Hong Kong Information Technology Report Q1 2009 - companiesandmarkets.com adds new report

Market Overview Despite current economic headwinds, BMI sees the Hong Kong IT market continuing to advance, with spending forecast to rise from an estimated US$4.33bn in 2008 to US$6.02bn in 2013. The Hong Kong Special Administrative Region (SAR) government has pledged investment in key modernisation and informatisation initiatives as part of its Digital 21 programme.

PC penetration in the territory is around 50%, which represents potential for organic growth over the five-year forecast period.

IT spending was fairly robust in 2008, even though business and consumer sentiment weakened in H208 and the stock market was 60% lower than its 2007 peak. The government and companies alike are still investing in modernisation of key sectors of the economy such as financial services, as Hong Kong strives to maintain its regional hub status. Meanwhile, the IT market should be sustained both by initiatives encouraging the integration of Hong Kong’s economy with neighbouring China to the north, and by the abolition of taxes on cross-border trade.

In 2007, Hong Kong was included for the first time in the Chinese government’s Five-Year Plan, for 2011-2015, underlining how Hong Kong’s economy is increasingly bound to that of China. In the 10 years since the handover to Chinese control, around 77,000 Hong Kong-owned or -controlled manufacturing operations have been established in the Pearl River Delta region, representing an increasing opportunity for Hong Kong-based IT companies to provide IT products and services.

Industry Developments The 2008 version of the government’s Digital 21 blueprint for information-society development identified five priority areas. The government allocated some HKD5.4bn in FY07 (ended March 31 2008) for ICT spending. The money has been earmarked by the government to improve the efficiency and quality of public service delivery.

Three veritable Hong Kong institutions have recently been undergoing major IT systems revamps.

Hong Kong’s sole railway and subway operator, MTR Corporation, was implementing one of the biggest railway IT infrastructure mergers (of similar-sized operators) anywhere in the world, following the purchase by MTR in late 2007 of Kowloon-Canton Railway Corporation (KCRC).

HSBC created a new unit called Business Solutions, the goal of which is to drive technology adoption to support new banking services. In 2008, projects have included radio frequency identification (RFID) at ‘premiere’ centres, as well as text-to-speak and remote video conferencing.

Ocean Park Corporation, operator of Hong Kong’s 31-year-old marine-themed amusement park, started a four-year IT infrastructure upgrade.

Competitive Landscape Despite being a sponsor of the 2008 Beijing Olympics, Hong Kong PC market leader Lenovo reported the slowest quarterly net profit growth in the past year in Q208. Reported Chinese market PC sales of 2.9mn units were well below analyst projections. A fall in H108 profits of 22%, and lethargic growth in global PC sales revenues of 5.1% in that period, alarmed analysts. In response to the disappointing results, Lenovo announced a restructuring programme focused on improving efficiency and on growth in emerging markets.

The focus on smaller manufacturing companies has led to the rise of Software as a Service (SaaS) in the Greater China region. NetSuite recently set up an office in Hong Kong to target the Pearl River Delta region, and it launched its Hong Kong service in September 2008. NetSuite planned to introduce its One World service in Hong Kong with subscription including customer relationship management (CRM), enterprise resources planning (ERP) and e-commerce applications at around HKD18,000 a month.

Salesforce.com is also active in the market.

Hong Kong continues to provide major IT services projects as a result of infrastructure spending on modernisation. IBM China/Hong Kong’s Global Business Services unit is acting as consultant to MTR in its IT infrastructure merger following the acquisition of KCRC. Meanwhile, Cisco Systems’ regional IT services arm won the contract to map out the four-year IT infrastructure revamp of Hong Kong’s premier theme park, Ocean Park.

computer Sales According to BMI forecasts, the computer market (including PCs and notebooks) will be worth US$1.66bn in 2009, up from an estimated US$1.56bn in 2008. Hong Kong spending on computer hardware did not appear to have been too affected by the economic downturn in 2008, but BMI anticipates that growth will ease in 2009 before recovering from 2010. Hardware revenues are forecast to increase, in US dollar terms, by a compound annual growth rate (CAGR) of 6.8% during 2008-2013, with growing broadband penetration helping to support growth in the consumer segment. The Closer Economic Partnership Agreement with mainland China is continuing to expand horizons for smaller enterprises and encourage investments in IT. Meanwhile, a projected 23.6% expansion in the number of broadband subscribers over the forecast period will provide an ongoing boost to the consumer segment, with the growing popularity of broadband and wireless applications.

