BIG YARN: The dollar down under

BIG YARN: The dollar down under

Just when the IT channel thinks it's safe to go back in the business bearpit after the GST and Olympics double whammy, along comes the tottering Australian dollar -- and the resulting increased prices.

Microsoft has lifted the cost of its business application software, operating systems, server software and development tools between 10 and 18 per cent; Apple Australia has slapped price rises of between 6 and 12.5 per cent on most Macs; and Dell Australia is hinting at an 8 per cent increase.

The immediate result is some buyer resistance but there are longer-term effects, according to Paul Connelly, managing director of distributor Daisytek. "We anticipate there'll be delays in implementations of hardware and software as the Australian dollar gets caught in the cross-currency trading," he warns.

While resigned to the falling dollar's effect on channel business, Connelly says it's a warning about more fundamental problems besetting the Australian information technology industry. "We have to look at doing more research and development in this country," he says, "and selling our innovations overseas. We have to stop being an importer of IT.

"The Federal Government is not very good at giving business incentives -- we're fundamentally a welfare country. Everyone's taxed to the hilt so no-one wants to make money.

"Australia is a small economy and we'll always be buffeted, so we have to find a way of coping because there'll always be another battle tomorrow."

Adding pluses and minuses

Microsoft's director of enterprise and solutions marketing, Alison Dodd, sees positives and negatives in the current downturn. "Suppliers of IT skills and consulting are likely to see increased overseas investment in areas such as computer games and the movie industry. This country is a hotbed of innovation and as investing here becomes increasingly good value, more people will see this worldwide.

"Yes, there is the threat of a brain drain but as has always been the case, businesses need to ensure they offer staff a package beyond financial reward, such as a strong career path and training," Dodd concludes.

Similarly upbeat predictions come from the venture capital sector. David Landers, "head coach" at ePark, a venture capital accelerator in Sydney, says the falling dollar boosts the local IT sector. "As a VC accelerator, we take Australia's most promising convergent technology start-up companies to the US. Being of Australian origin, we recognised early on the technology arbitrage opportunity that Australia offers.

"Even though we move our investee companies into the US market, we elect to maintain continuing development of the underlying technology here in Australia where the talent is every bit as good as in the US -- only it costs a lot less here and is more available. A falling Australian dollar makes this arbitrage opportunity even more attractive for us.

"The wider implication is that what works for us should work for the broader market. Technology development costs in Australia are now even less vis-à-vis the US and that is an opportunity for anyone buying technology services in US dollars."

Blame beyond the dollar

For Bruce Hockman, senior economist for Deutsche Bank, the ramifications of the nose-diving dollar are complex. "Imported inputs will be more expensive, either forcing local companies to increase prices, cut margins or try to source from domestic suppliers who will be more competitive.

"Beyond pricing there is a beachhead effect. It's harder to enter markets or create customers than it is to retain them. If the competitive impacts of the Australian dollar give us access to more markets, the opportunity to continue a presence in these offshore markets even after a lift in the dollar is quite common.

"At any exchange rate, price is rarely the only consideration. All the issues that go with quality, reliability and after-sales are always important.

"Hardware prices continue to fall in the industry as technology advances. Against this, tax on hardware has fallen under the GST but software taxes have increased. It seems that the big cycles in technology are being driven by issues other than pricing and exchange rates.

"The Australian dollar is not the only currency falling. European currencies have fallen and it is affecting the competitiveness of US producers and Asian suppliers from countries locked into the US dollar. As a result, European and other manufacturers are gaining an edge, and companies such as Dell have reported disappointing sales in Europe as a result. If this is sustained, the switch in sourcing of IT from US-dollar-based suppliers would accelerate."

The price rises due to the Australian dollar tumble are symptomatic of an almost-fatal flaw in the local IT industry, according to Tony Robey, a board member of the Australian Information Industry Association.

Basically, he says, we consume too many IT imports and don't produce enough exports. "If we don't increase our creation of IT goods and services, but continue to increase our purchases, it won't be long before we have a trade deficit in IT that no other export success will overcome."

He rejects Treasurer Peter Costello's assertions that Australia has one of the highest uptakes of new technology and a "new economy" is one which harnesses new technology "including e-commerce and the Internet in all of its industries". Robey counters this with the comment that if we were "doing all right, as the Government suggests, then we'd have a trade surplus in IT and our dollar would be at US75 cents".

This warning is echoed by George Campbell, Labor senator for NSW and Opposition spokesperson on IT. "Australia's trade deficit on IT&T has increased $3 billion under the Coalition from $6.73 billion to $9 billion in 1998-99," he says. "And the deficit on IT&T is predicted to triple by 2010-11."

Worse still, Campbell says, the Liberal Federal Government is pegging spending on the VET (Vocational Educational Training) sector at $918 million, which in real terms freezes funding for the fourth year in a row. This is at a time when demand for VET courses has grown 29.6 per cent since 1995.

Campbell is vehement in his criticism of this action. "The Federal Government talks about becoming a knowledge/innovating country, but won't better fund a key institution to achieve this."

It's not just in politics that observers are saying something's very rotten in the state of Australian IT. The perception of Australia overseas is that it's an old-world economy intent on digging things out of the ground, according to Zurich Group global chief economist David Hale. "Australia doesn't have any large, globally dominant IT companies," he says. "The IT share of your stock market is 1 or 2 per cent.

"The Government here is ambiguous about the IT sector: you've cut your tax allowances for R&D; you've allowed protectionism in the use of IT; you've got restrictions on datacasting for Internet companies."

An offshore viewpoint

In the IT industry itself, luminaries such as Sun's Scott McNealy reel off a list of the downsides: the altered capital gains tax regime is a problem; there's a lack of competitively priced bandwidth; incentives for R&D are low; and there's a lack of training to produce skilled workers.

McNealy's right: According to the Science and Technology Budget Statement 2000-01, Australia's investment in knowledge at 4.3 per cent of GDP is below the OECD average of 4.6 per cent; software expenditure is 6.7 per cent compared with 7.9 per cent, respectively; and R&D expenditure at 1.64 per cent of GDP is less than the OECD average of 2.05 per cent.

This lack of support is alarming the Australian Computer Society which is repeating its calls for the Federal Government to reinstate the 150 per cent R&D tax incentives in the wake of comments by Prime Minister Howard that increased support for R&D through taxation measures is unlikely.

President John Ridge says Howard's intimation of more funding for science and innovation is "very welcome, but the R&D syndication scheme offers more widespread benefits than funding increases. If the Federal Government wants to encourage the boards of Australian companies to invest in innovation, it must provide the incentive to enable them to realistically do so."

An even more radical suggestion has come from Ericsson's executive officer of development customer support, Ric Clark: companies should develop staff skills before they can be eligible for R&D concessions.

"Rather than having a tax incentive for R&D, the government should target efforts towards the development of competencies/skills upgrading."

World-class old economy

The irony is that, while Australia's agriculture and mining industries are the basis for our image as an "old economy", these two sectors are now world-class. Australian mining companies now develop 60 per cent of the world's mining software, and $1.5 billion in mining technology is exported annually.

Executive director of the Minerals Council of Australia, Dick Wells, sums up the urgent challenges facing the local IT industry when he warns, "If we don't spend the dollars on R&D here and maintain our leading edge, we will be buying technology in the next decade.

"In the last two years, there has been a collapse in commodity prices and production driven by technology advances, and there's been a 20 to 30 per cent cut in R&D expenditure due to that.

"We're our own worst enemy," he warns. "If this is a long-term trend, we are in trouble."

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