Canadian technology firms can expect a 20 per cent profit boost this year, but a dependence on exports, falling prices and the Canadian dollar all pose a threat to the industry’s future growth, says a Conference Board of Canada report released on Thursday.
Although the profits are projected to reach levels not seen since 1998, the Conference Board report indicated that much of the growth is carried over from the industry’s performance last year, while the first half of 2006 has shown a less rosy picture.
“After experiencing strong growth over the past two years, the fortunes of the ITC sector are weakening this year,” the report says. “Real production growth will average only two per cent in 2006, after rising by an average of 5.6 per cent in the previous two years.”
The Conference Board breaks up the industry into three main components: electronic equipment, computer services and telecom services. Michael Burt, the firm’s senior economist, said the rising dollar offers one explanation for the production slide, but there are other factors as well.
“We in Canada have really focused in the components side of the industry – the semiconductors and what have you. Some of the problems that ATI was having before it was purchased by AMD might have contributed to that (production decline) as well,” he said.
The report also notes falling prices for IT equipment, which it attributes to the rapid improvements in the quality of the industry’s products. “The declines are getting smaller and we see flat prices by end of forecast period. That’s an assumption based on competitive pressures. If we see steep declines, that will really put pressure on manufacturers,” Burt said.
While IT services and outsourcing are seen as major business opportunities by many firms here, the Conference Board does not share the same optimism. “The computer and electronic product manufacturing industry is operating near capacity, and major Canadian companies have announced that future increases in production will generally take place in low-cost countries rather than in Canada,” it says. “As a result, the industry in Canada is not expected to benefit fully from global growth going forward.”
IT services is an unusual industry segment in that it has a high exposure to trade, Burt said. The dollar therefore makes it easier for foreign companies to compete, and Canada’s reliance on exports for products is an even bigger concern.
“The economic outlook for the U.S. is fairly weak right now,” he said. “That poses considerable risk for the equipment makers, if there is a downturn for demand in their goods.”
For the ITC sector as a whole, costs are expected to rise by a 5.8 per cent this year, the report said. Wage rates are also on the rise, with average weekly earnings growth accelerating to 3.5 per cent in 2005.