Forecast for systems design sector shows profits falling

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

Michael Burt, senior economist and author of the twice-yearly report, “Canadian Industrial Outlook: Canada’s Computer Systems Design Industry—Spring 2007,” pointed out that this prognosis is merely a backlash. 2005 saw immense profits, he said, resulting in the topping up of the first quarter of 2006, and a record year with $1.8 billion dollars profit. Burt said, “Profit is weak, but it’s only weak 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 forecast that industry profits should 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, he said.

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

But last year did see weaker sales and demand, according to Burt. He attributes the deceleration in business investment in information technology hardware and software to timing and product cycle. Said Burt: “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 strength of the Canadian dollar has had an effect on this as well. The strength of the Canadian dollar has increased the amount of 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,” said Burt.

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.

A side-effect of the forecasted IT skills shortage, wage cost pressures are an upcoming challenge for the IT industry. Burt said that he was surprised that 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 indications 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. She said, “You’re heading toward the perfect storm of declining university enrollment (in IT-related disciplines) and the retiring population…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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Jim Love, Chief Content Officer, IT World Canada

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