Despite overall growth, many French ICT companies face structurally low margins, price pressure and an on-going consolidation process in the market.
- Further growth, but pressure on margins remains
- Wholesalers increasingly tap into the IT services segment
- Low insolvency level, but sudden business failures may occur
The value of the French ICT market amounted to about EUR 67 billion in 2016, with the share of the IT services segment (technology consulting, software and services) amounting to about 78% and the share of the hardware segment to 22%.
The French smartphones market decreased in 2016 for the first time, with a 6% drop in volume due to a high equipment rate and lower renewals. However, the market grew 5% in value, driven by sales of top-range products with bigger screens. Sales of computers (-4% in volume) and tablets (-21% in volume) continued to decrease due to market saturation, competition from smartphones and hybrid products and a low renewal rate for tablets.
In 2017 the French IT services sector is expected to grow 3% after increasing 2.9% in 2016. IT services will remain the main driver of ICT market growth due to the development of IT externalisation and cloud computing, driving up demand for servers and IT consulting. SMACs (Social, Mobile and Analytics in the Cloud) and SaaS (Software as a Service) technologies are expected to record further high sales increases in 2017.
However, 2017 is expected to remain challenging for the hardware segment, given the highly competitive environment, price pressure and the on-going consolidation process in the market. Many smaller players face difficulties due to the potentially one-sided concentration of their customer (or supplier) portfolio and limited value added. IT hardware wholesalers increasingly try to move away from pure hardware selling, to offer more added value products and IT services in order to improve their profitability, as this offers higher revenues and better margins.
Despite overall growth, many French ICT wholesalers suffer from structurally low margins, with equity ratios often not exceeding 15%. That said small- and mid-cap players are rather resilient if they benefit from flexible cost structures, while large listed IT service groups benefit from a strong domestic market position.
We expect payment delays and insolvencies to remain low and generally stable in the coming months, and our underwriting position in the ICT segment remains generally open to neutral. Sudden business failures cannot be ruled out due to the challenging market conditions, and we have to take into account that the risks, especially for smaller ICT businesses, are still high: with limited equity bases they will struggle to absorb any further decline in margins in a market that is highly competitive and which requires ICT wholesalers to provide additional services.