Weathering the storm

By the end of the year, the IT market will have a much better idea of how its prospects for 2009 are shaping up.

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By  Andrew Seymour Published  November 16, 2008

By the end of the year, the IT market will have a much better idea of how its prospects for 2009 are shaping up in light of the current turbulence. And if the recent spate of post-financial crisis announcements from several industry bellwethers is anything to go by then it could be more of an uphill struggle than many first suspected.

While the last couple of weeks have brought about an increase in the number of column inches allocated to the corporate clean-up policies of organisations hit by the credit crunch, they have also shed some much-needed light on the extent to which the economic climate is impacting the industry. If there has been one thing more frustrating than the level of speculation that has ensued in the wake of the crisis, it is the lack of clarity — although critics would rightly argue that one is a direct result of the other.

At last we are starting to see some actual evidence mount up, although it doesn’t necessarily make for comfortable viewing. Cisco, a vendor that has emerged healthily from periods of dramatic economic and technological change several times before, admitted earlier this month that a sharp decline in sales could hit its quarterly revenue by as much as 10%.

Tellingly, the networking giant also reported that sales during October — when the credit crisis spread beyond financial organisations — fell a hefty 9% on the same month a year previously.

Over in Finland, mobile devices outfit Nokia has scaled back its outlook for the fourth quarter and confessed that it anticipates industry volumes taking a nosedive next year. Like so many of its hardware counterparts, the combination of economic sluggishness and currency volatility has put the brakes on consumer spending with little sign of when that will change.

For those involved in the industry here, the definitive question still centres on how the Middle East market is going to be impacted during the next 12 months. That conundrum remains unresolved for now, but most companies have conceded that the market won’t be as sheltered from the problem as many initially claimed.

I would be surprised to hear international vendors talking seriously about rapid expansion in the Middle East next year though, mainly because they will be pre-occupied with how they can run their own businesses as leanly and effectively as possible. Don’t get me wrong, their expectations for Middle East growth will remain as lofty as ever, but the channel development dollars to accompany those aspirations might not be too forthcoming.

Executives I have spoken to during the past fortnight admit they are particularly anxious about what’s happening at end-user level. The current climate of fear is only set to force companies back into their shell, sparking a culture of acute prudence.

Even vendors which vehemently argue that their products are just what end-users need during times of difficulty have to admit that talk of lay-offs in sectors such as banking and real estate, for instance, is not good news for anybody, especially companies dependent on customers from those segments.

At the same time, channel partners are going to be forced to do more with less. Sources in Dubai Computer Street report that business has slowed down in recent weeks, while more and more suppliers are said to be tightening payment terms as they look to get their own houses in order. Never has the old adage of ‘cashflow is king’ been put under so much scrutiny.

Further affirmation that the industry faces a painful time ahead comes from IDC, which predicts that the EMEA market will experience growth of just 3% next year — a 1.5-point drop on its pre-crisis forecast. Admittedly, its decision to revise its numbers is largely down to developments in Western Europe, but Middle East and Africa growth is still set to slow to 8.5% even though the region will continue to enjoy relatively healthy expansion in comparison.

Interestingly, IDC cites several sectors that it believes are better placed to succeed, including IP phones and smart handhelds. It is also adamant that business continuity and IT security will receive investment regardless of the economic climate, while green IT and virtualisation are measures that will improve data centre efficiencies and drive down infrastructure costs.

The research house insists open source software will get an extra boost too, reflecting efforts to reduce non-discretionary IT expenditure — although Sun Microsystems clearly wasn’t hanging round to see if that projection materialised after revealing plans this week to axe up to 6,000 staff in a bid to save costs of between $700m and $800m. While employees in western markets are likely to bear the brunt of that news, it is still an indication of the trouble that the wider industry finds itself in.

Volume markets look particularly susceptible to the downturn. Gartner reckons worldwide semiconductor revenue growth in 2009 will crash by seven percentage points on its previous estimates, shaving more than $25 billion off the value of the market next year. IDC, as well, has downgraded its 2009 forecast for CPU growth despite a recent spike in quarterly sales.

The implication of this news in the Middle East is still to be seen, with some onlookers suggesting that it could lead to more stock being diverted to the region and others arguing that the credit situation isn’t strong enough for surplus quantities to be absorbed as easily as they would be in a stable environment.

Still, while the general consensus is that the Middle East market won’t be as rocked as dramatically as those in the west, it is quickly dawning on most IT providers that ‘weathering the storm’ is a term that the channel is going to become over-familiar with in the months ahead.

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