The Difference Between BRIC And PIIGS In ITC Markets

BRIC And PIIGS Highlights

• BRIC spending is bigger and constantly outgrows PIIGS
• The drop in ITC spending in Q2 2011 is similar to those in 2005 and 2008
• Multiple economic problems point to the start of a double-dip recession
• ITC spending is 25% of world GDP and can’t be immune
• Suppliers should focus on large, under-penetrated countries with balanced books, fossil fuel reserves and democracy
• Surviving the new downturn requires scenario planning and flexible pricing

Double-Dip Recession Coming In ITC Markets

ITCandor started its research in May 2009 – at the lowest point of the last downturn in ITC sales. Since then it has focused on sizing and forecasting the market, with a close look at the types of events that occurred in earlier periods of our industry. There has been a reasonable recovery and return to expected seasonality since then. However our market was worth some $6.3 Trillion in 2010 – around 10% of world GDP: therefore we can’t expect to get away from the effects of world economic downturn. Although there here has yet been a signal event such as Black Wednesday, September 11th, or the collapse of Lehmans, there is plenty of evidence to suggest the next downturn has begun. In case you need reminding:

• Unemployment figures in the USA continue to be worrying for the stock market
• The Great Earthquake in Japan reduced ITC spending significantly in Q2 2011 and restricted a number of unique and vital components for device manufacturers
• The Euro Crisis continues, with a number of smaller countries on the verge of financial disaster – held up by membership of the common currency and the benevolence of Germany and other large member states
• Sovereign Debt is a significant problem affecting countries who borrowed massively against future economic growth; government debt increased significantly as governments bailed out the banks in the Credit Crunch
• Austerity budgets introduced by countries with severe debt are themselves leading to job losses in the Public Sector and a downturn in spending
• The Arab Spring – encouraged perhaps by the increasing prevalence of smart phones and social media – promises more open markets in future, but has significantly reduced economic activity in affected countries; there are on-going problems in Syria and Libya of course and it looks as if the desire in many countries to overthrow dictators will extend disturbances for the indefinite future

The difference between 2011 and 2008 is that we can no longer rely on consumer demand to make up for the shutdown in corporate spending. If anything business spending on ITC had overtaken consumer spending in the last few quarters. This time capital spending is being cut in all sectors, so it may be useful to see how global companies can adjust their international sales activities to make the most of their opportunities over the next two years. The ITCandor market model tracks ITC spending in over 40 countries worldwide, so we thought it would be a good time to compare and contrast what’s been happening in BRIC and PIIGS regions to help advise our supplier customers plan for the new downturn successfully. The data included here is only a tiny part of our over all coverage – so please contact us if you need more for your planning purposes.

Market Growth In BRIC and PIIGS Regions

We don’t like the common practice of vendors to stop reporting their financial results by continent – still less those who then go on to boast about their increasing business in ‘growth’ markets. We use our expertise to estimate missing numbers of course, but believe that vendors should substantiate all relevant information to substantiate their claims. Over the last year or so 2 acronyms have become widely used, which are:

• BRIC – Brazil, Russia, India and China have been taken as the largest immature markets with strong growth opportunities; Dell for instance now always includes its revenue growth for BRIC in its quarterly results
• PIIGS – Portugal, Ireland, Italy, Greece and Spain are included in a less attractive grouping by journalists and economists; they are Euro countries undergoing exceptionally poor economic conditions

We combined our ITC spending data for each contributing country and converted to a constant Q2 2011 dollar rate in order to remove the effect of constantly changing exchange rates. Our results from Q1 2003 to Q2 2011 are shown in Figure 1. It demonstrates some interesting changes. In particular:

• There has been a reduction in spending growth rates in Q2 2011, similar to 2008, which resulted in a prolonged step decline and 2004 (indicated by the green circles in Figure 1), when recovery was fast and over all growth stayed positive in subsequent quarters
• Growth in BRIC has remained significantly ahead of PIIGS in almost all quarters
• The growth in World ITC spending typically sits in the middle, although at the beginning of 2005 BRIC growth was briefly less and there have been a few times when PIIGS growth was more
• The global nature of the ITC market is illustrated by the common changes in growth – it would be wrong to assume that investment in BRIC market sales will be immune from the new downturn

ITC sales in BRIC are larger than in PIIGS (see Figure 2). For a view of how individual country spending contributes to these regions see Figures 3 and 4.

Some Conclusions – New Recession, Old Solutions

Negative reporting has been a feature of financial analysts and the press over the last year or so, so we shouldn’t be too depressed about the long-term prospects for the ITC market. For ITC vendors preparing themselves for the double dip recession can make good money in all markets as long as they focus on a number of messages. For instance:

• The TCO advantages of Cloud Computing, especially in moving to highly-utilised shared, multi-tenancy solutions
• Helping customers to move from Cap Ex to Op Ex as a way of reducing fixed costs
• Alternative funding such as leasing, rental, or deferred charges; in the last recession IBM and others introduced special funds

We expect there to be a signal event in the near future to signal the official start of our new recession. There will certainly be new specific issues to be addressed (financial expertise in the event of the collapse of the Euro for instance). As a community we are likely to be more deeply effected this time round, as most governments have few resources and little enthusiasm to bail out the banking sector for a second time since 2008.
On a country basis we need to think of each country we operate in, analysing its size, ITC maturity, sovereign debt, natural resources and political stability. Obviously those that are large, under-penetrated, with balanced books, fossil fuel reserves and democracy are likely to offer the greatest opportunities. Growth in spending will be stronger, although not immune to the coming storm.
We intend to go on to forecast the downturn in spending across all ITC offerings and countries. Please let us know if you want to see the results by commenting here.