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The IT sector in Australia – including software, hardware, semiconductors and related services – is dominated by foreign companies. Taking advantage of a highly skilled workforce and superb research infrastructure, global IT powers such as IBM, Canon, Cisco, Google and Infosys have built facilities Down Under for product development, digital content production, and technical assistance.

Australia not a leading producer of info tech

Yet despite its technologically sophisticated population, domestic production of information technology has not been a significant component of the Australian economy. In an October 2010 speech to the Australian Industry Group, RBA Governor Glenn Stevens downplayed the importance of positioning Australia as a producer of information technology.

 “It does not seem to have been to Australia’s disadvantage not to have built a massive IT production sector” Stevens said. “On the contrary, the terms of trade are at a 60-year high, the currency just about equals its American counterpart in value and we face an investment build-up in the resources sector that is already larger than that seen in the late 1960s and that will very likely get larger yet. In the area of information technology, meanwhile, the pace of change continues to be rapid: prices continue to fall, profits have proved very hard to come by and a number of prominent names from 2000 have disappeared. It is still better, it seems, to be a user than a producer of IT.”

Stevens referred to a 2000 article by Austrade chief economist Tim Harcourt, who “made the point that Australia would probably do best, in its production structure, to stick to its comparative advantages in minerals or agriculture or various services” rather than focusing on “new economy” industries in the IT sector.

Generally underperforming sector

Info tech is one of the smallest sectors of the Australian stock market – and compared to sectors such as energy and materials, it has not done well in the present economic climate. Michael Hevern, head of research for TraderDealer.com, evaluating year-on-year performance in 2011 Q1, noted that the info tech sector was the biggest under-performer in the last year, down 18.4%. Macquarie reported that over the past six months, the Info Tech index of the S&P/ASX 200 underperformed 62.8% of the market.

Although the sector as a whole has underperformed, there are certainly a number of bright spots in the info tech sector, including these companies:

•    Scantech (SCD.AU) closed at a new 52-week high of 41.0c. 1-day price rise of 7.9%. Its six-month relative strength (or price close today/price close 6-months ago, then ranked by percentile in the entire market) is 83.

•    MobileActive (MBA.AU) had the highest rise, soaring 0.60c (or 30.0%) on average volume (VI of 1) to close at 2.60c. 1-week volatility of 68.8%.

•    NewSat (NWT.AU) trading at 0.90c was at the highest premium of 21.2% above its 1-month Volume Weighted Price of 1.0c. 5-day price rise of 12.5%.

Used in support of other industries

Perhaps the greatest success of the Australian IT sector has been in leveraging technology in support of other industries. In a recent article, Harcourt (still the chief economist at Austrade) explained that while Australia has done well over the past decade by focusing on its strengths in “old economy” mines and farms, “the mining and agricultural sectors themselves spawned a whole group of new innovative companies, that are in effect, services exporters (or “new economy in old economy” clothes if you like).”

“The thing about technology in Australia is in all areas where we’ve done very well, in mining and agriculture, we’ve added value with a lot of technology and services” Harcourt said in a recent interview. “So if you’re in a mine in Siberia, the technology will be Australian….if you’re in a vineyard in Argentina, the technology’s likely to be Australian.”

Broadband connectivity and the future of Australian business

In the next few years, information technology is expected to transform the Australian business landscape as the nation launches the National Broadband Network. This week, Prime Minister Julia Gillard, joined by Stephen Conroy, the Minister for Broadband, Communications and the Digital Economy, spoke in Perth about how the NBN will enable small businesses in Western Australia to take part in the digital economy. It will be interesting to see what Conroy has to say after the furore over his comments on Friday about the wholesale pricing model.

The controversial ubiquitous fibre network, carrying a price tag of A$36 billion dollars, will deliver “world’s best information technology and communications infrastructure,” Conroy said last month. The plan calls for providing fiber-based broadband to 93% of Australian premises. The remaining 7% of homes will be serviced by wireless or satellite services. The NBN represents the single largest infrastructure investment ever made by an Australian government.

Australia has long been a leader in its “ability to absorb information and communications technology and use it for economic and social benefit,” the criterion of The Economist’s Digital Economy Rankings. Yet it slipped from 6th place among the 70 countries ranked by the magazine in 2009, down to 9th place in 2010. In the two categories weighted most heavily by the survey, connectivity (15th place) and consumer and business adoption (12th place), Australia wasn’t even in the top ten. According to the Organization for Economic Cooperation and Development, Australia lags behind other developed countries in its use of high-speed broadband. The NBN will give Australia a significant boost in bandwidth, making Australia even more attractive to both foreign and domestic IT companies.

Independent telecom analyst Paul Budde describes the potential impact of the NBN on the Australian economy:

“The NBN will become the predominant infrastructure, and as a utilities-based network it will also provide its services to other sectors, such as healthcare, education and business. With these sectors involved we will see the industry developing specific new business models around infrastructure, ICT and retail.”

IT drives a new era in telecommunications

Information technology has already had a major impact on the Australian telecommunications industry – in fact, many market analysts and the ASX treat information and communications technology (ICT) as a single sector. Budde says that the NBN will dramatically change telecommunications in Australia.

“Telcos will have to decide where they want to play” says Budde. “Infrastructure will largely move to NBN Co and its contractors (eg, Telstra). Companies also have the opportunity to become the ICT providers to those other sectors. The larger sectors, in particular, will create a sizeable demand for value-added infrastructure services. The first of such contracts signed in the healthcare industry offers glimpses of such a future.”

Budde predicts that the telecommunications industry will double in size, to around $80 billion, by 2020.

Although the deal has not been finalised, one of the biggest beneficiaries of the NBN project is expected to be telco giant Telstra, which has entered into an A$11 billion agreement-in-principle with the government. Under the proposed agreement, the NBN will be built on Telstra’s existing infrastructure, and the government will pay Telstra for access to its facilities, ducts and exchanges. Telstra will switch its phone and internet customers on to the NBN while closing down its cable broadband and copper network.

Not everyone wants a piece of the Telstra pie, however. Equities trader and Empire Investing partner Chris Becker, in his MacroBusiness blog, says “any sane, rational investor shouldn’t touch [Telstra] with a ten foot or even a telegraph pole.”

Becker explains, “The future risks facing TLS are immense: regulatory hurdles, the NBN structural separation, the post-NBN retail competition environment, new technology development, international competition. I think the only thing in Telstra’s favour is an irrational investor surge of interest because of the high dividend yield and the spin around the post-Future Fund selloff.”

IT is key to competitive advantage

Forrester Research defines business technology as:

“A slow but relentless revolution in which traditional technology management, historically delivered only by an IT organisation, is changing to be pervasive technology use managed increasingly outside of IT’s direct control and measured by boosting business results.”

Regardless of whether you include IT companies in your investment portfolio, it certainly pays to do a little research into how the companies you invest in are using information technology. Whether you’re investing in resources, healthcare or industrials, companies that fully integrate IT into their business strategy are likely to see better results, as IT will clearly play an increasingly important role in the global business marketplace. Next week, we’ll look at the largest industry sector by capitalisation – the financial sector.

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