The reality of recession moved very much closer last week as some of the industry's biggest names confessed to tough times and took harsh measures to cut costs. Intel started the ball rolling when it acknowledged that the slowdown in the IT market had taken such a toll on chip sales that first quarter revenue will be some 25 per cent down of the fourth quarter of 2000, when revenue hit $US8.7 billion. A statement issued by the company claimed that soft demand for microprocessors used in servers was the primary problem, although demand for networking, communications and PC processors had also slowed. "If desktop processors were our only problem we would be close to forecasts," a spokesman said. "What's driving our problem is that it is spreading into the server space as well". He added that the failure of such a large number of dot-coms in the past year had also had an effect.
In addition, where once Intel could look to Asia for continued growth, it is now finding no solace there as the Taiwanese, Korean and Japanese markets are slowing fast. China and India appear to be the only bright spots in the company's international operations.
In an effort to counter diminishing revenue, Intel will cut its workforce by 5000 over the next nine months, and will lop 15 per cent off its R&D budget. Just a month ago CEO Craig Barrett had said Intel would increase its R&D spending because the IT industry will not be able to save its way out of recession.
The tough times for Intel had been predicted because of the company's close reliance on the PC market. However, few observers had expected Cisco to show signs of distress as early as it has. The company announced late last week that it is moving to cut costs by laying off some 3000 part-time and contract workers, and reducing its permanent staff by 5000. The layoffs will cost Cisco up to $US400 million.
"We're taking these steps because of the continuing slowdown in the US economy and initial signs of a slowdown expanding to other parts of the world," explained Cisco's CEO John Chambers.
"We also now believe that this slowdown in capital spending could extend beyond two quarters," Chambers added.
Investors reacted predictably and sold, dragging the NASDAQ composite index below 2000 for the first time in more than two years and hacking more than 400 points from the Dow Jones.
To confirm all the gloomy company news, the Semiconductor Industry Association released figures showing that worldwide chip sales in January were almost six per cent below sales in December. Ironically, January sales were 13 per cent higher than sales for January 2000.
The figures highlighted once again the frailty in the Asia/Pacific region, where January's sales fell 7.9 per cent below sales in December. Sales in Europe dropped only 2.7 per cent over the month.