According to recent research from Siemens, non-bank sources of finance are fuelling investment in technology by medium-sized companies. Kari Kupila reports
One of the significant values of technology investment rates is that they provide a sensitive barometer of the corporate sector's real rate of recovery from the recent difficult economic period. In its recent forecast for 2005, the International Monetary Fund projects GDP growth rates of 3.6 per cent in USA and 2.6 per cent in the UK. France is predicted to grow at 2.0 per cent -- a slower rate than last year. Germany is positioned as the rear runner at 0.8 per cent. Despite these 2005 growth rates, new research from Siemens Financial Services -- which investigates and analyses the current state of broad technology financing in key European economies and in the US -- nevertheless shows a confident increase in technology investment, indicating a steady return to economic health.
In entering into a discussion of the detailed findings of this research, however, we must also ask how any upturn in technology investment is being financed, especially since banks throughout Europe are reported to be reducing the amount of credit extended to SMEs. The availability of finance for technology investments --- especially in a European business community that is much more highly indebted than it was ten years ago -- is also a critical factor in the barometer of economic health. So what is happening with technology spending, and what does it tell us about business confidence amongst medium firms who make up the 'engine room' of the national economy? More specifically, what is the particular meaning of the study's findings to the IT and telecoms sector?
The Siemens Financial Services research, completed in March 2005, addressed an audience of companies with a turnover between â‚-50m and â‚-300m, this being the study's definition of larger medium-sized companies. 400 FDs or senior financial managers were interviewed by telephone -- 100 in the UK, Germany, France and the US. The study looked at the broad picture of technology finance availability and usage, defining 'technology' as anything from industrial plant, to office equipment, to information and communications technology.
Overall, the research indicated that non-bank sources of finance are boosting technology investment by European medium-sized companies. Companies have invested more in technology in 2004 and intend to continue to do so in 2005. A balance of companies increased their spending on technology during 2004. The US is the clear leader with 62 per cent of medium-sized companies saying they spent more in 2004 (the UK is the clear European leader with 47 per cent reporting spending increases).
In Europe those companies spending more in 2005 intend to do so at a higher rate than those who increased spending in 2004. A balance of companies intend to continue spending growth into 2005, with average increases amongst those reporting expected further spending growth of: UK 52.3 per cent; Germany 34.7 per cent; France 39.2 per cent; US 22 per cent. This growth comes from a low base following the post-millennial downturn -- for instance, in the currently most robust European economy (the UK) IT investment fell 21 per cent between 2001 and 2003.
Technology finance is readily available for these mid-sized companies and is boosting increased rates of technology uptake, across IT, business equipment, plant and vehicles, fuelling recovery growth. Technology finance is strongly available in US, UK, France, less so in Germany. Technology finance is most easily available in France (7.74 on a scale of 1-10), with the UK (7.71) and the US (7.61) not far behind. Finance is less available in Germany (6.82 on a scale of 1-10). Although technology finance availability lags somewhat in Germany compared to the UK and France, all countries are showing positive signs in this important proxy for general economic recovery.
The readily obtainable finance which is driving technology investment, however, is not primarily available through traditional banking lines of credit. Often, lease and lease-loan packages are helping mid-sized companies escape the bank credit squeeze on unsecured lending by accessing non-bank finance. Leasing is currently the most favoured financing method for technology investment across Europe, but especially in France. Aside from cash purchases, leasing is easily the most favoured technology financing option in France, Germany and the UK, particularly France. Growth in the overall leasing market in all three countries is therefore shown to be fundamental to companies' growing capital equipment spending plans. Notably, the overwhelming majority of medium-sized firms in Europe and the US see technology investment as critical to improvingtheir competitive position and accelerating growth, despite a small proportion of companies that do not see technology as a competitive advantage.
In the post-millennial years, European IT investment went through a major downturn. The bubble of dotcom spending burst and many suppliers of the web-based software solutions and telecoms technology disappeared or were bought for a pittance. The general economic effect suppressed IT spending by all types of company, whether in countries where consumer spending cushioned the recessionary threat (UK) or in those which suffered the full blast of economic downturn (Germany and, to a lesser extent, France).
Perhaps one of the most respected analyses comes from the European IT Observatory, and it is worth briefly reviewing this body's latest figures.
Western Europe as a whole has firmly passed its IT market nadir of 2003 (minor or negative growth) to record a healthy 2.7 per cent upturn in 2004, with 4.3 per cent increases projected for each of 2005 and 2006. Of the three major economies in the region, the UK remains the strongest, recording 4.1 per cent growth in 2004, compared with 3 per cent in France and just 1.8 per cent in Germany. All three countries are projected to continue this generally upward trend in 2005 and 2006, but share the prediction of a very slight fall-off in 2006. If the market is widened to also include telecoms technologies -- a logical step given the convergence between the two areas -- the same overall pattern emerges. We suspect that this phenomenon marks the end of the surge in IT and telecoms investment that resulted from three post-millennium years of under-investment, with the market showing a slight correction as it settles into a new self-sustaining equilibrium for the rest of the decade.
Through the recent difficult economic period, the IT and telecoms industry were forced to react and find ways that helped their businesses survive the drought. Margins came under the most severe pressure, leaving a legacy now where like-for-like pricing has been permanently discounted. Moreover, newer industries have come to the fore that help organisations spread the cost of acquiring IT and manage their cash flow better. These have ranged from a substantially increased take-up of outsourcing, along with software rental, ASP and web-based service provision.
The financing of software we have seen lags behind other more tangible IT elements, but is expected to grow substantially over the next few years. Software finance has suffered from difficulties concerning capital tax allowances for software assets in leasing arrangements. This is now being overcome, for instance in the UK, by an increasingly accomodating attitude from the tax authorities. However, possible prolongation of the tax-deductible write-off period for software in Germany may produce new uncertainties in this largest of European economies. One must also point to the criticality of software finance availability for the telecoms sector. As telecoms and datacoms convergence proceeds apace, the software element of telecoms solutions is increasing, making it imperative for medium-sized firms to be able to access suitable financial options to manage their investments in this area.
In summary, our research concludes that the growing availability of non-bank finance, in particular leasing, is helping to maintain growth in technology investment amongst medium-sized European companies. Whilst different technology types vary in their ability to access suitable finance, the general picture is highly positive. It will, however, be important for non-bank finance to become available for software in the telecoms sector to support investment in convergence technologies. Germany is expected to provide a technology investment and finance picture going into 2006 which mirrors the developments that are already discernable in the UK, France and the US. n
Kari Kupila is Head of Equipment and Sales Financing, Siemens Financial Services