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Negative growth

Negative growth

The 0.6 per cent drop in the gross domestic product for the three months to December - and the subsequent fall of the Australian dollar - has sparked widespread discussion on whether Australia will slip into recession. However this news came as no surprise to the channel which has been doing it tough since September.

If a recession is defined as two negative growth quarters, the IT industry is well and truly in the throes of a market downturn that could last another six months. But companies who can ride out the slump will emerge in a stronger long-term position - if not swallowed up in the meantime by another company.

"I don't think there is any need to panic," advised Dean Calvert, principal consultant of the South Australian-based reseller and services company, DA Calvert & Associates. "At the end of the day, the way to get the economy back on track is to get back to business."

Calvert believes the important issue is not to be overly swayed by growth figures, be they positive or negative.

"If a recession is to occur, resellers should take the chance to develop their business and get primed for the growth periods. A slow market presents the opportunity for resellers to make sure they are doing things right. When they come out the other end, the market is always higher than the previous peak."

The bigger issue is a general loss of confidence in the economy and what that will do for future orders, according Ian Thatcher, lead partner at Deloitte's Technology and Telecommunications Industry Group. Thatcher believes this will lead to a spate of acquisitions within the channel.

"I think the trend towards consolidation will undoubtedly continue," he said. "Medium-sized businesses will experience cashflow difficulties and it will lead to a number of mergers. This will translate to increased pressure on dealer margins and those businesses not in good condition are going to be looking at doing deals with other companies to stay alive."

The sentiment is echoed by Les Jessop, co-director of assembly-cum-distribution company Magnafield.

"There's no fat in the computer market anymore," he said. "Events such as Siltek getting rid of half their staff is a sign of the times. The problem is if customers are not buying, vendors discount their prices, which creates a fictitious figure in the market place."

Jessop said Magnafield had been able to streamline a significant part of its business towards e-commerce in the past year - a move which is now helping the company in tougher times.

"Everyone is on the same bandwagon, but our business hasn't gone backward. We saw the writing on the wall and have been working on our business portfolio. The external rep days are gone and e-commerce now accounts for around 31 per cent of our business."

As a privately owned company, Magnafield is finding it difficult in the current market conditions, but while most companies are looking at a downturn of 35 to 40 per cent, we are only looking at a 10 per cent drop, he said. Sliding exchange rates haven't helped matters.

"We don't hedge, so the exchange rate affects the product from the day it arrives in Australia," he said. "It makes it difficult when we are quoting on large orders - we now have to include an exchange variation clause."

General consensus is that we will not see an extended recession period.

Guy Goodman, managing director of Unix systems and solutions distributor MPA Systems, feels the IT industry is a very early barometer on the broader economy, but sees this current downturn as merely a natural cycle which stable businesses will be able to ride out. He observed the downturn hitting the industry well before the economic indicators showed and believes it will bounce back before the mainstream economy does.

"IT is one of the first things to get hit by a downturn and one of the first to recover," Goodman said. "I think the industry has been turning down since January, 2000 - straight after Y2K. I thought we had shaken it out last May but now I think it will take another few quarters to clear.

"This year will be a good measure of business strength."


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