After the Perfect Storm, Part II

24 July 2003

by Michael Mah, Senior Consultant, Cutter Consortium

I’ve been buying stocks again. Not a lot, mind you — the ” ‘Honey I Shrunk the Kids’ College Funds and Retirement Accounts” film turned out to be a horror flick that left me skittish, like most investors. But the few shekels that I have in money market funds have slowly begun to make their way into some carefully selected stocks and mutual funds. Hey, baby, the small investor is back!

But as I researched recent price patterns from the stock charts (thank goodness for metrics), it looked like — in some cases — I was already too late. A few of the equities that I was keen on actually saw their bottoms back in the February and March time frame. That was just before the war in Iraq. Since then, many have had dramatic rises, in some cases doubling. Rats, I missed the window! It would have been incredibly gutsy to have invested while others were running for the exits.

But that’s exactly what some technology companies have been doing during the recession, according to recent news. Apparently, smack dead in the middle of the semiconductor industry’s worst downturn in decades, IBM poured US $3 billion into a state-of- the-art chip factory in East Fishkill, New York — its largest capital project ever. Back in the 1990-1991 recession, Intel had also bet big on its microprocessors, doubling R&D to just under a billion dollars while simultaneously ramping up capital spending. It’s apparently been doing the same this time; it spent $11.5 billion on R&D and capital spending in the first year of the current recession. The fruits of that investment are now ripening. Its latest Wi-Fi offerings for laptops, cell phones, and other portables are rolling out right now. (And my new Centrino-equipped wireless Dell 600m is happily beaming to the 802.11 b/g base station upstairs as I write this article on my screened porch, here in the bucolic Berkshire mountains of western Massachusetts.) In the last week, both companies reported higher earnings, according to the New York Times, while stating that business is expected to be even better in Q3 and Q4.

Investing during downtimes is hard — it takes pure guts. In a recent BusinessWeek article, Professor Donald L. Sull of the Harvard Business School said, “Making a big bet is the thing that allows you to build a sustainable advantage — in technology, manufacturing improvements, or relationships. You spend, others don’t.” As a result, companies like IBM, Intel, and others that had the guts to take these risks are poised to crush their competition as the recovery gets underway. In IBM’s case, its investment in the Fishkill plant will contribute more than $139 million in profits this year, extend its lead over rivals like TI and NEC, and bring in an extra $2 billion in revenue when it gets up to full capacity. Yikes!

Companies that ran for the exits will have a hard time getting into the game now that things appear to be turning around. I’m seeing the panic in a few companies I’ve spoken to in recent months. One manager, wringing his hands about a software project that’s just starting to get into the pipeline, was bemoaning the fact that his management is upset that the project won’t be ready until 2004. They’re trying to ramp up, but it’s not easy, and they need it now. Ironically, they’d have it now — if they had started the project last year. But they didn’t. Last year, they were laying people off. Folks who had the domain knowledge to accelerate the project today are long gone. Some of them are working for the company’s competitors.

It’s easier to start seeing this stuff now with a little hindsight. To be fair, it was harder to fathom these scenarios a year or two ago. But IBM did, as did Intel and others that are poised to break away from the pack. My take on this is that it’s not too late. Companies bold enough to take the right risks (early) can make meaningful IT investments to create opportunities and capture market share. Some of their competitors are still in a trance, like deer in the headlights. The window is still open while they’re sitting on their wallets. But before they wake up, you may want to get a jump on them and get started now. What are you waiting for? Seize the day!

By the way, the Dow is up 100 points as I’m finishing this article. Apparently Microsoft announced that it beat revenue projections and is increasing its outlook for fiscal 2004. I think I’ll buy some stock.

— Michael Mah, Senior Consultant, Cutter Consortium

© 2003 Cutter Consortium. All rights reserved.