Economic slowdown, a result of business volatility bred by Internet?

NEW YORK, APRIL 1. As one of the brightest lights of the Internet revolution, Cisco Systems has long been looked to as the company that not only supplies the equipment that holds the web together but also understands how information technology makes business work smarter and better.

So when Cisco announced earlier this month that orders for its products had unexpectedly plunged and that revenue would decline for the first time in its 11 years as a publicly traded company, it did not just send shudders through the company itself and its own suppliers. It also raised profound questions about the role of the Internet in the current economic slowdown.

The Internet, with its myriad online connections, speeds the transmission of ideas, good and bad, and amplifies their reach. It has allowed business managers to peek into every link of the supply chain that feeds their manufacturing processes, and to change direction with a nimbleness that would have been unimaginable just a few years ago.

Yet power sparks hubris - a Porsche fairly demands to be driven at breathtaking speed. The result for the economy can be jarring. ``The supply chain looks a lot more like the stock market,'' said Mr. Andrew Whinston, director of the Centre for Research in Electronic Commerce at the McCombs School of Business at the University of Texas. ``It becomes much more volatile.'' And that could help to explain why the economic downturn seems to be happening on Internet time.

Since last summer, the economy has gone from a racetrack-like annual growth rate of almost 6 per cent to barely 1 per cent. Business executives in one industry after another have described being stunned by the abruptness of the drop in orders. Caught by surprise, manufacturing companies have watched their inventories soar.

With all the information supposedly at their fingertips, why were executives so out of touch? There appear to be several related reasons. As in past business cycles, companies got caught up in the boom, expanded capacity and output to meet expectations of continued strong growth that simply was not sustainable by all of them together. But added on top of that, it seems, was a sense of complacency that the new management information tools would provide plenty of advance warning of troubles ahead. That may have been asking too much of them.

``It is important to understand that the Internet cannot change what is going on in the marketplace,'' said Ms. Susan L. Bostrom, senior vice president of Cisco's Internet business solutions group. ``You can manage those variables that you can control, but what makes business fun,'' she said with a nervous laugh, ``is that there are always variables that you can't control.'' Finally, with so many companies farming out actual production to contract manufacturers, some clearly lost touch with the overall market environment.

The Federal Reserve chairman, Mr. Alan Greenspan, normally one of the Internet's biggest boosters, has started to warn that speed has its risks - and that it complicates his job as well.

Many companies ``were caught with their pants down,'' said Mr. Mark Zandi, chief economist for Economy.com, a consulting firm based in West Chester, Pa. ``Maybe the technology isn't as good as we thought it was in terms of inventory management.'' On the other hand, he said, ``Maybe it's good, but it's only good if you believe it.''

- New York Times

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