ICT

Risk assessment

Risk Assessment

Executive summary

All growth metrics are back on green in the information and communication technology sector, but disparities between the main segments of this disaggregated industry will remain strong and risks numerous. 

As the main beneficiaries of the secular trend towards digitisation of economic activities and lifestyles, IT service and software together with semiconductors will continue to outperform, with double-digit growth rates in 2024. The more mature telecommunications services and electronics manufacturing segments will record more modest growth. 

The sector as a whole is pinning its hopes on the rise of artificial intelligence. This technology, which is hungry for chips, servers, software and services needed to develop and deploy its most advanced applications, could have a powerful and lasting knock-on effect on the sector as a whole if its potential proves equal to the expectations it generates.

Growth in ICT activity in 2024 (annual % change)

Electronic equipment: modest volume growth, prices still under pressure

After two post-pandemic years marked by a sharp contraction in sales volumes, electronics manufacturers will return to better fortunes in 2024. Among the main product markets, sales volumes of smartphones, PCs, servers and televisions will increase by 4%, 2%, 2% and 1%, respectively. Corporate demand will generally remain stronger than that of consumers, whose purchasing power has since been eroded by inflation. For 2025, we expect volumes to continue to grow, thanks to the renewal cycle for products purchased during the pandemic.

Since their respective sales peaks in 2011, 2013 and 2016, the TV, PC and smartphone segments have become renewal markets. To keep growing, companies in the entry-level segment have no choice but to compete on price to gain market share. This strategy has led to a clear consolidation of the market, to the detriment of European, American and Japanese companies and to the benefit of new Chinese entrants. In the mid-range and high-end segments, TV manufacturers will continue to offer screens of ever-increasing size and resolution, while smartphone and PC manufacturers will introduce their first models specifically designed to take advantage of artificial intelligence.

However, the growth of this technology will be more tangible in the data centre server market, where sales are expected to grow by more than 10% in 2024.

Semiconductors: start of a new growth cycle

The semiconductor market is entering a new growth cycle: after contracting by 8% in 2023, worldwide sales are expected to rise by 16% to USD 611 billion in 2024, according to WSTS. Demand from the Americas (+25%) and Asia-Pacific (+17%) regions will drive most of the market's growth, while demand from Europe and Japan is expected to remain stable. For 2025, the sector expects worldwide sales to grow by around 12%, according to WSTS. All the traditional drivers of the semiconductor market are revving up. Volumes are up in the main customer markets: smartphones, PCs and servers. Prices in the critical memory chip segment, which accounts for 30% of worldwide semiconductor sales, are once again trending upwards thanks to the clearing of unsold stocks. In addition, the introduction of a new 3-nanometer etching technology by TSMC and Samsung in the second half of 2023, used to manufacture the most sophisticated chips, is also promising for the sector. Last, the use of semiconductors continues to grow in most secondary markets, such as automotive, household appliances and electrical equipment. Growth in production capacity, down from 5% in 2023 (8% in 2022), is also accelerating, and should reach 6% in 2024, with an ever-greater contribution from China (+15%), which already accounts for more than a quarter of the world market (26%). Despite growing capacities, the market shares of the Americas (9%) and Europe and Middle East (8%) regions will continue to shrink.

Beyond the specific case of Nvidia, whose stock market valuation quadrupled between June 2023 and June 2024, the impact of artificial intelligence is already clearly perceptible in the accounts of other specialists in microprocessors (CPUs), graphics processors (GPUs) and memory chips (DRAMs) used in AI-dedicated servers, and therefore in worldwide semiconductor sales. Boosted by the rise of the personal computer in the 1990s, the cell phone in the 2000s and the smartphone in the 2010s, artificial intelligence could prove to be the windfall of the 2020s for the semiconductor sector if this technology lives up to all its promises. Over-enthusiasm, however, could lead to a sharp correction in semiconductor sales, if the technology takes too long to be put to convincing, profitable use.

The geopolitical risk remains high, and has been reflected for several years in a growing number of trade restrictions between Chinese manufacturers and American and European suppliers of advanced technologies. Since October 2022, for example, the US has banned the export of advanced semiconductor and supercomputer technologies to China, and the support of US citizens for semiconductor manufacturing activities in China. Countries geopolitically close to the US, such as Japan, South Korea and Taiwan, could eventually take similar measures. These restrictions considerably complicate the supply chains of Chinese companies, resulting in lost business opportunities for Western companies. They could also, paradoxically and by necessity, accelerate the emergence of new Chinese competitors in the technologies in question. New restrictions on both sides could further increase the risks of shortages and overstocking, and thus accentuate the sector's notorious cyclical nature.

In the medium term, the industrial policies implemented by Japan, the US and the European Union could also enable them to reduce their dependence on manufacturers in mainland China and Taiwan.

IT services and software: labour constraints hamper growth and drive up costs

The IT services and software sector comprises the sub-segments of consulting, programming, data processing, managed services and software, collectively generating worldwide sales of USD 2,300 billion. With average annual growth of almost 9% over the past decade, its dynamism stems from the use of information and communication technologies by companies and public authorities to improve their efficiency.

