Three trends for the UK ICT market

Latest 2024 report about Electronics Three trends for the UK ICT market The UK ICT sector has slowed down since a pandemic boom when many companies invested heavily in IT kit and cloud computing. After more challenging conditions last year, the year ahead continues to look subdued in the UK and globally. A weaker global economy, replenished inventories, low investment, higher inflation and interest rates are all having an effect. But there are pockets of opportunity in the UK ICT sector and growth for firms that are willing to adapt and change. [Asset Included(Id:1657036081794;Type:AT_Media_C)] Hardware distributor diversification One of the challenges we see for the UK’s hardware distributors is that they are holding onto too much stock. Supply chain challenges led to over-purchasing and now firms are struggling to sell on that stock, which is putting a strain on working capital. We’ve seen a slowdown in payments and businesses are asking for extended terms, generally of 60 days.  But these firms are evolving to overcome these conditions, and to grow their profits in what is traditionally a low-margin sector. Increasingly, they are branching out from their traditional activities to provide services including cloud offerings and cybersecurity. The demand for these services is certainly there. Businesses are going to need more and more support as they grapple with changing technologies - AI in particular.  For a sector that has traditionally focused on low-margin sales, this isn’t an easy move, as it requires investment and recruitment of people with new skills. But as they get a foothold in providing these services, this diversification is likely to be a sustained trend: box-shifting alone will not be enough. Cybersecurity is a particular sweet spot for these firms to explore. I’d expect to see increasing M&A activity as distributors bolt on smaller cybersecurity businesses to quickly provide the skills and customer base they need to make a go of it in the market. Many smaller firms, themselves struggling, will happily be taken on by bigger market players. The impact of the sector’s diversification won’t drastically change its fortunes in the short term. But we could start seeing a material shift in revenue and profit later in the year, particularly as the economy recovers.  Meanwhile, businesses will also benefit as goods purchased during the pandemic come to the end of their useful life cycle. Data centre growth Elsewhere, software, cloud, data centres and managed services remain core drivers of ICT growth. Although demand conditions are likely to remain subdued as sticky inflation and high interest rates weigh on consumer and business sentiment, at Atradius we maintain a positive outlook for these sectors. Increasing consumption of data - particularly as part of the expansion of the AI, 5G and internet of things sectors - is driving demand for data centres. And there continues to be a need for new sites, as well as skilled labour, to meet expected digital infrastructure requirements. In recent months, we’ve seen the likes of Google and Microsoft announce major data centre investments in the UK. Altnet consolidation Since the regulator Ofcom opened up competition for the rollout of a fibre network across Britain, to connect homes and businesses to ultrafast broadband, there has been an explosion of smaller, independent telecommunications networks, or 'altnets'. However, there are too many suppliers, carrying heavy debt burden, excess capacity, and with too few customers. They need to grow their customer base quickly and grow their networks to re-coup the major investments many have made. So, there is concern that some suppliers may not reach a financially sustainable level of operation before their funding runs out, leading to some businesses failing. That is if they aren’t acquired by a competitor first - there are strong industry expectations of consolidation of some of these altnets, as they seek economies of scale. So, in short, the UK ICT sector is going through a period of change – diversification and likely consolidation – as it navigates economic challenges. The sector isn’t as buoyant as it was a few years ago, but there are some bright spots ahead.