Mixed news for local IT industry

ASK anyone who was involved in the technology sector of the market back in April of 2000 and they usually develop a glazed look when discussing the “Tech Wreck”.

AMP Henderson Global Investors chief economist Dr Shane Oliver has some bad news for these people. In his latest Insights journal he identifies deterioration in the fundamental of the Information, Communications and Technology (ICT) sector that is still occurring. He examines a number of factors that lead him to this view.

1) The combination of Y2K, the Taiwanese earthquake and the 1999 boom led to an over-ordering of IT equipment, particularly components like semi-conductors.

Demand for PCs and new software has slowed for several reasons, including: the perception that the gains in operating capability from the latest products are marginal compared with a few years ago, creating less of an urgency to upgrade; disenchantment with the Internet as expectations of what it could do right now ran ahead of reality; migration of the innovation to other technologies, such as palm-top computers; and a feeling that PC penetration rates are already high (apparently there are some surveys suggesting that everyone who wants a PC already has one).

2) As corporate earnings have weakened, the pressure tends to go on companies to cut their investment in IT.

This has slowed the demand for IT products.

3) The market is realising that there may have been a degree of over investment in ICT.

All of these factors lead Dr Oliver to the view that the technology sector is going to be remaining fairly depressed for some time.

The growth in US technology investment is likely to slow from annualised rates of between 20 per cent and 30 per cent over the past few years to a negative figure this year. So, near-term, Dr Oliver remains bearish on the sector.

On a longer-term basis he makes two salient points. Firstly, analysts have made comparisons between the over-investment in technology in the US and the over-investment in Japan in the late 1980s, or even in the US railroads during the 1880s.

The adjustment process will be a lot swifter this time. IT depreciates a lot faster than do buildings and plant and railroads.

Secondly, IT will still provide long-term productivity-enhancing benefits, and that hasn’t changed. Hence, the longer-term growth will continue.

From an Australian perspective, the current downturn is good news. There is every likelihood that prices of components and hardware will be declining. We, in Australia, are big users of the product but not big producers of IT. This should make our costs of production relatively cheap. For our tech sector it is bad news, as the world spending on tech continues to decline.

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