aticle doesn't mention sunw but you know its sunw equipment that makes these large companies get smarter...another reason for suwn growth..
Increase in Technology Spending
And Stock Prices Is No Coincidence
By GEORGE ANDERS and SCOTT THURM
Staff Reporters of THE WALL STREET JOURNAL
Up 30% last year. Double-digit gains for each of the previous seven years. Forecasts of another
big increase this year.
That sounds like the stock market. In fact, it's the record of investments by U.S. businesses in
computers and other technology. From Detroit to Decatur, Ga., companies are spending billions
each week to automate design and production, to track sales and inventory, and to share
information through ever-larger computer networks, including the Internet.
This side-by-side increase in stock prices and technology spending is more than coincidence. It is
part of a fundamental reworking of the U.S. economy. Companies that use technology wisely are
finding that they work faster, cheaper and more efficiently. Companies that stumble in the computer
room are all too likely to be devastated in the marketplace.
How big is it? Adjusted for price fluctuations, information-technology outlays now account for
more than one-quarter of all U.S. investment and more than half of business spending on new
machines.
Investors for years have been fixated on the obvious winners in the high-tech boom: Intel Corp.,
Microsoft Corp. and Cisco Systems Inc. Stocks of these leaders have outpaced market averages
by more than 10 to one this decade.
Increasingly, though, analysts and investors realize that the customers of this technology also are
winners, especially among the giant companies that make up the Dow Jones Industrial Average and
Standard & Poor's 500-stock index. "Look around the globe," says Adam Hetnarski, a portfolio
manager at Fidelity Investments in Boston. "The U.S. has the highest percentage of spending on
information technology. And which economy is the strongest? The U.S."
When Mr. Hetnarski looks for promising big companies to add to his portfolio, he is impressed by
firms with aggressive information-technology strategies. "You want to leverage the people you have
and increase your operating margins. Technology is one of the best ways to do that."
Of course, technology doesn't create only winners. Just as the automobiles replaced horse-drawn
carriages and airplanes minimized the importance of trains, new generations of technology will
threaten existing businesses. The Internet imperils distributors and retailers by connecting customers
directly with manufacturers.
And as the Internet puts information at consumers' fingertips, relentless bargain-hunting may drive
down prices for goods ranging from cars to catheters. If so, future efficiencies from technology are
likely to be passed along immediately to consumers, instead of contributing to corporate profits.
And companies like bookseller Borders Group Inc., that are late getting on the Internet
bandwagon, can often expect to see their stocks suffer.
Nonetheless, U.S. enterprises expect continued payoffs from information technology. Consider
what it has done for some of the 30 companies in the Dow Jones Industrial Average:
At Chevron Corp., technology helps the company find more oil and recover it more
cheaply-especially important in the face of slumping petroleum prices. Seismic surveys are
manipulated by computer to create three-dimensional maps of the most likely oil and gas
deposits. Chevron and other big energy companies have begun using "4-D" models, which
attempt to predict how oil fields will change over time, especially as they are pumped. As a
result, oil companies waste less money on dry holes. Chevron used to drill 10 or 12 wells-at
up to $4 million per well-to find oil. Now, the company strikes oil roughly once every five
wells. Such improvements have helped shrink oil-industry production costs 16% since 1991.
"The industry has learned to make money at prices that are about the same as they were in
the '50s and '60s," says Donald Paul, vice president for technology and environmental affairs
at Chevron. "The reason is technology."
At Merck & Co., attempts to develop new medicines "have been completely transformed by
technology over the past decade," says Bennett Shapiro, the drug-maker's head of basic
research. No longer do Merck researchers need to dribble compounds, one at a time, into
sample dishes and await results. Instead, microchip-controlled machines can conduct
thousands of tests at once and tally the results automatically. That speeds new-drug
development by as much as 20% while cutting costs. It also lets researchers focus on
high-skill judgments instead of lab-bench drudgery.
Faster development cycles are catching on at General Motors Corp. It used to take GM 40
months to design a new car; that has been cut to 24 months and may soon drop to 18
months. Computer-aided design lets GM produce the dies for making bumpers and fenders
in half the time required a decade ago. Simulation software enables GM to preview its crash
tests hundreds of times a day on a computer, so the final safety tests involve only a few days
of crashes, rather than weeks of metal-bashing.
