The information technology industry has grown by leaps and bounds in recent years, fueling the American economic boom of the 1990s and subsequent growth and development. In the process, it has become a part of business in nearly every major industry, from textiles to banking, from furniture to biotech. As globalization gathers speed, IT is also rapidly gaining ground around the world, as more and more people and places connect every day to the global information network. Yet with all the excitement of millions of new Internet users, however, many neglect to understand the dynamics of the industry. While the spread of IT provides IT with tremendous market opportunities, the industry faces renewed challenges of industrial competition, regulation, and resources that it must overcome to succeed.
General Industry Structure
The information technology (IT) industry can be broadly defined as the sector of the economy providing the means to transmit, store and process data in electronic forms. In practice, the industry can be hard to define, in part because some products in the industry (for example, semiconductors) serve as inputs both to multiple segments of the industry and to other industries. In other cases, voice data (as in telecom) and electronic data (as in computer information) are considered to be separate. This categorization includes a variety of sectors, including both computers and computing, networks and technology solutions, and telecommunications. IT covers a set of manufacturing and service activities, including:
- Semiconductors: This sector encompasses the development and production of a variety of chips that serve as inputs for the hardware assembly and telecommunication industries, and also serve as components of a variety of non-IT consumer durables.
- Hardware: Hardware covers all hardware assembly (including personal computers, servers and workstations), along with manufacturing of peripherals, networking equipment, storage and other components.
- Software: This sector includes the development of general operation systems and application software, along with more customized, business-specific IT solutions.
- IT/Telecom Services: IT Services include companies that produce services to the IT and telecom industries, including wireless solutions, systems integration, software development, installation, and support. This sector includes consulting services.
Information Technology in North Carolina
Information technology (IT) is one of the largest and most important industries located in North Carolina, employing more than 87,000 people in 2006 (see Table 2a). North Carolina's strengths in this industry lie primarily in semiconductors, hardware, and software. Even after the major setbacks in employment, nearly 65,000 people were employed in those three segments.1 North Carolina does, however, serve as home to companies that are operating in every sector of the industry, including IT/telecom services.
Within these links, North Carolina's strength lies largely in manufacturing. Manufacturing remains a critical component of the North Carolina IT industry, still employing more than 30,000 people. The major players in the field that are located within North Carolina cover the entire manufacturing chain, from semiconductor manufacturing to hardware assembly and beyond. Some key examples:
- RF MicroDevices, a leader in the production of analog semiconductor chips and a beneficiary of the booming market for wireless technologies.
- Flextronics International, which provides a comprehensive set of R&D and logistical services to tap the capabilities of its semiconductor fabricators, providing both chips and comprehensive integral packages.
- Cisco Systems and Solectron, global leaders in the fields of storage and networking components, which focus their North Carolina activities on assembly of manufactured products.
- IBM, whose North Carolina operations rank second among U.S. states and include a highly profitable server division.
North Carolina has also sought actively to attract new semiconductor and hardware businesses to the state. Within semiconductors, while North Carolina has offered incentives to smaller semiconductor manufacturers to build and expand operations within the state, it has been unable and unwilling to offer the larger capital incentives needed to attract the larger global players in this industry. This is especially noticeable for foreign firms, as the state contains no plants from leading foreign firms. In terms of semiconductor R&D and design, North Carolina has excelled both within the U.S. and globally. A significant portion of design and development for major global firms takes place here in RTP. In hardware, North Carolina has successfully attracted new Dell and Lenovo in the past few years, sending a message that the state is a serious player in attracting new hardware manufacturing and building a core of "magnet businesses" that can attract suppliers and customers.
North Carolina's Software Industry
The software industry in North Carolina has also improved recently, helped by the presence of several of the nation's leading software companies. Microsoft, SAS, and Red Hat are examples of growing companies that are leading the positive trend. Microsoft, which dominates the market for PC operating systems, and IBM, which is a key player across the industry, both have substantial operations in RTP; SAS and Red Hat are both headquartered in RTP. SAS is growing very rapidly in offering business solutions, while Red Hat is a leader in the increasingly popular open source Linux OS and is working with IBM.
Many other steps that North Carolina is taking, though less direct, relate to the growth and development of the software industry. For example, one of the most important preparations North Carolina is doing impacting the software industry is in preparing its citizens to take part in the rise of computer usage in daily life. Currently, Governor Easley maintains the importance in learning and functioning with cutting-edge technology, as through his One Carolina Agenda, he proposes both the training of teachers in "21st Century skills" and the opening of the first "21st Century skills" center to increase citizen participation in a technologically advanced society. In addition, North Carolina is seeking the help and support of top firms with greater access to resources, looking to build public-private partnerships to increase citizen use and familiarity with computers.
