Technology
Computer Industry Sales Recovering, Jobs Flat

John Thompson scans the computer industry in Texas and the nation.

As with everything high tech, the computer industry hit a brick wall in the recent recession. During the 1990s, stock market hype and speculation about limitless growth potential fueled huge computer expenditures. The industry took off as corporations scrambled to take advantage of promised productivity gains by buying new computer technologies. Extensive efforts by firms to establish an online presence were an especially potent driver of industry growth during this period. Ramped-up spending from Y2K worries provided an additional boost.

Much of the buildup was justified. But in retrospect, some of it outstripped real demand. By late 2000, the true face of demand came into focus, and computer infrastructure sales buckled. Year-over-year growth in the value of U.S. computer shipments, which had averaged 29 percent from 1993 through 1999, dropped to an average of 10 percent in 2000 before turning sharply negative in 2001 and the first half of 2002. The weakening in shipments preceded equity declines for the sector (Chart 1). The ratio of computer shipments to gross domestic product, which had risen to 0.27 percent by the second half of 2000, fell to 0.14 percent by August 2001.

Chart 1

As investors realized that the reversal had staying power, a massive sell-off in equity markets began. This capital flight had a drastic effect on portfolios. Based on the Standard & Poor’s computer index, an investor holding $10,000 in computer stocks in mid-2000 would have been left with just over $2,000 in equity by mid-2002.

The downturn in industry activity was felt across all computer manufacturers, but companies with the least competitive cost positions were hit the hardest. Reduced demand brought on by the deflated Internet bubble resulted in acute competitive pressures, which led to some industry consolidation. The most notable example was Hewlett-Packard Co.’s (HP) acquisition of Compaq Computer Corp. in 2002.

Competitive Dynamics
The churn in the computer industry is not new. It has been ongoing for a couple of decades. Compaq first challenged IBM’s dominance in the early 1980s. Propelled by an idea to sell “luggable” computers, Compaq made huge gains against the giant incumbent. By 1994, the Houston-based company had overtaken IBM to become the world’s largest PC maker. But along the way, a more subtle revolution was taking place. Adopting a sales model that adapted instantaneously to consumer tastes and preferences, Dell Computer Corp. was positioning itself to become number one.

Ironically, Dell’s opportunity came as the industry began to contract in 2000. As competition intensified throughout the downturn, low-cost producers were the gainers. According to the most recent data available, Dell continued to make large strides in market share in 2001 and 2002. Between second quarter 2001 and second quarter 2002, Dell’s market share grew from 12.8 percent to 14.8 percent (Chart 2). Over the same period, the combined market share of Hewlett-Packard and Compaq slipped from 17.9 percent to 15.1 percent. Dell now has the largest market share of any computer manufacturer.

Chart 2

Recovery on the Horizon?
The computer industry’s prospects are contingent on the pace at which industry demand recovers. In turn, industry demand depends on the strength of the nation’s economic recovery and on firms’ replacement cycles. Technological innovation, which continued at a strong pace throughout the downturn, can drive computer sales, but it is not sufficient in and of itself. During the 1990s, corporate and individual desire for the latest and greatest in computer technology helped propel information technology investment. This upgrading habit became a less important driver of sales growth during the recent recession.

In contrast to the past few years, recent months have shown some rebound in the computer industry. In July 2002, year-over-year growth in computer shipments turned positive and has remained in the black through March of this year (Chart 1). Real computer shipments in March 2003 registered $4 billion, up from $3.1 billion a year earlier. The national economy’s slow recovery bodes well for shipments going forward, albeit at subdued levels compared with the 1990s. While some analysts argue that corporations’ upgrade schedules will boost computer sales in 2003 and 2004, the net outcome of these expectations has so far been mild.

