Stability longed for in a sector gone mad

THE YEAR IN THE MARKET: Despite initial optimism that demand for technology products and services would recover during 2002, the overall economic climate remained depressed for much of the year.

Thousands of jobs were lost at technology companies in the Republic, with firms such as Nortel Networks and Celestica severely rationalising their Irish operations.

New investment in the sector remained weak, with the possible exception of Intel's decision to restart work on Fab 24.

The world's biggest chip-maker delivered an economic boost for the Government just weeks before the general election by restarting construction work on its $2 billion (€1.96 billion) fabrication plant, which will employ 1,000 staff in Leixlip.

The first tranche of Government aid for the project - worth almost €50 million - was paid earlier this month to Intel, although Fab 24 will not be completed until 2004.

"Intel put a completely different perspective on 2002 as far as IDA Ireland was concerned," said Mr David Hanna, manager, information and communication technologies (ICT) division of IDA Ireland.

"The project had to be completely re-won following the firm's decision to halt construction. Intel had a lot of other options and we had to fight hard to retain the project."

The IDA's annual survey of jobs won and lost during 2002 is not complete but initial figures suggest 2002 won't be as bad as 2001 when Gateway, Motorola and General Semiconductor all closed their doors in the Republic.

"Ireland has come through the last year very well in terms of job losses compared to other countries such as Scotland.

"Irish managers have generally been very smart about seizing new functions for their companies and moving up the value chain," Mr Hanna said.

Certain technology sectors are weaker than others, with the telecoms sector still looking vulnerable while semiconductors and the computer sector are showing signs of recovery.

But there had been little new technology investment during 2002, he said.

The IDA has been successful in attracting research and development activities to several Irish technology firms including American Power Conversion (APC) in Galway. But some of these have not been announced because of sensitivities within the companies concerned.

The IDA is forecasting a better year ahead for technology in 2003 but certain factors make it difficult to plan. There is considerable unease in the Middle East and who knows what will happen if this takes off, according to Mr Hanna.

The difficult economic climate has hurt the Republic's clutch of indigenous technology firms as hard, if not harder, than the international technology industry.

Several Irish firms are considering management buy-outs and Spectel, a Dublin-based firm that develops video-conferencing software, was forced to pull a planned flotation in the first half of 2002 when initial optimism of a recovery disappeared.

"One of the significant things which happened this year is that even those technology firms with a stable customer base were valued by the market below the cash on their balance sheet," said Mr John Coolican, technology analyst with Merrion Stockbrokers.

"We've seen the market put no value on technology which firms like Trintech, Baltimore and Iona develop. It shows an appalling lack of confidence that firms will be able to make profits," he said.

These low valuations have encouraged several entrepreneurs to cobble together bids to take the firms private. Conduit, Alphyra and Riverdeep could leave the Irish Stock Exchange early in 2003, and companies such as Trintech and Datalex could face possible bids next year, according to industry observers and analysts.

The demise of a quoted Irish technology sector could fatally undermine the Irish Stock Exchange's ITEQ technology index, introduced in September 2000 with a market capitalisation of more than €3 billion. Just eight high-tech firms have listed on the ITEQ since its establishment and, if Alphyra and Riverdeep manage to leave the index, its value would probably fall below €500 million.

Further consolidation in the sector is also likely following the DSP Group's acquisition of Dublin-based chip-design firm, Parthus, and SkillSoft's acquisition of Irish e-learning firm SmartForce.

Many small private tech firms are facing a struggle to raise new financing to help keep them afloat during the sustained industry downturn.

One-time high-flying companies within the technology sector, such as Norkom, Servecast and Massana, have all undergone restructuring in 2002.

"We are keeping our heads down and executing," said Mr Paul Costigan, chief executive and co-founder of Massana, a Dublin-based developer of communication chips, which has raised more than $31 million to date.

The firm, which was named one of Europe's top 100 emerging technology firms in May 2001 by the prestigious technology magazine Tornado Insider, lost €12 million in 2001 and raised working capital from existing investors in 2002.

Mr Costigan is hopeful that the market for semiconductors - which has faced the worst downturn in its history over the past two years - will recover in 2003. And most observers believe a recovery in the chip sector will preface a wider technology recovery as chips are the brains that are built into computer and communication devices.

Preliminary figures released by Gartner Dataquest this month show the global chip industry inched up slightly in 2002 on sales of computer memory chips following a nearly one-third drop in revenue in 2001.

Revenue for semiconductors rose 1.4 per cent in 2002 to $155.4 billion following a 32 per cent decline in 2001.

But it would take a brave or foolish punter to bet their savings that the most severe downturn in the history of the technology industry is over.

The threat of war, continued unease over the accuracy of financial accounts and a weak global economy is unlikely to enable technology firms to deliver strong profit growth.

Perhaps the best that can be hoped for is a prolonged period of stability.