TCS Daily


Go Tech, Young Man!

By Joshua Livestro - May 20, 2004 12:00 AM

Did you ever see a dream walking? Well, during NASDAQ's recent 12th investor program for the technology sector at Merrill Lynch's London headquarters, the dream was walking, talking and power-pointing all day long. In twelve presentations, a number of leading NASDAQ listed technology companies presented their outlooks for 2004 and beyond. At times, it was as if the process of creative destruction was coming to life before our very eyes. Solid state LED technology will make the light bulb a thing of the past. Voice over Internet Protocol will spell a revolution in telephony. Ever more powerful microchips and ever faster chip-to-chip interfaces will allow for new applications in anything from systems management to cinema-quality computer games.

What was most remarkable about this dream, however, was not its fantasy element but its sense of realism. This was a dream that had survived the rough day after the night before. All companies used their presentations to emphasise "reduction of costs," "repayment of debts" and most of all, "profitability, profitability, profitability." All that matters now is the bottom line. The market's laws of gravity have clearly done their work and these companies are the better for it. All boasted net profits, improved cash flows and steady growth rates.

The main reason these companies are back in the black is because they completed the necessary process of restructuring quickly and efficiently. In doing so, they didn't just do themselves and their customers a favour. By focusing on profitability, they have also done a lot to improve (inter)national productivity rates. US Bureau of Labor statistics show that while the hourly productivity of manufacturing workers grew only 2.2 percent rate in the tech world's annus horribilis 2001, it increased by 7.2 percent in 2002 and by a healthy 5.1 percent in 2003. In its recent fifth annual report on the Digital Economy, the Department of Commerce acknowledged the fact that "the recovery in IT-producing industries and increased use of IT throughout the economy are helping to drive very rapid productivity and output growth."

Perhaps the single most important aspect of the restructuring operations was the outsourcing of cost-inefficient parts of business operations to emerging market countries. This phenomenon generated a lot of heat in the early part of the American presidential election campaign. John Kerry used his speeches to rail against "Benedict Arnold companies sending American jobs overseas." In his TV spots, he implicitly blamed the outsourcing policies of these companies for the fact that "jobs are leaving the US in record numbers." But the recent impressive growth figures in the US job market (600,000 new jobs in the last two months alone) show that this argument is flawed. Outsourcing has in fact helped to create new business opportunities, in the tech sector and elsewhere. As Catherine Mann of the Institute for International Economics pointed out, outsourcing leads to lower prices of (among others) computer hardware, which leads to lower production costs for American businesses, which in turn leads to greater profit margins, which will inevitably lead to increases in employment. The truth is that outsourcing is changing people's lives - for the better.

And not just in the US. In a rare moment of optimism, New York Times economic commentator Paul Krugman observed that, in the space of a just single generation, the opening up of developing nations to western products and investments has led to "an enormous, unexpected improvement in the human condition." Former developing countries like China and India have come on leaps and bounds. Over time, that will also create new market opportunities for tech companies. Companies like UTStarcom, for instance. In his presentation, the company's CFO Michael Sophie predicted that by 2006, China alone will have 100 million handsets and 60 million ADSL connections. With its strong presence in China, his company is in a prime position to profit from the continued growth in the Asian market. Or like Lam Research Corporation, which according to its CFO Mercedes Johnson looks set to increase dramatically its market for conductor etch technology in Asia.

But what about Europe? In early 2000, European heads of government pledged to make the European Union the "most competitive economic area in the world" by 2010. Right now, most would probably settle for just becoming one of the most competitive areas. As the OECD pointed out in its 75th Economic Outlook, Europe is the only part of the world that is not profiting from the current global economic upturn. A recent survey by the World Economic Forum showed that within Europe, only the Scandinavian countries and the UK were able to match US competitiveness. It's no accident that those are the same countries that have most enthusiastically embraced the technological revolution.

Calls by Messrs. Blair, Chirac and Schröder to reduce bureaucratic burdens on European businesses are surely welcome. But if Europe is serious about unlocking its own economic potential, it should do more to encourage the growth of the technological sector of its economy. It could start by trying to learn from its own successes. The European market in mobile telephony (the biggest in the world) is a case in point. European regulators have taken a laissez faire approach, allowing the market to flourish. There are encouraging early signs that European legislators are taking a similar light touch approach to the newly emerging VoIP market. Recent efforts by the European Commission to speed up the cumbersome process of patent filing inside the EU and to extend greater protection to intellectual property rights should also help to create the conditions for a technology-driven recovery. By allowing technology companies to tap into the vast potential market created by the EU's enlargement, Europe's policy-makers may just have opened the door to a more competitive future for the old continent. My advice for young European entrepreneurs looking for the next big business opportunity? Go tech, young man, go tech!


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