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US-China trade war poses big risk to tech industry outlook

US-China trade war poses big risk to tech industry outlook article image

The global information and communication technology (ICT) market continues to expand, with sales of ICT products and services expected to increase more than three per cent in 2019.

Enterprise software and IT services are forecast to exhibit above average growth in the coming year.

Software-as-a-service (SaaS) is also driving growth in almost all software segments, while communications services continue to drive the majority of spending, according to the latest report from Atradius, a global leader in risk management.

But escalating trade tensions between the United States and China pose a big risk to the industry outlook, says Mark Hoppe, managing director, Oceania, Atradius.

ICT-related goods are still largely excluded from the US$200 billion of Chinese imports subject to the 10 per cent to 25 per cent tariff increase in May this year by the US administration.

However, any US steps to impose tariffs on essentially all remaining imports from China and retaliatory measures by Beijing would definitely affect ICT industry performance.

Dampening business and consumer confidence

“These tensions could dampen business and consumer confidence worldwide and hurt the currently favourable ICT spending environment,” said Mr Hoppe.

“At the same time, the impact of the US decision to potentially block domestic and even foreign suppliers from doing business with the Chinese technology firm Huawei could have a major impact on many ICT suppliers in the medium and long term – especially in Asia and the US.”

According to the Atradius report, the Australian ICT market is forecast to grow further in 2019 and 2020. 

And state and federal governments remain key investors in IT projects, while business and consumer ICT spending is driven by economic growth and technological progress.

Other key findings include:

  • In general, Australian ICT is a profitable segment with steady margins. However, in 2018 margins deteriorated for businesses in the ICT wholesale and retail segment, where the market was very competitive and cost pressure was high.
  • Many Australian ICT businesses are highly leveraged, either via debtor financing for working capital management or through term loans. Banks are quite open and willing to offer loans to the industry. It is important for ICT businesses to have healthy cash flow as a lot of companies earn extra margins through early settlement of invoices, so having working capital funding in place or trade credit insurance to cover payment default is important.
  • Payments in the Australian ICT sector remained the same compared to last year, and generally take between 30 and 60 days from invoice date or between 30 and 45 days from end of month. Payment experience over the past two years has been good and the level of protracted payments and insolvencies remains low compared to other industries. No major change is expected in 2019.
  • Atradius’s underwriting stance remains generally open for IT producers and service, as this segment generally performs well with profitable businesses and a good non-payment notification and claims record. The same accounts for telecommunications, which is a highly regulated segment with many financially strong businesses.  
  • Atradius’ underwriting stance on ICT wholesalers and retailers has become more restrictive, especially for small businesses, which suffer most from the highly competitive environment. Smaller ICT retailers often face liquidity issues, and credit insurance claims in this segment have increased over the past 12 months.

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