Skip to main content

Tech is facing the unprecedented. Never before has a war loomed at the same time companies are already slashing spending on computer hardware. With IT demand already so weak, fears about a conflict in Iraq may make matters only worse.

Granted, in some cases war jitters may offer a convenient excuse for companies suffering from fundamental business weakness. It's worth noting that war worries haven't yet been a factor in corporate profits.

But they have recently been fingered as a cause for weak orders. And there's a strong case to be made that escalating war rhetoric could further destabilize a still-woozy tech market as nervous U.S. businesses react by further cutting IT spending.

One Word: Lockdown

"Everyone is focused on driving down costs so they can keep earnings up if revenues don't go anywhere. If we go to war, we'll see a real lockdown on IT spending and even more cost pressure," predicts Meta executive vice president Howard Rubin. "Everyone will be trying to protect earnings by controlling costs, since they don't know what will happen to revenues."

Semiconductor companies are a prime example. With the prospects for a decent chip recovery still in question after scant growth in 2002, chipmakers like

Intel

(INTC) - Get Intel Corporation Report

and

Taiwan Semiconductor

(TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report

have already been on a tear to slash their spending on new factory equipment. And lately, nervousness about an overseas conflict has made equipment buyers even more cautious, claims supplier

Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

.

Last week, the bellwether chip-equipment company blamed a shortfall in orders partly on "geopolitical uncertainties," in addition to "ongoing economic weakness."

The conflict in Iraq also surfaced on

TheStreet Recommends

Cisco's

(CSCO) - Get Cisco Systems, Inc. Report

earnings call Tuesday. After forecasting a possible revenue decline in the current quarter, CEO John Chambers noted that "if war were to be averted, that could be an opportunity to the upside."

With

Hewlett-Packard

(HPQ) - Get HP Inc. Report

scheduled to report earnings in a few weeks, analysts at two different banks have recently predicted shares will become volatile if war breaks out and customers temporarily tighten spending.

"In our opinion, the other side of war should help loosen demand," said Lehman analyst Dan Niles in a note on H-P. In a separate report, he wrote, "We believe the lingering threat of a war will keep new orders for both communications and computer and electronic products challenging in the near-term. We believe that end-demand is somewhat suffering the longer the uncertainty lingers."

IT Spending Already Slipping

What's so unprecedented about the current scenario is that a war would take place at a time IT spending already is waning. In 2002, spending as a percentage of corporate revenues slipped 11%, from around 3.8% to 3.4%, according to Meta Group. The firm predicts spending will slide up to 10% again this year (an assumption that doesn't reflect additional disruptions from a potential war).

"It's never happened like this two years in a row," says Rubin, who notes that IT spending has historically always grown or, at worst, gone flat. Even when the U.S. went to war with Iraq in 1991, IT spending stagnated but didn't decline, he says.

But that was at a time of strong growth for computers and semiconductors. Now, with a much weaker demand backdrop, he suggests spending would see an even more painful drop-off. "We've never been in a time of decline when

war hit, so we don't know what that would look like," says Rubin.

Many industry watchers agree, saying it simply makes sense that a war would prompt cautious CFOs to further batten down the hatches. "Anecdotally and understanding consumer behavior, with corporate behavior you have to expect

reduced spending is likely to be an issue," says Steve Baker, an analyst with NPD Techworld. "In a time of uncertainty, people cut back on nice-to-haves and focus on must-haves."

In the fourth quarter, he notes, retail sales of desktop PCs and notebooks fell 6% from the same period a year ago.

War Fears a Handy Excuse

To be sure, pundits say the fallout from war jitters could be overblown -- and some companies are likely to use it as an excuse.

"There's an old saying about retail, that same-store sales are bad because the weather was good and also bad because the weather was bad," says Baker. "There's always an event you can blame those kinds of things on. And will people do that? Absolutely, without question."

Indeed, in the wake of Sept. 11, 2001, some companies caught flak for blaming their business troubles in part on that day's terror, when a fundamental lack of demand arguably was the more likely culprit.

And it's worth noting that demand hasn't fallen off a cliff yet, as war worries have heated up in the past month. In the first two weeks of January, sales from U.S. technology distributors stayed weak, but the trend didn't look much different than in previous years on a seasonal basis, notes Baker. In just that brief window, "it doesn't look like things are getting a lot worse," he says.

Some IT suppliers back that view, shrugging off concerns about a potential war.

Ingram Micro

(IM)

, the leading global distributor of computer hardware for the likes of H-P and

IBM

, said Monday that uncertainty related to a potential war hadn't affected demand, according to a

Reuters

report. "I would not say it is not a concern, but we have not seen it bubble up yet," said spokeswoman Ria Marie Carlson at a conference in San Francisco.

Still, for as long as war looms, tech outfits must contend with the potential for a further drop-off in demand. For investors hoping for a glimmer of light after three years of bruising

Nasdaq

declines, that's hardly a pleasant kickoff to 2003.