Essentially made up of national or regional markets, like most service activities, the sector is nevertheless experiencing increasing internationalisation in the software, managed services, programming and data processing segments. Over the past decade, IT service exports from India and the US, for example, have more than doubled, and now account for over USD 150 billion a year. After big data, cloud computing and cybersecurity, companies in the sector are now focusing on the deployment of artificial intelligence technologies to further accelerate their growth.

Meeting growing demand is the main challenge facing companies in this sector, where labour is both the main cost item (between 50% and 75% of sales, depending on the segment) and the main source of competitiveness. In recent years, a shortage of qualified profiles has weighed on companies' ability to meet demand, driving up wage costs. The sector also has to contend with the growing demands of regulatory authorities, particularly in terms of data collection, hosting and security (General Data Protection Regulation in the European Union), and the control of illegal or misleading content (Digital Services Regulation).

Telecommunications: usage explodes, sales stagnate

The telecommunications sector generates annual worldwide sales of around USD 1,500 billion. Telecoms markets are national, oligopolistic and most often dominated by a former state monopoly. International groups are the exception, and most of them have significantly reduced their activities outside their home countries or regions in recent years, in the absence of economies of scale or sufficient synergies.

Driven by the rapid development of fixed and mobile networks in developed economies between 1995 and 2015, the sector is now largely mature, and profitability depends on the size and degree of concentration of domestic markets. In this respect, American operators benefit from a market that is both vast (330 million inhabitants) and concentrated (Verizon, AT&T and T-Mobile hold over 90% of the market), enabling high margins. In contrast, European markets remain national and more fragmented, and therefore comparatively less profitable.

In emerging countries, mobile telecoms deployment continues to sustain low-reward growth, due to comparatively low average revenue per user (ARPU). The number of mobile and fixed broadband subscriptions worldwide is expected to grow by 1% and 3% per year respectively over the next five years. After a decade of almost zero growth, the sector's sales are likely to increase only marginally over the same period.

Telecommunications usage, however, continues to grow at a steady pace thanks to the deployment of faster and more extensive fixed (fibre optic) and mobile (5G) networks. Data volumes exchanged on mobile and fixed networks worldwide are expected to grow by 20% and 12% respectively per year over the next five years. The challenge for telecoms operators is to monetise this improvement in service quality with consumers who are opportunistic and price-conscious (in developed countries) or budget-constrained (in emerging countries).

In the absence of sustained business growth, telecom operators will be relying on cost-cutting to boost profits. In Europe, many operators have been gradually withdrawing from their mobile network management activities through the creation of tower companies, whose capital they have often opened up. Outsourcing these activities meets the dual need to reduce the sector's very high capital intensity (capex equivalent to 15-20% of sales) and to raise funds to reduce high debt levels. As a result of major investments in network infrastructures, numerous mergers and acquisitions and share buyback programs have taken place.

Telecommunications: traffic booms, sales stagnate

The telecommunications sector generates annual worldwide sales of around 1,500 billion USD. Telecoms markets are national, oligopolistic and most often dominated by a former state monopoly. International groups are the exception, and most of them have significantly reduced their activities outside their home countries or regions in recent years, in the absence of economies of scale or sufficient synergies.
Driven by the rapid development of fixed and mobile networks in developed economies between 1995 and 2015, the sector is now largely mature, and profitability depends on the size and degree of concentration of domestic markets. In this respect, American operators benefit from a market that is both vast (330 million inhabitants) and concentrated (Verizon, AT&T and T-Mobile hold over 90% of the market), enabling high margins. In contrast, European markets remain national and more fragmented, and therefore comparatively less profitable.
In emerging countries, mobile telecoms deployment continues to sustain low-reward growth, due to comparatively low average revenue per user (ARPU). The number of mobile and fixed broadband subscriptions worldwide is expected to grow by 1% and 3% per year, respectively, over the next five years. After a decade of almost zero growth, the sector's sales are likely to increase only marginally over the same period.
Telecommunications usage, however, continues to grow at a steady pace thanks to the deployment of faster and more extensive fixed (fibre optic) and mobile (5G) networks. Data volumes on mobile and fixed networks worldwide are expected to grow by 20% and 12% respectively per year over the next five years. The challenge for telecoms operators is to monetise this improvement in service quality with consumers who are opportunistic and price-conscious (in developed countries) or budget-constrained (in emerging countries).
Short of sustained business growth, telecoms operators will be relying on cost-cutting to boost profits. In Europe, many operators have been gradually divesting their mobile network management activities through the creation of tower companies, in a move that has often involved opening up their capital. Outsourcing these activities is a response to the dual need to reduce the sector's very high capital intensity (capex equivalent to 15-20% of sales) and to raise funds to reduce high debt levels. Over the past decade, the sector has relied heavily on borrowing to finance its network investments, as well as numerous mergers and acquisitions and share buy-backs.

Last update : July 2024