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Tech industry may get huge upgrade
For most of the two years since the Internet bubble burst and knocked the technology industry into its worst slump, everyone from unemployed programmers to disaffected investors has looked hopefully to 2003 for a turnaround.
Now, with the new year about to begin, it looks like a high-tech turnaround is indeed on the way — albeit a relatively slow and modest one, as corporations move to upgrade their aging computer systems and look for people to maintain them. The industry's momentum is then expected to accelerate in 2004 and beyond.
Spending on information technology rises and falls with corporate profits. As the economy softened in 2001, companies delayed modernizing their systems, particularly given that many had spent considerably in the late '90s on upgrades to combat anticipated Y2K problems.
IT expenditures peaked in 2000 at more than $1 trillion, before falling 10% in 2001 and remaining flat in 2002.
But now those upgraded systems are themselves in need of upgrading.
Only a quarter of the PCs in use today are powerful enough to run Microsoft Corp.'s Windows XP operating system, which is quickly becoming the standard for desktop and laptop applications. Happily for the tech industry, that need to update coincides with growing strength in corporate earnings.
"Corporate profitability is the driving force for improvement in IT spending," noted Daniel Niles, a technology analyst at investment bank Lehman Bros. "We believe this is beginning to occur."
At a recent meeting with securities analysts, executives from Palo Alto-based Hewlett-Packard Co. said they expect IT spending to grow 2% to 4% in 2003 and then increase 7% to 9% annually for several years after that.
"There should be another upgrade cycle within the next three years," said a report this month by management consultant Booz Allen & Hamilton Inc. — though not, it noted, of the magnitude of 1999-2000.
PC sales, virtually flat for the last two years, were better than expected in the third quarter, and 2002 may show a gain over 2001.
The outlook for 2003 is even brighter, in part because new systems are sure to be in demand.
According to Lehman Bros., some 500 million PCs are too old to run Windows XP. Microsoft will not offer technical support for Windows versions 3.1, 3.11 and 95 after today. Windows 98 and Windows NT versions up through NT4.x won't be supported after June 30.
In addition, equipment purchased from 1997 to 1999 is now fully amortized, meaning the initial costs to companies have been recaptured on the books.
Those factors are expected to combine to help spur a broad purchasing cycle.
Chip manufacturers are gearing up for a boost in business, as well. Global chip sales hit $12.68 billion in November, a 20% increase over last year, according to the Semiconductor Industry Assn., a trade group based in San Jose.
Japan's Hitachi Ltd., Toshiba Corp., NEC Electronics Inc. and Mitsubishi Electric Corp. are shortening or eliminating their New Year's holiday breaks on their chip-making lines, the Nikkei Business Daily reported last week.
Some tech stocks already are showing signs of a rebound. In the last three months IBM Corp. shares have risen from less than $60 to close Monday at $76.25 on the New York Stock Exchange. Over the same period, HP's stock has climbed from about $12 to $17.44 on the NYSE, and Santa Clara, Calif.-based Sun Microsystems Inc. has increased from $2.50 to $3.08 in Nasdaq trading.
Still, some are counseling caution. Toni Sacconaghi Jr., an enterprise hardware analyst with Sanford C. Bernstein & Co., said recent tech stock gains are based more on sentiment than on any real corporate spending.
"I haven't seen any evidence of an improvement in corporate IT demand over the last few months," Sacconaghi said.
Meanwhile, outsourcing probably will be especially hot in 2003. Spending in this area could boom by 10% as companies farm out their IT needs to the likes of IBM, Electronic Data Systems Corp. and El Segundo-based Computer Sciences Corp.
A number of mammoth outsourcing contracts have been announced of late. HP and Toronto's Canadian Imperial Bank of Commerce, for example, recently closed a $1.5-billion deal.
EDS and Bank of America Corp. last week announced a 10-year, $4.5-billion outsourcing pact. And IBM won an IT contract Monday with J.P. Morgan Chase & Co. that's worth $5 billion over seven years.
And it's not just the big companies that stand to benefit from a pickup in IT budgeting.
"Any company with revenue of below $1 billion is prime for picking now" for those offering IT services, said Greg Chun, founder of business consultancy Greco Technologies Inc. in Pasadena.
"Yes, IBM is doing banks, etcetera. But the middle market is huge, much larger than the top 100. That's where the bulk of the market is."
One potential area of expansion is document storage, as corporate and government offices increasingly archive material electronically. In particular, the business of storing medical data digitally is set to take off next year as the health-care industry steps up its compliance with the Health Insurance Portability and Accountability Act, which governs how patients' records are handled.
IT employment also is expected to see healthy growth in the coming year, with firms needing to hire 1.1 million people to meet their IT requirements in 2003, the Information Technology Assn. of America said in its latest employment survey.
Tech-support workers and Web and database developers will be in particular demand, the group said.
But despite the million-plus jobs anticipated, it still probably will be a tough market for those seeking employment — a harsh reminder of how far the sector has fallen.
Six months ago, Greco Technologies put an ad on Monster.com for a software developer and received 600 applications in one day. Greco had to use a filter to winnow the submissions to a manageable number, a surprising break from past experience.
"A year and a half earlier," said Chun, "we wouldn't have gotten any response because everyone was employed."