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January 7, 2009

New Year’s Foreboding

Michael Feldman

As is usual for the supercomputing world in early January, news is hard to come by. With so many academics in the community, a lot of HPC practitioners are still on their extended winter breaks. As for commercial HPC companies, they may not be so eager to return to work to confront the new economic realities they’ll be facing in 2009.

With the recession in full swing, the most likely news for HPC vendors may be bad news. Layoffs, mergers and other forms of retrenchment may end up being standard operating procedure for these organizations in 2009. Even though HPC-related businesses are expected to be spared the worst of the recession, that doesn’t mean there won’t be consequences. In fact, some of the effects of the downturn are already in evidence.

At the end of 2008, Cray executed a Goodwill write-down of about $55.4 million because the company’s stock price fell below its net assets. Even though Cray was able to book $100 million in Q4 as a result of the official acceptance of the new Jaguar petaflop system by Oak Ridge National Lab, the non-cash write-down meant that the company still suffered a net loss for 2008.

Cray’s stock was not the only one tanking. Practically every public IT company with (or without) an HPC stake rode the steep market decline that began in September last year. By the end of 2008, stocks of IBM, HP, Sun Microsystems, SGI Dell, Microsoft, Mellanox, Voltaire and ANSYS reflected the general market sell-off that occurred in the fourth quarter; most losing one-third of their value or more.

Stocks of chipmakers Intel, AMD, NVIDIA and Xilinx followed a similar pattern. The semiconductor industry, in general, is in for a rough ride this year. According to BusinessWeek, the global semiconductor industry is going to be hit hard by reduced demand for chips worldwide, just as production capacity is peaking.

The extent of the recession’s effect on the HPC market is going to be the big question in 2009. A lot depends on how governments around the world react to the financial turmoil. Pumping up R&D and industrial users of HPC would help maintain demand, but with so many sectors in trouble, even all the government stimulus packages being considered in the big industrialized nations will be unable to cover everyone.

In particular, the financial services sector is likely to consolidate, regardless of bailouts or stimulus spending, although this may not translate into reduced HPC spending. According to a recent survey of IT professionals at tier-one banks, HPC investments will grow in 2009. This probably reflects the view that IT spending, in general, makes sense in practically all economic climates, since it helps increase worker productivity. In good times this translates into larger revenues; in bad times it means workers can be replaced with technology.

Other major HPC sectors should be able to weather the economic downturn fairly well, too. Flush with cash, oil and gas companies are not in any immediate trouble, although the lower demand (and prices) for hydrocarbon fuels will inhibit some seismic exploration ventures, at least in the near term. Likewise, biotech companies that have plenty of cash on hand should also be able navigate through the recession, although startups may starve for funds because of the lack of investor capital and the tight credit market.

Where governments can help most is getting the overall economy back on track and making some key investments. In the U.S., President-Elect’s Obama’s plans for a government stimulus package are still being drawn up this month. More than half of the nearly $800 billion proposed will go towards tax relief, which will do little to spur computing demand. But the remainder is to be spent on programs, including infrastructure build-out and energy research and development — both of which could entail new HPC activity, albeit not immediately.

Obama and the Democratic Congress are also likely to fulfill their commitment to double federal funding of basic research over 10 years and make the R&D tax credit for corporations permanent. Since this entails only a few billion dollars per year, there probably won’t be a lot of opposition to this type of spending, especially when seen against a backdrop of trillion dollar per year deficit spending.

The real problem is at the state level, where, according to the Center on Policy and Budget Priorities, the cumulative budget shortfall will be $89 billion in 2009, ballooning to $145 billion in 2010 and $180 billion in 2011. If the stimulus package doesn’t cover shortfalls at the state level and the feds don’t step in with extra money, university and other state-sponsored R&D funding could face severe cutbacks. The governor of Wyoming has already made up a $1 billion wish list for Obama to rescue his state’s projects, including $50 million for a supercomputer at the University of Wyoming. Other states are sure to start lining up for federal funds.

HPC users are understandably wary. In a poll taken by Douglas Eadline at Linux Magazine in December, 40 percent of the 42 respondents said the economic downturn would not effect their HPC budget plans for 2009. Eadline suggests those are pretty good numbers, considering the rest of the IT industry appears to be headed for a more severe downturn. John West, at insideHPC, adds his two cents on the topic, noting that HPC use is precariously balanced on the backs of the HPC providers:

HPC vendors are experiencing economic disruptions because razor thin margins and little access to working capital mean they are hypersensitive to even small changes in the market. But they could stabilize where they are now and slowly return back to the “critical, but stable” state they’ve declined into over the past decade. However, if the disruption pushes into the HPC provider community — the labs and departments that provide HPC cycles and expertise to users — and we see a large scale reduction in employment and acquisition, then I think we’ll be in for a wholesale restructuring of the HPC market.

The open question is whether the downturn will be resolved in the next four quarters. Because of the long intervals between budget planning, procurement and deployment, it’s quite possible that any trouble exposed in 2009 will only be a prelude to deeper problems in 2010 and beyond. But if the recession is basically over by the end of this year, the hangover should be relatively mild. Otherwise, HPC growth is likely to take a much lower trajectory for the foreseeable future.

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