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 ICT sector braced for change

Economic research by top global trade credit insurer Atradius reveals major shifts in the landscape of the global ICT sector, driven by advancing technologies and changing market conditions.

The Atradius ICT Market Monitor reports that in an environment of continuing uncertainty  fuelled by the potentially negative impact of Brexit, interest rate increases, currency fluctuations and international trade disputes, ICT companies also face increasing pressure to improve time to market and to ensure that their offerings are best in class and include evolving technologies.

These challenges must be managed in an environment which is already characterised by high competition and tight margins and the Atradius report warns that the combination could increase the probability of failure for ICT businesses that are not able to adapt.

Tracey McIntyre, Senior Sector Underwriter at Atradius commented: “The choice for many ICT businesses in order to survive is either go big or go niche. We’re likely to see many firms partnering up by pooling their resources for mutual gain, alongside mergers, acquisitions and divesture, which can provide a fast track to fending off competitors from both inside and outside the industry. Of course the underlying concern is that highly leveraged ICT companies could face challenges in financing mergers and acquisitions or other strategic investments.”

More positively, the global market is continuing to expand with businesses continuing to invest in ICT as they anticipate revenue growth albeit with a shift in spending patterns. Projects in digital business, blockchain, IOT and progression from Big Data to algorithms, machine learning and AI are the main growth drivers.

Focusing on the UK market, Atradius outlines that the ICT sector has seen average growth of 5.8% over the past 3 years but uncertainty surrounding Brexit is taking its toll and has  resulted in lower market expansion and there are concerns that a talent shortage and a wider skills gap could hamper growth. This uncertainty has led to UK businesses being less willing to commit to long-term IT projects with budgets revised, plans postponed and non-essential upgrades delayed which has had a negative effect on the already low margins of many ICT businesses, especially in the ICT retailers segment. Pressure on margins also rose last year as input costs increased due to the depreciation of the pound, reducing the purchasing power of many ICT companies that are importing or purchasing in euros or US dollars and selling in pounds. However, the outlook for the ICT sector in the short term is relatively stable compared to the uneven economic conditions in the UK this year.

Encouragingly, Atradius reports that the level of protracted payments in the UK industry remains low with no rise in non-payments in the last 12 months and an “average” level of insolvencies. No substantial change is expected this year. However, competition continues to be fierce and businesses margins are expected to remain under pressure with minimal barriers to entry.

Tracey McIntyre continued: “The biggest risk in the current climate stems from the unknown. Nobody can predict what Brexit will look like or its full impact. The potential relocation of financial institutions to mainland Europe in the wake of Brexit could have a knock-on effect on ICT suppliers. While the British government has sought to reassure major finance firms that the industry would be protected in a Brexit trade deal, the real outcome remains to be seen.

“The best path forward for businesses in limiting risk exposure is preparation. This includes foreign exchange hedging mechanisms, developing a comprehensive knowledge of your buyer and their trading environment and being tuned in to spot any red flags which could indicate trouble on the horizon and investing in protection.”