SA is slowly coming out of a recession, but a possible second global economic collapse could put many companies out of business, costing the sector hundreds of jobs.
The last global meltdown, which fastened its icy fingers around the world almost three years ago, resulted in at least 50 casualties in the ICT sector during 2009, double the amount of companies that folded in 2008.
Gartner puts the chances of a global double dip at between 25% and 40%, and warns CIOs to pay attention to the global economy, and have a plan in place, just in case.
The Companies and Intellectual Property Registration Office's figures indicate that more than 50 companies closed their doors last year, double the number of collapses in 2008. This year alone, several large firms have ceased to exist, among them Faritec, Square One and Dialogue SA.
This list will expand exponentially if another recession hits the country, as several companies are already under financial pressure. However, despite warning bells, some local analysts and companies do not seem to be taking the threat seriously.
Worrying signs
Commentators are already voicing concerns that SA could head into another recession if the world economy relapses out of growth.
Bank governor Gill Marcus says although SA's recovery is taking place, “it is hesitant, fragile and uneven”. She says the sustainability of the recovery “will be dependent on the global recovery in general and in Europe in particular, which is the destination for about one third of our manufactured exports”.
Tarsus Technologies CEO Pierre Spies is concerned that SA could be facing a double dip if the global economy goes back into recession. “The double dip is a big concern, but I'm not too sure whether it will be a double dip or a 2010 hangover.”
He says the last recession resulted in liquidations being “alarmingly” higher year-on-year, and a couple of hundred smaller ICT resellers either collapsed or owed money they could not repay during the past year.
In addition, as spending has not fully recovered - with companies sweating assets and government focusing on the Soccer World Cup infrastructure needs - another recession would push companies already in a precarious position over the edge, Spies says.
Companies that are teetering on the brink of collapse are those that do not have a sound financial structure, says Spies. “If you don't have a sound financial base, you will have challenges.”
Risk factors
Paul Booth, independent analyst, says although most listed companies used the recession as an opportunity to clean up cost structures and gear for growth, this may not be true of private companies that are not in the public eye.
Booth adds that companies that are dependent on large contacts could see themselves in trouble, as spending is frozen or cancelled. However, Booth says, it is difficult to pinpoint which sectors within the ICT industry could be in trouble.
Companies that are at risk are those with little or no cash flow, and market capitalisations that are not too small to be seen as collateral for raising capital, or raising funding through issuing new shares, notes Booth.
On the edge
Several companies are still trying to fight their way out of the first recession. Total Client Services, for example, made a loss in its last financial year and its cash flow took a hit, because implementation of a government contract was delayed.
Beget Holdings went from a profit to a loss in its latest results, citing depressed trading conditions. The dismal trading environment also resulted in the company having a negative cash flow from operations.
Zaptronix, which is trading under cautionary, is carrying an accumulated loss on its balance sheet, and again made a loss in the first half of its year.
The company's financial position was cause for concern for its auditors, which expressed worry at its year-end that it was not solvent. Zaptronix has also indicated that it does not have enough working capital to grow.
Wary eye
Datatec CFO Ivan Dittrich says he is not seeing signs of another recession, and the company's order book is sound. However, he explains that the company is keeping an eye out for a possible interruption in global economic growth.
“We haven't seen signs of a double dip, but that doesn't mean that it won't come,” says Dittrich. He is mindful of the fact that trading conditions could easily change four or five months down the line.
Altron CEO Robbie Venter says the company has “not seen any evidence that a double dip in the economy might be looming”. However, he says, “market conditions remain difficult and we do not expect any spectacular recovery to take place within the next 12 months”.
Venter says “volumes are holding up and our order books have shown signs of improvement during the first few months of this financial year”. However, in order to benefit from any upswing in the economy, Altron had to focus internally on restructuring and right-sizing its businesses.
The electronics and technology group is concerned about the strong rand, which makes exports more expensive, and could encourage international competitors to enter the local market.
Start to plan
Global research company Gartner warns that CIOs need to already have a plan in place to tackle a second economic downturn, as concerns about the health of the global economy are again surfacing.
“The possibility of nations defaulting on repaying massive loans, high unemployment rates, depressed housing prices, limited access to consumer and business credit, a growing belief that a sustained economic recovery may not be possible this year, and an array of other factors have all combined to shake investor confidence to its core.”
Ken McGee, VP and Gartner fellow, says the “potential for a second business downturn should be sufficient to compel CIOs to plan for another business downturn... Our bottom-line advice is to prepare the 'second recession' plan, rehearse the 'second recession' plan and hope that you never have to use the 'second recession' plan.”
Gartner VP and fellow Mark Raskino adds most people do not believe that a recession will happen. However, there is a 25% to 40% likelihood of another economic slump, he says. “We just don't think its something anyone should avoid thinking about and doing some contingency planning for in the months leading up to budgeting time.”
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