2005 Industry Report: Electronics

Scant money and lost jobs do not compute

The buzz

TREND: Contraction. Companies are closing, moving to other states or outsourcing jobs to lower-cost countries. Young companies are having difficulty raising capital.

OUTLOOK: Don’t expect much better in 2005. And don’t even dream of a return to the growth experienced in the ’90s.

Five years ago, North Carolina enjoyed a reputation for creating electronics and information-technology jobs. It had about 166,000 in 2001. But it has lost about 30,000 since. Nearly half the state’s IT companies have closed their doors or moved out of state, according to the North Carolina Electronics and Information Technology Association. Jobs also shifted offshore. Some companies outsourced entire IT departments to countries such as India.

“We had the illusion that the industry was booming in the 1990s, when in fact there was no money behind the boom,” says Mark Vitner, senior economist for Charlotte-based Wachovia. “Levels of employment like that will likely never come back.”

Jobs aren’t the only place the sector is falling short. Nearly as bad is its failure to attract venture capital. The $49 million collected by North Carolina companies during the first quarter of 2004 was the worst quarter since 1997. While the second quarter was better — a total of $82 million — only $9 million went to software and IT companies. Contrast that with 2000, when North Carolina companies secured almost $2 billion.

But while young companies are having problems getting enough money to grow, some of the sector’s old hands are thriving. Cary-based software maker SAS Institute rolled out an update of its SAS 9 Intelligence Platform software in March. It was among factors driving 12% revenue growth for the company through the third quarter.

Data-mining software such as SAS’ and WebSphere by IBM, developed at the company’s Research Triangle Park campus, continues to be in demand. “We’ve had the development of so much communications technology in the last 10 years that I think the growth area will be business intelligence that helps companies manage that information,” says Arvind Malhotra, assistant professor of information technology at UNC Chapel Hill’s Kenan-Flagler Business School. The outlook was more uncertain for IBM’s personal-computer division, based at RTP. The Armonk, N.Y.-based high-tech giant announced in December that it was selling the division to China-based Lenovo Group for $1.25 billion and an 18.9% stake in Lenovo, which will compete with Dell and Hewlett-Packard. Lenovo says it will keep the 1,900 employees who market and design computers in RTP.

Executives at Raleigh-based Red Hat turned red-faced in 2004. In June, the stock hit a four-year high of $29.06. In July, the company restated earnings for the past three years. While the bottom line didn’t change much, the uncertainty, coupled with subsequent earnings reports that were at the low end of analysts’ expectations, drove down the stock price. In mid-December, it was trading about 45% below its high in June.

Cary-based SpectraSite, operator of 7,700 wireless-communications towers, continued its comeback from Chapter 11 bankruptcy. The company reported net income of $40.4 million through the third quarter, compared with a net loss of $6.1 million through the same period of 2003. But a year-end merger announcement by Sprint and Nextel cast a cloud over future earnings. Both companies lease space from SpectraSite, with Nextel being its largest customer. SpectraSite would lose revenue if the surviving company cancels leases for redundant antenna sites.

Durham-based Cree, which makes semiconductors and light-emitting diodes used to illuminate cell phones and other devices, reported net income for the fiscal year that ended in June of nearly $58 million, a 66% increase from the previous year. The company expects the upward sales trend to continue. In August, it announced it would spend at least $300 million to expand its plant near RTP, creating 300 jobs during the next five years.