Offshore nations may keep U.S. tech firms in the black

Emerging markets boost IBM, but will they recession-proof other U.S. firms?

IBM's third-quarter earning statement wasn't just about numbers. It was also a defense of globalization, with the company describing the opportunities in emerging markets as equivalent to the California gold rush.

And Mark Loughridge, IBM's chief financial officer, made sure that no one missed his point in the company's fourth-quarter earnings call Thusday. He used the term "gold rush" three different times, adding in "virtual gold rush" and the "gold rush of the 21st century" by countries anxious to build out their infrastructures with modern technologies. This is spending from the same countries that have also been getting U.S. technology jobs, thanks to offshore outsourcing.

IBM backed its assertions with numbers, showing that 65% of its business is now overseas, with emerging markets growing by double digits. In the 2006 calendar year, IBM's non-U.S. operations accounted for 60% of its revenue. IBM signed US$1.4 billion in services deals last quarter in India alone. The company's fourth-quarter revenue was US$28.9 billion, a 10% increase from the same quarter a year earlier.

But will these emerging markets continue to grow, and will they avoid being dragged down by an economic downturn in the U.S.? Based on its forecasts, IBM is confident of their success, which it said will exceed analysts' expectations into 2010. That confidence is because of a broad range of countries such as Malaysia, Poland, South Africa, Ecuador "and dozens more around the world, with insatiable demands created by a growing middle class for public and private infrastructures to support explosive economic growth," said Loughridge on the earnings call.

In India last week, Sebastian Teunissen, adjunct professor and executive director of the Clausen Center for International Business and Policy at the Haas School of Business at the University of California, Berkeley, saw for himself the economic activity and described it in astonishing terms. Teunissen took a group of students to Bangalore and Mumbai for two weeks to expose them to that country. "I've been doing this for a number of years, and I'm still blown away," he said of his annual student trips.

Teunissen visited a number of Indian firms and saw U.S.-branded tech products, PCs in particular. "There are an awful lot of people there who are really, really hungry for technology," he said. Numbers from market research company IDC seem to support that assertion. Another market research firm recently reported that in last year's third quarter, the Indian PC market grew 25% in that quarter, with 1.8 million shipments total. Worldwide, nearly 270 million PCs were shipped for the entire year of 2007.

Much of the revenues made by the big offshore outsourcing firms comes from U.S. companies -- as much as 60%. But Teunissen said these firms are recognizing that they can't count on the U.S. and "are making a very strong effort to expand into Latin America, Europe and the rest of Asia," adding that "it will be bad for U.S. companies only if they can't handle the competition."

William Gamble, who heads Emerging Market Strategies Co., a Pawtucket, Rhode Island-based firm that provides legal analysis and consulting, said that some argue that the emerging markets are so strong that the old adage, "when America sneezes, the world catches a cold" is no longer true. But Gamble disagrees.

Gamble said he believes the subprime mortgage crisis will ultimately affect economies overseas. "Are American bankers the only ones who made this mistake? Of course not," he said. Pointing to recent reports of real estate pricing declines in parts of China, Gamble described overseas tech spending as a short-term boon for the U.S. industry.

Hoyt Bleakley, an assistant professor of economics at the University of Chicago Graduate School of Business, said said the emerging-market countries get income from the U.S. and other big national importers. For instance, he said, if U.S. demand for manufactured goods imported from East Asia changes with the economic conditions here, "then there is probably going to be less incentive [in emerging markets] to invest in all kinds of capacity." This does not necessarily mean that the overseas markets will stop buying U.S. goods and services, Bleakley said.

Emerging economies are also exporters of capital, sending their money to the U.S. and other countries for investing. "But I think the game is up on that one," said Bleakley, because of the subprime market here. However, if the U.S. is no longer a good investment haven, this could prompt overseas markets to invest in their home economies rather than the U.S, said Bleakley. "That is in a sense good news -- if they decide to keep their capital at home and invest it home, that could mean they are going to buy things we produce," he said.

Bleakley said IBM's characterization of an overseas gold rush is "over the very long haul ... probably right." There will be a lot of demand from overseas markets, he said, "but is it necessarily going to be supplied by IBM as opposed to a whole host of other potential competitors?"

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