Why the tech sector is defying the recession – and what’s next

“Normally, a double-digit contraction in economic activity would have resulted in firms cutting back on their ICT spending,” says a new Westpac report on tech sector, compiled by economist Paul Clark.

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“But this time has been different with firms accelerating their use of ICT [information and communications technology] products and services that leverage off new digital technologies in order to adapt to the reality of Covid-19. In the short-term, we expect spending on ICT will moderate slightly from current levels but should remain elevated.”

One the ground, some major ICT players are definitely anticipating that moderation.

Datacom group CEO Greg Davidson recently told the Herald that from his position as the head of the largest independent IT services firm, he could see that “A lot of people spent a lot of their budget for the year on helping make remote working happen for all of their teams.

“And they’re now only wanting to commit to shorter-term, more obvious payback-type activity for the foreseeable future.”

The Datacom boss added, “Covid has changed everything. It’s caused easily the largest reprioritisation of customers’ plans that I can remember – far more so even in the GFC.”

The shift to cloud computing, which eliminates the need for spending up-front and suits remote working, has accelerated during the Covid era.

“As the pandemic raged and the New Zealand economy went into recession, many firms ramped up their spending on ICT to minimise the impacts of the pandemic on their operations and ensure business continuity,” Westpac’s report says.

“That, in turn, accelerated the adoption of subscription-based digital solutions, such as
cloud-based software and infrastructure services (including new generation data processing) as well as broadband.”

Being more flexible, cloud computing is better for coping with external shocks.

And, “For many customers, subscribing to cloud-based services is often a more cost-effective and flexible option than physically owning ICT products/infrastructure that provide similar services. Scalability refers to the ability to provide services to additional subscribers at a low marginal cost.”

While the pandemic has accelerated the digitisation of business, the report also emphasises that the services sector has become a larger and larger sector of our economy – a trend that was always going to fuel a rise in the importance of ICT.

The report notes that locally-generated ICT activity is heavily centred on software and services.

Data processing and web hosting has been the fastest-growing market segment, it says,”underpinned by the pervasiveness of the internet, the increasing popularity of cloud services, especially software-as-a-service and infrastructure-as-a-service.”

Most cloud services are hosted offshore. But, for the first time, one of the Big Three data centre/cloud computing companies – Microsoft – has confirmed plans to build a server farm in New Zealand. It will spend upwards of $100m on to build one of its “Azure” regional data centres in Auckland. And Canberra Data Centres – 50 per cent owned by Infratil – has broken ground on two data centres in Auckland’s northwest, which it says will be a $300m-plus build.

The accelerated pace of digital transformation as Kiwi firms look to mitigate the impact of Covid has been good news for some within the tech sector, the report says.

Westpac’s Clark says spending on ICT has been relatively robust as a result, and that should remain the case, although some moderation in the short-term is likely.

“With the digital genie now out of the bottle and firms more open to new ways of working, we expect that spending on ICT products like cloud computing, social networking software and collaboration platforms will continue to be buoyant,” he says.

Govt vs business vs consumer spending

Spending on ICT services in New Zealand is dominated by firms and private households, the report says.

Firms spent about $8bn on computer design services in 2019. They also spent a lot on wired and wireless telecommunications services ($1.8bn), as well as on data processing and web hosting ($0.4bn) services.

Meanwhile, households spent about $1.1bn on accessing the internet, another $1.5bn on wired telecommunications and a further $2.2bn on wireless telecommunications. Spending on wireless communications would also include expenditure on accessing the internet using mobile devices.

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Unsurprisingly, households spent virtually nothing on computer systems design, data processing and web hosting services.

The Government spends relatively little on ICT services overall, compared to private firms and households, the report says. But it adds, “That said, it still invested heavily on computer systems design services ($1.4bn) in 2019, as well as wired telecommunications ($320m) and wireless telecommunications ($230m). A further $120m was spent on data processing and web hosting services outsourced to specialist providers.

What's next

However, Clark believes the news is unlikely to be quite as good elsewhere.Even though the economy is expected to improve over coming quarters, ongoing Covid-19-related uncertainties are likely to mean slower investment in traditional ICT products and services. That includes hardware and software.

“Longer-term, however, we expect ICT spending to grow strongly across all market segments, with the export market likely to be a particular area of growth,” Clark says.

“Taking advantage of future growth opportunities will pose some big challenges.Indeed, firms in the ICT sector will find themselves being increasingly squeezed by two opposing forces.On the one hand they are going to face ever-increasing demands for new ICT products and services, while one the other hand the means of addressing them are likely to become ever more constrained.

“That is likely to lead to a sustained period of corporate activity, with firms actively merging with and acquiring others, within and across market segments”.

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