IT spending still in the dumps. For now.
In the case of an economic uptick, it's likely that IT expenditures will again outpace overall spending growth.
By Arnie Berman
Columnist
Red Herring
January 10, 2003
It would be nice if recent IT spending surveys offered positive proof that technology spending will be a lot more gratifying in 2003 than it has been over the past three years. They don't. If the economy is in dire straits in 2003, IT spending will be too. That said, IT spending should be in the dumps only if economic activity is dismal.
In 2001, legions of once-hot tech companies whined endlessly about the weak economy. But the economic picture was much less a factor in their results than the declining willingness of corporations to throw money at far-flung new technology projects. If the economy were the chief culprit behind the sector's woes, formerly high-flying public companies like Ariba, Brocade Communications Systems, i2 Technologies, and Siebel Systems wouldn't have disappointed investors so much more than the notoriously cyclical IBM (Nasdaq: ARBA, BRCD, ITWO, SEBL; NYSE: IBM).
In 2002, technology spending continued to suffer from a lingering hangover. But in recent quarters, economic weakness and dogged uncertainty have stymied technology spending much more than in 2001. Even IBM has disappointed.
In 2003, the hangover will be largely irrelevant; the economy will be paramount. Recent discussions with influential IT buyers lead to an in inescapable conclusion: while IT spending confidence is low, IT user needs are high. If the economy improves in 2003, no segment is likely to experience a more profound recovery than technology.
For corporations, technology spending is not like dessert--a discretionary choice that they can just choose to live without. Low prices and huge selection aside, Wal-Mart is the bane of mom-and-pop retailers because it has used technology to ruthlessly squeeze suppliers, minimize inventory levels, and optimize its product mix. Even so, like most companies, Wal-Mart has reined in its IT spending over the last two years. But it can only cut so far.
Corporate technology spending can be divided in two broad categories: "change the business" spending and "run the business" spending. In 2001, corporations walked away from their change-the-business ambitions. In 2002, change-the-business spending remained in the freezer, but the majority of companies took a meat cleaver to their basic run-the-business spending, as well.
Few companies can afford to ignore those latter buying needs for long. Phrases heard again and again from corporate IT buyers lately include "pent-up demand," "skipping version upgrades," and "aging infrastructure."
Of course, a good economy may be a necessary condition for good technology spending--but it is not a sufficient condition. What's also required is pervasive groupthink that there is a next obvious thing worth doing--and that those who don't will lose competitive ground. Groupthink was a positive influence for enterprise client/server implementations, the Y2K fix, and Web project spending. More recently, negative groupthink has compounded the impact of negative economic trends. In 2002, questions like, Why should I spend before my competitors? have been the norm.
But the existing base of storage, networking, PC, and core applications infrastructure has aged to a point where IT spending complacency is rapidly disappearing. Appetites are growing, and groupthink is shaping up to again be a positive force in 2003.
In the case of an economic uptick in 2003, you should favor stocks in the hardware and component sectors, which will benefit from a recovery in "boring" infrastructure spending. Companies to watch include names like EMC, Hewlett-Packard, IBM, LSI Logic, Micron Technology, National Semiconductor, Taiwan Semiconductor Manufacturing, United Microelectronics, Applied Materials, Lam Research, Network Appliance, and Novellus Systems (NYSE: EMC, HPQ, IBM, LSI, MU, NSM, TSM, UMC; Nasdaq: AMAT, LRCX, NTAP, NVLS).
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Arnie Berman is chief technology strategist at the SoundView Technology Group. He does not have a position in any of the securities mentioned in this article.
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