Computer Makers in Texas
What happens at the national level in the computer industry sets the stage for computer activity in Texas. While there is limited data at the state level, a few indicators are available to track the statewide industry. The vast majority of Texas computer makers are small, privately held companies with 100 or fewer employees. In fact, 60 of the 64 Texas computer makers are private enterprises.[1] However, two public companies—Austin-based Dell Computer and Palo Alto-based HP—dominate the statewide industry in both sales and employment.

For the most part, as Dell and HP go, so goes computer activity in Texas. Dell pays the wages of 52 percent of Texas computer workers. HP controls 44 percent of Texas computer industry payrolls, leaving 4 percent of employment to private computer makers (Chart 3, inset).[2]

Chart 3

The financial performance of Dell and HP has diverged in the computer downturn. Even though the stock prices of both computer behemoths fell with the rest of the market in 2000, since then Dell’s stock has held up well against the rest of the industry. HP’s stock price has been on a downward trend since mid-2000 (Chart 3).

Dell Computer. Throughout the downturn, Dell has stuck to its model of selling directly to customers through the Internet. Because it has been able to match product development and offerings to consumer demand, Dell can carry almost no inventory, which was particularly important as the industry weakened. Dell had $35.4 billion in revenues for its fiscal year ending Jan. 31, 2003. Its most recently reported profit margin (profit divided by sales) was 6 percent. Earnings per share for the quarter ending Jan. 31, 2003, were 23 cents.

Hewlett-Packard. It has now been over a year since the industry’s largest-ever merger. HP completed its acquisition of Houston-based Compaq on May 3, 2002. As the effects of the merger have played out, the financial results at HP have been rather weak. HP’s profit margin was –1.1 percent for the fiscal year ending Oct. 31, 2002, on $63.1 billion in sales. However, earnings per share for the quarter ending Jan. 31, 2003, registered a positive 24 cents.

Other Computer Makers. If national trends are any indication, small private computer makers in Texas gained market share in the past year, although in comparison with the portion of the market controlled by Dell and HP, the gains were negligible. The largest of these small computer makers are Addison-based Bloom Technologies and Clone Computer Corp., each with 100 employees. Carrollton-based M&A Technology Inc. employs 72 workers, while Computer Solutions in San Antonio has 50 employees. The average size for all smaller computer makers in Texas is about 15 employees.

Employment Growth in the Computer Sector
While Texas has experienced strong growth in computer manufacturing over the past two decades, employment in the U.S. computer industry has been on a downward trend for at least 15 years. Many computer makers have moved operations overseas to take advantage of more competitive labor and wage environments. In fact, Bureau of Labor Statistics data show that since January 1988, employment in the industry has declined by 150,000 workers. In most cases, computer companies have shifted operations offshore, but not corporate headquarters.

Before the computer industry downturn, this declining employment trend was not evident in Texas. In fact, computer employment in the state rose steadily between 1994 and August 2000 (Chart 4). But since 2000, Texas has sustained a significant blow to its computer sector. After peaking at 34,100 employees in August 2000, computer employment in the state has declined 33 percent, or 11,400 jobs. This drop has taken a major toll on computer-dense areas like Houston and Austin. Although recent state computer employment data provide no evidence of a turnaround, improved year-over-year sales figures offer some hope for the battered sector.

Chart 4

Summary
Along with other high-tech sectors, the computer industry hit a funk in 2000. However, Census Bureau data indicate that year-over-year computer shipments have been growing for at least nine months. But despite these increases, the national sector continues to lose employment. Computer-related jobs have migrated abroad because of more favorable labor markets.

After growing for seven years, employment in the Texas computer industry reversed course in 2000 and remains in decline. The recovery in shipments juxtaposed to falling statewide employment suggests that firms are reluctant to leverage themselves too heavily in human capital. In addition, as the sector continues to improve, job gains may go abroad instead of returning to where they were lost.

Notes

1	The figure 64 was obtained by selecting computer firms in the NAICS 33411 category (computer and peripherals), whose primary description indicated computer manufacturing or computer making.
2	Leading Edge Communications Inc., The Texas High Technology Directory, 2003.

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