Banking

Market meltdown likely to impact IT spending

The folks who control IT budgets -- chief financial officers -- are not going to be very enthusiastic about spending on tech projects amid the current market volatility.

When the stock market tanks in a short period of time, technology spending often goes with it. Simply put, there will be a round of downward revisions for technology spending in the next few weeks, barring some miraculous rebound in the economy. Is it too early to call a soft patch for technology? Not really.

For starters, technology spending often tracks gross domestic product, and economists are already scurrying to cut their second-half forecasts. Meanwhile, other reports indicate that inventory levels in the tech supply chain are creeping higher. And the final reason why tech spending can be expected to take its lumps: psychology.

I've lived through enough business technology cycles to know that companies instinctively pull back their capital spending amid uncertainty. These stock charts of the Dow Jones Industrial Average and S&P 500 scream uncertainty. Here's the cycle:

  • Market tanks.
  • Shares of companies follow.
  • Companies get cautious.
  • Spending and investment slow.
  • Economy pulls back.
  • Cycle repeats.

In this environment some technology projects -- new data centers, cloud computing, software as a service, and automation -- make the cut. Other technology efforts, such as PC upgrades, may not.

Now the latest round of tech earnings highlighted how enterprise spending continued to chug along. Consumers were a bit flighty, but businesses were investing in technology. However, Juniper Networks recently noted that it was seeing a few economic hiccups. Cisco has been seeing warning signs amid its own execution issues. And Forrester Research was ready to cut its IT spending forecast based on debt ceiling talks. The United States raised its debt ceiling, but Standard & Poor’s downgraded the country's rating. That move is a first, and while the merits of the downgrade are debated, the fact that the U.S. balance sheet is a mess isn't.

Also: Forrester: U.S. Debt Ceiling Showdown Will Affect IT Spending

What's a chief financial officer to do amid this mess? Pull back on spending -- big time. Given that the CFO controls the technology budget, it's just a matter of time before IT spending takes a hit.

In addition, the tech supply chain may already be wrestling with inventory issues. Mirae Asset, a Hong Kong research firm, said the technology industry is facing an inventory glut amid weak demand. In a research report, Mirae said:

Prior to this study, we thought inventory issues in the tech supply chain were limited to upstream semiconductor companies, mainly triggered by the earthquake in Japan in March. Companies ordered more than they needed because of concerns on component shortages. Our study indicated that downstream companies (including EMS companies, distributors/retailers and handset makers) too hold inventory levels similar to the previous financial crisis during 4Q08 and 1Q09. We attribute this to the end-market slowdown over the last 2-3 months.

Indeed, Mirae has a table that highlights days of inventory across various supply chain players. Here's a sample:

  • Qualcomm had 50.9 days of inventory in the second quarter, the highest since the first quarter of 2009.
  • AU Optronics, which makes LCD panels, had 45.9 days of inventory in the second quarter, up from 43.3 days in the first quarter. Those tallies are the highest since the third quarter of 2008. LG Display has a similar situation.
  • Contract equipment manufacturers - Flextronics, Sanmina-SCI, Jabil, and others -- all have high inventory levels.
  • Retailers and distributors -- Ingram Micro, Tech Data, and Best Buy -- all have inventory levels that are lofty.
  • On the handset side of the equation, Nokia, RIM, and Motorola are at inventory levels dating back to the fourth quarter of 2008 and first quarter of 2009.

Add it up and the tech sector appears to be destined for rough sledding.

Related:

This article was originally published on ZDNet.
6 comments
Timbo Zimbabwe
Timbo Zimbabwe

That headline alone makes me think "Duh, ya think?"

Englebert
Englebert

as they did today ? Let's have some positive articles, instead of the constant stream of negativity.

TGGIII
TGGIII

1) If the "tax and spend" our way out of the hole is not possible due to government over extension, companies will earn less because the government is not pumping the inflationary bubble by dumping billions on the market. The stocks may be settling down to their correct value for an era of fiscal responsibility....Hey it could happen. 2) If companies can cut all this IT spend and still do business, what were they spending it on in the first place. I know some of it was legit, but all too often, projects are selected for gee-whiz factor instead of business need. If we stuck more to business need, we would have less yoyo-ing of resources every time the market hiccupped...or threw up. I spent most of my MBA training defending constraints based planning because we have a tendency to generate ego driven improvements instead of understanding and managing our businesses for maximum profit.

adornoe
adornoe

A smart manager will try to deal with all kinds of situations, good, bad, and in-between.

TexasJetter
TexasJetter

You are correct, as a manager we need to take an objective point of view, good, bad, and otherwise. However a big part of the consumer side of the economy is driven by fear, which is propagated by all the negative reporting. As @Englebert suggested, the positive side of things seem to be seldom reported, so a constant state of fear is created, making the downturn a self-fulfilling prophecy. I???m not suggesting that fear and negativity are the sole contributors, but they certainly have a significant impact.

adornoe
adornoe

back by doing things that keep them interested in their products or service. As an example, even during the recession of the last 4 years, there are companies making huge profits, such as Apple and Microsoft and many others in many different sectors. People will hold on to their money and won't make an unnecessary purchase, but, there are ways to entice them and "make" them part with their money. Even in downturns, there are winners.