Brexit is no doubt one of the biggest questions facing businesses today. Despite being nearly 15 months on from the EU referendum, the true impact of Brexit is yet to be understood, let alone realised. When it comes to the ICT sector, what we do know is that the continued uncertainty is hampering performance; leading to a slowdown in growth and squeezing the already thin margins amongst fierce competition.
The immediate impact of the referendum result was of course the jolt in exchange rates. The Pound’s sudden decline translated into higher PC prices in local currency terms, reducing the affordability of imported hardware and packaged software. Dell and HPE confirmed a 10% price rise to UK retailers as early as July 2016 as a direct response. Over a year down the line, a decline in consumer confidence and household consumption is having an impact and at the same time the industry is seeing an increased number of delayed long-term corporate IT projects due to price rises and continued market uncertainty. Growth levels in the British ICT sector are anticipated to be almost halved this year – down from a growth of 4.5% in 2016 to just 2.6% in 2017. This all comes at a time when the broad PC market has been fairly static as technology improvements have not been sufficient to drive real market growth. Increasingly, consumers are using smartphones as their only computing device; a further threat to PC and tablet sales.
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. While demand for hardware products is declining, software and data services are being turned to 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. The wearable market is also active, with figures from the IDC reporting that fitness trackers and smart watches are selling well due to new vendors entering the market and fresh product investment. A further boost is likely, with the development of multi-purpose wearable devices fusing together health and fitness capabilities, and smart-phone notifications. Meanwhile, ear-worn devices passed 1% of all shipments for the first time in a quarter while smart clothes generated more than 1% of sales during 2016. This is thought to present an opportunity to sell multiple wearables to single consumers as ‘fashion’ items. The challenge ICT businesses 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.
More positively for ICT businesses as a whole, Atradius’ latest Market Monitor reports that despite the challenges ahead, current payment experience within the sector is good, with the number of non-payments remaining stable in the past 12 months. The level of sector insolvencies is described as “average” with no substantial increase expected in 2017.
However, market competition continues to be a big issue and going forward, margins which are already small will be further squeezed. Consumer confidence is likely to be challenged further this year by the impact of price inflation, while businesses are likely to be faced with additional cost pressures due to a weaker Sterling, the impact of the National Living Wage and business rate increases.
The traditional ICT sector in many developed markets is no longer growing at a rate that cushions businesses against the impact of these rising costs and falling prices, with the result that many do not receive the returns they need from their working capital. 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 margins.
After many years of relative stability in foreign exchange rates, Sterling’s continued weakness and volatility has added further pressure to the ICT sector and business as whole. With many UK companies importing/purchasing in EUR/USD and selling in GBP, this has always been a theoretical risk in the sector, but in periods of stable exchange rates, it is less of an issue. However, in the wake of the Brexit referendum currency volatility has become a significant factor. Adopting appropriate hedging mechanisms is vital to ensuring that businesses sufficiently limit their risk exposure.
Furthermore, any future breakdown of trade deals following the UK’s departure from the EU will likely have an impact. The EU markets represent an important resource for business growth and also for recruitment in the British ICT industry and a departure will potentially lead to added costs for UK resellers. In addition, any potential loss of single market access could significantly impact the UK’s position as a European financial services hub, encouraging a relocation of activities to other European centres. As financial institutions are major ICT consumers, any migration out of the UK may have a knock on effect on suppliers to these organisations.
With Brexit on the horizon, the biggest risk that lies on the path ahead will continue to be non-payment – whether through broken trade deals, currency fluctuations, political ramifications, economic decline or insolvency. But opportunities for trade are out there, especially for those businesses that prepare well and ensure they have good strategies to navigate the risks and to protect their cash flow. One obvious obstacle that can lead to failure is lack of information. Not only of political, geographic, trade sector and distribution channels; but also a real understanding of your buyer and an ongoing assessment of their credit strength. As the ‘Brexit’ future unfolds the landscape for the sector will undoubtedly see change, but whatever changes might occur, a business armed with the correct information and well prepared can mitigate against the risks and reap the rewards of new and successful trade relationships. With continuing uncertainty, the one certainty that remains is that water-tight risk strategy and payment protection are outright essentials to weathering any Brexit storm.
Richard Reynolds, Deputy Head of UK Sales at trade credit insurer Atradius
Image Credit: KurKestutis / Shutterstock