The ICT (information and communications technology) sector is being hampered by uncertainty caused by Brexit with a slowdown in growth, thin margins and fierce competition, reports trade credit insurer Atradius.
In its annual ICT Market Monitor, Atradius warns that British 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 a growing 4.5% in 2016, the growth in the British ICT sector is expected to slow to just 2.6% in 2017.
While demand for hardware products is declining, the Atradius Market Monitor hails software and data services 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.
Positively, Atradius reports 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.
Simon Rockett, Risk Services Manager for Atradius UK, said: "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. 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."
As part of its ongoing advice and trading support, Atradius 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. Price rises of up to 10% have been seen across the supply chain following the pound's depreciation against the US dollar and higher import costs.
Mr Rockett added: "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. 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."