Morgan Stanley Sees IT Recovery in 2003; Margins Declining
Jun 26, 2001 - 15:43:10 HKT
Quamnet News Service
Morgan Stanley Dean Witter said it believes that recovery in information technology will come later, probably in 2003 with margins for IT manufacturers declining.
"After having met with 80 institutional investors in the past two weeks, I found that about one-third still expect a sharp IT rebound to take place before year-end or at the latest in the first quarter of 2002," Morgan Stanley's Andy Xie said in today's research note to the house's clients. "Three months ago, nearly 80 percent of the region's institutional investors had this expectations."
The current round of market pessimism is mainly related to the sharper than expected decline, he said. East Asian export data for April and May were forecasting a more than 20 percent decline in US IT capital expenditure for the third quarter of 2001, which is the main source of earnings for most IT technology bellwethers.
Xie said he believes that hopes for a sharp recovery will be disappointed. IT spending was behind the buildup of the IT asset overhang in the U.S. service sector. "The surplus is probably US$200 billion to US$400 billion, in my view. A surplus of this magnitude could take another two years to digest."
The main argument in favor of a fast recovery is the high depreciation rate of IT assets, according to Xie. In a downturn, however, rapid replacement of existing equipment might make a company look bad in the eyes of investors and corporate behavior changes as a result. The estimated 30 percent depreciation rate for IT capital may be halved in this downturn, he said.
Xie said he believes that IT recovery will come later rather than sooner. When it comes, the US may not be the leading sources of demand. Corporate America is already networked while a large number of companies in Europe and Japan are still not networked, and therefore IT investment still offers high benefits there, he said. However, corporates in both regions have suffered from the US slowdown. The US has been a main source of revenue growth for companies in Europe and Japan. "Since theses regions don't have the money to spend now, I think the IT recovery is likely to come in 2003," he concluded.
As more and more countries get into the IT supply chain and demand growth becomes more muted, margins for IT manufacturers are likely to converge towards those for other types of commodity producer, Xie said.
The slow recovery and declining returns for the IT industry hit East Asia particularly hard, he said. "Korea, Malaysia, Singapore and Taiwan may have to change their industry mix considerably to achieve the growth rates that they have seen in the recent past. We may have to review our outlook for their growth potential in 2002 and beyond."
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