Economic Influences On The Australian Information & Communications Technology Sector, 2003

 

 

By Devon Andersen, CEO of AT.DEV.AT, Andersen Technology Development

 

http://at.dev.at/

 

1st March, 2003

Perth, Western Australia

 

Copyright 2003, Andersen Technology Development

 

 

Executive Summary

 

The Information and Communications Technology (ICT) sector in Australia has been responsible for significant contributions to Australia’s growth, and the trend is poised to continue. The Australian National Office for the Information Economy (NOIE) predicts that the Information Economy will contribute up to 2.6% of GDP by 2004-5 than would otherwise occur, and is considered quite a stable contribution to Australian GDP. This contribution could drop to 1.7% on a worst-case scenario if skills are too short in supply. Australian Firms and citizens will continue to benefit from the underlying ICT productivity regardless of the minor deviations (in particular with regards to the recent dot-com demise). ICT has improved the country’s GDP, critical in boosting output maintaining employment. In the longer-term, Australia is well-placed to compete globally being ranked 2nd in the OECD for e-business readiness. However, taking this opportunity will require significant work by the Government and Firms. Emphasis will need to be made on turning the ICT import dependence around and maintaining proper employment levels within the local industry, perhaps by improving local skills. Primary and secondary producers need to be encouraged by Government to increase their ICT take-up. ICT is an easily outsourced area, and whilst outsourcing will reduce domestic costs for Firms and provide better output, the cost to Australia will lead to possible increases in domestic unemployment.

 

Businesses already are flagging barriers to sustained progress in the Information Economy such as a lack of affordable broadband Internet access, continued IT skills shortages, and sustained privacy and security concerns. New ICT markets in Australia will emerge in the areas of Construction, Mining and Agriculture. Retail, Wholesale, Manufacturing and Transport are currently in the process of ICT investment adoption.  Finance, Communications and Utilities have already had significant investment in ICT, allowing them to remain globally competitive and fueling Australia’s GDP growth.

 

 

Contents:

 

Economic Influences On The Australian ICT Sector. 3

Favorable Conditions. 4

Information Technology driving Australian GDP output 4

Long Term Employment 6

Obstacles to Growth. 8

Uneven Distribution of ICT Throughout Economy. 8

Domestic IT Unemployment & Skills. 8

Outsourcing & Global Competition. 8

Uncertainty: Iraq War 9

About The Author. 9

References. 10

 

Economic Influences On The Australian ICT Sector

 

This is an economic report on the domestic and global issues surrounding Computers, Information & Communication Technology (ICT) and the resulting Information Economy; which have made a major contribution to the GDP growth within Australia. The Australian National Office for the Information Economy (NOIE) predicts that the Information Economy will contribute up to 2.6% of GDP by 2004-5 than would otherwise occur (NOIE 2003 Allen Report) and appears to be stable over the next decade. Most of the ICT used have been imported; as hardware, software and related services; and implemented according to local conditions.

 

Keynesian economics provides that GDP equals the total market value of consumption, investment, government expenditure, and net exports (McTaggart 2003). In the ICT area, consumption of goods and services, government expenditure and investment are all up. However, net exports in ICT are negative (see later discussion).

 

 

 

Favorable Conditions

 

Information Technology driving Australian GDP output

 

Australia has an excellent track record in IT use and policies. The Australian Bureau of Statistics (ABS 2000) and NOIE (NOIE 2002) provide these useful facts and OECD rankings (of 14 countries) for Australia:

  1. 64% of Australian homes either own or lease a Computer, ranked 2nd in OECD.
  2. 52% of Australian homes linked to the Internet, ranked 7th in OECD.
  3. B2C (Business to Customer) as % of GDP was 0.2%, ranked 6th in OECD.
  4. B2B (Business to Business) as % of GDP was 1.1% ranked 4th in OECD.
  5. E-Government at 50.7% of Federal information and services available online ranked 3rd in OECD
  6. E-Business readiness (environment conducive to development of e-business opportunities) ranked 2nd in OECD.

