The dot.com boom and the fall-out at its end saw new resonances attached to countless hitherto ‘ordinary’ words. Like the boom itself, these assaults on the lexicon often concealed their primary motive, which was to subvert some fairly standard and well-accepted principles of economics to serve more selfish ends.

A prime example of this trend involves ‘inventory’. In its basic form inventory is just ‘stock’. If you want to add a pejorative connotation, you can infer that it means ‘unsold stock’. So far, so straightforward – but not once it has been run through the mangle of tech-financial jargon.

Mea non culpa
As the Internet boom began to implode, ‘inventory’ entered the consciousness as never before. Indeed, its use became a central plank of the ‘not my fault’ attitude with which tech companies attempted to show that the world had conspired against them. ‘Inventory’ acquired a persona of its own, as if it were some third party external force working against the companies involved.

If ‘inventory’ is ‘(unsold) stock’, then the root cause of excessive inventories is either over-production or a miscalculation of demand or a sudden, unforeseen collapse in demand. In the case of the technology companies, it was all three of these things although on each count it was the manufacturers who were at fault. The way many continue to talk about inventory issues, you might think that the fault lay with customers and, by extension, the market.

Moore is less
One reason why inventories cause such headaches for technology manufacturers is that they are subject to rapid depreciation and a limited period before obsolescence in a way that much traditional manufacturing and engineering output is not. Unlike a warehouse full of tractor parts, for instance, technology products such as networking equipment and semiconductors are subject to Moore’s Law.

As a result, when faced with over-production surpluses or a fall-off in demand, technology companies can not simply cease production and concentrate on selling down inventory levels. There are three reasons behind this.

First, they must still develop and manufacture new products if they are to ‘stay in the game’ in future. Second, the market value of inventory items falls by the week. Third, selling off inventory at reduced prices impacts the price at which next-generation successor products can be launched, or the size of demand for them, or both.

Fruity
So, far from resembling traditional manufacturing output, tech inventories are more like those of ‘fresh produce’ in a grocery store – with a finite shelf life and a steadily decreasing market value as that shelf life nears expiry. Beyond a certain point, the value of unsold stock becomes zero.

For all that, food producers and retailers have shown far more ‘creativity’ when it comes to managing production levels and inventories and maintaining prices than the technology sector has ever done. Faced with a warehouse-full of unsold tomatoes, food producers will find a use for them somehow, perhaps by packing them off to the Third World or selling them off to ketchup makers.

If the tech companies were in charge of the same situation, they would stand by and watch them rot while blaming everyone under the sun (and probably the sun itself, too!) for the calamity. This would enable them to return to their shareholders and blame all of their problems on ’inventory’.

Investors faced with such board-level rhetoric could do worse than counter that at least they had thought up a use for all those rotten tomatoes.
Jim Chalmers