Manufacturing slowdown may cause downtime in Indian IT industry

The manufacturing segment, which has been the growth driver for the Indian IT industry, is likely to hit the slow lane.  This is because of the ongoing trade war between the US and China, apart from slowdown concerns in countries such as Germany and the UK.

In the June quarter of FY20, revenue from this segment grew faster than other key verticals for the top Indian IT players. According to a report by Spark Capital, in the June quarter, revenue from the manufacturing vertical grew 3.6 per cent sequentially for the top six domestic IT companies.

Compared to this, the banking, financial services and insurance (BFSI) sector saw sequential growth of 0.6 per cent, and retail and CPG vertical witnessed a growth of 0.4 per cent in Q1 of FY20. 

Revenue growth in the telecom vertical was at 0.5 per cent, while energy and utilities witnessed a growth of 0.9 per cent. The top six domestic firms include TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra and L&T Infotech.

“Technology spend by manufacturers has definitely picked up in the recent quarters due to focus on Industry 4.0 apart from emergence of new age technologies such as Internet of Things (IoT) and machine learning, among others,” said Pareekh Jain, founder of Pareekh Consulting and an IT outsourcing advisor. 

“However, events like rising trade tensions between the US and China and slowdown fears in the global economy can put brakes on the discretionary spends related to digital services,” he added. Reports suggested that the Sino-US trade war has rattled much of the global automotive supply chains and affected big automakers including Volkswagen, Hyundai Motor Co and Honda Motor Co which have supply chain operations in China.  Apart from trade war, economic contraction in two major European economies like UK and Germany have also raised concerns. 

While GDP growth in UK contracted 0.2 per cent in April-June quarter, the contraction for Germany stood at 0.1 per cent during this period. 

Major manufacturers like Rolls-Royce, Volkswagen, Daimler AG, Siemens, BMW Group, Bosch, and Continental AG operate in these two nations, which spend billions of dollars as their technology spends.

“There is a high likelihood that we will see revenue growth decline for the IT vendors as manufacturing clients cut back on spending. A no-deal Brexit, uncertainty in Europe, the US-China trade war, not to mention the upcoming US election will all impact the revenues of enterprises in this segment. The first area where we have historically observed spending cuts has been IT,” said Hansa Iyengar, senior analyst at London-based Ovum Research. 

“We can anticipate at least 2-3 quarters of weak show from this segment,” he added. 

Experts said firms like HCL Technologies and Tech Mahindra would face larger impact on their revenues from this vertical in case of any slowdown.

In the quarter ended June, manufacturing segment contributed 19.9 per cent to HCL Tech’s total revenue while Tech Mahindra drew around 19.4 per cent revenue from this business segment. During this period, manufacturing vertical contributed 7.9 per cent for Wipro, while it was 9.6 per cent for Infosys.