Caterpillar Corp. is installing sensors on its most expensive earth-moving machines to
monitor engine temperature, oil pressure and metal shavings in the oil. From construction
sites in South America to mining operations in Indonesia, the information is relayed by
satellite to Caterpillar headquarters in Peoria, Ill., so technicians can be dispatched to fix
small problems before they become big ones. Caterpillar's 25 parts warehouses also are
linked by satellite, to find replacements and deliver them quickly. "If our computer system is
shut down, we're out of business," says Jim Baldwin, vice president of Caterpillar's parts and
service division.
At McDonald's Corp., computers are at the heart of the hamburger chain's newest effort to
boost sales: a cook-to-order system. Customized software ships orders from touch-screens
at the counter to the kitchen, instructs machines to make the fries and drinks, and forecasts
supply needs during busy times of the day. These new systems cost about $25,000 per
store, which McDonald's is splitting with its franchisees. The company hopes the typical
franchisee will save $15,000 a year by throwing away less food.
A decade ago, Wal-Mart Stores Inc. did most of its daily inventory management at
distribution centers. Now its computer systems provide such pinpoint detail that Wal-Mart's
headquarters staff can manage inventory, item by item, at each store. If size 4 diapers are
scarce in Athens, Tenn., but shelves are glutted with size 2s, Wal-Mart's information system
will spot that disparity and arrange restocking shipments automatically. "We can know
what's being sold, store by store, from cash-register data instead of having someone walking
the aisles," says the company's chief information officer, Randy Mott. He won't share precise
data on employee productivity, but he says that his company's inflation-adjusted sales per
worker are rising a lot faster than the national average of about 2% to 3%.
Even at International Paper Co., one of the weaker performers in the Dow industrials over
the past decade, technology is transforming something as simple as building cardboard boxes
for shipping products as disparate in size as television sets, toilet paper and paint. IP's
factories traditionally lost a sizable part of the production day reconfiguring machines-as
often as seven times in an eight-hour shift. Now, computer-automated machinery has cut this
transition time in half, letting some IP machines run for an extra hour or more a day.
As technology prices fall, smaller companies can adopt the same tools and reap similar gains.
PetsMart Inc. is connecting its 500 pet-supply stores to an inventory-tracking system that also will
cut the typical time for processing a credit-card sale to less than one second, from as much as 10
seconds. Inside its stores, computer-controlled monitors track the water temperature, acidity and
chlorine levels in up to 160 fish tanks. The systems have reduced fish deaths by 10% in the 200 or
so stores where they have been installed since late 1997, says chief financial officer Neil Watanabe.
In Austin, Texas, computer-aided design and manufacturing helps Sulzer Orthopedics create new
artificial joints in seven months instead of four years. Designers at Sulzer, a unit of
Switzerland-based Sulzer Medica Ltd., test joint designs electronically and share them with
surgeons.
Computer-controlled machines can make a prototype from these designs in less than a day. And
Sulzer's simulations of how its joints will perform are so precise that the U.S. Food and Drug
Administration approves products based on them. That frees Sulzer from three to four months of
testing an artificial knee to see how it responds to stress. The upshot: Seven years ago, Sulzer
offered only three products. Today, the company offers seven knees and 13 hips.
Forty years into the computer revolution, it is hard to find a corner of American business that isn't
using technology to improve efficiency. Even among the warehouses and sheds of the Cleveland
waterfront-where State Fish Co. employs five cutters to do a job that hasn't changed much since
biblical times-personal computers are shaking things up. A PC installed in January translates hotels'
orders into detailed cutting instructions. Handwritten notes and word-of-mouth are giving way to
computer printouts and on-screen displays. The company's controller, John Giarelli, says he hopes
improved efficiency will pay for the system in three years.
His computer venture is tiny stuff compared with the immense projects under way at GM, Chevron
or Caterpillar, but Mr. Giarelli wants to be seen as a technology advocate, too. "The only thing that
separates a small company and a large company is the number of transactions," he says. "We all
have the same problems."
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