10 Things You Need to Know: Technology Buildout Goes Global

A need for equipment overseas will benefit companies stateside.
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Not long ago, Peter Canelo, a

Morgan Stanley Dean Witter

markets strategist, asked a group of investors in Europe how many of their firms had a Web presence. Hands went up. He asked about e-commerce initiatives. Hands went up again. It was a big change from a year earlier, when Canelo had asked the same group the same questions, and only a smattering responded affirmatively.

Welcome to the global technology buildout, which will benefit both U.S.-based tech giants such as

Cisco

(CSCO) - Get Report

and

Lucent

(LU)

, as well as newcomers such as Spanish Internet service provider

Terra Networks

(TRRA)

.

For some time now, technology has been a mainstay of the U.S. economy. Over the past five years, information and communications technology spending has contributed about 25% to

gross domestic product

growth here, according to the

Commerce Department

. Technology has by all accounts raised U.S. productivity, allowing the economy to run at a quicker pace without raising the specter of inflation. And, of course, quick-growing tech companies have been the basis for the stock market's tremendous gains.

Yet tech isn't nearly as big a part of the European and Asian scenes. While the U.S. economy has boomed in the past few years, Europe's was stagnant and Japan's was downright dismal. Companies and consumers suffered, and as a result, neither spent much on computers.

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Now, Europe's economy looks like it has regained its footing. Japan's economy, while by no means robust, is at least growing again. Perhaps most important for tech growth, analysts expect Internet usage in Japan to grow to 69 million people in 2005, up from just 14 million in 1999.

"Other places in the world are

ripe for getting plugged in," says Josh Feinman, chief economist at

Deutsche Asset Management Americas

. "I expect you'll see tech proliferate around the world, especially as the global economic environment improves."

The Other Part of the Story

One technology procurement manager for a major European financial company expects to spend plenty this year. He'll be buying from U.S. tech companies (he's based in the U.S. for a reason), and that's the other part of the story.

As overseas businesses lay in the technology they need to compete, U.S. companies will be the main beneficiaries. Major U.S. technology companies already garner 30% to 40% of their profits from overseas, says Morgan Stanley's Canelo, and he expects profits to surge on "an enormous amount of catch-up spending."

Vincent Willyard, manager of the

(DHIIX)

Duncan-Hurst International Growth fund, says the usual suspects -- companies such as Cisco, Lucent and

JDS Uniphase

(JDSU)

-- will benefit.

"We're talking about networks here, and as they expand, people who sell switches and routers and things like that are going to benefit tremendously," Willyard says.

Willyard also sees development of a global wireless network as part of this trend, which will aid profits at companies such as

Ericsson

(ERICY)

,

Nokia

(NOK) - Get Report

and

Siemens

in Europe and

Matsushita Electric Industrial

(MC) - Get Report

in Japan. These companies make handsets that allow people to surf the Net. The devices have already taken some countries, such as Italy, by storm.

"Wireless handsets are penetrating quicker and to a larger magnitude than some other technologies like PCs or TVs ever did," Willyard says. "These things aren't just phones. They're a communications device, and they're going to become the communications device of choice."

Let My Telecom Go

Of course, one of the catalysts behind this new network of communications has been the telecom deregulation that's swept the globe in recent years. Internet use proliferated in the U.S. compared with other countries, not just because of the robust economic backdrop but because telephone deregulation here cleared the way -- per-minute rates in other countries have made extensive browsing cost-prohibitive. Now, the desire for cheaper Internet access is forcing through telecom deregulation overseas.

"In Europe in particular, you're getting deregulation in utilities and telecoms," says Bruce Kasman, chief U.S. economist at

J.P. Morgan

. "That's significant because it's lowering the fees for Web connection and the like."

You need look only as far as Terra Networks for evidence of how lucrative deregulation can be. The ISP was spun off from Spain's

Telefonica

in November and nearly tripled on its IPO.

But besides the obvious benefits to tech companies' bottom lines, the building of a U.S.-style technology infrastructure in the rest of the world could have profound effects on the global economy. Feinman thinks it will lead to a boost in worldwide productivity. That could lead to faster sustainable growth. "If it happens," he says, "it will increase living standards across the world."

Eventually, though, that stepped-up productivity could be a thorn in U.S. markets' side, Feinman says. One of the reasons the U.S. has done so well lately is that it had a productivity boom while the rest of the world languished. That's brought money looking for high returns to U.S. shores, boosting U.S. asset prices. "If the rest of the world starts to pick up," he says, "some of those forces will be reversed. The U.S. won't be the only game in town."

Staff reporter

Joe Bousquin contributed to this article.