This shows the strong contribution of B2B over B2C in the domestic economy.

 

Strong growth in Computer use and Internet access (ABS 2000) exists in the household (see Figure 1) :

 

 

Figure 1: Household Computer and Internet Access, Courtesy of the ABS (2000).

 

 

 

 

Australian Firms are outspending other OECD members in Information Technology & Communications as % of GDP, see figure 2:

 

Figure 2: ITC Spending in Firms as % of GDP, Courtesy of OECD (2000)

Spending in the sector provides stimulation to the domestic Information Economy. Much of this spending in Australia is based on local services and imports, as this OECD following figure 3 shows:

 

Figure 3: Net Export of Information & Communication Technology 1997, Production minus Expenditure as % of GDP (Source RBA 2002 based on OECD data):

The RBA claims that the lack of IT export is not a problem, quoting the OECD:

“The key to benefiting from ICT [Information and Communications Technology] is to focus on policies to foster its use, rather than its production” and it identified Australia as a country that had done exactly that. Clearly the RBA focus is on maintaining the use of IT domestically, using imports and foreign investment as a source of growth. This appears to be correct, Australia’s government deficit has been negative for about the last 30 years (McTaggart et al 2003),  IT exports have been negative, yet GDP has been increasing (McTaggart) and IT has been a positive contributor to GDP.

 

The Australian Government Budget papers (2002-3) state that with regards to Australian imports, there has been a gradual shift from services to consumption and capital good imports, particularly with respect to ICT imports. They claim that this shows the rapid adoption of ICT technologies in Australia. Of all imports, ICT showed the most dramatic change from 1% of total imports in 1985-6 to about 9% of imports in 2000-1. Less services are imported, presumably as they are now being supplied domestically.

 

Figure 4: Share of Total Import Volumes, 1985-86 to 2000-01 (Source: Australian Government Budget 2002-3):

 

The investment in ICT hasn’t been across all sectors of industry, however. Financials, Communication and most utilities have led the recent use, with notable laggards in Agriculture, Mining. See figure 5 below:

 

Figure 5: Australia’s Nominal Investment in Hardware and Software as % of Gross Value Added (GVA) (Source RBA 2002)

 

 

Clearly ICT is driving the Australian economy to new levels, and it is expected to continue.

 

 

Long Term Employment

 

The Allen Report (NOIE 2003) also characterizes expected employment (if there are no dramatic changes, e.g. war) needs to increase by 30% from 2001 levels in order to sustain GDP output. Employment of IT specialists peaks in 2004 and then declines.

 

Figure 6: Expected Increase by Year of Employment of Specialists from 2001 (Source NOIE 2003)


 


They state that an Analysis scenario suggests that a sustained period of IT skills shortages (the likes required by Industry) would have a detrimental impact on output (real GDP). In this case, the output would be limited to a maximum of 1.7% GDP contribution as compared to 2.6% GDP contribution in the central-case.

 

Figure 7: With and Without Shortage of Skills (Source NOIE 2003)

 

Obstacles to Growth

 

The Australian ICT industry is performing well domestically to increase productivity, yet our skillset falls short of the rest of the world and impinges on our ability to compete globally. IT execs are under extreme pressure to cope, and invariably this is interrelated with the IT labor market available within Australia.

 

The government policy so far has address PC availability, Internet access availability, financial/banking/transaction reforms, IT skills. It also provides best practice guidelines, and consumer affairs (eg http://www.ecommerce.treasury.gov.au/html/build.htm based on conjunction with the OECD), and protection. Perhaps spurred on by the OECD the Government has done little to encourage positive ICT exports.

