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2006 industry report: electronics

Sizzle is more a drizzle in tech's second wind

The buzz

TREND: Modest growth as investors regain confidence in the industry.

OUTLOOK: Cost cutting by big users of information technology could make life rought for consultants.

The Tar Heel electronics industry isn’t performing anywhere near the dizzying levels of the 1990s, but no one expects it to any longer. In fact, expectations are so low that many people probably don’t realize that the industry is growing. “It may appear glacially slow,” Wachovia senior economist Mark Vitner says. “But tech is still growing faster than the overall economy.”

The slowdown may be part of the industry’s maturation. The spurts of the mid- to late 1990s — followed by the collapse in 2001 — have been replaced by a more measured, clearheaded approach, and invest-ors are putting more faith in electronics companies, including software makers, than before. “People have come back to their senses that a well-balanced portfolio needs to include tech companies,” says Dave Rizzo, CEO of Durham-based NC IDEA, a nonprofit that invests in early- stage startups. “There’s a lot of investment money out there that needs to be working for people.”

Much of the $366 million in venture capital garnered by North Carolina companies through the third quarter of 2005 went to biotech or medical-device companies, but they weren’t the only big winners. Durham-based Motricity closed on $30 million in venture funding in July. The company, which distributes music, games and other content for cell phones, later bought La Jolla, Calif.-based M7 Networks, which builds networks linking customers, wireless carriers and content publishers.

Tempering the infusion of capital is a belt-tightening mentality. North Carolina companies have begun offshoring some information-technology services. Charlotte-based Wachovia said in 2005 that it expected to save as much as 30% on IT costs by sending work to India. Rival Bank of America had already offshored some IT functions. “I think that it’s going to be a bumpy road for the IT consulting field in North Carolina until that all shakes out,” says Olin Broadway, executive in residence at UNC Charlotte’s College of Information Technology.

Keeping IT and other electronics jobs in North Carolina has been a major focus of state economic developers. They’ve given incentives to Round Rock, Texas-based computer maker Dell to build a factory in Winston-Salem and to Chinese computer manufacturer Lenovo and Greensboro-based semiconductor maker RF Micro Devices to expand operations here.

Lenovo, which bought IBM’s personal-computer business in 2005, will build an $84 million campus in Morrisville and add 400 jobs to the 1,800 it already has in the Triangle. The company will receive up to $9.1 million in state incentives and more than $1 million each from Morrisville and Wake County. In late 2004, Dell received a state incentives package worth up to $225 million in tax credits. Its Winston-Salem factory opened in September and employed 650 by the end of 2005. Employment is expected to increase to 1,500 within five years. RF Micro received a $500,000 state grant for its $75 million expansion, which was expected to add 75 jobs in Greensboro by 2007.

Jobs in data storage and software also are on the rise. One ex-ample is Sunnyvale, Calif.- based Network Appliance, a data-storage-software company, which plans to boost its Triangle work force from 360 to 561 by 2007.

Last year was a mixed bag for some of the state’s established high-tech companies. Red Hat, a Raleigh-based reseller of Linux software, got a high-profile investor. Dell founder Michael Dell invested $99.5 million in Red Hat, taking the largest slice of $600 million in debentures offered by the com- pany. Dell resells Linux software on its servers. Red Hat posted second-quarter net income of $16.7 million, up nearly $5 million from the year before.

Durham-based Cree, which makes light-emitting diodes and other semiconductors used in cell phones and other equipment, said it will shift production of switching devices used in computer-server power supplies from Sunnyvale, Calif., to Durham, but it wouldn’t say whether that would add jobs in North Carolina. It’s coming off a disappointing year. Earnings per share dropped 12.5% to 28 cents during the fiscal year that ended in June.

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