Irish companies failing to get to grips with reality of slide in US economy

Irish companies with Silicon Valley operations believe the Republic has not yet understood the severity of the economic downturn in the US technology sector and say they expect many more company failures in the US and the Republic.

But they also say they are cautiously optimistic about a turnaround and all have benefited from the few upsides of a downturn - a better hiring market and cheaper office space.

"It happened very, very quickly and very, very severely. Many industry veterans have said they've never seen anything like this," says Mr Paul Costigan, the Palo Alto, California-based chief executive of Dublin company Massana, which produces specialised microchips for broadband communications. "It's very nasty out there."

"Some semiconductor companies are talking about negative bookings (where they take back inventory or lose sales already on the books), and I've never heard that before," says Mr Bill McLean, president of US operations for Dublin's Parthus, which develops semiconductor designs and software for wireless devices. Mr McLean, based at Parthus's San Jose office, is a 20-year veteran of the semiconductor industry and says colleagues believe the current economic situation "is the most brutal downturn they've ever seen".

Yet that US reality hasn't sunk in for Irish companies. "I think there is a distance," says Mr Hugh Grant, chief technology officer for Dublin business automation software company Cape Clear, which is enlarging its Silicon Valley operations. "They can't understand that - the sheer number of companies that have disappeared [here] overnight."

But Irish technology firms in the US also said the downturn hadn't significantly affected their own company plans. "It's largely business as usual. I think we're more careful in planning - we have to be more focused on the trade shows we go to, the customers we talk to," says Mr Grant. "There's not a lot of fat on the beast."

Parthus, with 60 people in the US, 35 in San Jose, is also sanguine. "Our business model is somewhat impervious and companies in our sector tend to do better when the economic cycle swings around," says Mr McLean. "Our activity actually picks up under these market conditions." That's because semiconductor producers put money into research and development, and expand facilities during downswings in order to swiftly ramp up production in the next upswing.

After releasing results that met market expectations this week, the company's briefing with analysts underlined this point. Mr McLean told analysts that Parthus saw no reason to alter its six-month forecast - its intellectual property is in demand in the downturn.

Dataway, a San Francisco- and Dublin-based Internet security company, notes the economic boom had brought almost too much success. "We couldn't deal with the amount of business out there and some of it was silly," says Mr Simon Lewis, Dataway's chief technology officer. The economic about-face, however, was a shock - he's seen "nothing this fast and this severe".

But he too argues that his company, which remains fully self-funded, is doing fine. "Thankfully we haven't had to change our plans because we're somewhat insulated - security products are required no matter what and we do have a steady revenue stream," he says. "We definitely have got slower growth but we're pretty much growing the way we had planned."

Massana, with 80 employees, 12 of which are in Palo Alto, transitioned from a services to a semiconductor company last year, which puts them at a good point to weather a downturn. "We're at the fortunate stage in our development where we haven't put a lot of product out on the market," says Mr Costigan.

"Furthermore, we're focused on the future", with a major product shipping later this year. "We're not pulling back," he says.

"Six months ago our major challenges were recruitment and getting time from lawyers and accountancy firms. But now, the cost of capital has become quite a serious challenge, so everyone is trying to deal with a new set of constraints," says Mr Costigan. "Just because there's money out there doesn't mean they're going to invest it. A lot of good companies are going under because they can't close rounds." Massana is in a good funding position, he says, having received $6.5 million (€7.3 million) initially from ACT in Dublin and a second round from Vision Capital, BancBoston, Dresdner Kleinwort Benson and Jafco.

As for the Republic, he thinks "an incredible amount has been achieved" in the technology sector. "Ireland has a very strong base with which to face a downturn," he says. "But events may happen that may be out of Ireland's control," he cautions.

Havok, a 35-employee Dublin company that designs physics-based technologies used for creating 3D effects in computer games, is another company that has watched its market alter in 2001. Last year was extremely bullish, capped with several gaming console launches. "A lot of that has changed now", with fewer companies and hype, says Mr Ed Cherry, Havok's Palo Alto-based vice-president of global sales. "That's actually quite useful for us - getting rid of the chaff. We want to work with people who are going to be around in the future," he says.

"I wouldn't say there's been a major change to our strategy. Our customers haven't gone away. We're still working to the plan we had 12 months ago," he adds. However, the venture market is terrible. "I wouldn't want to be seeking funding right now."

Havok is enjoying some of the downturn's perks - it subleased new Silicon Valley office space at 60 per cent of the rent the original tech-company tenant is paying, and notes it is seeing "more quality CVs". "You're able to negotiate quite hard right now," adds Mr Cherry.

Cape Clear's Mr Grant says the downturn's "mixed blessing" is that "it gives us greater access to office space and employees". Dataway's Mr Lewis is particularly confident of the downturn's benefits in both the US and the Republic. "Some great businesses will come out of it. There's great talent," he argues. "Some people are tired of a decade-long expansion. During a downturn they can catch their breath and get some perspective, and come out reinvigorated. There's a lot of learning that people have gone through and none of that will be lost."