 

 

Uneven Distribution of ICT Throughout Economy

 

As shown in the previous Figure 5, Traditional primary and secondary industries are not heavy users of ITC (RBA 2002), service-based sectors have been the major adopters. This means that the contribution to GDP output of ICT has been uneven across the economy. It would seem that given Australia is a resource-based export economy, greater emphasis should be made on promoting ICT throughout the primary and secondary industries. Government policy intervention has so far had little regard for these industries (apart from providing rural network infrastructure) instead focusing on Individual take-up, e-commerce initiatives, and e-government (promoting e-commerce by government example).

 

Domestic IT Unemployment & Skills

 

There is fierce debate within the media/organisations (such as the Australian Computer Society) and the Government about the state of ICT unemployment in Australia. ZDNet (2003) reported in February:

 

“The 2002 ACS ICT Australian Employment Survey has revealed that unemployment in the IT industry is now nearly double the national average, running at 11.9 percent. According to the ACS an alarming 43.7 percent of unemployed ICT workers come from traditionally stable industry sectors of finance and banking.”

 

This was met with a rebuff from the Government (ZDNet 2003) in regards to the ACS, according to ZDNet:

"[This survey is] hardly the basis for any firm extrapolation," Alston said.

"…the fact is that, while the ICT labour market remains subdued relative to highs experienced during the tech boom, figures released by the Minister for Employment and Workplace Relations earlier this week show that there was a rise of 14,400 or 7.5 percent in the employment of ICT professionals over the year to November 2002, In fact, the latest figures from the Department of Employment and Workplace Relations show that unemployment of IT professionals averaged 3.8 percent in 2002".

 

It appears that there is currently great confusion and hidden unemployment numbers in the domestic ICT economy. The Business Review Weekly editorial supports the ACS findings (Featherstone, BRW 2003), however the monthly Olivier Internet Job Index appeared to show strong growth of 20% in Internet-related jobs from January to February 2003 (Pearce 2003). This probably shows an uneven distribution of employment through the domestic ICT sector.

 

 

Outsourcing & Global Competition

 

Outsourcing of ICT in Australia will continue to dominate in 2003. Regional outsourcing, stronger government leadership and vendor consolidation are among the trends likely to dominate Australia's tech industry in 2003, according to Gartner Group's Asia-Pacific office (Ferguson, ZDNet 2003).

 

Outsourcing has the benefits of reducing costs, yet it is difficult to sell to domestic Management for fear of employees losing their jobs. India is one proven example where entire areas of ICT and have been outsourced for the last 20 years, and now other countries such as Philippines, China and now Eastern Europe (including Russia) are emerging with the right outsourcing capability, with the capability to reduce costs by as much as 50% (Judge, ZDNet UK 2003). Outsourcing will lead to job losses.

 

The other drawback according to the market research firm Gartner (Frauenheim Special to ZDNet 2003) is that almost half of outsourcing operations in Australia will fail in 2003. This is mainly due to the failure of contract-negotiators and Management following the contractual progress, hinting at the lack of ICT Management skills in Australia.

 

The global market is currently outsourcing these areas (which represent external supply areas for Australian companies, and threats to local companies) according to BrainStorm Group 2003:

  1. Application integration
  2. eBusiness/Web
  3. New development
  4. Maintenance/modernization
  5. Core business applications
  6. Legacy integration

 

Uncertainty: Iraq War

 

War issues loom as a problem for the domestic and global ICT economy. Recent reports (S. Junnarkar and E. Frauenheim, Special to ZDNet 2003) have stated that according to recent surveys by investment bank Merrill Lynch:

“Although less than one-fifth of the surveyed American and European CIOs said they would slow technology spending with the start of the US-led war against Iraq, fewer still said they would increase spending even if the war were to end quickly” and that “90% of those surveyed said that such a turn of events [winning the war] would not cause them to increase their IT spending.”. This is supported by Oracle, Sun and other tech companies.

Given Australia’s involvement and exposure to the US markets the ICT sector could suffer from reduced spending.

 

 

 


About The Author

 

Mr Devon Andersen is the CEO of Andersen Technology Development. Devon manages, outsources and develops software and research projects.

