The new year may not bring about the hoped-for renewal

Out with the old and in with the New Year, but will 2002 be a much better time for the beleaguered IT industry?

It’s difficult to imagine 12 more difficult past months, but early indications are that 2002 probably won’t see much improvement and in fact could be worse. Computing hardware and software makers suffered in 2001 what were for many unprecedented declines in business fortunes; the result of dried-up capital budgets and deferred spending on new projects. The network communications equipment industry, in particular, was hardest hit by these spending cuts as evidenced by the revenue devastation surrounding Nortel and Lucent, among others. Can these companies recover?

Amazingly, many among the vendor community seemed blindsided by the economic woes of IT. However, the warning signs of a difficult year were clearly evident three months prior to 2001, when network equipment makers saw an alarming drop off in product demand, particularly by communication carriers, for certain product types such as fibre optic gear.

It was the tip of the iceberg. Spending cuts on network infrastructure ran deep in 2001. None appeared to be buying anything and a stark contrast to seven or eight previous years when appetites for network gear, particularly among telecommunications companies, were insatiable.

In retrospect, the massive decline in demand was the day of reckoning, which should have been anticipated. When disaster came, the vulnerability of companies like Nortel and Lucent was painfully exposed – that being an utter dependence upon North American carriers for traditional voice equipment that has caused near ruination. Where was product and customer diversity for these vendors?

Seven-plus years of market capitalization boom for these companies and many, many others evaporated in mere months. There was futility in the hope that a bottom had been reached and stability arrived. Yet, the worst was always yet to come. Industry veterans, most notably Nortel CEO John Roth, threw up their arms and simply stopped trying to forecast how low the slide could go.

Much of the year was a holding pattern as most vendors, rather than looking for growth, were quite satisfied with modest declines and absolutely euphoric when business held steady at neither growth nor decline. Everyone hoped to ride out the storm, with the assumption that spending would ultimately continue as the unabated need for infrastructure and bandwidth resumed.

The timing of the World Trade Center disaster in New York City could not have been worse. Faint hope for economic recovery in 2001 completely disappeared in light of the devastation and ensuing uncertainty surround the continuance of terrorist attacks in North America.

This defining event prompted IT market researchers, including IDC, to rethink already dour forecasts for the ensuing three years. Expectations now are that the events of Sept. 11 will prompt further IT spending declines and that the hoped-for early or mid-2002 recovery will be delayed further.

So, for example, the 7.4 per cent growth expected in 2001 for the $44 billion-plus Canadian IT market is now expected to be only about 3.5 per cent – the lowest rate of growth in many years. Market growth over the forecast period from 2001 to 2003, prior to Sept. 11, was anticipated to be an average of 8.9 per cent each year; it has been downgraded by IDC to be 5.6 per cent each year.

Hardest hit is the current $14 billion market for IT hardware, which had been expected to grow a modest 3.1 per cent in 2001 but will in fact shrink by 5 per cent. The decline comes from stumbling PC/server sales, while storage and network hardware are expect to see modest growth over the forecast period. IDC expects that growth in the hardware market won’t resume until 2003, when 4.1 per cent is forecast.

Both software and IT services show much better health than hardware. However, software is expected to realize 8 per cent growth in 2001 and 2002, contrary to previous forecasts, which suggested growth of 10.4 per cent and 15.3 per cent, respectively. IT services – consulting, integration and operational activities, among others – sees a lesser decline relative to hardware and software. IDC’s forecast for IT services growth post-Sept. 11 sees a decline from 9.7 per cent to 8.8 per cent in 2001, 10.2 per cent to 8.4 per cent in 2002, and 10.1 per cent to 9.7 per cent in 2003.

So 2002 becomes the year of FUD (fear, uncertainty and doubt). Fear that the horrendous events of Sept. 11 will be repeated, uncertainty regarding the continuance of our professional existences in gainful employment and doubt that the economic climate will get much better by the end of 2002.

While many are hoping things will improve in most facets of the economy and particularly in IT, there’s precious little current evidence, other than hope, to suggest that it will.

McLean is director of enterprise network services research for IDC Canada Ltd. in Toronto. He can be reached at