Euro Tech: Pockets of Growth amid the Gloom

Finally, some signs of a rebound in the battered industry

Europe's technology industry can't seem to get a break: Every time a turnaround seems near, another crisis pops up. First it was a lingering hangover from the Internet party, which saddled tech companies with surplus capacity, overpriced assets, and huge debts. Then, just as the excesses were getting worked out, rising geopolitical tension in 2002 put demand in a deep freeze. Now, the war in Iraq is over, but instead of a hoped-for bounce, tech growth is in doubt again thanks to severe acute respiratory syndrome and pervasive economic weakness. "It's still a mixed picture, with lots of uncertainty," says Jorma Ollila, chief executive of Finland's Nokia Corp., the world's No. 1 seller of mobile phones.

Count Ollila among the optimists. His crystal ball still shows worldwide handset sales climbing 10% this year, to about 445 million units, making this among the best-performing categories in tech. Others would give anything for numbers like that. Shipments of PCs in Europe, the Middle East, and Africa will advance just 5.7% this year, predicts researcher IDC in London. European software sales by companies such as Germany's SAP will likely creep up just 2.4% in 2003, says Frankfurt's European Information Technology Observatory. And revenues from information technology services will climb only 2.8%.

Meanwhile, vendors of telecommunications equipment are girding for their third straight year of shrinking sales. So far, says Alcatel President Philippe Germond, the Paris-based company is sticking to its promise to return to profitability by yearend. But if the SARS crisis continues, he warns, "it will hurt the worldwide equipment market in 2003," by delaying network rollouts. Germond notes that salespeople and technicians have had to cancel trips to Asia.

Some faint rays of light are starting to shine through the gloom. The battered chip sector -- a leading indicator -- showed a sharp upturn in the first three months of 2003, with global revenues 13% higher than the year before, according to the Semiconductor Industry Assn. That's due to firmer prices and the fact that manufacturers are putting more chips in products from cell phones to cars. The best performers grew even more: Geneva-based STMicroelectronics, the world's No. 3 chipmaker, reported first-quarter earnings surged 140%, to $79 million. "We're seeing a textbook semiconductor recovery," says Jean-Philippe Dauvin, the company's chief economist.

Buyers also continue flocking to new stuff. Emerging categories such as broadband Internet connections, Wi-Fi wireless networks, and Internet phones surged in the first quarter. "There are definite pockets of growth," says Therese Torris, research director for Forrester Research in Amsterdam.

Even capital is starting to flow more readily. German chipmaker Infineon Technologies sold $806 million in convertible bonds in a matter of hours on Apr. 30. "We're going to see more new issues soon," says John Crompton, co-head of European equities at Morgan Stanley in London, which co-managed the Infineon placement. Heartened investors have bid up European tech stocks 23% since the end of March.

Is the upturn enough to fire up Europe's sluggish economies? Back in the late 1990s, analysts fretted that supercharged tech spending coupled with sharp price competition could lead to so-called "profitless prosperity" for IT vendors. Now, the situation is reversed: Tech companies have cut their costs so much that they're managing to squeeze out earnings -- or at worst, trim losses -- even on soft sales. Still, Forrester's Charles Homs worries that Europe's tech spending gap with the U.S. is widening: "If Europe seriously means to become the world's leading knowledge-driven economy, it must greatly boost technology investment." Even with an upturn next year, info tech will amount to 7% of Europe's economy, vs. nearly 10% in the U.S.

At least European consumers are doing their part. Growth in sales of home PCs outpaced those for business use by 25% in the first quarter, says researcher Gartner Dataquest. Peripherals maker Logitech International, based in Romanel-sur-Morges, Switzerland, and Fremont, Calif., figures its sales of mice, keyboards, and gaming accessories will climb 9% this year. Infogrames Entertainment of Lyons, France -- now called Atari -- maker of video games such as the highly anticipated Enter the Matrix, saw revenues surge 31% last quarter. And European Net penetration continues to grow at a satisfying clip: It now tops 44% of households and is expected to reach 66% by 2006. That's helping fuel huge growth for all manner of European Web ventures, such as Paris-based comparison-shopping site Kelkoo, which reported revenues up 280%, to $7.7 million, in the first quarter.

Still, the key to growth for Europe's tech leaders lies in the depressed corporate sector. There, the signals are still mixed. "We're hearing more optimism, but customers are still taking a cautious approach to spending, says Rob Lloyd, president for Europe, Middle East, and Africa at U.S. networking giant Cisco Systems Inc., which on May 6 reported a 35% jump in quarterly earnings on a 4% decline in sales.

When companies do buy, they're driving hard bargains. Take Merloni Elettrodomestici. The Italian white-goods maker has invested $67 million over the past three years in new software and systems to streamline operations. But even as it plans to nudge up tech spending a bit this year, Merloni plans to slash outlays for IT consultants by up to 30%. "We want to get more man-hours for the IT budget we have," says Chief Information Officer Mauro Viacava. With growth slow and corporate budgets tight, one tech company's gain could very well turn out to be another's loss.

By Andy Reinhardt in Paris, with Gail Edmondson in Frankfurt

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