsible for more than $US1 trillion in market value over
the five years to 2000.
The flow-on effect to the economy has been enormous. Payrolls
have exploded in the tech sector and the big tech companies have
generated huge amounts of cash.
Mandel thinks we've been in an asset bubble so the April tech
wreck was just the beginning. He expects a burst of "suppressed"
inflation as companies seek to maintain profits by raising prices,
which will be easier because of the slowdown in competition from
insurgent companies.
His strategy? If you accept his theory, cut personal debt levels now!
He believes governments will need to pick up the slack on funding
for R&D, innovation and education. "In the end, it will be necessary
to cut taxes and increase spending." |
