Some Bright Spots Aside, OC Companies Face Hard Times Overseas, Too
During the early-1990s economic downturn, technology companies found growing markets in Asia and Latin America to offset slumping U.S. sales.
This time around, the world economy is a markedly different place, with global markets more tightly intertwined with the U.S. economy and feeling the effects of the slowdown under way here.
“The present day is going to show more similarities to what happened during the Asian economic crisis in the late-1990s,” said Manuel Lynch, vice president of marketing and business development with Irvine-based chipmaker Microsemi Corp.
Following the collapse of the South Korean and other regional economies at that time,leading to an Asian economic “flu”,a lot of American companies with close ties to Asian markets suffered. In Orange County, companies such as Powerwave Technologies Inc., Ingram Micro Inc. and others felt the side effects of the Asian flu.
Now the current economic slowdown is sending ripples through overseas markets, which in turn are hurting sales by U.S. companies to those markets,creating a vicious circle.
Ingram Warns
Santa Ana-based Ingram Micro this month warned that the economic slowdown is spreading globally.
The largest distributor of technology products said it expects a year-on-year revenue decline of 18% to 20% for the second quarter.
“The demand slump is no longer isolated to the U.S.,” said Ingram Chief Executive Kent Foster. “We’re now experiencing slow markets throughout the world.”
Sales in every part of the world were weaker than expected in May and early June, according to Michael Grainger, Ingram Micro’s chief operating officer and president. And at the beginning of June, Ingram Micro announced 1,000 layoffs.
Some of the companies who make the products that Ingram Micro sells, including Hewlett-Packard Co. and Compaq Computer Corp., also have warned of continued slowing.
Probably the most notable example of the U.S. slump going global is in the semiconductor sector. Many Asian companies,buyers of U.S. chips,are suffering from the same drop in demand for their products that domestic chip customers are facing.
Newport Beach-based chipmaker Conexant Systems Inc. relies on East Asia for 80% of its business. The company has struggled with the sharp downturn in semiconductors, reporting a $262 million loss in the quarter ended March 31. The company recently said it would cut 1,500 jobs.
European Woes
But Asia is not the only region where OC tech companies have hit a wall. Rainbow Technologies Inc., an Irvine provider of computer security software and hardware, announced earlier this month that it expected to lose money in the second quarter, instead of breaking even, as business slowed both in the U.S. and in European markets.
Rainbow officials attributed the loss to slow-moving inventory and price pressures in some markets.
The company has roughly a 50-50 revenue split between the U.S. and the rest of world.
“International markets are a major contribution to our business and will be for some time,” said Humphrey Chan, Rainbow’s director of Asia-Pacific Rim operations.
The company has sales offices throughout East Asia as well in Europe, Australia and India.
Chan said the overall slowdown in the U.S. has made Rainbow a little more conservative in its expansion plans worldwide.
“There’s a slowdown everywhere right now,” Chan said. “But we expect growth to continue in our East Asia markets.”
One place that still is growing for OC tech companies is China, and companies that have invested the time and effort to get into that nation are seeing some payoffs.
“China is a very high-growth market in recent years, hitting growth rates as high as 10% per annum,” said Wai Szeto, director of worldwide business development for Fountain Valley-based Kingston Technology Co. Inc. “The Chinese have incredible purchasing power right now.”
The overall PC market in China likely will see continuing annual growth of 10% to 15% annually, while the U.S. shows slow growth and Europe shows flat growth, according to Szeto.
Parts of Asia continue to struggle, too, Szeto said, pointing to a Japanese economy that has yet to recover from a decade-long slowdown. In Japan, people are cutting back on spending, and the computer market is relatively saturated.
But “with PC prices falling every year and per capita income in China increasing, the market shows huge potential,” Szeto said. “For anyone in the PC business, China is where the action is.”
Richard Rutledge, marketing vice president for Irvine disk drive maker Western Digital Corp., agreed.
“Asia is by far the fastest-growing region for us,especially China, where we’re having record sales,and India is very strong for us, too,” he said.
Rutledge noted that not only is the demand strong in those nations, they also have relatively low operating expenses,and the combination of solid revenue and low overhead yields a robust bottom line.
“It’s a lot less expensive to operate in Bombay or Beijing than it is in Tokyo,” Rutledge said. “But you have to get in the game early.”
And Rutledge pointed out that it’s not just Asia that offers good profit potential. An overseas technology lag presents U.S. companies with significant opportunities to sell products no longer in demand domestically.
“Mexico is doing well, along with emerging markets in Eastern Europe that are showing high growth,” he said. “And we’re doing well in the Middle East, including places that a lot of people don’t think of, like Iran and Saudi Arabia.”
Similarly, Irvine software maker Wonderware Corp., a unit of Britain’s Invensys PLC, is reporting positive results so far this year, with its Latin American business generally following a bit behind U.S. trends somewhat regardless of upturns or downturns.
“Worldwide, we had a bit of a tough time in calendar 2000 but in the first quarter 2001 we’re starting to see a bit of a recovery,” said John Nicholson, Wonderware vice president of sales for the Americas.
And Linksys Group Inc., an Irvine networking products company, says it plans to grow its activities in Europe, Latin America as well as Japan and China.
The company currently relies on overseas markets for only 10% of its sales, with 70% of overseas sales taking place in Asia.
“Although Pacific Rim countries lag a few years behind the U.S. technology sector, they are picking up where we were,” Linksys spokeswoman Karen Sohl said.
Still, rather than relying on Asian markets to pick up the slack like in the early ’90s, OC’s economy is bucking the overall U.S. slowing trend somewhat by falling back on a diversity that includes some economic sectors that are doing well.
“A lot of companies are relying on things like local defense sector spending to offset the current downturn in high tech,” Microsemi’s Lynch said. “The military, aerospace and medical device sectors are weathering the storm right now.”
Microsemi looks to North America for about 60% of its total sales, with Europe grabbing 25% and Asia accounting for about 15%.
The company earlier this month said it had agreed to buy two Massachusetts companies for $20.6 million to boost its own space and military work. n
