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US turnaround by mid-2009?

December 17, 2008 10:52 IST

The downturn has hit tech companies hard. Layoffs are announced almost every week, and even where there are no layoffs other measures are being taken. Annual bonuses are being reduced or eliminated. Travel is being cut. And virtually all business expenses, like lunches and entertainment, are disappearing from Silicon Valley.

There are different approaches being taken to whittle down payroll expenses. Some companies have extended their holiday closures from one to two weeks. Others are slashing their payrolls 10% to 15% in preparation for an extended downturn. Chartered Semiconductor, however, has avoided wildly swinging the ax and instead opted to reduce pay for employees.

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  • Aside from the camaraderie idea that, "We're all in this together," this makes solid business sense. The cyclical nature of the tech world makes it hard to find people to hire when the industry begins revving up again. Even when companies do find qualified workers, training them is expensive and time consuming.

    But the surprising part is that most top executives don't think the downturn will last beyond next year. Greg Hinckley, president of Mentor Graphics, believes his company will start seeing a turnaround by second quarter. Jack Harding, CEO of eSilicon, believes it will begin in the third quarter. And even the most pessimistic execs believe a turnaround is inevitable by the end of 2009.

    Global Semiconductor Alliance executive director Jodi Shelton says even the most negative prediction for the semiconductor industry is a 15% drop in sales. That may sound bad, but in 2001 the chip sector plummeted a whopping 32% and had to wrestle with two years of excess inventory caused by double-ordering in the dot-com explosion. Inventory is at an all-time low in this downturn.

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  • So what's really going on behind the scenes to warrant these kinds of cuts? First off, apparently not everyone believes the downturn is so mild. Shelton noted that about a third of the companies in the GSA will lose money in 2009. Many are gun-shy after the 2001 downturn. And even if they don't believe the downturn will last, the credit crunch has made it hard for companies without piles of cash to meet their payroll expenses. In those cases, they don't have much choice but to cut wherever possible.

    Second, even when jobs come back they don't necessarily come back in the same place. The limits on H1-B visas may sound great on paper for keeping high-paying tech jobs in America, but there aren't enough graduates out of engineering schools--or students enrolled, for that matter--to fill the jobs when they are available. Without an increase in visas or a sudden interest in engineering and science, there won't be enough engineers to staff tech companies in the U.S.

    Most people assume tech companies are shifting jobs to places like China because wages are cheaper there. The cost is lower, but it's not that much lower. The bigger issue is having enough of a talent pool available to remain competitive, and companies will go where the labor is plentiful.

    Finally, even if the economy does begin churning again, it will take time before all the pieces are humming along. Globalization and specialization mean not all parts of the supply chain experience an uptick or a downward slide at the same time. Cuts will continue for some companies even while a turnaround is under way for other companies.

    Ed Sperling, Forbes.com
    Source: