Blog Post

Even Bigger Nightmare On Tech Street

Updated: The technology sector, already rocked by the credit crunch and slowing global economies, is facing a bleak 2009, the impact of which is going to be felt across the entire ecosystem. From PC makers to chipmakers to chip equipment makers, almost everyone is bracing for a stomach-churning ride.

“The problem is three times worse than everybody thinks,” said Terry Gou, chairman of Hon Hai Precision Industry Co., a large Taiwan-based contract manufacturer. According to The Wall Street Journal, he is looking to cut jobs in his factories, most of them in mainland China.

Now here is a man who should know the actual extent of the troubles. His company’s customers include Apple (s AAPL), Nintendo and Hewlett Packard (s HPQ). Its subsidiary, Foxconn, makes handsets for Motorola (s MOT) and Nokia (s NOK). Any slowdown in orders from his end customers affects his business. Closer to home in Silicon Valley, companies like Cisco Systems (s CSCO) and Hewlett-Packard (s HWP) and Adobe (s ADBE) are shutting down for the holidays to save money.

In other words, the entire technology ecosystem is slowing down to a crawl. Chipmakers Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. have slashed their revenue forecasts and are putting employees on unpaid leave. Last week, the Gartner group issued a report forecasting a 16.3 percent decline in semiconductor sales in 2009. Many feel that they are being optimistic, especially when consumers are holding onto their cash tighter than ever.

PCs and mobile handsets, the twin drivers of technology demand, have seen their sales slump. The worsening sales of handsets are taking down some big names. Sony Ericsson is going to sell six million less phones in the fourth quarter of 2008, according to Mark Sue, analyst with RBC Capital Markets. In the first quarter of 2008, Sony Ericsson will sell 18.5 million devices. “Internal plans indicate SNE may end 2009 with units down as much as -20% YoY,” Sue writes in a note to his clients. While Sony Ericsson has its own sets of problems, the overall weakness in the demand for cell phones is leaving no room for handset makers to miss key product launches or release duds.

The impact of slowing PC and handset sales is being felt by companies like Intel (s INTC), Texas Instruments (s TXN) and National Semiconductor (s NSM), all having indicated that their revenues are going to decline next year. Further down the food chain, even semiconductor equipment makers are cutting jobs and running for the proverbial hills.

Never before have we witnessed such a sharp and sudden fall-off in lithography system demand, triggered by an unprecedented mix of falling end-demand for semiconductors, weak memory prices and restricted access to capital for our customers,” Eric Meurice, ASML’s president and CEO, said in a press statement. ASML, based in Veldhoven, The Netherlands, supplies equipment to Intel, among other chipmakers.

In July 2008, we wrote about the vulnerability of the online advertising sector.

We know the housing and financial sector-related ads have already declined drastically, now we’re going to start to see other sectors cut back on advertising, too — and that is going to have a negative impact on everyone from large social networks to ad networks to Yahoo and Google to small startups, including weblogs like ours.

Oh boy… another night of worrying and thinking about the nightmare on tech street!

Updated with correction: Adobe took umbrage with their inclusion in the post as one of the companies that was shutting down to save money. Well, it is a bit of a nit pick on their part. Here is their comment via email.

However, it has been Adobe’s policy for approximately 15 years to have a winter shutdown period concurrent with the Christmas and New Year’s holidays. The shutdown is not related to the slowing economy. This winter, the shutdown will extend from Wednesday, December 24, 2008 through Friday, January 2, 2009. Employees will receive most of this time as a paid holiday, although they will be asked to utilize paid vacation time for December 29 and 30.

19 Responses to “Even Bigger Nightmare On Tech Street”

  1. The system is severely out of balance. We work to much & things are overpriced.

    If every year things become more automated, and we learn how to create the necessities of life with less effort, and
    the infrastructure in countries moves from a development phase to simply a maintenance phase,
    wouldn’t it make sense that the demand for labor and the work available would shrink? Our increases in productivity should be creating more and more time for recreation. Unfortunately the cost of living has been forced upwards largely from an oversupply in credit. There needs to be a major deflation in prices (scary to employees), or a major influx of capital to consumers (scary to anti-government republicans), to restore a healthy balance.

  2. Mark Fuqua

    It’s called creative destruction and we’re a couple of decades over due. Central banks, especially the US Fed, decided to avoid recession at all costs…very similar to when the US Forest Service decided to suppress forest fires…with very similar results…huge amounts of undergrowth was allowed to grow up, so now, we have a dozy of a forest fire on our hands.

    Forest fires are natural and very necessary to the proper functioning of the forest ecosystem. Through thier destructive power, dead wood and undergrowth are burned away, allowing new life to spring forth. By suppressing the forest fires, the US Forest service allowed so much undergrowth to develope, the eventual fire destroyed far more than it would have otherwise.

