Technology analysts live in one of two camps. One believes the enormous investment in response to te...
Technology analysts live in one of two camps. One believes the enormous investment in response to telecoms deregulation, Y2K and the dot.com boom has created excess supply that will take years to work off.
We don't share this gloomy view, though. We believe that, although the boom went too far, the key lesson of the current downturn is that technology investment is cyclical. So, as the economy recovers, technology spending will also recover. The US economic downturn is the main source of current problems, but it will respond to further monetary easing and show signs of recovery very soon.
There are already some early signs. The NAPM (National Association of Purchasing Managers) Index, an indication of manufacturing sector confidence, has risen two months in a row. NAPM has been a good bellwether for the rest of the economy, so GDP growth should also bottom out soon. Although we won't see another boom, we expect higher business confidence, leading to stronger levels of tech investment.
Until corporates see this, they won't be inclined to relax budgets and start to spend. As it did on the way down, a US recovery will set the tone for global activity and markets.
For a technology company to thrive in difficult conditions, it needs to display the following traditional qualities. First, good management. The downturn has exposed many boards to conditions that they won't have seen before, and many won't survive the challenge.
The second requirement is a strong balance sheet. New funding is now almost impossible to obtain. A potentially fatal blow to a loss-making start-up or a telecoms company with an incomplete network.
Next comes the need for a diversified and well financed customer base. Suppliers to cash-constrained telecoms and technology companies are under pressure to make concessions, such as risky vendor financing. The clearest example of this is in telecoms, where operators are struggling with price weakness as a result of capacity growth, and are burdened with the cost of 3G licences, though the ceaseless growth of data volumes needs ever-higher long-term investment.
Successful suppliers are those with a unique offering that prevents customers from playing one supplier off against another.
We believe the economic recovery is close at hand, and remain confident of the long-term prospects for products and services such as data-enabled mobile-phones, high capacity telecom networks, enterprise software, alternative energy generation and many others. Current conditions favour the large, established companies which can outlast or ultimately absorb the small start-ups.
We expect the European recovery to be more sober. One reason is that Europe's technology leaders have valuations that reflect their qualities.
Steve Martin is manager of RSA Investments EuroTech fund
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