North Carolina's IT Services Industry
IT Services, though traditionally smaller than the manufacturing-based sectors, seems to be growing in North Carolina. Accenture's large office in Charlotte is a perfect example of the growth of the industry. Given the relatively young nature of this segment of the industry, it is difficult to give policy implications or future projections of where the model may lead. While corporate giants such as IBM have shown that it is profitable for large scale corporations, smaller corporations still have been struggling, due to a lack of economies of scale and name recognition these new companies cannot attain. The role of this developing industry in North Carolina remains to be seen, but should be watched with great interest over the next several years.
Geography of the Industry in North Carolina
The geographic distribution of IT manufacturing and software development activities is concentrated, reflecting the technological intensiveness of the industry, necessitating both the proximity of major research institutions and appropriate infrastructure. Three counties - Durham, Wake and Mecklenburg - account for most of the plants and IT industry employees, and with Guilford and Forsyth as rising locations, especially in IT services (see Maps).
North Carolina Exports in the IT Industry
Increasingly, North Carolina firms are also looking to export their goods abroad. Foreign demand for North Carolina exports is growing, though it remains lower than 2000 levels. Asia has solidly increased its imports from North Carolina, with China, South Korea, Japan, and Malaysia posting largest gains in recent years. Stagnating demand in some industrialized economies (the United Kingdom, Canada and the Netherlands, among others) presents cause for concern regarding future growth in exports from North Carolina (Table 4).
In general, North Carolina boasts a number of strategic strengths that benefit IT industry players, as well as a number of key weaknesses. This can be summed up in the SWOT analysis for North Carolina, given below:
Figure 1: SWOT Analysis for North Carolina in the Global IT Industry
Recent Industry Trends and Developments
IT is an extremely diverse industry, including both manufacturing and services, and the production of both consumer and capital goods. At the same time, there are important characteristics widely shared across the industry:
- Innovation has been crucial for the industry, much of which has experienced technological progress at killer rates: that is, by a factor of 10 or above per decade. Per-unit computational power and communication costs have fallen dramatically as well, leading the way for a productivity boom throughout the economy. Therefore, R&D will remain critical at both industry and firm level.
- Globalization has much stronger effects on IT than on many more traditional sectors. Many IT products have very low weight-to-value ratio (e.g., critical semiconductor microeconomic components, computer hardware), do not have physical containers (e.g., computer software code), or are services that can be detached from geographical setting due to low data transfer costs. This allows the relatively easy global relocation of segments of the production chain to exploit the comparative advantages of different regions. It is not accidental that IT helped to lead the trend of "outsourcing" of white collar jobs, sending advanced manufacturing processes and service operations to East and South Asia.
- While IT was a major beneficiary of the high-tech boom of the late 1990's, it also suffered severely from the burst of the dot-com bubble. All segments declined in 2002, some much more than others. There has, however, been at least a partial recovery in most sectors, for even in a downturn, IT plays a critical role in enhancing business productivity, which has grown at phenomenal rates over the last two years.2
Trends in Semiconductors
In semiconductors, leading firms in North Carolina and elsewhere are eager to reduce costs, primarily through adoption of more efficient technologies and more streamlined value chains. In particular, all have taken ample advantage of both outsourcing and offshoring. These have the potential to affect the industry as it exists in North Carolina, with especially severe impacts on workers.
Trends in Hardware
Hardware manufacturing has undergone dramatic swings over the last decade. The industry witnesses a resurgence of growth in production and new products sparked by the proliferation of the Internet. Since 2000, the industry has seen several signs of maturation. The number of new entrants into the market has dwindled and industry concentration has increased. Moreover, much of the manufacturing that has survived has been subject to outsourcing operations. These have all contributed to the employment losses evident in the tables.
Trends in Software
Software fares better among the two major service segments of IT. Software has also been hit by the bursting of the tech bubble and a sharp decrease in PC sales in 2000, but the software industry has improved in recent years. Reasons for this upward trend include: corporation investment in software upgrades for recent hardware purchases, higher PC sales, and an increase in the demand for internet security solutions. The increasingly important potential of web services software is another main factor in a positive outlook in the sector.
North Carolina has played an important part in the development of the IT Industry. With heavy investments to attract corporations to settle in North Carolina instead of typical states such as California or Texas, the state now is a leader in the nation. Research Triangle Park and the Piedmont Triad do an excellent job of fostering regions in the state where technological development thrives. In addition, the educational system - especially the college levels - have enabled corporations to easily train employees at a rapid pace.
Key Competitors: Semiconductors
In semiconductors, North Carolina faces stiff competition from a few states in manufacturing, namely Texas and California. These are the states with the highest concentration of actual wafer assembly, particularly populated with plants belonging to large global players. Both Intel and AMD are headquartered in California, and so most of their American duties are carried out there. Texas Instruments has kept its headquarters in Texas, where it has also kept most of its U.S. fabrication. North Carolina is home to some chip manufacturing, however, mostly small- and mid-cap firms manufacture here, because the government has previously offered incentive packages to this type of firm to settle here.
