Official: Foreign competition threatens IT industry

A Bush administration official said Tuesday that the greatest threat facing the technology industry isn't the economic downturn that has savaged dot-coms and telecom companies, but foreign competitors who are learning from the U.S.

"More than business or market downturns, I believe the greatest threats to our technology industry and leadership are foreign competitors who are going to school on how the U.S. has done it over the last 50 years," said Bruce Mehlman, assistant secretary in charge of tech policy at the U.S. Department of Commerce. Foreign nations are "putting the right long-term policies in place in their countries to support their sustained growth and innovation."

Mehlman, speaking at the Aspen Summit, an annual public policy event sponsored by Washington-based policy think tank The Progress and Freedom Foundation, raised the point in part to underscore the Bush administration's goal of seeking regulatory and tax relief to remove obstacles to tech investment.

Many at the conference who work in tech industries support regulatory relief, particularly in the telecom sector now bearing the brunt of the downturn. Speakers at the conference today examined the roots of the downturn, but also heard some pep talks.

"I'm really bemused by the doom and gloom that's out there," said Thomas Siebel, chief executive officer (CEO) of Siebel Systems Inc., a San Mateo, California-based maker of business application software. "We need to get a grip on what's happening here.

"We got into kind of a bubble situation and now some sanity is returning to the world. That's not a problem," said Siebel.

"Certainly, things look grim," said Mehlman. "The collapse of the tech stock bubble has wiped out US$5 trillion in paper wealth. Business rate of investment in new equipment software has plummeted from a positive 18 percent to a negative 14.5 percent in just 18 months."

He went on to say that "some of the current downturn is fairly representative of a natural correction that happens after the incredible activity of the last five years." But this correction, "is not the same as an end to revolutionary changes brought by the underlying technology. Even as markets were plummeting last year, global internet usage grew by more than 67 percent É B2B e-commerce grew 132 percent."

This "recession" was caused by several shocks, said Kathryn Shaw, a professor of economics at Carnegie Mellon University in Pittsburgh, and former Clinton administrator advisor. The foreign exchange rate -- the price of U.S. currency against other nations' currencies -- rose, causing manufacturing to slump. Rising energy costs and a declining stock market also affected the economy, she said.

Shaw also cited a soaring build-up of inventory that hurt the high-tech sector. "When [the downturn] hit, they didn't foresee how much their inventories had been overbuilt," she said.

"Given this increase in capacity ... that was way overdone, it will take some time to continue to pull down that inventory correction and to return to production again," she said.

"The digital economy can't prevent these shocks," said Shaw. But the new economy, coupled with a growth in productivity, has had beneficial effects, contributing to a long economic expansion and low unemployment.

The economy is now working through the slump in demand, said Shaw. "I don't want to predict how long recovery will take, [but] this year looks bleak."

Even so, Shaw said she believes the tech industry will see a return to higher productivity that's been a defining feature of the new economy. "All the technology gains that you still have at your fingertips have yet to be implemented and fully felt throughout the business world," she said.

The Bush administration said last week that it expected the growth rate to reach 3.2 percent next year. But David Hale, chief global economist at Zurich Financial Services, said it would be difficult for the administration to achieve that forecast.

Because this downturn is overwhelmingly focused in the telecom and IT sectors, and not in housing and automotive, Hale said the Bush administration and lawmakers need to address the problem on a microeconomic level, with tax allowances and other actions to aid struggling sectors.

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