US budget cuts to hit APAC tech

U.S. government plan to avert debt crisis will slow IT investments and impact Asia-Pacific ICT players, but serves as chance for them to reassess business strategies, say observers.

The U.S. government's plan to increase its debt limit and cut federal budget will negatively impact technology players in the Asia-Pacific region, but companies can also take the opportunity to finetune their business strategies and sharpen their competitiveness, noted industry watchers.

Severe budget cutbacks in the U.S. public sector would lower opportunities for services and technology sales into U.S. government agencies and other organizations by Asia-Pacific's ICT industry, Steve Hodgkinson, research director at Ovum told ZDNet Asia in an e-mail interview. At the same time, there could also be further cutbacks by large U.S. ICT companies to maintain profitability, similar to Cisco's recently announced plan to lay off about 11,500 workers worldwide.

The U.S. House of Representatives passed Monday, a plan to raise the nation's debt ceiling through to 2012 and cut government spending by about US$2.5 trillion. The deal is expected to be passed by the U.S. Senate today.

Hodgkinson added that uncertainty about the global impact of a worsening U.S. economy would no doubt impact overall business confidence in the Asia-Pacific region, especially for companies selling into the U.S. market or U.S. companies with operations in the region.

Derry Finkeldey, principal analyst at Gartner also predicted that the budget cuts phased in from 2013 are likely to "put the brakes on IT spending", especially in the "already cash-strapped State government departments".

"It is also unlikely there will be further stimulus spending to bolster IT growth in the U.S.," Finkeldey said in an e-mail. "As consumer confidence is impacted, it is expected that decisions such as auto and other large purchases will continue to be delayed, impacting retail and other supply chain industries."

No singular sector affected
The initial impact of a default would not be felt by particular IT industry verticals, according to Kevin Noonan, research director at Ovum.

"Instead, the impact is likely to be felt strongest by companies with a high exposure to financial risk and debt," he pointed out in an e-mail. "For example, access to money for venture capital and R&D may become more difficult, in the period while markets realign themselves.".

Greg Unsworth, Asia-Pacific technology industry leader at Price Waterhouse Coopers (PwC), explained in an e-mail that IT vendors with U.S.-headquartered banks and other financial institutions as major clients could see a sharper dip in their top-line revenues and profit margins, as they were under additional scrutiny to manage their cost.

"As financial hubs, both Singapore and Hong Kong could see a downward slide in the demand for IT goods and services from the usually lucrative financial services sector," he added.

However, Gartner's Finkeldey noted that business intelligence and analytics would be a top priority in many industries as they wanted to know immediately how their businesses are faring and to see changes in conditions immediately.

"This is driving interest in the uptake of technologies that have potential to deliver a leaner organization that is agile and cheaper [such as] server virtualization [and] cloud services," he said.

Asia-Pacific firms take measures
In the light of the new developments in the United States, IT vendors will continue to shift their focus on serving the demand from fast-growing economies in Asia and lower their dependency on the U.S. economy, predicted Unsworth of PwC.

He noted that significant long term deviation from major Asia-Pacific IT firms were not expected since the fundamental fiscal strength of Asian economies and the presence of growth engines such as China and India should mitigate any long term impact of the debt crisis.

Unsworth added that entrepreneurial firms could view the situation as a window of opportunity to re-evaluate and modify their business toward a more diversified, resilient model in the long term. Companies should note, however, that the direct impact the debt crisis would have on their operating model and fundamental cost structures would likely be transitory.

Gartner's Finkeldey concurred that vendors in the region can hone their competitive differentiators in the meantime, although she acknowledged that Asia-Pacific subsidiaries of U.S. firms would "feel some of that pain".

"It may present an opportunity for emerging Asia-Pacific IT firms to demonstrate commitment to local customers and explore growth opportunities that some U.S. firm will struggle to compete with," she said.

Noonan of Ovum also advised fast growing economies in Asia to reassess their exposure to the U.S. sovereign debt. "Asia-Pacific companies will need to access a regional strategy that deals with a new ongoing financial risk."

US announcement short-term relief
Hodgkinson added that the plan negotiated by U.S. President Barack Obama and Democrat and Republican leaders, was likely not to achieve dramatic turnaround in the fundamentals of the U.S. economy as its aim was to "avert the immediate crisis, beyond which the medium-term outlook still remains rather bleak".

"Given the U.S. debt levels, there is still a risk of rating revision which will cause some instability in the debt markets," said PwC's Unsworth. "This will still result in some lack of confidence in the IT sector resulting in a cautious approach to expansion and investment."

Noonan also pointed out that finding a way to meet its debt repayment was "not really a solution" as it did not provide long-term certainty for business.

However, Gartner's Finkeldey maintained that the decision had quelled some of the urgency around the economic situation in the United States and many economists are expecting only slight impact on the U.S. economy in 2011.