An impending recession?

We’re hearing a lot about the so-called credit crisis fuelling a forthcoming downswing in the economy, with gloomy headlines predicting a global recession. Is the channel concerned? What effects will (or would) a downturn have on the industry? Our team of channel experts are considerably less gloomy than the press…

If the media is to be believed, we’re heading for a recession fuelled by the ‘credit crisis’ – ie. financial institutions making over-ambitious loans on which they can’t collect. If this is indeed the case, what effects will it have on the IT channel?

"Like every sector of business, the IT channel will feel the squeeze as customers delay paying their bills for longer and the banks tighten up on credit and overdrafts," says Dennis Scott, commercial director of online credit checking and financial management service e-bcm. "It will make life harder and make it more important than ever to be sure you get paid."

Randall Pevin, market development director at Target Components, is planning ahead. "The marketing support services we provide for our customers helps mitigate temporary slowdowns," he explains. "If you live and die on price without supporting your customers, you tend to get hit a little harder when slowdowns of any type occur."

Michael Moritz, a partner in Californian venture capitalists Sequoia Capital, which has financed hugely-successful start-ups such as Yahoo, Google and YouTube, says there’s nothing new under the sun.

"The headlines make it seem very bad, but if you line up newspaper headlines and magazine covers about financial calamities over the last 25-30 years, or even the last 100 years, you find the predictions of the pending Armageddon are very similar," he recently told the BBC.

"It doesn’t matter whether it was the dotcom crisis in 2000, the Asian credit crisis in 1998, the stock market collapse in 1987, the 18 per cent and 19 per cent interest rises in the early 1980s or the swoon in American stock markets in the 1970s, the echoes are quite eerie."

So is there a credit crisis in the IT industry? "We certainly haven’t seen any consistency industry-wide here at Target," says Pevin. "The actions of some of our competitors suggest they’re desperate for business, but our own trade has remained healthy and our existing customer base is continuing to buy at a good pace."

Kenneth Teh, director at Edimax Technology, believes the recession will be felt on the High Street. "Online shopping has grown drastically over the past few years, and this is affecting High Street sales," he explains. "During a recession period, the end-user will buy more online to save a little money."

Scott is concerned about financing. "I wouldn’t call it a ‘crisis’ yet, but IT businesses are certainly not going to get too much help from their banks," he says. "Major distributors can fill the gap to some extent, but they will also be wary of over-exposing themselves, so it looks like retailers will soon start running out of places to go if they need to re-finance."

Perhaps surprisingly, Moritz expects no slow-down in financing start-ups. "The credit crunch is not having much of an effect on our business, particularly where we invest in small companies," he insists. "A recession can be a good time to make investments because it sorts out the get-rich-quick scam artists from the genuinely committed."

So what can the industry do to prepare for a recession, should it appear? Teh is clear. "Reduce margins to increase revenue, and the channel should invest to encourage retail to keep focussing on its current products," he advises.

Pevin thinks flexibility is the key. "It’s not a matter of the industry insulating itself," he says. "Businesses like Target which are innovative and flexible, with the appropriate structure and cost base, can adapt to changes in conditions and continue to do well. Those which are less innovative, have unwieldy cost structures or lack flexibility, will react slowly and get caught in the carnage."

"The industry’s not doing enough at the moment," Scott complains. "Channel companies should be doing more to reduce the risk of bad debts or late payments, which are a problem further down the line.

"It’s easy to be wise in hindsight and say ‘why didn’t I check the credit-worthiness of a customer that’s gone bust?’ but it’s too late by then. Retailers and resellers need to get into the habit of checking before they do they deal. Crossing your fingers does not work."

So the message is clear. Disaster can be averted, but we have to stay on the ball…

Will there be a recession?
Only a fool would fail to plan for the worst, but how harsh is the predicted downturn likely to be? "Many commentators are taking far too pessimistic a stance in my view," says Dennis Scott.

"Yes, economic growth may be slowing down, but there’s still growth and IT is probably growing at a rate significantly above that of the wider economy. Even if times do get tougher, there are positive things you can do to protect yourself against the squeeze."

Kenneth Teh also complains of media exaggeration. "The UK is not going to have a major recession, but the media is projecting a very serious picture to everyone, and this causes consumer confidence to fall drastically."

Michael Moritz is also unimpressed. "The credit crunch we’ve been going through for the last six or nine months, particularly in America and to some extent in Europe, is just another one of those periodic events that sweeps the financial markets," he says.

"We often see newspaper and magazine headlines that say ‘this credit crunch is like the 100-year flood’, but the fact of the matter is these ‘100-year floods’ tend to occur every three years or so."