Technology executives around the world are preparing for economic troubles to deepen. Many hope that their products will prove indispensable for customers and see emerging economies as sure-growth markets.
But low- and middle-income U.S. consumers are struggling, and the relative strength of U.S. corporations may not last, executives said at the Reuters Global Technology, Media and Telecoms Summit in Tokyo, Paris and New York this week.
Virgin Mobile USA Inc, the prepaid mobile phone service company, expects economic problems to last into the first half of next year for its mostly young customers. Oil and gasoline prices keep breaking records, groceries are taking larger chunks of paychecks, and the mortgage crisis is still shuddering through the U.S. economy. That is especially difficult for low- and middle-income groups, said Virgin Mobile USA Chief Executive Dan Schulman.
“People are really and truly trying to make ends meet at the end of the month,” he said. “There are debts to be paid.”
Far beyond Main Street, the Wall Street banks and other financial titans will need room to raise new funds, since credit is tight, said Rick Simonson, chief financial officer of cell phone maker Nokia Oyj. “It seems since last summer people have been trying to call the bottom for financials. It seems they haven’t quite been found yet in terms of the restructuring and the capital raising that has to go on there,” he said.
And even those who see a relatively strong corporate America still investing in products to cut risks or improve efficiency are girding for tougher times.
“If you read some of the written stuff, you would’ve expected that the U.S. basically spent absolutely no money in technology, and that is absolutely not true,” said John Chen, chief executive of software maker Sybase Inc. But he is not planning on an economic revival in the second half of the year. “I have to prepare. When I run a business I have to assume that it’s not going to be pretty,” he said.
Fujitsu Ltd Senior Executive Vice President Chiaki Ito said he was concerned that the costs of absorbing the crisis in subprime mortgages—the risky home loans that have gone bust for many U.S. and U.K. lenders—could divert government funds usually spent on technology.
“I am extremely worried about the indirect effects of the subprime problem,” he said. Meanwhile, manufacturing faces risks from rising food and fuel costs. “If costs go up, this could trigger a recession,” he added.
Technology was expected to outperform all rival sectors in the S&P 500 index in the second quarter, even though earnings won’t be as high as Wall Street initially targeted, according to Thomson Reuters data. Second-quarter earnings growth of 15% was seen decelerating to 12% in the third and fourth quarters and rise to 18% in full-year 2009.
Still, the case of economic nerves has spread to many customers, executives agreed. “Most of the presidents (I’ve spoken to) have expressed concerns,” said Tadahito Yamamoto, president of Fuji Xerox, the office equipment unit of Fujifilm Holdings Corp.
Hope—and success so far—for many companies is based on smaller economies that are increasingly investing at home. U.S. companies with wide international exposure like IBM have benefited from stronger economies and a weak dollar. Big Blue says that infrastructure projects in the developing world are key.
“If I were in a business model where I needed double-digit growth out of the G7 to drive my performance, I would be in a cold sweat,” said IBM Chief Financial Officer Mark Loughridge, referring to the Group of Seven nations. But Loughridge said an economic tremor in such big, advanced economies would not necessarily be felt by emerging ones.
“I personally see less kind of linkage, dependency between the established markets and the high-growth markets,” he argued.