Pain before payoff in computer systems design industry

A Conference Board of Canada report released on Wednesday predicts profits in the computer systems design industry will fall in the upcoming year, but says it won’t be a permanent problem.

This prognosis is merely a backlash, according to Michael Burt, senior economist and author of the twice-yearly report, ‘Canadian Industrial Outlook: Canada’s Computer Systems Design Industry — Spring 2007.’

He noted that 2005 saw record profits. The spill over from this year had a positive impact on Q1 of 2006, raising the profits for that year as well.

By contrast, he said, “profit is [now] weak – but only in the near term. [In subsequent years] it will return to increases of about five per cent per year.”

Industry revenues rose by 1.1 per cent in 2006, according to the report, and should fall to $1.6-billion this year.

It also predicted that industry profits would hit a record $1.9-billion by 2011. Production growth will also stay healthy, with an increase of three to four per cent per year in the future, Burt said.

“This return to profitability shows an overall indication of a healthy industry,” said Lynda Leonard, senior vice-president with the Information Technology Association of Canada.

But last year did see weaker sales and demand, according to Burt. He attributes decreased business investment in information technology (IT) hardware and software to timing and product cycle.

“We’re coming off a high rate of growth in IT investment that is part of the replacement cycle. The phenomenon began to ramp up around the time of the Y2K scare – there was a lot of investment back then.”

Other factors influencing sales and demand include the American housing market.

The United States has a strong effect on the Canadian technology market, so the downturn in the housing market has triggered an economic slump that has slackened the demand for Canadian IT products. “The rate of growth has slowed,” said Burt.

The strengthening Canadian dollar has had the same impact. The hardening loonie has increased competition among importers, and has lessened foreign demand for exported IT products. However, according to the report, the dollar’s current weakening will allow Canadians to boost their competitiveness once more and decrease the import competition. Both these factors will drive production growth.

The above factors have resulted in weak pricing, according to Burt, who said that this is rare. “Historically, this industry has seen pretty good price appreciation. It’s unusual to see price discounting, but I expect this situation to return to normal.”

Despite weak sales, demand, profit and pricing, costs were down by 1.1 per cent, which the report attributed to falling material costs and muted wage gains.

Wage cost pressures – a side-effect of the predicted IT skills shortage – will be an upcoming challenge for the IT industry.

Burt said that he was surprised Canada had managed to keep its labour costs under control for as long as it did.

“As any industry expands, there’s usually pretty significant wage pressure,” said Burt. “This will slow profit growth.” The report said to expect a wage appreciation rate averaging four per cent annually in the coming years.

While Leonard is pleased about the report’s suggestion that wages will be driven forward in the near future (and the accompanying spike in production that will herald this trend), she is worried about the impending IT skills shortage.

“You’re heading toward the perfect storm of declining university enrollment (in IT-related disciplines) and the retiring population,” she said.

“This industry’s one-and-only natural resource is the knowledge and brain power of its employees and if there isn’t enough, that has a significant impact on growth.”

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