“Top business risks in the technology industry” by Aileen L. Saringan (November 8, 2010)

SUITS THE C-SUITE By Aileen L. Saringan
Business World (11/08/2010)

In the business environment post-global economic and financial crisis, new risks beset companies. And with the constant demands on the way business is conducted, many companies struggle to cope with the pace of their customers and competitors, particularly those who ascribe to a “one size fits all” or “all-in-one” mentality.

In 2009, the world economy saw slow growth in various industries in the aftermath of the global recession that started in 2008. Some of the questions raised are: What comes next? What are the risks and challenges that companies need to continue to focus on? How will these be addressed to achieve sustainable growth?

Apple co-founder Steve Jobs once said, “You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.”

What he said is indeed true. To be ahead of the pack, there is a tendency for different technological systems to evolve toward performing similar tasks. Driven to gain competitive advantage, technology companies have developed designs that spur customer interest and product salability, all in one package.

Most of the technology deals last year brought computing and information management power on any device, anywhere, anytime.

The market has also seen the globalization and convergence of technology industry sectors, of technology enabling other industries, and of technology platforms (smartphones, netbooks and tablets). Smart stand-alone and embedded devices are also able to gather information, just as information can also be generated through social networks such as Facebook, MySpace and Twitter.

These trends have led technology companies to move toward one direction — transaction integration. Top technology companies are strategically thinking about mergers and acquisitions, joint ventures, and alliances to achieve integration. Key considerations include how the culture, products and services, sales and supply chain complement each other to enable the right integration. Some players in the industry converge to diversify their revenue streams like hardware companies that buy software companies. Other technology companies also invest in other industries such as medical equipment companies in the health care industry.

A growing number of people now prefer using their smartphones for online and other games, and this has put pressure on the sales of dedicated handsets like Sony Corporation’s PSPs and Nintendo Co.’s DS. Intel Corporation is unveiling its first chip design that has graphics capabilities built into the processor, which could potentially eliminate the need for separate graphics cards in most personal computers. The simplistic “all or nothing” approach is now evolving into more complex, hybrid models, as technology companies strive to achieve growth through strategic alliances and transactions.

Because of unfavorable global economic conditions, some foreign investors were unable to earn reasonable profits, much less keep their companies afloat. A number of foreign direct investors have pulled the plug on their Philippine operations.

Since some of these investments require putting up factories, employing Filipino workers and technological methods in producing goods and services in the Philippines, these companies must be able to establish sustainable cost-cutting measures and flexible cash management strategies and at the same time deliver high-quality outputs. This is vital for companies so that they do not run the risk of diminished content quality and customer loss.

Aside from controlling operating costs, technology companies have to continue developing better cost structures through restructuring. This will affect most subsidiaries of global technology companies. Cost efficiency and quality of output are some of the metrics used in evaluating business units in different countries. By having low labor costs and a high-quality work force, subsidiaries of global technology companies here in the Philippines will continue to operate in the future.

Similar to other emerging markets, the Philippine economy slowed down due to the global economic crisis, particularly because of the abrupt surge in food and fuel prices.

The technology sector was not spared as some manufacturing plants had to close and reduce their employees and workers to manage costs.

According to a report from MarketResearch.com, the systemic financial crisis has significantly resulted in the lack of liquidity, reduced industrial productions and weak consumer confidence that led to poor demand for electronic components and devices globally.

Although the semiconductor and electronic sectors continue to be a major contributor to the Philippine economy, total exports of electronic products decreased by 28% in 2009 compared to the 2007 level.

On a positive note, while some of the first-world countries are still not totally out of recession, certain emerging markets like the Philippines have rebounded and have almost returned to their pre-crisis levels. Our electronic product exports grew by 20.61% from January to August 2010 compared to the same period in 2009, which is a very good development.

Companies, however, need to be wary as the European economy has been involved in a debt crisis which could open up real possibilities of a second round of downturns. When this happens, the gains that the Philippines has recently achieved may be quick to disappear.

To address this risk, increased foreign investments will help sustain the growth of the industry in the country. According to Ernesto B. Santiago, president of the Semiconductor and Electronics Industry in the Philippines, Inc., multinationals are reviewing global strategies and are determined to make their presence felt in Asia. With this in mind, the technology industry’s rebound can be sustained if aggressive investment promotion campaigns are undertaken to attract the big multinationals.

With threats facing the technology industry today, it is critical for companies to have the ability to anticipate the potential relevant risks, react and respond accordingly and successfully implement procedures to address the identified risks. At the end of the day, the risk management process laid down by senior management will be essential to finding the solutions of today’s challenges.

(As of publication, Aileen L. Saringan is an Assurance Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.