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Local ICT sector may never fully recover from COVID-19 shock

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The devastating impact of the coronavirus (COVID-19) pandemic on SA’s ICT sector is unfolding in three waves, with a full economic recovery forecast to be “highly unlikely”.

As the shock caused by the COVID-19 pandemic reverberates through the global economy, industry insiders believe that in a worst case scenario, the sector may never fully return to pre-pandemic levels, with the ramifications on SA’s digital economy expected to linger for longer than expected.

Since the introduction of SA’s strict lockdown regulations on 26 March, most South African companies have experienced devastating financial losses, influenced by supply chain disruptions, a drop in consumption and SA’s already fragile economy, with scores of employees either taking pay cuts or losing their jobs.

Adrian Schofield, production consultant at the Institute of Information Technology Professionals SA, says while the ICT sector is likely to be better off than others, due to the long-term demand for technology products, services and skills, a worst case scenario could mean a full recovery from the fallout of the current crisis may not be on the cards.

“An optimistic view is that recovery will take three years or more, but outdated policies could prevent recovery altogether.

“SA’s economy was stagnant before the pandemic, with many factors draining the funding that is required to sustain growth and development. These factors include the theft of a trillion rands through corruption, losses incurred in state-owned enterprises over decades, and an inefficient and overstaffed public service.”

Schofield explains that the COVID-19 lockdowns have resulted in both winners and losers in the local ICT sector – winners are the networks that are supporting the increased usage of digital communications by business or citizens. The losers are generally the small and medium businesses whose clients stopped operating, some of which will never re-open operations.

Schofield points out that in its weakened state, “economic recovery in the sector is always going to be tenuous, as demand for tech products and services either remains low or may not be affordable, even when there is an increased need”.

Bernard van der Walt, technology, media and telecommunications (TMT) sector lead and partner at consulting firm BDO South Africa, says with Wuhan in China being the largest producer of optical fibre and cable in the world, most of the large technology multinationals have witnessed reduced demand for their products, and the breaks in the supply chain have resulted in a ripple effect in the sector.

“Many businesses have been forced to close stores, factories, manufacturing plants and offices, and allow employees to work from home. Labour-intensive industries are the most affected by the virus and this has impacted on planned local projects, development and product releases in this sector.

“There cannot be a return to the normal – all companies must embrace digital to accelerate their offerings.”

Between January and May, there has been a significant decline in market cap of listed integrated telecommunications service companies in SA – a R63 billion drop, or 15%, adds Van der Walt.

Debt among these companies has also increased significantly at R73 billion, or 51%.

“While many sub-sectors are effected, the media and telecommunications industry, tech start-ups, and mergers and acquisitions industries are among those severely impacted,” according to Van der Walt.

An IDC study on SA’s economy shows the IT industry outlook (excluding telecom and mobile) in January 2020 was forecast to grow by 2.2%. By March, that outlook was adjusted to show negative growth of -3.7% as spending on ICT is estimated to decline anywhere from 2% to almost 7% in the worst case scenario.

Nedbank forecasts that 1.6 million jobs will be shed in SA in 2020, with National Treasury projecting that SA’s GDP rate will contract by between 5.4% and 16.1%.

Bernard van der Walt, TMT sector lead and partner at BDO South Africa.
Bernard van der Walt, TMT sector lead and partner at BDO South Africa.

Waves of recovery

Arthur Goldstuck, head of World Wide Worx and chairman of Sasfin Bank’s Digital Advisory Council, states the repercussions will come in three waves, with the last wave resulting in the digital economy plunging deeper into crisis.

“We’re seeing multiple phases of the heavy fall-out from the crisis. The most immediate has already been felt by those companies crippled by the initial lockdown. The next phase will be felt as infections escalate through the population and businesses unable to operate as a direct result, or because their customer base is coping with the crisis.

“The third phase, which is already under way, will be the impact of increased unemployment, resulting in reduced demand across all sectors and sizes of companies.”

As the economy goes into a deepening recession, spending as a whole will slow down, unemployment will worsen and the ICT sector will “go into a slump along with the rest of the economy”, Goldstuck warns.

Companies that provide the essential products, services and guidance that keep other businesses competitive may be the winners in this environment, he adds.

“But they will still have to be sensitive to their customers' pains, and make sure they are not being exploitative in any way.”

There is a silver lining

Cathy Smith, MD of SAP Africa, says due to the fact that ICT companies support other sectors, some of which have been hard hit by the crisis, the ICT sector will continue to feel the impact well into next year.

The silver lining, she adds, is that other opportunities will open up in a post-COVID-19 South Africa, requiring much closer collaboration by multiple stakeholders.

“One of the biggest opportunities is establishing a more inclusive economy built on social impact. Social entrepreneurship is gaining ground as a more sustainable and broadly beneficial business model for addressing socio-economic challenges on the continent.

“Another opportunity is how traditional businesses adapt and potentially find new ways to generate new revenue streams through the use of technology. Commercial models also need to shift because large-scale capital investments into new technologies are unlikely.”

Goldstuck concurs, noting that innovative software developers with skills in machine learning and robotic process automation will find massive opportunity in the future as more businesses, large and small, look for new ways to automate their processes and services.

“E-commerce back-end services are thriving, and we can expect many new apps and support services to emerge around e-commerce and delivery services. Companies operating in remote working and home schooling solutions will thrive and will see tremendous opportunity for online and digital services that are carefully targeted to this segment,” he concludes.

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