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Tech giants counting on consumers

By David Kirkpatrick

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(FORTUNE.COM) -- When and how will the technology industry emerge from its torpor? That question was a near obsession for the many tech luminaries at last week's World Economic Forum in Davos, Switzerland. Yet nobody had a very good answer.

At a session specifically focused on the future of tech, some of the industry's leaders did offer up something verging on optimism--if you're willing to think long-term. After dismissing the notion that anyone can forecast a recovery accurately, Sun's glib CEO Scott McNealy pointed out, memorably, that "Technology still has the shelf life of a banana, and it will start to grow mushy." Much of the technology purchased by corporate customers to prepare for the millennium changeover, especially PCs, has now passed its expiration date.

At the same time, the attitudes of corporate customers have fundamentally changed in the years since 2000. What matters these days, as Michael Dell put it, is not delivering technology per se so much as value and productivity. Cisco CEO John Chambers agreed that what matters to corporate customers is "technology tied to productivity." Ever the optimist, he said he was confident companies would eventually start buying--even sooner than most expect--but only after they see their own financial results turn decisively upward. A buying surge, Chambers insisted, could occur within three or four months of such an upturn.

Upturn could be far away

When will that upturn finally arrive? Unfortunately, most people at Davos believed an overarching economic recovery remains depressingly distant--both in the U.S. and worldwide. That forecast has helped drive tech's giants to look beyond corporate buying for other potential sources of revitalization. In fact, more and more of them seem to be pinning their long-term hopes on the global consumer. In an interview, CEO Michael Marks of Flextronics, the world's largest contract electronics manufacturer, explained that as more tech products become consumer products, production volumes are rising dramatically. "Even networking hubs and routers are going into peoples' homes," he marveled.

Simultaneously, the core intellectual property—the essential design and software—is increasingly embedded in the semiconductor chips at the heart of digital devices. A typical cell phone four years ago had 1500 parts and required thousands of designers. Flextronics' latest phone was designed by just 60 people and uses only 300 parts. That, Marks said, makes the end product less expensive to make for companies like his. Such progress will lift cell phone sales this year to more than 400 million worldwide, said Marks.

And the trend can be discerned in many sectors of tech. "When you see a $45 DVD player, you know that things are changing," C.K. Prahalad, the widely respected professor of corporate strategy at the University of Michigan Business School, told me over coffee. He'd seen the Chinese-made device on sale recently in the U.S. Richard Newton, Dean of Engineering at the University of California at Berkeley, summarized what many techies see happening over the next decade: "Increasingly, the cheapest products and services will be built with the most sophisticated technologies." (McNealy, on that panel, contributed a corollary thought: "Everything out there with a digital, biological, or electrical heartbeat will get connected to the network.")

Developing nations have buyers

Prahalad and a surprising number of other Davos attendees continue to pursue the idea that as tech gets more ubiquitous and inexpensive, the third world could be the source of technology's greatest growth. If you're looking for potential individual buyers of tech, the world's developing nations have plenty of them—in the billions, if products can be made inexpensive enough. HP CEO Carly Fiorina remains the most enthusiastic corporate exponent of this somewhat counterintuitive notion. She and others say that the products most likely to sell, however, are those that can increase the productivity of poor workers. In an interview Fiorina talked about a solar-powered digital-camera-and-printer HP is launching in poor parts of India. All Indians are required to have an identity card with a current photo, but getting pictures taken has been expensive, and often required residents of remote villages to travel significant distances. HP is getting village women started using the new product. Now the photo shop comes to the customer, eliminating travel, and photos are produced much less expensively.

But whatever opportunities such customers might present long-term, short-term signs for the industry remain decidedly mixed. This week we heard an optimistic view from the very group that, as Marks says, matters most—chipmakers. The Semiconductor Industry Association reported that chip sales stabilized in 2002. SIA predicts 20 percent growth this year, driven most, of course, by consumer devices—cell phones, DVD and MP3 players, and digital cameras. But, as if to keep us all from getting cheery, a countervailing report emerged from Applied Materials. The tech bellwether announced that its trend in new orders was unexpectedly bad--down 35 percent from the preceding quarter. Applied is the dominant global maker of machines used to make those chips at the heart of cheap devices. When its business is slow that means companies up the entire technology food chain think theirs will be slow too for some time to come.

Yes, tech will revive. But we may be looking at mushy bananas for some time yet.

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