Software Software sales were worth an estimated US$260mn in 2008, according to BMI estimates, but were expected to decline to US$246mn in 2009. Hong Kong boasts one of the most advanced software markets in the region, with software accounting for an estimated 6.0% of IT revenues in 2008. The territory has long been an important market for new launches of packaged software products. The current economic crisis may lead some companies to cut IT budgets or defer systems updates. Other companies, however, may see IT as a way of bringing greater efficiencies and increasing competitiveness in difficult times.

Beyond basic ERP applications, growth opportunities include CRM and business intelligence. As vendor attention turns to smaller companies, the Software as a Service (SaaS) model is enjoying increasing popularity.

IT Services In 2009, the IT services sector is projected to grow to a value of about US$1.37bn, from an estimated US$1.30bn in 2008. IT services CAGR is expected to be around 7% in 2008-2013, with a trend towards larger outsourcing projects in both the public and private sectors evident over the past couple of years.

With sweeping lay-offs across Asia announced by Citigroup and other banks, IT budgets could be expected to be cut. However, some vendors have reported continued interest from financial services companies, which are now looking at IT as a key element of their strategy for increased operational efficiencies. Regulatory compliance will also continue to drive IT spending.

E-Readiness The narrowband internet user penetration rate stood at an estimated 57.9% in 2008, and was expected to grow fairly slowly to 61.0% by 2013, owing to the growing popularity of broadband. The number of users is forecast to reach almost 4.6mn by the end of the forecast period. Hong Kong’s international bandwidth prices should continue to decline over the next few years, giving a further boost to the sector. In 2008, the number of broadband subscribers was estimated at just under 2.1mn; this is expected to rise to nearly 3.0mn by 2013.

Hong Kong is strengthening its Wi-Fi strategy as it attempts to keep up with regional leaders such as Singapore and Taiwan. The Hong Kong government has recently committed another HKD220mn over two years to the deployment of a community Wi-Fi network that will serve more than 200 public venues.

These are to include government offices, libraries, and major cultural and recreation centres. Some venues in Hong Kong, such as Cyberport and Hong Kong airport, already have Wi-Fi.

Digital 21 In September 2004, the Hong Kong government set up a new Digital 21 Strategy Advisory Committee (D21SAC) as its main advisory board on IT and related matters. Chaired by the commerce, industry and technology secretary, the committee advises the government on strategies and measures to further the goals and objectives set out in the Digital 21 Strategy. The D21SAC replaced its predecessor, the Information Infrastructure Advisory Committee (ILAC), as the highest-level government advisory body on IT matters. Under the current phase, the focus is on service quality, including the consideration of lower pricing for e-services and an increasing emphasis on CRM. Other ongoing initiatives under the strategy include promoting the Cyberport and the Hong Kong Science Park more aggressively through trade promotion offices. In December 2007, the government outlined its Digital 21 plan for 2008.

Cyberport The Cyberport was designed to provide the city with a major regional hub that would attract leading IT companies and professionals. The first phase of the HKD13bn project, developed by local company PCCW, was inaugurated in November 2001. After the science park opened in June 2003, it came under criticism for having failed to attract enough tenants to fill the 38,000m2 of office space. This was mitigated slightly when the Dutch electronics firm Philips agreed to rent a floor, and subsequently when Microsoft announced it was moving its 250 Hong Kong-based employees there. However, the high-tech blue-chip companies seem to have lost interest, with commentators pointing to the lack of a mature venture capitalist (VC) community, favourable e-government policy, or even ‘entrepreneurial spirit’. As the Cyberport does enjoy some advantages, including a favourable location and proximity to the vast mainland market, there is increasing demand for the government to revive the project.

Author:
Mike King
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