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Brainstorming with some managers the other day for an analog for this year's telecom/tech annihilation, we kept going back to the disk drive business from 1985 to 1992. That was the period where this once highflying group hit a wall as too much capacity coupled with an endless price war led to massive
losses, combinations and a recognition that hypergrowth is a thing of the past. Perhaps that's what has to happen in the telco equipment business to get the bleeding to stop.
At first glance, the analogy seems flawed. Drives were a commodity; the type of telecom equipment we are talking about seems highly proprietary. The growth of telco vastly exceeds the growth of the drive business. My problem with that criticism, however, is that during the mid-1980s, we were saying the same thing about drives. We thought as we discovered new ways to record data and invented new substrates that contained more information, that drives were a hypergrowth industry. When it hit the wall, then as now, analysts thought it was impossible that these companies would report losses. But losses came with shocking regularity.
With those losses came a focus on balance sheets and a focus on being the lowest-cost producer. The highest-cost producers rapidly disappeared. The lowest-cost producers grabbed market share and purchased the remains of those that had repeatedly blown up.
Too grim? Consider that
Nortel(NT Quote - Cramer on NT - Stock Picks), an excellent company, has now guided estimates down to losses from big gains. Consider the surfeit of fiber and switches. Consider all of those darned routers for sale on
eBay. Anecdotal, yes, but maybe these stocks bottom when we
expect losses and we get losses that aren't as bad. (Witness the bottoming process in DRAM maker
Micron(MU Quote - Cramer on MU - Stock Picks), which traders have bid up furiously because of a smaller loss.)
If that's the case, and the drive model holds, we still have some work to do on the downside in the telecom equipment technology makers.
Jim Cramer
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