Key Competitors: Hardware
In hardware, North Carolina has posed itself as a leader in manufacturing among U.S. states. With major corporations such as Dell and Lenovo settling in North Carolina, other industry leaders look at the state as a model for hardware manufacturing in the U.S. Other states, however, are indeed competitive with North Carolina. When Dell was considering sites for its new facility, several other states - Oklahoma, Ohio, Tennessee and Virginia among them - all have competitive offers with tax incentive packages ranging from $10 million to $116 million. Luckily for North Carolina, the state was able to attract Dell's interest with its competitive offer.
Key Competitors: Software
North Carolina's software sector faces major challenges from West Coast states, specifically California's Silicon Valley region. While the name "Silicon Valley" was created largely due to the immense production of silicon chips, the area has become well-known in recent years for its innovations in software production. Firms like Cisco Systems, Apple Computer, and Symantec have set precedence for global leadership in software production and continue to contribute to global attraction to the Silicon Valley region of California. What Silicon Valley offers California that may make for tough competition in the years to come will be the tradition and technological infrastructure that already defines the region. For North Carolina, it will be imperative to spur both the currently existing research institutions (including colleges and universities) to increase the development of innovative software as well as vital industry-specific collaborations between growing software firms and industries, such as biotechnology and banking, in which North Carolina has become a dominant force.
Key Competitors: IT Services
In the nascent IT services sector, New York, Los Angeles, and Washington D.C. all house large IT Service industries due to their central location to industries across the board. These locations give them a competitive advantage by being able to learn from the different industries and apply them to others. By using comparative metrics, North Carolina firms learn less and are not able to expand their reach immediately.
North Carolina and its fellow U.S. states also face increasing competition from international destinations. It is important to note that this competition comes not only from traditional hubs in developed markets, as in Europe or Japan, but also from developing markets - both traditional players like Singapore and Taiwan and new entrants like China and India.
North Carolina faces competition in semiconductor manufacturing from numerous other states and other countries. A major trend in the overall semiconductor market has been growing demand in Asia. This region currently holds more than 60% of worldwide demand for semiconductors, with Europe and the United States essentially splitting the remaining 40%. This geographic trend makes manufacturers more inclined, and obviously more likely, to build any new plants and centers closer to the product's final destination. Which such a large market in Asia, it does not make that much sense for manufacturers to build new plants in the U.S., or even more specifically in North Carolina. Manufacturing plants are incredibly capital intensive to build and operate, so most large retailers tend to have a few, very large plants. For this reason, location must be chosen thoughtfully and with foresight into future market trends. In AMD's case, this firm has invested large sums of money into its new plants in Dresden, Germany, making it appear that AMD has no plans to enter into the North Carolina market (this is the only firm in the top three global manufacturers that does not have a pretty sizable R&D presence in North Carolina).
In hardware, Asia remains a major player, with entrants from Taiwan, China, Japan, and others. In this instance, Lenovo's operations in North Carolina represent an interesting case. Lenovo's North Carolina plant, unlike those of other hardware manufacturers, is seen as a general plant for worldwide manufacturing. Lenovo agreed to invest $84 million to develop plants in the Research Triangle area and it serves as a prime location for their U.S. operations. This is interesting since Lenovo is a Chinese company. With China becoming a larger market for PCs and hardware, it seems counterintuitive that they would move away from the emerging market. However, Lenovo realizes the strength and potential North Carolina has and decided to settle here especially since IBM had a long-standing relationship with the state.
The internationalization of software has led more computer firms to open training facilities around the world, thus producing more highly-trained workers to handle the entire software production processes offshore. The result becomes stratified U.S firms searching for new international niches to increase a global reach and profits settle in these areas creating newer innovative products and potentially the same general software products at a fraction of the cost it would take for the product to be manufactured in the U.S. Countries like India and China have increasingly tremendous growth potential, creating not only a profitable niche for a strong, complete software industry, but also one of extreme importance. The aim of many of these countries is to create a degree of self-sufficiency so that, one could both create and innovate their country infrastructure without the interference of foreign investors. While in the short term, U.S based firms may find investments overseas lucrative, future ramifications may result in slowed software production, intensified by production process stratification across the country. To compete with rising international competition, North Carolina must fortify the entire software production process internally.
- The following segments in Table 2a are included into the count: Computer and Electronic Product Manufacturing, Software publishing and Computer System Design and Related Services.
- This is apparent from Tables 2a, 3a, and 3b. All industries listed reached their peak values in 2001 and declined subsequently. Losses in the manufacturing segments were greatest, while the R&D segment were less. Implications are discussed in the Workers and Jobs section.
INDUSTRY SECTION LAST UPDATED: August 24, 2007