CLSA Baratte

Immediate outlook for technology spending bleak

Recessionary conditions in the West are impacting consumer spending on technology and emerging markets will take some time to compensate, according to CLSA's Nicolas Baratte.
Tablets, a growth item (AFP)

Overall consumer spending on technology after the financial crisis has been flat, resulting in an overhang of inventory for manufacturers at the end of the second quarter this year. As is the case for a number of industries, emerging markets are the only bright spot with consumer spending staying flat or, in select cases, increasing. The total technology spending in emerging markets has climbed at a compound annual growth rate (Cagr) of 7.2% since 2002, as opposed to a negative figure for the US and Europe over the same period.

But emerging markets cannot, as yet, compensate for the decline in consumer spending in developed countries and the result of this dip in demand is particularly evident in Taiwan, the world’s centre of new-technology product manufacturing. Technology product sales in Taiwan have declined year-on-year based on data for the period between January and August.

People do not see enough exciting product innovations to convince them to spend money, explained Nicolas Baratte, regional head of technology research at CLSA, with respect to the overall lack of growth in the consumer market. Baratte was addressing media at the firm’s annual Investors’ Forum in Hong Kong last week. His forecast for the traditional segments in the industry verged on pessimistic, with a forecast growth of 10% for televisions until 2012 and essentially no growth for desktops, notebooks and feature phones until 2014.

Three-month average sales at US electronics and appliance stores declined by around 2% year-on-year in July, which is not surprising when juxtaposed against a high unemployment rate. Three-month average sales of eurozone household equipment declined by 1%.

Emerging markets have caught up with developed countries in terms of total computer sales this year and Baratte expects these markets to account for 60% of global sales by the end of 2012, compared to just one-third in 2004.

“The potential for penetration of tablets in emerging markets is very interesting,” said Baratte, highlighting the future for small laptop computers in developing countries.

The penetration rate will increase to 80% if the tablet cost falls to two weeks of income (WOI), according to an Intel report, from current levels of six WOI in China, 31 WOI in India and five in Eastern Europe. The correlation between weeks of income and sales is immediately visible with penetration rates standing at 18%, 4% and 30% respectively in China, India and Eastern Europe. Intel forecasts that penetration in China will increase to around 40% by 2015.

Baratte argued that innovation and productivity will drive unit prices down, which will in turn trigger an increase in consumer spending.


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