Telecom Recovery Dialled In - June 22, 2005
By Stephen S. Poloz, Senior Vice-President and Chief Economist , Export Development Canada
The spectacular crash of the global telecom sector back in 2000 has had experts wondering whether a renaissance would ever occur. But the world economy is in the best shape in over eight years, and even the telecom sector is dialled in to the recovery.
First, a refresher course in telecom history. In the wake of U.S. telecom deregulation in the 1990s there was an explosion of telecom service providers. Competition by its very nature means duplication or even triplication of capacity in some markets. This meant strong demand for telecom equipment, but with only so many subscribers to go around competition became fierce and pricing power evaporated. With interest rates rising in the background, financing for telecom equipment purchases dried up. Equipment suppliers talk even today about how the demand for equipment imploded overnight in 2000. The downturn was very deep – to illustrate, capacity utilisation in the telecom equipment business in the U.S. fell from over 90% before the crash to about 40% in 2002, a much deeper hole than the rest of the tech sector.
The good news is that the equipment that was put into place in the late 1990s is now passing its prime. It needs replacement not only because it is wearing out, but because it is being displaced by new technology. Global investment in telecom equipment is likely to exceed US$100 billion this year. On top of that, the subscribers are there. The world economy is expected to grow at a trend rate of around 4% in 2005 and 2006. The entire world is participating, and the penetration of wireless telecom use is rising steadily and expected to continue to do so.
Canada’s telecom exports destined to non-U.S. markets began to show new signs of life in 2003. But exports to the critical U.S. market did not resume growth until 2004, when there was a 6% increase. Total Canadian telecom exports were up 11% in 2004, a figure that would be even higher were it not for continued declines in global prices for telecom equipment. The level of competition has not lessened noticeably, so suppliers will face continued downward pressure on prices. In the U.S., capacity utilisation in equipment providers is still only around 63%.
Where are the big export opportunities, outside of the U.S.? The U.K. has become a solid market for Canadian exporters, with a rise of over 80% in 2004 and a further rise of 15% expected this year. Continental Europe, too, saw a 38% increase in imports from Canada, and 10% growth is forecast for this year. But the truly new business is in Latin America and in Asia. In the case of Asia, many companies are opting to invest directly and provide equipment to customers from there – a global supply chain – which means that there is even more business growth than reflected in the export numbers. But there is little doubt that the recovery is real, and EDC is forecasting 7% growth in telecom exports in 2005, and a further 5% in 2006.
The bottom line? Telecom exporters have had a long dry spell, and the fundamentals that gave rise to the crash of 2000 have not gone away. Competition for new business will remain intense, but the early signs of a telecom recovery are quite promising.
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