John Schwartz New York Times Service
Saturday, March 31, 2001
Link Seen in Speed of U.S. Downturn and the Net
NEW YORK As one of the brightest lights of the Internet
revolution, Cisco Systems Inc. has long been looked to as the
company that not only supplies the equipment that holds the Web
together but also understands how information technology makes
business work smarter and better.
So when Cisco announced this month that orders for its products
had unexpectedly plunged and that revenue would decline for the
first time in its 11 years as a publicly traded company, it did not
just send shudders through the company and its suppliers. It also
raised profound questions about the role of the Internet in the
current economic slowdown.
The Internet, with its myriad online connections, speeds the
transmission of ideas, good and bad, and amplifies their reach. It
has allowed business managers to peek into every link of the
supply chain that feeds their manufacturing processes, and to
change direction with a nimbleness that would have been
unimaginable just a few years ago.
"The supply chain looks a lot more like the stock market," said
Andrew Whinston, director of the Center for Research in
Electronic Commerce at the McCombs School of Business at the
University of Texas. "It becomes much more volatile."
And that could help to explain why the economic downturn seems
to be happening on Internet time.
Since last summer, the economy has gone from a racetrack-like
annual growth rate of almost 6 percent to barely 1 percent.
Business executives in one industry after another have described
being stunned by the abruptness of the drop in orders. Caught by
surprise, manufacturing companies have watched their inventories
soar.
With all the information supposedly at their fingertips, why were
executives so out of touch?
There appear to be several related reasons. As in past business
cycles, companies got caught up in the boom, expanded capacity
and output to meet expectations of continued strong growth that
simply was not sustainable by all of them.
But, on top of that, it seems, was a sense of complacency that the
new management-information tools would provide plenty of
warning of troubles ahead. That may have been asking too much
of them.
"It's important to understand that the Internet cannot change what
is going on in the marketplace," said Susan Bostrom, senior vice
president of Cisco's Internet business solutions group. "You can
manage those variables that you can control, but what makes
business fun is that there are always variables that you can't
control." Finally, with so many companies farming out production
to contract manufacturers, some clearly lost touch with the overall
market environment. Many companies "were caught with their
pants down," said Mark Zandi, chief economist for Economy.com,
a consulting firm based in West Chester, Pennsylvania.
"Maybe the technology isn't as good as we thought it was in terms
of inventory management," Mr. Zandi said. On the other hand, he
added, "maybe it's good, but it's only good if you believe it."
The Federal Reserve Board chairman, Alan Greenspan, normally
one of the Internet's biggest boosters, has started to warn that
speed has its risks - and that it complicates his job as well.
When discussing the downturn in recent weeks, Mr. Greenspan
has been going out of his way to lay some of the responsibility for
the unexpected force of the current swings to the Internet and
business tools he has long lauded as helping to reshape the
economy.
During the headiest days of the 10-year economic expansion,
some commentators insisted that the Internet and other information
technologies were powering a new economy that would effectively
eliminate the boom-and-bust business cycle.
As things began to wobble, that view has given way to a
counterargument that the dot-com bust could drag the rest of the
economy down with it, creating what Michael Mandel, the
economist and journalist, called an "Internet depression."
But what Mr. Greenspan is suggesting is a middle interpretation,
one that acknowledges the overall benefits of Internet-based
technologies in business but which also warns of the risks.
"The faster adjustment process does raise some warning flags," he
testified to Congress last month. Business managers, Mr.
Greenspan said, have access to more information, but everyone
often gets similar signals. "As a consequence," he said, "companies
appear to be acting in far closer alignment with one another than in
decades past. The result is not only a faster adjustment, but one
that is potentially more synchronized, compressing changes into an
even shorter time frame."
This kind of volatility is showing up on warehouse shelves across
the country. And much of it appears to be due to a combination of
a widespread bout of "irrational exuberance" with the rise of
supposedly turn-on-a-dime businesses that maintain a vast supply
chain of companies that do much of the manufacturing that goes
out under the corporate brand.
Cisco Systems is a leader in relying on many less well-known
companies to manufacture much of the hardware that it sells.
Cisco's sales plunge has caused havoc for companies like
Solectron Corp., the world's largest contract manufacturer of
electronics equipment.
Last week, Solectron said the sharply slowing sales for its
customers would force the company, based in Milpitas, California,
to lower its profit estimates and to cut 8,000 jobs, about 10
percent of its work force.
Solectron's chief financial officer, Susan Wang, said that to a large
extent, she and other executives at the company could see the
problems coming.
After companies had trouble getting the parts they needed in early
2000, those customers ordered far more goods than they could
realistically sell, perhaps expecting that even if the market were
glutted, their own products would beat the competition.
But Solectron was in a bind. Even though it tried to warn
customers a year ago that their manufacturing orders were
unrealistically optimistic, they did not want to hear bad news.
"If we had said no, they would have told us, 'You're not a good
partner for me - we'll find somebody else,"' Ms. Wang said. "Our
only responsible reply was, 'Yes, of course, we'll try.'"
Thus, Ms. Wang said, the effect of a new technology often hinges
on the difference between having a powerful tool and the wisdom
to use it well.
"It's analogous to a child saying, 'I want to learn how to cut down
this little tree here,'" she said. "And you say, 'That's wonderful, I'm
going to give you this power saw. It's the best tool.'"
Ultimately, Mr. Greenspan contends, the aspects of new business
technology that helped lift productivity and bring about the boom
will also help the economy to bounce back more quickly.
That remains to be seen.
Still, even as hopes fade for a V-shaped line on economic charts
showing a quick, sharp recovery, authorities on the new supply
chain say that when the recovery finally does begin, the
best-networked companies will recover the fastest.
The answer to avoiding a repetition of the current inventory bulge,
these authorities insist, is to continue to improve the technologies
so that companies can get a better look along their supply chains
and eliminate remaining inefficiencies.
But that process cannot be complete until the process of
manufacturing and delivery come closer to matching the speed at
which data zip around the network.
In any case, to Ms. Bostrom of Cisco, the silver lining in the
current economic clouds is the ultimate recognition that in both
good times and bad, "the Internet allows the fast to beat the slow." |
