EY View from the top: Q2 2013

View from the top: Q2 2013

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Despite pockets of strong growth and investment around the “mobile-social-cloud” and big data analytics megatrends, YOY aggregate sales growth for the top 100 global technology companies was negative for the second quarter in a row in Q213.

This suggests that even as the macroeconomic outlook improves, particularly in developed economies, the customer-demand shift toward megatrend technologies like smart mobility and the cloud continues to accelerate, eating away at demand for legacy products and services.

That shift contributed to a 1% YOY sales decline in the second quarter for the top 100 technology companies, following a 2% YOY decline in Q113. The decline comes despite significant innovation in the technology megatrends.

However, megatrend-related innovation is helping to drive significant sales growth — 25% in Q213 — among the 25 fastest-growing public technology companies.

For the top 100 global technology companies, megatrend-related innovation disrupts their established product lines, business models or both, even as they continue to invest in and place their bets on where they want to play in the emerging megatrends-dominated technology landscape.

So, while some top 100 companies are leading innovation in one or more of the megatrends, most must catch up with leaders’ innovations. And all continue to face the “innovator’s dilemma” of deciding when, how and how fast to transition to innovative new products and services from highly profitable but increasingly outdated ones.

At the same time, surprising shifts in the macro economy may be catching technology companies unprepared. Growth is picking up in the US, Europe and Japan, but slowing in many emerging markets.
Companies across many industries have focused on emerging markets for growth for many years, but this year developed economies appear to be contributing the majority of global economic growth.

“It is far easier to say ‘Don’t be afraid to cannibalize your own products and services’ than it is to do. But customers are sending a message that is perfectly clear: they’re focused on the possibilities created for their businesses by mobile-social-cloud and big data analytics — and legacy products and services won’t do.”

Pat Hyek,
Global Technology Industry Leader, EY

Outlook for technology sector

We found in our last report, the top 100 global technology companies faced disruptions from the megatrends of “mobile-social-cloud,” big data analytics and accelerated technology adaptation, along with declining growth in emerging markets and other macroeconomic factors, and predicted stagnant times ahead.  In our last report, the top 100 continued to report negative aggregate sales growth.

Developed economies are slowly returning to growth, but for the time being, that growth is being offset at least partially by declining growth in emerging markets. And new geopolitical unrest in the Middle East threatens what net growth the global economy now has.

So it is unlikely, for the next couple of quarters, that global economic growth will provide the total demand growth necessary to overcome the top 100 technology companies’ innovator’s dilemma. That means that as customers continue to shift toward smart mobile devices, cloud services and SaaS instead of on-premise software, declining legacy sales will likely counter-balance any megatrend-induced growth.
For 2014, we anticipate a return to consistent aggregate sales and operating income growth.