Technology Industry Overview
When marketing to the technology industry, or marketing to the high tech industry, it is important to have a firm understanding of the technology market. Before we discuss the technology sector, we first must define what it consists of. (More on this later*.) In our research we find that various overviews tend to group differing verticals, so deciding how to look at industry numbers can be confusing. For various reasons, we’ve chosen to begin with the current wisdom that groups software, Internet services, IT services, and semiconductor manufacturing, along with biotechnology and scientific research into the US technology sector. We’ll begin with some general info regarding this group:
According to the World Bank, global technology exports total nearly $2 trillion annually. The American technology sector includes about 145,000 companies whose annual revenue combines to equal more than $1 trillion. Major players include IBM, Microsoft, Intel and AT&T. Broadening the mix to include computer manufacturing adds the likes of Hewlett-Packard and Dell to the ‘big dogs’ list.
Leading technology companies based outside the US include Nippon Telegraph and Telephone Corporation (Japan), Samsung Group (South Korea), and Siemens (Germany); top exporters include China ($350 billion), Germany ($140 billion), the US ($140 billion), South Korea ($103 billion), and Japan ($99 billion).
Spending in the technology sector is growing, in spite of global economic difficulties, at an expected rate of 7.1% in 2011 and 8.7% in 2012, according to Forrester Research.
*Because Frantz Group includes ‘hardware’ (computer manufacturing, PC manufacturing, data storage systems manufacturing, networking equipment manufacturing, and similar) in its target market mix, we have a vested interest in serving site visitors interested in these more-specialized verticals. For this reason, we’ve woven statistics and information related to these areas into the tech grouping as defined above when they diverge notably from the group as we move forward in this document.
Annual revenue numbers for US computer manufacturing ($75 billion), data storage systems manufacturing ($9 billion), and networking equipment manufacturing ($50 billion, with a global number of twice this), combine with the above technology sector numbers to create a US mega-sector, while global numbers for PC manufacturing ($200 billion) and computer manufacturing ($225 billion foreign on top of US number, and expected to hit a global number of $320 billion in 2015), along with the sector’s overall economic resilience, command major respect.
Success of companies in the technology sector is dependent upon their ability to develop and profitably market new products, most of which are based on computer technology. R&D costs can soar as high as 15% of annual revenue where sector companies capitalize on scientific discoveries and build them into salable products. Interestingly, recent discoveries/inventions such as superconductivity and nanotechnology have not received the large capital investments that half-century-old inventions like the computer, the integrated circuit, the laser or the transistor once did, because at this point, apparently, too few practical applications have been found for them.
The technology sector is capital-intensive, with average revenue per worker extremely high per year, ranging from something like $300k to a whopping $1.8 million in the computer networking industry. Initial funding is usually accomplished through venture capitalism (numbers are too big for bank lending) with earnings intended to catch up and repay investors once products get a toehold. Large companies tend to have the financial advantage, but smaller enterprises succeed with specialized expertise. The life of tech products is often short, with new versions being developed constantly, and an insatiable need for engineers and experts powers synergistic relationships with academic research institutions. The frustration of industry insiders over US institutions training engineers form abroad who then need to leave the US instead of being able to use their skills here is in the news (though foreign tech pros are very often brought to the US for up to 6 years under the H-1B program), as is the topic of altering/improving US education so it can better train engineers and tech workers for our future.
Pricing is a critical issue in for tech producers, with global competition creating pressure between comparable products and services. Success depends upon staying in sync price-wise while maintaining margins and differentiating value points between competing offerings. Over the last ten years, producer prices for computer manufacturing have dropped by half as technological advances have made it cheaper to manufacture many devices even as their performance has steadily improved. ‘Premium products’ are noted as being most profitable and are more often produced by those companies with deeper pockets, as the required investment is greater.
Seen as an ‘opportunity’ in one overview, the fact that low margins in the computer business have driven manufacturers to sell software and consulting services illustrates the above-noted trend; IBM’s numbers, according to the same overview, recently showed 55% coming form consulting services, 23% from software, and only 20% from computer hardware.
To facilitate easier entry into global markets, tech companies often ally with others internationally for various reasons. Smaller companies, for example, might outsource manufacturing to partners abroad, where more powerful companies might simply invest in operations as best suits their needs. International trade policies, as paraphrased from one top industry overview, pose problems for technology companies when protectionist controls on imports and exports, tariffs, and confusing or changeable legal environments serve to slow or convolute the path to profitability.
IBM has been a Frantz Group client for nearly two decades. When they sold the IBM PC Division to Lenovo (a Chinese company – also our client for a time) a sea change became apparent to us; now, many of the largest global computer makers are based in the Asia/Pacific region. China is anticipated to outstrip the US in PC shipments by 2013, and the growth of the Chinese market is such that Chinese and other foreign computer manufacturers are making it a strategic market share priority and looking to build plants and distribution centers there.
As far as marketing in the technology sector is concerned, companies tend to use a combination of direct and co-marketing; trade shows stand out as winning vehicles, with the Internet serving in various capacities ranging from research help to actual sales. Sales and support personnel from companies like IBM now use online chat to advantage. Many and various factors are involved in technology purchasing, ranging from seasonality to lengths of sales cycles.
Key to technology companies’ success at sales and marketing efforts is product evaluation and testing on the parts of customers’ technical and IT staffs. Once products are in place, strong and efficient technical support is of extreme importance to both buyers (tweaks, uptime, troubleshooting, timely upgrades) and sellers (service and professional fees, upgrades and aftermarket sales). On both counts, smaller developers and vendors can find themselves at a disadvantage, often lacking horsepower to accomplish some or all of this work. As a result, they often license their products to larger companies, or partner with them, to assure these products getting to market.
