Uncertainty caused by the UK’s decision to exit the European Union (EU) will create tough survival decisions for companies in the information and communications technology (ICT) sector, which is already experiencing a slowdown in growth, thin profit margins and fierce competition, reports Atradius.
In its latest annual ICT Market Monitor, the trade credit insurer warns that the UK’s ICT businesses are fighting against a slowdown in household consumption and an increase in the delays of long-term corporate IT projects which will almost halve growth levels within the sector this year.
After growth of 4.5% in 2016, the UK’s ICT sector is expected to expand by only 2.6% this year.
The insurer reports that while demand for hardware products is declining, software and data services are taking their place as the main drivers of growth, together with cloud computing. The continued development of mobile apps and new technology are anticipated to drive the sector forward in coming years.
Atradius also notes that payment experience within the ICT sector is good with a low level of protracted payments and no increase in the number of non-payments year on year. In addition, the level of sector insolvencies is “average” with no substantial increase expected this year. However, market competition is a big issue and margins which are already small, will be further squeezed.
“The traditional ICT sector in many developed markets is no longer growing at a rate that cushions businesses against the impact of rising costs and falling prices, with the result that many do not receive the returns they need from their working capital,” commented Simon Rockett, risk services manager for Atradius UK.
“Currently, the main triggers for defaults and insolvencies in this sector are increased price pressure and margin erosion due to heightened competition and lack of product differentiation. With minimal barriers to entry and new challenges arising it is a fiercely competitive environment and businesses are being forced to compete on price as they also try to differentiate their offering to preserve already thin margins.
“Looking forward, advancing technologies and changing market conditions will drive dramatic shifts in the sector landscape, putting pressure on distributors to clearly delineate their value to resellers and vendors. The choice they face to survive is to go big or go niche. Sustained and continued margin pressure, and fierce competition will increase the probability of failure for those businesses that are not able to adapt.”
The insurer adds that it is working with ICT buyers to develop foreign exchange hedging techniques to help mitigate against the fall in the pound since the Brexit referendum result in June 2016. Price rises of up to 10% have been seen across the supply chain following the UK currency’s depreciation against the US dollar and higher import costs.
“Currency volatility has not had a major impact on ICT businesses in recent years but, in the wake of the Brexit referendum, it is now a significant factor,” said Rockett. “Adopting appropriate hedging mechanisms are vital to ensuring that businesses sufficiently limit their risk exposure.
“Any future breakdown of trade deals following the UK’s departure from the EU will likely take their toll. The EU markets represent an important resource for business growth and also for recruitment for the British ICT industry and a departure will potentially lead to added costs and implications for UK resellers. With uncertainty the only certainty, a water-tight risk and credit and payment protection are outright essentials to weathering any Brexit storm.”
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