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Impact of the new IT rules and regulation on economic growth and businesses - EY - China

New rules and regulations on IT and fair competition

Impact of the new IT rules and regulation on economic growth and businesses

  • Share

Figure 6: Economic impact model flow

 

Figure 7: Top 15 US trading partners for imports, 2011

Source: US Census Bureau, BSA, estimates from industry experts; EY analysis
32 Source: BSA; estimates from industry experts

Figure 8: Manufacturing value chain and its key functions

34 Source: Selected figures from Gartner; EY analysis

Figure 9: Examples of potential opportunities for IT service providers

Source: Various IT service providers; EY analysis

The impact on overall manufacturing costs is not expected to be substantial enough to influence overall cost trends and composition.

The introduction of the UCA and similar IT legislation is not expected to have significant impact on a country's macro-economic performance.

The introduction of UCA and similar IT legislations may affect four areas: GDP growth, manufacturing overhead/costs, global manufacturing export distribution and US manufacturing import distribution.

A high-level economic model (Figure 6) was developed to analyse the possible impact in the four areas as described. The model was restricted to countries and territories in Asia with relatively large manufacturing industries, namely China, India, Indonesia, Malaysia, the Philippines, and Vietnam. Turkey was also included.

As a result of the UCA and similar legal IT legislation, manufacturers may decide to increase their IT spending to ensure compliance and to avoid potential risks.

This in turn leads to an increase in IT spending within the economy.

Analysis shows that projected nominal GDPs may grow at a high rate for some countries/territories in the next few years, and the increase of manufacturer IT spending as a result of the UCA, or similar legislations, is not expected to have a significant impact on nominal GDP.

The quantum of IT spending is considered to be fairly insignificant when compared to other cost components (such as labour costs)5. Therefore, the impact on overall manufacturing costs is not expected to be substantial enough to influence overall cost trends and composition.

This impact is unlikely to affect other factors that may be cost-driven6.

Potential impact on trade import distribution in the US

An increase in manufacturer IT spending is unlikely to directly result in price increases of US imports.

Hence, the impact of the UCA and similar legislations can be expected to be more direct. This would also imply that it would be advantageous for a manufacturer to ensure compliance to secure future manufacturing contracts from partners in countries with legal IT legislation in place.

Figure 7 highlights a few factors:

  • Rate of unlicensed software use: For the majority of the top import partners, the UCA and similar legislation are unlikely to have a significant impact due to the relatively low rate of unlicensed software use within the country.
  • Manufacturing-related imports: Countries that have a high rate of unlicensed software use may not necessarily export manufacturing-related products to the US.

Currently, there is no quantifiable evidence to prove that US import trends from selected countries will be affected by the UCA and similar legislation, but this may change in the future.

This depends on several factors – such as the importers’ risk appetite and availability of substitute imports, legal activity resulting from UCA and related legislations, percentage of a country’s exports that consist of manufactured products.

How the rules affect the manufacturing value chain

The expected impact for players along the manufacturing value chain can come in the form of potential benefits, such as increased competitive advantages, cost and time savings, improved security and financial advantages; while the costs are likely to arise from the demand for compliance and legalization of IT.

Players that are adjacent to the manufacturers on the manufacturing value chain are most likely to see the greatest impact.

New rules offer opportunities across the IT industry

For IT users

Being in line with the current (and future) IT rules and regulations will require a company’s commitment to using legal IT, as well as initiatives to educate stakeholders about the pitfalls of failing to do so – all of which come at a cost.

However, a company can look at the costs as a form of investment to realize potential long-term benefits, such as:

  • Cost and time savings: Having an automated, consolidated software asset management system that can help reduce software licensing and support costs, as well as reduce the time spent on tracking and updating software licenses
  • Competitive advantages: Having competitive advantages over companies that do not use legal IT in their business operations, as foreign partners are more likely to work with companies that use legal IT in their business operations
  • Improved security: Avoiding security risks from using illegal IT and preventing business disruptions as a result
  • Financial considerations: Avoiding potential financial penalties from the use of illegal IT – some countries view the use of illegal IT as a form of tax evasion, which can incur heavy financial penalties if discovered. In addition, legal costs can be significant if a lawsuit were to be brought against a company as a result of a law such as the UCA

For IT service providers

Players in each category of the IT ecosystem should now see direct implications and opportunities, including IT service providers, to extend their existing services to meet requirements for compliance with legal IT legislations.

Consultants should conduct training program to provide the aforementioned services, particularly in countries where manufacturers are more likely to be affected by legal IT legislations.

Also, there may be a third party certification organisation to issue proof of legal usage of IT products for companies’ IT infrastructure, as well as an internationally-respected and recognised body to provide a “whitelist” service.

That would allow trade partners to perform background checks on manufacturers regarding compliance matters.


5 Analysis shows that IT spending is not expected to exceed 3% of manufacturing output (value added) as a result of the UCA. Compared to labor costs, which typically make up 30% - 40% of manufacturing output (value added), the quantum of IT spending can be considered to be fairly insignificant
6 Such as raising product prices to account for higher IT spending


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  • Stephen Y. Lo 
    Asia Pacific Technology and Telecommunications Industry
    Advisory Leader
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