China Slowdown's Ripple Effect on Foreign IT Vendors

TAIPEI (TheStreet) -- Tales about the slowdown in China's economy have maundered on for two years and we all must have priced it into our positions by now, I thought lazily this week. That jaded view was suddenly shattered by a new report.

The slowdown from breakneck growth of 9% to 10% over the decade from 2001 is squeezing real businesses, according to evidence from tech industry market research firm IDC. The American market research company forecasts IT spending growth of 9.5% in China this year, down from a previous prediction of 12.9% growth and a "sharp" deceleration compared to the past four years. Watch out if you sell PCs, servers or IT services to China.

China's GDP is supposed to grow 7.8% this year, the International Monetary Fund says. Also, just for statistical fun: IDC says worldwide IT spending will rise 4.6% this year, less than a previous forecast of 4.9% and last year's 6%.

Managers of large firms in China can cut IT spending, from the boss's new BlackBerry to replacement of an entire office-wide system, as that cost-cutting technique is "easily scalable," says Jay Jacobs, research analyst with Global X Management in New York.

"A slowdown in China is certainly putting negative pressure on revenue in the region, and in order to keep profitability I am not surprised to see a reduction in IT spending," Jacobs says, anticipating a shift from initial investment in new technology to replacement of existing systems. "This makes it easier for companies to cut back on expenditures and simply extend the life of their existing IT infrastructure."

About 10% of global IT spending takes place in China, where some 600 million people use personal computers and 1.2 billion (most of the population) have mobile phone accounts. Specifically, IDC says, China makes up 16% of world PC spending and 23% of smartphone spending.

Stephen Minton, vice president with the IDC Global Technology and Industry Research Organization, calls China's cutback on IT outlays part of a "classic spending reduction cycle" in response to the broader slowdown.

That means making PCs and servers last longer and extending upgrade periods, Minton says. He says this trend already showed in the first half of the year.

"In any market, especially mature markets (and China is now a relatively mature hardware market, at least in major cities), businesses classically react to weaker economic growth by cutting back on capital spending," Minton says in an email, adding that "'good-enough computing' takes hold until the economy stabilizes."

At the same time, IDC says in a news release on the subject, PC sales came under pressure in the first half of the year from cheaper tablets while the rapid adoption of cloud services is "cannibalizing" revenue from sales of more "traditional" software and IT services.

Decisions in China to hold back IT spending obviously weaken the power supply to global equipment sellers, the likes of Dell ( DELL), Hewlett-Packard ( HPQ), Toshiba ( TOSBF) and local favorite Lenovo ( LNVGY). Since the world financial crisis of 2008 that hobbled demand in Western countries, vendors of this type have looked to China as a turnkey solution.

"If China gets sick, the IT industry gets sick," Minton writes. "The main hope in the industry right now is that any slowdown in China will be mitigated by a pickup in mature economies, for example Europe, where the economy seems to be recovering and IT spending is picking up." But both Europe's recovery and spending pickup are happening "slowly," he adds.

Of course if tablets are edging out PCs, vendors that sell both, as most do now, would gain as they lose. And getting stormed by the cloud should lift Microsoft ( MSFT) new China business .

Other analysts expect China's GDP growth slowdown to level off and note that its two bellwether stock markets have gained over the past month after a dismal first half.

The Communist leadership aims to check inflation, manage the supply of credit and seek a balance between aggregate supply and demand, official Chinese media say. More macroscopically, it wants to steer away from depending on exports, especially as target markets have slumped since 2008, and rely more on so far reticent domestic consumer spending.

But that doesn't mean China is pulling the cord from capital investments, a core economic driver over the past 15 years. It is sure to spend lavishly on infrastructure such as airports and expressways. The government still encourages industrialization of China's historically poorer western region, meaning more factories -- a major growth engine before the slowdown. Despite hype about controlling a property bubble, I see no credible evidence of a housing downturn.

My initial seen-it-before view was premature. But property, infrastructure and other capital investments should keep China's economic growth well within positive territory, requiring not just the occasional new PC.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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