At 7:02 a.m. on Dec. 7, 1941, a Sunday, at the Opana radar station on Oahu, Hawaii, Pvt. Joseph Lockard saw what appeared to be a large flight of planes on the oscilloscope of the set he was working with. He duly informed a superior, Lt. Kermit Tyler, who reckoned that it was probably just a flight of U.S. planes coming in, and told Lockard to "forget it." Lockard continued to plot the flight until 7:39 a.m. when it got lost in the radar echo of surrounding mountains. A truck came to pick up Lockard and his companion for breakfast.
On the way back to camp, Lockard saw thick plumes of oily smoke rising up from the harbor. He knew what it was. The day that would forever live in infamy had begun.
It's a lesson we were all supposed have learned from our history texts, but the management teams at many tech companies apparently skipped the chapter on
. While most American companies have reacted to the slowdown in the economy quicker than ever before, the minions of Silicon Valley have been slow to the punch.
Did You Tell the Man ... That It Looked Like an Unusually Large Number of Planes?
Economists have been struck by the speed with which companies have responded to cooling demand. Though inventories have climbed relative to sales in recent months, the U.S. inventory-to-sales ratio is more than 10% below where it was 10 years ago. The
National Association of Purchasing Management's
inventories index has fallen off sharply, a reflection of companies' aggressive efforts work off any excess stock on their shelves.
Source: Bureau of the Census
There are even companies that, despite slower growth, have been able to improve their inventory position.
, for example, saw revenue growth slow to 14% in the fourth quarter from 18% the previous year. Yet Harley's inventory-to-sales ratio slipped 3%, meaning that it actually improved its inventory position despite slowing demand.
That companies have such an apparently good handle on their inventories augurs well for the economy in general. The advent of a networked economy has allowed companies to see their supply chains, track orders and manage inventories in ways they never have before. Whereas in the past it might take months for a company to fully realize that demand had cooled, now it can react to slower sales almost immediately. "That argues the inventory correction process will probably be shallower than it has been heretofore," says
chief investment strategist Jeff Applegate.
Yet the inventory positions of the companies that have been selling corporate America its fancy new oscilloscopes are not in such good shape.
"The dirty little secret of tech companies is they claim to be at the center of productivity improvement, yet they're about the worst-managed companies that you'd want to see," says Jeff Matthews, president of the Connecticut-based hedge-fund
. "There's hardly anyone out there that isn't having an inventory problem."
The inventory problem has infected technology companies of almost every stripe. In the most recent quarter,
saw its inventory-to-sales ratio climb 25% from the previous quarter. Servermaker
saw a 16% climb. In the oh-so-hot area of network-attached storage,
inventory-to-sales ratio rose 46%, while its inventory turns -- the number of times that it was able to sell its inventory -- saw a 29% decline.
The difference between a lot of tech companies and the rest of America is that the rest of America knows what it's like to see a real slowdown in demand.
has been through nearly 20 recessions as a public company. Cisco has been through one -- not that the nascent networking king saw a drop in its near-viral growth back in 1991.
The ability over the past decade of many high-tech companies to continue to grow rapidly even when the rest of the economy moderated led many to believe that technology was somehow divorced from ebbs and flows of demand. And it was not just the hapless investors who chased the
Nasdaq Composite Index
to new heights that were thus benighted.
Did FDR Know Beforehand?
"Everyone thought the New Economy would not be cyclical, and that includes the management of these companies," says
chief quantitative strategist Rich Bernstein.
The idea of inventory management -- which assumes you have something to manage -- appears to have been almost anathema at many tech companies. "You're running a business and for five years it's pedal to the metal," says Matthews. "You can't even keep up with demand. Do you change your whole mind-set based on eight weeks of data?" In fact, says Matthews, there were companies that not so long ago were getting up at conferences and saying they were so harried they would welcome a "normal quarter."
But while one can understand how the slowdown caught tech companies flat-footed, that doesn't really make it all right. With the rest of America -- which is to say, their customers -- hunkering down, with that great predictive engine, the U.S. stock market, slipping, these guys didn't hear the drone of the encroaching slowdown. And now they're going to have to pay for it.