Bubbles of trouble in tech

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SAN FRANCISCO — This may be the worst decade for the technology sector since the invention of the transistor in 1947 launched this smaller-faster-cheaper industry. When the dot.com bubble burst in 2000, the tech sector experienced widespread layoffs and many Internet startups went bankrupt.

Now technology is suffering indirectly from the second bubble to burst in the new century, this one a housing crash that has precipitated the worst financial crisis since the Great Depression.

Tech firms from North America to Asia have responded with layoffs and hiring freezes. So far the pullback has been less severe than the dot.com aftermath and has mainly affected those tech sectors most sensitive to consumer spending. If policy makers can calm the larger financial crisis, forecasters expect the tech industry to emerge from the doldrums with the rest of the economy in 2010. Meanwhile, the slump is likely to drive mergers and consolidation as global competitors in this maturing industry attempt to grow through acquisition.

One sign of weakness in technology was a slump in 4th quarter semiconductor orders. Chips are the foundation of electronics and year-end shipments are typically strong. But the near-collapse of the financial system in September and October seems to have altered that dynamic and stalled growth. “The current global economic turmoil is clearly having a significant impact,” as Semiconductor Industry Association president George Scalise said in a recent forecast. SIA expects worldwide chip sales to drop nearly six percent in 2009 — the first such yearly decline since orders collapsed in 2001 after the dot.com bust.

North American semiconductor firms including National Semiconductor, Lam Research and Applied Materials have already announced layoffs. Taiwan Semiconductor Manufacturing Co. recently clamped a hiring freeze on its 20,000-person work force. TSMC is one of the world’s largest contract manufacturers, making chips for consumer devices such as Apple iPods, Sony televisions and Motorola cell phones.

The financial crisis has also curbed the global appetite for computers. Industry forecasters have lowered estimates for PC shipments in 2009. Instead of the double digit increases of the last several years, they now hope for growth of around 4 percent and expect much of that to come at the low end as buyers opt for a new genre of cheap mini-laptops. Computers now seem to be valued for mobility and connectivity as opposed to some new use that could drive enthusiasm and demand.

Such trends spell trouble for tech firms worldwide, which depend on a virtuous circle of new software applications driving demand for hardware and services. The anticipated PC slowdown will add to the woes at Dell Computer in the United States, which has been languishing for some time.

Lenovo, a rising tech brand from China, has seen its profits plunge and hinted at possible job cuts. The technology slowdown threatens to worsen the recession in Japan, which has suffered a slump in exports of semiconductors to its Asian manufacturing partners. South Korean chip exporters are also experiencing shortfalls as a consequence of softening demand for PCs and consumer electronics in North America and Europe.

In contrast to the general gloom, Hewlett-Packard recently pleased investors with a stronger-than-expected fourth quarter earnings report. Over the last decade HP has grown through acquisitions. It swallowed Compaq in 2002 after a bitter board feud, but recently acquired computer services firm EDS without much dissent. Analysts credit HP’s diversification for its success.

The lesson is not lost on other tech firms seeking to bolster their fortunes in slow or no-growth times. Four years ago, Lenovo became the world’s third-largest computer vendor when it acquired IBM’s PC division. Since then it has tried to gobble up smaller PC makers but has been outmaneuvered by its Taiwanese rival, Acer. Earlier this spring Acer acquired the U.S.’s Gateway Computers and the European Packard-Bell to become the third-largest computer vendor after HP and Dell — pushing Lenovo to fourth as Toshiba rounds out the top five in global PC market share.

In the semiconductor arena, South Korea’s Samsung made a hostile bid in September for SanDisk, a U.S. manufacturer of the flash memory storage used in music players, digital cameras and cell phones. Samsung withdrew the offer in October as SanDisk shares plunged amid the financial crisis. Samsung’s raid resembles Microsoft’s grab for Yahoo.

So long as the shares of small tech firms remain depressed, the larger companies will see them as bargains. Expect consolidation in the mature trunk of the tech industry as newer offshoots such as green energy and social networking struggle to grow in a hostile clime.