Positive spin put on state's telecom base

New firms termed on cutting edge of technology

`The ranks of the envied'

Capital-spending cuts in industry seen favoring Md.

Maryland's Economy

Close-up on capital spending

April 15, 2001|By William Patalon III | William Patalon III,SUN STAFF

After looking at the scorched earth that's currently the U.S. telecommunications-equipment business, it would be understandable if Tim Cahall was fearful for Maryland - which boasts that this capital-spending sector is an emerging economic strength.

But just the opposite is true of Cahall, chief executive officer of Columbia-based Trellis Photonics Ltd., which makes optical-networking gear. He believes Maryland will enjoy a long-term benefit from the bursting of the capital-spending bubble.

The reason: The newness of the telecom-equipment sector in Maryland means most of those companies are offering the most cutting-edge technology in the business.

"The worse it gets, the better we'll do," Cahall said of Trellis and other Maryland-based companies that make telecom gear.

Capital spending - outlays for everything from heavy machinery to telephone-networking gear - helped turbocharge the U.S. economy's record expansion and the stunning bull market in technology stocks that accompanied it.

But the economy has turned for the worse, and Corporate America is suffering through what some have labeled a "profit recession," so cost-cutting companies are shearing their capital-spending budgets. If those cuts are too severe, some economists worry that what might have been just a mild downturn could become an excruciating affair, accompanied by widespread firings and a bear market for stocks that lasts for years.

"The big driver of economic growth in the last part of the 1990s truly was capital spending," said Steven A. Wood, a former Bank of America economist who is chief economist for FinancialOxygen Inc., an Internet firm that serves as a financial intermediary between small community banks and big money-center banks. "The worries are now that - if this was indeed an investment-led boom - we'll now have less capital spending, [which will worsen] what would otherwise have been only a period of subpar economic growth."

Outside the defense business, for most of the 1990s, Maryland hasn't been a major supplier of capital goods. Its diminishing manufacturing sector accounts for just about 7 percent of the state economy, compared with 15 percent nationally, and the capital equipment firms tend to be smaller companies whose wares are highly specialized, or even customized for a buyer.

"The companies tend to be $20 [million to] $100 million in sales, privately held and not very visible," said Paul Engle, a manufacturing and technology consultant for the Baltimore office of Grant Thornton LLP, an international accounting and consulting firm.

During the past several years, however - and just as the U.S. market for telecom gear entered its boom - Maryland found itself home to a roster of firms with leading-edge telecommunications technologies.

Among them: Cahall's Trellis Photonics, Ciena Corp. of Linthicum, Corvis Corp. of Columbia and YAFO Networks Inc. of Hanover, all of which make equipment for fiber-optic networks, along with Aether Systems Inc. of Owings Mills, which has developed wireless technology for hand-held computers.

"In the past five years, we've gone from the ranks of the enviers to the ranks of the envied," said Anirban Basu, chief economist for Towson University's RESI Research & Consulting arm. "We've been able to land our own technology cluster - particularly in the areas of fiber optics and photonics ... longer-term, this is the fastest-growing part of the [telecommunications] economy."

With Internet use still growing 200 percent a year, and all sorts of new services slated to come on line in the next few years, economists and state economic development officials say Maryland gained entrance into this capital-equipment sector at just the right time.

It's certainly generating growth: In Maryland, the information technology manufacturing-and-services sector - which includes the making of telecommunications equipment - accounted for 48.2 percent of the state's high-tech work force in 1998, compared with about 39 percent nationally, one economist said.

"It's a key sector," said Pradeep Ganguly, chief economist for the Maryland Department of Business and Economic Development.

While much has been made of the so-called "bubbles" in the dot-com sector - and among technology stocks in general - analysts say it was really a bubble in capital spending that powered the boom, only to spawn the economic and stock market pain that has followed.

The numbers bear this out.

Historically, two-thirds of the nation's economic activity is tied to consumer spending. But capital spending by corporations has climbed from 6 percent of gross domestic product in 1991 to 12 percent today - a doubling that served as the fuel to shift both technology stocks and the economy into overdrive, said FinancialOxygen's Wood.

In normal doses and strategically applied, capital spending is a good thing: It makes companies more competitive, boosts their profits and enables them to offer their customers all sorts of new products and services.

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