Computer Harware Industry Poised to Weather Problems In General Economy: No Bailouts but a Bit of Stimulus

Been Here, Done This

All industries are cyclical: good and bad times come and go, to a large extent along with the strength of the economy as a whole. Even those who help with the unavoidable - death and taxes, can offer a more complete range of services and products to clients whose portfolio’s are doing well, or at least whose job’s are stable. It’s rare, however, for someone not yet 30 years old to have had their industry go up, then down, then up again, and now on the way back down again, in the space of their career.

And it is on the way down, but how far? The last time a bubble of irrational exuberance popped, we were standing right on top of it. Even those with little .com exposure ran out of Y2K work to do. This time, we were nowhere near the bubble. Actually, the new bubble was in part caused by mutual fund managers with more incoming investment than brains, needing somewhere to put the money .com couldn’t be trusted with.

Instead of giving billions to businesses that had no chance of ever turning a profit, they gave it out in hundreds of thousands at a time to people who have no chance of paying it back. A mortgage is theoretically safer than tech R&D, since you can foreclose on the underlying property. Unfortunately, all investments have one thing in common: they are only worth what someone is willing to pay for them, when you need to sell them. And people without jobs don’t buy houses.

We may not have been near the bubble, but it was big, and made out of toxic debt, and now we’ve all been covered in toxic-debt slime. When Intel, Microsoft, and Google, are all laying people off, it is impossible to say IT is getting through this unscathed. Bad times lead to shake downs, and companies that aren’t ahead of the game suffer. Companies with huge manufacturing assets and labor pools, like Intel, are susceptible no matter what they do.

That all being the case, there might be a silver lining. The grizzled, twenty-something, veterans of the computer industry seem to be resisting the toxic slime’s economic properties, at least in relation to people in other industries.

No One Ever Bails Us Out

One thing we learned last time is that, for some reason, the businesses and people that make the computers and communications ubiquitous in modern life possible, and the families they support, don’t deserve the same treatment given to other industries. The reasoning for this is widely open to debate, but it is obvious that a solid business model isn’t a criterion. For the people who have been laid off, and their families, obviously help is needed. But relative to the economy as a whole, computer hardware, and IT in general, are hanging in there.

Also, governments aren’t explicitly bailing out tech (in the States at least, Canadian businesses can depreciate hardware bought from 2009-2011 at 100%, creating significant tax savings), but IT is going to pick up some crumbs. By virtue of them being everywhere, it is impossible to spend money without spending some on computers. Elements of the US stimulus package intended to combine addressing immediate problems with long term benefits in particular, will see money going to computer hardware.

$20 billion of the money going into health care (a subject the president will be judged by as soon as people can stop worrying about the economy) is aimed at improving electronic record keeping in health care, a long overdue project. $6 billion is going to improve broadband communications infrastructure. There’s also $20 billion to increase the sophistication of the power grid, creating a so called ‘smart grid’).

While this is certainly good news for the time being, we’ve seen some seriously short-sighted thinking in the massive cut to education spending. Apparently, trimming the pork from this bill included taking $67 billion out of money for school construction and modernization. That includes $6 billion specifically for modernization of higher education, and $1 billion for technology education in general, which puts technical training that much further out of reach. This didn’t just remove the immediate construction, IT, and education employment benefits.

There is also a generation or two that will have further problems finding good jobs, with all of the effects they will have on the economy. You can use the tax cut you got instead on a computer and private classes so your kids have some job skills that apply to this century.

IT Don’t Need No Stinking Stimulus

Intel, with much fanfare, in a message delivered by CEO Paul Ortellini himself, announced that they would spend $7 billion on upgrading plants in the US over two years, to deliver 32nm chips, which would employ 7000 people. Hopefully this is a light at the end of the tunnel to the 5 to 6 thousand employees Intel just laid off.

The UAE’s government thinks enough of US chip manufacturing to have handed over billions to AMD in a plan that includes owning half of a chip foundry in the New York Capitol region. AMD has also had to lay off 1100 employees, and cut salaries across the board on those that remain. While both companies’ shares have been hammered, and earnings have also slid, they are still planning on building and hiring in the US, just not right now.

For most in the IT or hardware game, it’s time to batten down the hatches, not flee the ship like a rat. But if the average isn’t too bad, then there have to be some bright spots bucking the trend.

Bright Spots

2008 saw one big computer hardware trend flourish, and another continues to grow. Both could actually be considered as part of the mobile computing trend. In 2008, for the first time ever, laptops outsold desktops. A big factor in increasing notebook sales was the netbook PC.

Asus benefited immensely, and they are hoping to ride the success of their Eee PC onward to greater market share for Asus notebooks overall. Acer caught on quickly, and their adoption of the netbook format brought them within striking distance of Dell for no.2 laptop maker by volume (HP is still number one). The low-power Atom CPU’s used in these small computers were able to shore up Intel’s 2008 bottom line to some extent.

This might be seen as bad news for hardware in general, since a netbook costs far less than a notebook or most desktops. That is thinking in the past though. The low, and lowering, cost of the netbook, opens up new international markets. China’s economic strength, and India’s burgeoning and highly tech literate and technophile middle-class, coupled with a $200 US computer, change the game completely. They might even help western nations with their trade balance deficits, if companies here can get their ducks in a row. Asus and Acer are Taiwanese and trade on the Taiwan Stock Exchange.

Turn On a Dime or You’ll Be Lucky to Have One

Microsoft, for instance, will have to radically rethink the way it does business. No one is going to pay $200 for a computer, then turn around to drop over $100 on an OS, let alone several hundred on a simple office software suite. Particularly since the OS is resource intensive, and a $200 PC doesn’t have many system resources to spare. That’s true of buyers from Fort Worth to Kuala Lumpur, via Hawaii or the Dominican.

If MS can’t come up with something that can work with little space and cut down boot times, and be able to sell it for ten or fifteen bucks to OEMs for use with cheap PCs, they’ll never be the powerhouse they are, or were, in PC operating systems. Call it Windows Eco and hype the power saving features or something. But we are supposed to be talking about bright spots, and there is one more, and it’s a biggie.

Food, Shelter, and Something to Do

Video games may not be a necessity, but unless things get much worse, most people will still have a few bucks and need a distraction. And video games, to some extent, benefit from the limited amount people have to spend on recreation. Many may not be booking vacations with hotel stays and travel and theme parks and concerts and restaurants. That means they are spending time at home though.

For the price of admission alone to DisneyWorld for weekend, a family of four can get a Wii and enough software and peripherals for months of quality time. A Massive Multiplayer Online game subscription, at $10-15, which can often provide too many hours of entertainment, makes a nice alternative to going out to a movie, once. And with more money being spent on “E” for everyone games than “T” for Teen or “M” for Mature games combined, gaming is indeed something families do together.

So the critical areas of computing for the international masses, health care, killing invaders from other planets, communications infrastructure, and so on in that fashion, should keep the IT and hardware industries’ heads above water. If you find that you’re bored of shaking your fist at the news, shake your Wii-mote for a change. The next time you buy software, you might have more to do with saving the world than described in a game’s story line, particularly if you can use it to teach kids about computers.