    Likewise this reccession is going to be a dozy…but the end result will be great opportunity for many and the end of the road for many others…

  3. I doubt this is a moment of “peak waste” as Tim O’Reilly writes in his response to your post. Or even that this is a bad thing, except in the short term, for the tech sector. The good thing about downturns is that they shake out weak players. Companies that shouldn’t be able to survive will finally collapse. The remaining ones will become stronger. Rationality (except where government intervention occurs) will determine which companies, like Apple, will continue to sell products like the brilliant iPhone and which ones, like RIM, will be forced to admit that their products (Storm) need to be entirely rethought… and others (LG Voyager?) will just go away all together.

    This is a flight to quality across the entire economy. Bad businesses will be vanquished by good ones – we should rejoice.

  4. Consider that the US represents 4% of global population and 5x relative share (20%) of the global economy. The other Developed nations reflect a similar imbalance in varying degrees. Ghana, Africa generates a 1/10th share of the global economy relative to its population. The other undeveloped nations reflect a similar poor showing at about 2% the per capita economic contribution of the US. The over zealous extension and subsequent collapse of credit will force the US and other developed nations to contract, but there exists a vast growth potential among developing nations that deserves attention.

    See – Telerupted: Africa, the Last Infotech Frontier

  5. Nightmare? No, it’s more like we’re finally waking up from a really great dream that ended in a nightmare.

    Let’s look at the facts: for decades, the central banks of the world (especially the US’s Federal Reserve) have been cranking out liquidity, i.e. printing money or allowing the banks through low reserve ratios to create debt. This is the Austrian School definition of inflation: the increasing of the money supply.

    Inflation has two effects: it makes prices go up faster than wages, and it gives people reason to make malinvestments. When people have all this “new” money, they ignore the fact that their old money (401ks, stocks, savings) is worth less. They take this new money and spend it, usually in the wrong way.

    Some people buy houses that are overpriced because of all this new money. Some people invest in markets that are overheated because of all this new money. Some people go out and buy a $1000 cell phone or a $2000 notebook or a $5000 TV. These are all malinvestments.

    As the Austrian School economists show, time and again, since 1920, malinvestments cause bubbles, and bubbles cause busts which are really in fact just reality coming in full force.

    There’s a solution: end central banking. End fractional reserve banking. This way, with a fixed money supply that is backed by SOMETHING, people will see their money growing in value over time, rather than falling. Their wages will be realistic when they change (they’ll go up if you become more efficient in the market, they go down if you become less efficient in the market). People will see their money gains value over time even if it sits in the mattress. This causes them to rethink spending it like a bunch of soldiers on leave before a huge battle coming ahead.

    I’m so happy that my competitors are all over-leveraged with debt and bad assets. I have savings, and now I can buy those malinvested assets at pennies on the dollar. I can hire those who are unemployed at reasonable wages based on their value to the market, and not based on what their over-debted ex-employers were willing to pay. Consumers can now consume what they truly want and need, not what they think they “must have” because their over-indebted neighbors bought something nice.

    You don’t need a new car every 3 years, unless you really can afford it. You don’t need a new TV every 2 years, or a new PC every 12 months, or a new cell phone every 24 months, again unless you can afford it. When people see value in saving, they can buy things that are affordable rather than go into debt and cause prices to skyrocket for those of us who save.

    This is a GOOD THING. Markets should tank, because the markets pay no real dividend on average. Companies that NEVER issue a sane dividend are NOT PROFITABLE. Eventually, all that capital investing crashes when a competitor takes over the market. Issue dividends, and people like me will invest again. Stop destroying the value of our currency, and people will start hiring again at reasonable wages.

    I love the site, Om, but I detest the idea that falling prices is bad for people. I detest the idea that punishing malinvestors is a bad idea. Recessions are the BEST for the wise investors, because they can buy discounts when for years their money was worth less and less due to the morons who went bat-crazy buying whatever they could.

    I’m excited. I’m expanding. And I’m still saving my money for the next boom-bust craze.

  6. Just passing on some Yahoo tips for Monday. At this moment in time, however bad things are – they are. Perhaps is helpful at difficult times to deal with the environment in it’s declining condition, instead of to dwell in it:

    Notably we are hearing announcements about Land Rover Jaguar in the UK. Millions definitely to be pumped in. But notably not billions. They earned £750m profits last year (I believe), and would have increased this year should we not have had so many crooks for bankers (and politicians). Anyhow – they sold every single Jaguar XK made, and sales on Land Rover’s increased.

  7. Small business with greedy owners will not be affected by this financial disaster. Also the outsourcing companies will be the most important players in the next years, because everyone will want to cut their costs. In this situation I think that the competition on the outsourcing side will lower the fees. And in this case the amount of money in the IT industry will be much smaller that these last years.

  8. Don’t worry, Om. You’re going to survive and thrive.

    Man, China though. They’ve enjoyed quite the decade of prosperity. My worry is the state of their political-economic situation. Everything is hunky dory in their weird psuedo communistic capitalistic system when their economy is on the up and up. What happens when their economy really starts to feel the weight of this global economic downturn?

  9. Everything is crunched, but I think that weblogs, and the internet in general, isn’t going to get a big blow like hardware, real estate, and banks of course…
    The .com bubble belongs to the beginning of the decade. We are now at the end.
    I wouldn’t worry about this site…