BBC Thursday, 26 April, 2001, 11:43 GMT 12:43 UK

Silicon Valley feels the pain

The industry overestimated how quickly demand would grow. By the BBC's economics correspondent, Andrew Walker in California

There is no doubt that the business climate in Silicon Valley has deteriorated in the last few months.

In January 2000 there were signs then that things were slowing down and it was harder than the preceding few months for technology businesses starting up to get investment funds.

Companies like the chip maker Intel were selling less, but the serious carnage was largely confined to the "dot.coms", the start-ups planning to use the internet to sell something to consumers.

Subsequently, a stream of businesses have disappointed their shareholders with news of slumping profits and sales, and the gloom has spread throughout the technology sector.

The likes of Cisco and JDS Uniphase who supply network equipment were thought to be partially immune, that belief turned out to be completely wrong.

Indeed many people think that the telecommunications companies are in the deepest trouble.

Deep trouble

Sandy Robertson, an experienced San Francisco investment banker who specialises in working with technology companies, says business has been investing too much in this kind of equipment - the booming stock market made it very attractive to companies to raise money to invest.

Now they realise they overdid it, orders have come to a screeching halt.

Michael Crosno, Chief Executive of Epicentric, a company which supplies internet software, says it is now harder to make sales.

"It takes longer to complete a deal and the decision has to be approved at a higher level in the company doing the buying - now the chief financial officer or maybe even the chief executive have the final say."

He also says that buyers are under more pressure to show there is a payback when they invest in new technology, and he thinks they won't start buying again on a large scale until they can show a return from the investments they have already made.

Nonetheless he is optimistic about his business.

Upbeat views

They are upbeat at Solectron too, a company which provides much of the manufacturing capability for technology companies based in Silicon Valley.

Company Vice-President, Phil Fok says "more people are still getting connected to the internet and more businesses are putting an increasing amount of their work onto networks."

"It is just that the industry, collectively, overestimated how quickly it would grow."

He says it is like plucking a guitar string.

"We pulled it way back and it has been let go there is a dramatic snapback. It will take a while to settle down again," he says.

Job losses

Investment banker Sandy Robertson sounds gloomier. What worries him is the lack of any convincing evidence that the decline in orders is coming to an end.

When chief executives say they think have good reason to expect an improvement later this year, he doesn't really believe them.

Jason Krause, a writer for the internet newspaper the Industry Standard, agrees. He says that what he calls "the lack of visibility" about the outlook is really shocking.

Like just about everybody in San Francisco and the Valley, Robertson thinks there is a big future for the internet in the long term.

But other technical revolutions in the past - the railways, electric utilities, the car - have also transformed our lives, while some people have lost their shirts investing in them. He thinks there are real parallels with the internet today.

And for now the job losses are mounting, as technology companies try to shore up their finances in the face of collapsing orders.

A telling illustration of the new climate in the area now are number of lunchtime discussions over job losses.

-- Anonymous, April 26, 2001

Answers

Very similar. Add auto companies to the list. From the 1900's to the 1930's, there was a slew of 'em competing for market share. Seeing that I'm from Michigan, they sort of highlighted that in our history class.

Uh, what's that saying about those who don't follow history?

-- Anonymous, April 26, 2001

I totally agree. A lot of these young people seem to know just about nothing regarding history. Any knowledge about the causes of the Great Depression should have sobered them immensely.

-- Anonymous, April 26, 2001