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To: kemble s. matter who wrote (172569)	3/24/2003 11:08:07 AM
From: William F. Wager, Jr.	Respond to of 176387

Tech Companies Scramble To Fill Military Orders... From todays WSJ: Tech Companies Scramble To Fill Military Orders By PUI-WING TAM Staff Reporter of THE WALL STREET JOURNAL When Plantonics Inc. got a call from one of the U.S. Army's airborne divisions recently, the telephone-headset maker was handed what seemed an impossible order: The Army unit wanted, in just four weeks, 500 customized headphones to plug into tactical radios. Normal production time for such nonstandard devices is 16 weeks, but Plantronics's special-products team dropped nearly everything to focus on the job. The 13-member group in Santa Cruz, Calif., borrowed engineers from other divisions and delayed work for six other clients. Within 48 hours, the team had a prototype; a few weeks later it delivered the headsets. "We've gotten so many requests for products from the Department of Defense and military that they need immediately. So we're reprioritizing," says Mike Erbe, Plantronics's director of special products. The war has proved to be a break -- though probably a short-term one -- for some tech companies in Silicon Valley, and they have been throwing out their traditional corporate playbooks. Many have refocused on military projects at the expense of bread-and-butter consumer or business products. Some are increasing factory shifts and speeding up production cycles, while others are hiring more staff -- all actions that run counter to recent cost-cutting trends in the industry. More than patriotism is at stake. For many tech companies, the U.S. government and the military are among the few bright spending spots. The government's annual information-technology budget, not including military spending, is around $60 billion, according to some estimates. Merrill Lynch & Co. expects federal IT spending to rise 8% this year and 12% in 2004. Meanwhile, war jitters and the sluggish economy have damped business and consumer tech spending. Military and government contracts tend to have a disproportionate impact on smaller tech companies because they're less likely to be as diversified as the big concerns. But International Business Machines Corp. says government business -- federal, state and local -- is among its few growth areas, with revenue up by "double digits" last year and growing. Software maker Oracle Corp. says that because of spending increases, federal government sales now account for 20% to 25% of its overall sales. In February, Silicon Graphics Inc. won a $26 million order for hardware and software from the Defense Department. A company spokesman says 35% of its revenue comes from defense and government contracts, up from 22% to 24% before Sept. 11, 2001. The recent increase in military production isn't likely to pull the tech industry out of its prolonged slump, though. Only a select group of companies is getting war projects, usually those with established military or government relationships. And even for many of these companies, such projects -- while proliferating -- remain a small slice of their overall business. Plantronics, for one, estimates that just 1% to 2% of its revenue derives from customized products for the military. Still, the recent activity calls to mind the heightened role Silicon Valley has played in past combat situations. In World War II, radar technology was developed at nearby Stanford University, says Doug Henton, a Palo Alto, Calif., economist. About a decade ago, the military began buying commercial off-the-shelf technologies. And many tech companies got their start through military grants or contracts. When Silicon Valley boomed in the late 1990s, defense projects dropped off as companies explored more lucrative commercial opportunities. "It's been a very cyclical relationship, kind of an up-and-down pattern," says Mr. Henton. "But right now, there is clear demand from the military, so companies are stepping up to the plate." At Savi Technology Inc., Sunnyvale, Calif., orders for logistics-tracking software and radio-based "smart" tags started to jump in December, says Blair LaCorte, an executive vice president of business development. Savi immediately ramped up factory production, scheduling three shifts a day, up from one a day. "Before, everyone wanted to go lean, but we think it's better to invest in overcapacity right now," Mr. LaCorte says. Palm Inc., the Milpitas, Calif., hand-held computer maker, recently shrank a production cycle to quickly create devices with homeland-defense software for the government. John Inkley, Palm's federal sales manager, says that while the company typically needs 12 to 18 months to negotiate, test and deliver products, it required just six months this time. "There's a much greater sense of urgency now," says Mr. Inkley. San Jose, Calif., touch-technology maker Immersion Corp. got an order for 44 medical simulators from the U.S. military in August. The devices, costing an average of $15,000, help train medics to draw blood and insert intravenous lines. Immersion mobilized its entire 42-person office in Gaithersburg, Md., to fulfill the order. Employees worked 10 hours a day for three weeks to ready the shipment by September. The tough part, of course, is telling nonmilitary clients their needs are taking a back seat. Mr. Erbe at Plantronics says he has had to call commercial customers once a week for the past few months to postpone and reschedule their shipments. "Can you live with the delay?" he asks them. For the most part, Mr. Erbe says, "people are very understanding." -- William M. Bulkeley contributed to this article. Write to Pui-Wing Tam at pui-wing.tam@wsj.com Updated March 24, 2003