Editor’s note: Charles Davidson covers the Atlanta tech scene for Local Tech Wire. His column appears regularly on Mondays. Jobs aren’t even safe in Mexico any more.
Globalization has led technology companies such as Scientific-Atlanta Inc. to ship more jobs south of the border. The Norcross, Ga.-based maker of communications gear has over the past few years created nearly 5,000 jobs in Mexico.
On July 3, Scientific-Atlanta said it would cut 1,300 jobs, or 30 percent of the work force, at its Juarez, Mexico digital set-top box plant. The company had earlier eliminated 750 jobs there, and said it might cut more.
The news among other big Atlanta tech companies has not been much better lately, raising the question of whether a turnaround of any significance is coming any time soon. Over roughly the past 12 months, four of Atlanta’s largest publicly traded tech companies — Scientific-Atlanta, CheckFree Corp., Earthlink and ISS Group — have lost a combined $10.4 billion in market value.
But the trend isn’t unique to Atlanta. Tech firms in the Carolinas as well as nationally have shed billions in paper wealth, stock prices have plunged in the Nasdaq sell-off, and what good news can be found is largely in the biotech and life science sectors.
If the views of analysts are a guide, things might not get much better in the short term. In the past month, various analysts have lowered projections of the stock performance or estimates of financial performance of all four companies.
No one’s saying any of these companies are about to go under. Most of them have solid balance sheets with enough cash on hand to ride out numerous storms. And over the long haul, the consensus seems to be that the big corporate customers that pay the freight for the tech firms will keep buying.
But how long is that haul?
Witches’ brew of factors
Jeffrey Humphreys, director of the Selig Center for Economic Growth at the University of Georgia, says that three factors are constraining capital spending on technology in the short term:
- Overspending on technology the past few years
- Sinking stock market valuations that make it harder to spend
- Generally weak demand throughout the domestic and global economies
“I’m a long-term optimist for capital spending, and particularly in information technology and biotechnology,” Humphreys says, “but I’m a short-term pessimist.”
Investment spending by companies will be one of the last important components of the economy to snap back from recession, Humphreys figures.
“The concern,” he says, “is that we don’t get any increase. That’s the worrisome possibility.”
Throughout the U.S. economy, the utilization of production capacity has been declining, meaning companies don’t need to add more capacity, Humphreys says. Note Scientific-Atlanta’s cutbacks in Mexico.
The most recent government figures show that for May 75.5 percent of the industrial production capacity in the U.S. economy was being used, a tiny uptick from April, but still more than 6 percentage points below its 1967-2001 average.
That reality, plus the uncertain economy, falling stock prices and financial scandals are making it hard for companies to justify spending on technology or anything else.
Productivity and prudence
“It leaves even prudent plans sitting on the shelf,” says Humphreys. “There are a lot of investment plans that should go forward that may not go forward.”
Nevertheless, over the long term, he thinks high technology will be viable, while the telecommunications industry will take longer to work through a whopping imbalance between demand for services and money spent on equipment to deliver those services.
“There are many reasons to be a believer in high technology,” Humphreys says. “The most important one is probably what technology does to productivity. It’s hard not to be bullish on technology when you look at the productivity gains it brings forth.”
He calls it the most time-tested trend in U.S. economic history, and history in general for that matter. Still, for nervous shareholders and executives, optimism for the next decade or two is less comforting than uncertainty for the next quarter or two.