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Funding could pick up for tech companies, while cuts in defense spending expected

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The next year is likely to be one of transition for San Diego’s technology and defense sectors, with one adjusting to budget cuts and the other gearing up for potential post-recession success.

With the wars in Iraq and Afghanistan scheduled to wind down, the Department of Defense is expected to reduce some of its contract spending. The local defense industry has also been buoyed by construction spending for the last few years, and that may not continue in the same amounts, according to Shirley Adams, chairperson of the National Defense Industrial Association of San Diego. She said contractors should look for the competition to get stiff when it comes to government projects.

The technology sectors, on the other hand, could be looking at an influx of money. The industry shouldn’t anticipate a boom, but there might be a thaw in funding and mergers and acquisitions, according to industry analysts.

“I think you’ll see considerable activity around clusters,” said Duane Roth, chief executive of the local technology trade group Connect. “Washington suddenly has cluster mania, and Connect is sort of Exhibit A of what they’d like to see happen across the country.”

This means government research funds could go toward more San Diego companies associated with local technology clusters, such as the CleanTECH group, which is helping to foster environmentally friendly companies. The government has budgeted a record $150 billion in grants in the coming year, and Roth said San Diego is poised to take in a strong share.

Private funding could pick up for technology companies, too. Kevin Carroll, director of the trade group TechAmerica in Southern California, foresees a much stronger year for mergers and acquisitions, as buyers and sellers are becoming increasingly closer together in their estimates on companies’ worth.

He also predicted a thaw in venture spending and initial public offerings.

“Capital markets are really opening up,” Carroll said. “There’s a pent-up demand for IPOs.”

He said San Diego’s clean tech sector has matured to a point where more products could be ready for the market. Roth said this could also come about as a result of new funding methods that came out of the lack of venture spending over the last few years; there is increasingly money available to help fill the gap in funding between early stage research and getting products out to consumers.

Roth predicted that genomics would be a growth point in 2011, as well as clean tech companies.

A recent report by TechAmerica showed that San Diego was able to hold onto much of its work force through the recession -- not adding many jobs, but not shedding as many as other tech hubs, either. Carroll said this bodes well for the region coming out of the gate fast when the recovery really sets in.

“If I had my choice of any place to sit in a tech recession, it would definitely be San Diego,” he said.

If defense companies want to thrive in 2011, and beyond, Adams suggested they focus as much as possible on information technology and security. She said there is a lot of funding going into cyber security, and the technological side of health care, meaning data management, medical records and other health care-specific programs.

“The government is putting out contracts,” Adams said. “If anyone’s going to get funded, it’s going to have something to do with IT.”

The only downside to this, particularly with cyber security, she said, is that the government still needs to put standards and policies in place before it can get a clear view of what it wants.

“We’ve gotten a little bit of cart before the horse. Even though it’s a concern, there’s still a lot of policies and laws that need to be in place,” she said.

Another area companies should look if they are seeking defense contracts, Adams said, is through cost savings programs. In recent years, the military has been trying to save money by insourcing, but there is evidence that this isn’t working as well as it hoped. There may be contract opportunities to go in and show the military more streamlined, cost effective ways of running systems.

“What you really want to do is do more, but without more money,” she said. “It’s not so much the old cliché of doing more with less, but more without more.”

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