Emerging Markets Chill IT Spending Forecast

February 10, 2014 Dan Burger

Just as the sizzling economic growth of emerging markets was a red hot poker for the IT industry, the cooling of those economies has caused IDC to scale back its worldwide IT spending growth projection for 2014. The Asia/Pacific (including China), Central and Eastern Europe, the Middle East and Africa regions are all witnessing devaluated currency, rising inflation, and bulging trade deficits, none of which bodes well for IT spending.

Add to that what IDC calls “the inevitable deceleration in the growth of smartphones and tablets,” and we have the basis for a corrected IT spending forecast that is lowered by four-tenths of a percent, from 5 percent to 4.6 percent. That’s somewhere in the neighborhood of $8 billion dollars being swept off the table. But the market is expected to surpass $2.1 trillion in sales, which is still a lot of money.

Things could be worse, if not for tech spending in the United States and Western Europe where infrastructure upgrades and replacements are overdue and gaining attention. During 2013 there was a 3 percent decline in server spending and a 5 percent decline in storage spending. That has turned around to spending increase of 3 percent on servers and storage looking like an accurate prediction for 2014. It would take server revenue to approximately $55 billion and storage to near $38 billion. Along with increased hardware investment comes the added bonus of IT services revenue. IDC predicts services revenue will get a 4 percent bump in 2014.

Restacking the IT spending dominos is the job of IDC’s Steve Minton, vice president of the territory known as global technology and industry research. Minton was quoted in a Timothy Prickett Morgan article published by EnterpriseTech describing the spending adjustment as yet another aftershock of the financial earthquake of 2008 combined with a few key product evolutionary occurrences.

“Ever since the financial crisis, budgets have been tighter–they froze, and then never really returned to pre-2008 levels. The emergence of cloud, for example, has allowed CIOs to put more pressure on IT suppliers and drive down prices. But related to that, cannibalization is a big part of it, too. Cloud spending cannibalizes from traditional IT services and software, often at lower price points; tablets cannibalize from PCs, usually at lower price points. Enterprises use virtualization so they have to buy fewer servers, and less often. They use storage management software to use their storage hardware more efficiently, and buy less storage (and they outsource some of their server and storage needs to the cloud, too). And partly related to all of that, as these markets get squeezed and become even more competitive, we get even more price erosion–average price per server, per TB storage, and so on–in a vicious cycle.”

As for pent-up demand for infrastructure in the United States and Europe, Minton’s perspective, accompanying the statement he put out with the IT spending forecast, shows confidence in more stable economies.

“The inevitable slowdown in the explosive pace of smartphones and tablets is masking an underlying improvement in many areas of IT spending,” he says. “Businesses in mature economies are beginning to feel more confident about the economy compared to a year ago, and this is translating into new IT investments. There’s significant pent-up demand in the US and Europe for infrastructure upgrades, capacity and bandwidth investments, and overdue replacement cycles. Many businesses will choose to fix the roof while the sun is shining in 2014.”

The IDC forecast also indicates the continuing strength of enterprise software spending, with 6 percent to 7 percent growth during 2014. Software spending was noted as a key component in the Gartner IT spending forecast that pegged overall IT spending at a more conservative 3.1 percent increase this year, but expected enterprise software spending to increase 6.8 percent.

So despite the unsettling impacts of the emerging markets, the overall picture remains encouraging as most experts do not anticipate global consequences.

“What goes up must come down, and emerging markets have been on the down slope since last year,” Minton says. “The good news is that, at the same time, mature economies have stabilized significantly. The U.S. seems to be heading in the right direction and the worst of the crisis may be over in Europe. While growth in mature economies will still lag emerging markets in most cases, the balance of risks has shifted considerably.”