Brace for the worst as crunch bites
By Paul Kunert
18 July 2008
Insolvencies and administrations in the UK channel are at a four-year high, but the real test for local IT suppliers will be whether they can survive what is predicted to be a tougher second half of 2008.
According to figures by credit reference agency Graydon – which monitors about 8% of companies in our industry – almost as many companies collapsed in the first half of the year as went under in the whole of 2007.
“It has been a very tough start to the year as the market has been relatively flat,” said Graydon’s head of intelligence Mark Ancell.
“The number of insolvencies has gone up, as have the number of insurance claims and the number of debts being collected by third parties for recovery.”
From January to June, 130 firms were liquidated or went into administration, compared with 167 in the whole of 2008. The last time figures approached this level was in 2004, when 145 businesses went under in the first six months.
The market is undoubtedly tough, but anecdotally the value of the company closures has fallen year-on-year, said Ancell, noting that in 2007 distributors lost money on the high-profile closures of Watford Electronics and Evesham.
Despite this, the current quarter is critical because it is typically the leanest of the year and could crank up the pressure on resellers that are already close to the brink.
“Many will struggle to keep the business afloat and for some the only option will be administration. But they need to keep the lines of communication open with distributors, not stick their heads in the sand when problems appear,” Ancell warned.
A BDO Stoy Hayward LLP survey indicated business failures were set to rise 18% by 2009, but the level of collapses in the technology, media and telecoms (TMT) sector, would remain relatively flat.
The “consumer spending tap” is about to be switched off, said Shay Bannon, business restructuring partner at BDO, but in the commercial space user businesses were gearing up for difficult times by investing in IT.
“They are trying to gain a competitive advantage and reduce costs because it is the age old argument that machines are cheaper than people,” he said.
However Bannon argued the reseller channel is more volatile than most firms in TMT and it is factoring in a higher number of administration or liquidations in the supply chain.
In other research BDO has said UK business confidence has reached a 16 year-low due the deepening impact of the credit crunch and rising food and utility bills.
The economic uncertainty kick-started by the crisis in the banking sector has indeed infected other markets, most notably retail and corporate enterprise and the malaise could spread further before the year is out.
The situation is summed up by Graeme Watt, president of worldwide distribution at Bell Micro: “It will be a tough market and a time when having a vigilant and highly experienced credit team comes into its own.”