Mr Devon Andersen holds a 1st Class Honours Bachelors degree in Applied Physics, and also a Multidisciplinary Science Bachelors degree in Computer Science and Physics from Curtin University of Technology, Western Australia. Devon is currently completing his Masters in Business Administration at the Graduate School of Business, Curtin University.

Devon can be contacted via the http://at.dev.at website.

 

References

 

 

McTaggart, D. et al 2003, Economics, 4th Edition, Addison Wesley, Australia

 

NOIE (National Office on the Information Economy), 2003, Australia's Information Economy: The Big Picture (The 'Allen Report')

Retrieved from http://www.noie.gov.au/projects/framework/progress/research.htm on March 28th, 2003.

 

NOIE (National Office on the Information Economy), 2002, Australia’s Position Relative to Other Countries

Retrieved from http://www.noie.gov.au/projects/framework/progress/ie_stats/CSOP_April2002/CSOP_pages/aust_relative_other_countries.htm on March 28th, 2003.

 

Australian Bureau of Statistics (ABS), 2000, Survey: Use of the Internet by Householders, Australia

Retrieved from http://www.abs.gov.au/Ausstats/abs%40.nsf/e8ae5488b598839cca25682000131612/ae8e67619446db22ca2568a9001393f8!OpenDocument on March 28th, 2003.

 

Reserve Bank of Australia (RBA), 2002, “Research Discussion Paper: Australian Use of Information Technology and it’s Contribution To Growth”

Retreived from http://www.rba.gov.au on March 25th, 2003.

 

Australian Government, 2002-3 Budget Papers

Retrieved from http://www.budget.gov.au on March 25th 2003.

 

ZDNet Staff 2003, ZDNet: ICT unemployment double national average: ACS, 20th February 2003

Retrieved from http://www.zdnet.com.au/newstech/hr/story/0,2000024989,20272235,00.htm on March 30th, 2003.

 

ZDNet Staff 2003, ZDNet: Alston slams ACS unemployment, 20th February 2003

Retreived from http://www.zdnet.com.au/newstech/hr/story/0,2000024989,20272251,00.htm on March 30th , 2003.

 

J. Pearce (ZDNet Australia) 2003, ZDNet: Aust IT jobs returning to growth: Olivier, 3rd March 2003.

Retrieved from http://www.zdnet.com.au/newstech/hr/story/0,2000024989,20272520,00.htm on March 30th, 2003.

 

S. Junnarkar & E. Frauenheim (Special to ZDNet Australia) 2003, ZDNet: Study: War could crimp IT spending, 26th March 2003

Retreived from http://www.zdnet.com.au/itmanager/trends/story/0,2000029592,20273166,00.htm on March 30th, 2003.

 

I. Ferguson, ZDNet Australia, 2003, ZDNet: Consolidation, outsourcing to dominate Aust 2003: analyst, January 21st 2003

Retreived from http://www.zdnet.com.au/newstech/enterprise/story/0,2000025001,20271426,00.htm on March 30th, 2003

 

P. Judge (ZDNet UK) 2003, ZDNet: India: Threat or Promise?, 3rd February, 2003.

Retreived from http://www.zdnet.com.au/itmanager/trends/story/0,2000029592,20271727,00.htm March 30th, 2003

 

E. Frauenheim (Special to ZDNet) 2003, ZDNet: Gartner casts doubts on IT outsourcing, 27th March 2003.

Retreived from http://www.zdnet.com.au/itmanager/trends/story/0,2000029592,20273222,00.htm on March 30th, 2003

 

Featherstone, 2003 Business Review Weekly: Editorial Comments: A look Within, March 20-26 2003.

 

BrainStorm Group, 2003. Offshore Trends – The Emerging Global Market

Retrieved from http://www.outsourcing-russia.com/kb/docs/outsourcing/o27013-02.pdf on March 30th, 2003.