The tech industry has held back spending to brace for a potential recession in 2023, but if history repeats itself, there may be a silver lining to the recession: the rise of technological innovation.
In the year In 2008, the Great Recession brought 4G LTE mobile broadband, when only 30% of American households owned a smartphone. Most economists are predicting a recession this year, and tech industry watchers are predicting that 5G will bring innovation in industrial IoT, connected intelligence, autonomous systems and quantum computing.
Speaking at last week’s Consumer Electronics Show (CES), Steve Koenig, vice president of research at the Consumer Technology Association, said he expects to see new innovations in those areas to address pressing issues such as labor shortages.
“Yes, there have been cuts in technology, but businesses in the global sector are struggling to find workers,” Koning said. “Technological innovation can help with this.”
Advances in manufacturing and driverless truck technology are moving forward to fill the void for vehicle drivers. At CES, John Deere unveiled its autonomous tractors – an indication of more innovation to come.
Special failure
According to Christopher Gilchrist, principal analyst at Forrester Research, companies that continue to invest more than their competitors during economic downturns show strong resilience in the market.
“What’s unique about this downturn for the tech industry is the simple fact that at the level of maturity these tech companies are at today, they’ve never really gone through a full economic cycle,” Gilchrist said. “Most of these companies were still in the early stages, high growth modes leading to financial crisis.”
In the year The Great Recession of 2008 brought 4G LTE mobile broadband. In the year The fall of 2023 could drive innovation in 5G, connected intelligence, autonomous systems and quantum computing.
This naturally puts pressure on minority shareholders to maintain recent profitability targets due to long-term growth as their business models mature, Gilchrist said. Between 2000-2010, R&D was higher than in other R&D-intensive industries, and these companies experienced post-recession growth faster than the overall market, he said.
Gilchist added that tech-forward business models have seen gains in the market during the Covid-19 pandemic, while others have been forced to restructure amid shutdowns and manage drastic changes in consumer behavior.
A market correction will accelerate this year, putting pressure on profitability in the near term. The question now is how much price will pressure technology companies for long-term growth?
Tech giants like Salesforce, Microsoft, Google, and Amazon have cut costs by cutting back on hiring, layoffs, and restructuring, while margins continue to shrink in places where they are thin. These systematic reductions will reduce pressure on stocks while allowing companies to maintain their position in the market, analysts said.
R&D continues with caveats
While the era of relatively cheap capital and big bets on unsustainable business models has passed, investments in technological innovation continue to be more regulated.
Tech companies have adjusted their spending strategies. Investments will be driven by restrictions, regulations and lessons learned on issues like cryptocurrency and security, said Seth Robinson, vice president of industry research at CompTIA, a nonprofit association for the IT industry and workforce.
“Nothing extinguishes the creative flame, it transforms it,” he said.
Research and product development are long-term investments, and analysts expect tech companies to continue spending with few caveats. The initial R&D will practically point to high-margin segments, Forrester’s Gilchrist said.
“Rather than targeting opportunities that expand new markets, R&D efforts target opportunities that expand existing markets,” he said. Gaining growth from a stable market is smarter than generating growth from an unstable market.
In other words, R&D will go into hot markets such as security, cloud and AI, rather than into new markets that are not yet profitable. Tech industry leaders at CES reiterated the need to invest in those areas to drive business forward.
“Anyone who ignores those megatrans is holding themselves back,” Nasdaq Chairman and CEO Adena Friedman said in a session at CES.
Innovation ensures competitive advantage
Of course, there’s a strong business case for maintaining R&D strength in an economic downturn, and tech companies with high profits and cash reserves will continue to do so, Gilchrist said.
Giving up today will cost you dearly tomorrow.
Christopher GilchristPrincipal Analyst, Forrester Research
“Cash may not be ‘cheap’ anymore, but these companies are sitting on a lot. Not putting the money to work will prolong the impact of this coming downturn,” he said. Giving up today will cost you dearly tomorrow.
In most cases, it will be up to IT leaders to convince business executives to invest more in strategic technologies – a difficult task, especially in organizations that still view IT as a profit center.
“Companies should continue to invest in technologies that improve competitive advantage,” said CompTI’s Robinson.
Although recent headlines have focused on tech company layoffs, the bigger picture is that companies continue to invest in hiring IT professionals who can drive innovation initiatives.
CompTIA reports that 30% of all tech jobs are posted in new technologies like artificial intelligence or in roles that require new technology skills.
Microsoft, Intel, IBM and Cisco did not comment on the tech investment plans.
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