International channel remains shaky, says new report

US channel consulting firm, Global Touch, and financial services company, Morgan Stanley, have released their Q4 Channel Tracker report, isolating ongoing trends in the US and European IT channel.

"The mood of the market is cautious," says Denise Sangster, president and CEO of Global Touch. "If the greatest challenges for the IT industry remain economic in 2002, the survey respondents believe that recovery will take place starting in the third quarter. On the other hand, if political uncertainty becomes a key focus, then all bets are off as to this year`s performance."

The data for the report captured a full quarter of business after the 11 September attacks - "an event that further weakened an already anaemic IT market," says the report.

The report draws attention to imbalances in the IT supply chain in both the US and Europe with regard to average sales prices, revenues (or volume) and gross margins.

"When two or more of these indicators come under pressure, the system for making money gets out of balance, forcing channel partners to compensate by selling more products or changing their business models to achieve the same overall profits," says Sangster.

"Unfortunately, in today`s market, there is little chance that robust revenues will return anytime soon. With pricing and margins under pressure, the net impact is that channel partners are facing huge financial challenges, causing them to shift from `How do I sell the latest technology?` to `How do I keep my company viable and out of bankruptcy?`"

According to the report, almost all respondents noted some pricing abnormalities, with the most significant price-cutting taking place in the PC desktop and server markets. Close to 50% of US channel partners and 22% of European channel partners noted that they had seen manufacturers making special deals to capture sales in those areas.

"Our data shows that manufacturers were willing to sacrifice their relationships with channel partners in the last quarter in order to close sales," says Sangster. "This may have helped their bottom lines in the short-term, but it could have long-term consequences on the overall health of the channel structure," she warns.

While the US respondents were optimistic that the demand for PCs had hit bottom, 66% of their European counterparts indicated that an ongoing slowdown in this market had led them to revise and downgrade revenue forecasts for the first half of 2002.

According to Global Touch, demand for servers will be flat or down for the next two quarters at least.

"When will we see increasing demand and sustainable purchasing trends for a broad assortment of IT products is the $100 billion-plus question," says Sangster. "While it appears that a vast majority of channel partners expect the US economy to improve by Q3, some feel Europe may lag behind and not see improvement until 2003. Hopefully, the market will improve soon enough to avoid the potential catastrophic damage to the channel that our survey points to," she concludes.

Other key findings from the Global Touch Channel Tracker report include:

Demonstrating the overall weakness of the market, only 3% of participants in the US and Europe reported that sales were ahead of expectations. However, they both reported that inventories continue to be well controlled.

Over 66% of the participants from Europe (a 3% decline compared to Q3) and 41% participants from the US (a 23% improvement compared to Q3) reported that Q4 sales were below expectations.

Over 90% of respondents said that US Q4 sales would be flat or below Q3 sales (ending 30 September 2001), while 66% of European respondents indicated that sales were flat for the quarter.

In year-to-year comparisons for the fourth quarter (Q4 2001 compared to Q4 2000), more respondents see lower revenues than expected in Europe than in the US. This is a reversal over the prior quarter`s results when US channel partners expected lower results.

During the first quarter of 2002, US channel partners expect prices to remain "buyer friendly" or down by up to 20% in some technology categories, such as servers. In Europe, pricing is also expected to become more "buyer friendly", particularly in the printer market.

The trend of PC sales being below expectations entered Europe with close to 50% of respondents in Europe and the US now both sharing this viewpoint.

While inventories remain generally controlled, Compaq`s European inventories for desktops were rated as the highest among PC vendors, while Toshiba edged out IBM with the highest inventory of laptops.

In a year-to-year comparison, US respondents predict that revenue projections for Q1 2002 will be flat or down for all of the major PC desktop vendors, including Apple, Compaq, HP and IBM. Projections for European respondents were more positive with most expecting moderate to very strong growth for the all of the vendors except Apple. For Apple, expectations are for revenues to be flat or below 2001 numbers. The positive European outlook is important for the UK market, which ends its fiscal year in March 2002.

In laptops, a similar situation is expected in the US with flat or negative growth for Q1 2002. Results for Europe show a mix of expectations for laptop sales, with about half expecting growth and half projecting flat or declining revenues.

Almost half (48%) of respondents reported that planned US customer orders of PC servers were cancelled or postponed during Q4, a slight decrease from Q3. However, the percent reporting a similar situation in Europe doubled to 35% in Q4 compared to Q3.

In the continuing of a troubling trend for the Unix market, server sales continue to be far below expectations. This is especially true in Europe, where over three-quarters (76%) of server resellers report that sales are below what they expected. The results highlighted that Compaq was the most challenged in this category with over 50% of respondents noting that sales were flat or below expectations.

Revenue projections for the US PC server market show a downturn for Compaq and HP, with flat to negative growth for IBM. In Europe, all three vendors can expect some growth, with IBM in the best position to see revenues increase.

Epson can expect to see the most growth in sales of inkjet printers, while Xerox can expect to see a moderate decrease in sales.

In monochrome laser printers, HP, Lexmark and Canon can expect to see growth, while Xerox experiences flat sales.

HP, Lexmark and Tektronix should expect to see moderate to strong sales growth in colour laser printers, while Xerox encounters flat to moderate growth.

Global Touch`s next Channel Tracker report, covering Q1 2002, will be released in April 2002.