Industry consolidation will be a continuing trend according to pundits. Large companies, once distinct from one another, now need to deliver broader offerings as customers demand more from them, and are becoming ever more similar. Other trends include: the licensing of university technology (schools are beginning to ask for royalties for technology first discovered there), the trend toward commercialization of federal lab research which was previously secret as a way to profitably use what might otherwise languish (to learn more, research the National Technology Transfer Center), and of course, the continuing growth of the Internet as a marketing and advertising platform.
In terms of major challenges to the tech sector, two primary topics appear repeatedly. The first is the very high cost of R&D. As we’ve said, tech companies are continually under pressure to invest and invent, with the ‘heavy hitters’ spending the often quoted 15% of annual revenue toward this end (but keep in mind that this sector does include biotech, scientific and aerospace research, which are big spenders). The paralyzingly high cost of R&D is hard on all companies but can be murderous to small tech companies. The second major speed bump is one we’re all dealing with since 2008 – the industry’s dependence on consumer and business spending, and, by default, upon the state of the US and global economies. Upgrades and updates can be pushed-off; purchases can be delayed. “IT spending in particular is vulnerable to corporate budget cuts,” says one trusted overview. And, say all of us in this industry… It should also be said, however, that superior performance of new equipment, an especially notable point for the computer networking equipment manufacturing vertical, can be a driver to upgrade despite the economy.
Also in the challenge column are: the industry’s dependence upon skilled practitioners when demand outstrips supply; the rapidity with which tech products become obsolete vs. the heavy demands of their development/production, product pacing, sales windows, and speed to market (PC makers spend far less than the broader tech sector on improvements, at 1 to 3% of revenue, and computer manufacturers in general spend about 5%, but both tend to race to integrate new components and be first to market as the life cycle of a product can be only 18 months); competition from other countries – look for this topic to become hotter in the future – as the US’s 1/3 of global R&D spending is gained upon by other European countries now spending roughly the same amount for R&D in proportion to their GDPs; defense restrictions on technology sales primarily effecting superconductors and encryption technology; and, worries over senior management being tough to hang onto when their compensation is tied to volatile stock prices.
For computer manufacturing, additional concerns include, dependence on foreign suppliers for components like computer chips ($50 billion per year, with over half from China) as well as environmental concerns.
On the industry growth front, we have a bit of a bumpy ride: US corporate profits rose 10.2% in Q1 of 2011 vs. the same period of 2010, but by Q3 that number had fallen to 7.9%, and pundits were calling US growth the slowest in two years. US durable goods manufacturers’ shipments of computer and electronic products rose 1.6% in the first 11 months of 2011 (down from 3.8% after Q2), but US telecommunications revenue was up 3% for Q3 of 2011 over 2010 (risen from 2.7% for Q1), and US revenue for computer systems design was also up, at plus 10.9% over 2010 (also an improvement from 10.1% for Q1).
Opportunities for growth in the broader technology sector include three standouts. First, anticipated defense spending for communications could swing interest back toward the previously stalled satellite phone system along with investments in related technology. Second is the bright spotlight we’re seeing on security across the board, with DHS apparently inclined to entertain ideas from small and midsized companies in addition to the heavy hitters who range from security companies and electronics vendors to big military contractors. Third: nanotechnology. We just finished saying that nanotechnology wasn’t getting it’s props in terms of investment at this point due to lack of practical application, yet we keep seeing it noted as the major breakthrough area in research today along with decoding the human genome, so, it clearly won’t be long before we get this one right. Nanotechnology involves producing materials and devices that are ‘ultra-small’ – maybe as tiny as actually being constructed form individual molecules – and holds enormous and powerful potential for the fields of electronics, materials, medicine and who knows what else. Our research shows at least six major electronics players launching notable nanotech programs.
In the computer manufacturing arena, flash memory products (high capacity, low cost) and multiple processors (more power) are opportunities in step with the “more power” fad and mobile wireless communication products (laptops, smart phones) follow the portability preference.
You’ll be seeing more from wireless carriers as they work to promote mobile payment; currently, the public is dubious about adopting phone-based devices utilizing ‘near-field technology’ in lieu of rewards-packing credit cards. We’ll see if this becomes a trend or a dud in 2012.
One more thing: Cloud computing. Last year, we said, “’The cloud’ will create new opportunities in many areas of the tech sector, but is especially notable for data storage equipment makers.” At the time, it looked like a conundrum: though migration to cloud computing services was a potential boon to the international IT sector (endless opportunity plus some confusion, but ‘big data’ would have room to grow), it also posed what looked like a problem for server manufacturers, since companies could now rely on cloud storage instead of their own on-site servers. For 2011, worldwide cloud services were anticipated to reach something like $90 billion, and that revenue had to be siphoned from somewhere, didn’t it? Interestingly, this apparent problem was a nonstarter, as demand by cloud service providers is now listed in the opportunity section of industry outlooks, and the influx of revenue from cloud providers is expected to take up any slack in the server market to traditional channels. Worldwide cloud service revenue is predicted to reach nearly $150 billion by 2014, rising to $177 billion by 2015. PCs, though, may suffer from yet another adversary as cloud technology encourages the offloading of more applications and storage, helping to speed the pc’s evolution toward less complex, more mobile devices.