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

Market Overview The Malaysia IT market is projected by BMI to grow at a compound annual growth rate (CAGR) of 8% over the 2008-2013 period, despite increasing signs of the market being affected by the current global slowdown. Spending is expected to ease further in 2009, before recovering to increase to around U$6.2bn in 2013, from US$4.2bn in 2008. The effects of the difficult economic headwinds affecting the market should not be underestimated, and most vendors reported an impact on demand from all major segments by H208.

Despite a difficult economic and political situation, the market has strong growth fundamentals including low PC penetration, rising incomes and a high-tech focused national development plan. The low computer penetration rate should enable sustainable market growth over the next few years, particularly as broadband and internet penetration continues to rise. There are several areas of potential, including mini-computers, and entry-level servers for small businesses.

However, Malaysia’s IT market is distinguished by a marked digital divide, which really makes for two separate markets. In the Klang Valley area around the capital Kuala Lumpur, a mature urban population surpasses even some developed nations in terms of IT adoption on some indicators. Outside this metropolitan area, around 20mn people still lack access to basic information and communication technology (ICT) infrastructure.

Industry Developments In 2008 major public sector IT projects were cancelled or delayed as the government attempted to deal with the effects of the global economic crisis. The cut backs on the IT sector were significant as government had previously been one of the highest-spending IT verticals, accounting for between 10% and 15% of total spending.

In mid-June 2008 the government implemented a freeze on purchases on computer equipment as part of an austerity drive. The move, which also included reductions in the purchase of printing equipment, came as the global economic crisis deepened. The federal government’s austerity drive quickly spread to the state level, with the Penang state government announced that it had postponed the procurement of laptops and printers for its state assembly.

The Malaysian budget for 2009, promulgated by the government in early September 2008, was seen by the IT industry as one of the weakest for ICT for many years. However, it was hoped that the Malaysian government’s MYR7bn (US$1.9bn) economic stimulus package, announced in November, would bring some relief to the economy and to the IT sector.

Competitive Landscape PC vendors launched promotions and cut prices as the economic crisis hit. With the rise of the consumer segment in a market traditionally dominated by business and government, vendors adapted their strategies. In 2008, Dell announced a second retail partnership, with Fosa Marketing. Dell’s partnership with Fosa followed an earlier retail distribution agreement with TecAsia, which the company considered successful.

In 2008 the Malaysian government announced plans to roll out OpenOffice.org software in public schools nationwide from January 2009. In the past few years, the government has promoted an open source software
drive among government agencies. Over 10,000 seats in over fifteen government agencies were reported to have been migrated to open source software, including 2,000 at the Ministry of Human Resources alone.

The growth of outsourcing opportunities over the past couple of years, and particularly in the banking and financial services sectors, has led to new vendor investments in data centres and other infrastructures.

Local IT services giant Hei Tech Padu won a MYR32mn five-year services contract from Bank Simpanan Nasional to build an IP network Meanwhile, CIMB Bank has a MYR70mn outsourcing agreement with EDS believed to be worth at least MYR7mn a year.

Computer Sales BMI has downwardly revised its hardware sales projections for 2008 and 2009, to reflect a government austerity drive and negative business sentiment. Hardware CAGR is put at around 7% for 2008-2013, with growth easing further this year before picking up again after 2010. Overall hardware spending is expected to rise to more than US$3bn by 2013, with computer sales including notebooks and accessories at above US$2.5 bn. PC sales will be supported by the government’s push for greater broadband penetration, for which an optimistic target of 50% by 2010 has been sent. Other factors include ICT in education programmes, and a number of e-government initiatives. The government is determined to tackle the digital gap beyond the Klang Valley area, and is rolling out an extensive network of community PC centres. One of the targets of the plan is middle-income potential computer owners who have the ability to afford a PC. Such programmes, together with falling prices, are opening up the market to lowerincome tiers.

Software For 2008, software sales were calculated by BMI at US$246mn, but revenues are expected to dip to US$240mn in 2009 in line with the worsening global economy. However, to 2013 we see them rising healthily to US$355mn. Software CAGR for 2008-2013 should be in the region of 8%. With the economic crisis having an impact in both public and private sectors, most vendors were likely to experience lower demand in late 2008. Many companies, and particularly trading companies, are cutting back on non-essential systems upgrades. In the case of the public sector, the economic crisis has compounded a situation of political uncertainty, which has led to delay in some projects, even before the government launched its austerity drive in June 2008. Basic e-business applications such as enterprise resource planning (ERP) and financial are finding increasing popularity with the business market, as enterprises look to enhance productivity through automating accounting and other functions. Managed hosting is growing in popularity according to vendors.

SME Focus The government’s new MYR500mn small and medium-sized enterprise (SME) fund demonstrates that helping smaller businesses to leverage IT has become a major priority. Around 90% of Bursa Malaysia companies fall in the SME category, and these companies are increasingly being seen as a key IT vertical demand sector in Malaysia. Many are facing a tough time currently thanks to rising costs and high oil prices. At the same time SMEs need to become more competitive and have more access to information and technology. Recognising the situation, the government in its recent mid-term review of the Ninth Malaysia Plan said that SMEs should be helped more.

Indeed, the government recently remarked that it wanted to see SMEs contribute 50% of GDP from the current 32%, with the application of new technologies key to achieving this goal. PC penetration is relatively high among Malaysian SMEs by regional standards, creating potential demand for software and services. However, it has been estimated that only around 5% of Malaysian SMEs have fully automated IT and communications operations. Indeed, according to local estimates, only around 30% of Malaysian SMEs have any form of enterprise level ICT solutions, with costs remaining the biggest barrier to further penetration. It has traditionally been the case that the majority of SMEs view ICT as ‘a good thing’, rather than a necessity.

The new SME fund therefore highlights a key strategic area in the local market for vendors. A new generation of SMEs have now often had more exposure to IT and are more sophisticated in their understanding of how IT can add value, despite a number of failed implementations in the past. While most SMEs remain cost-conscious, as described elsewhere, there appears to be increasing appreciation of the value that IT can add. For example, business software vendor SAP has said that SMEs account for around 40% of its Malaysia revenues and customer base.

IT Services IT services spending, excluding telecommunications-related spending, is forecast to reach around US$1.3bn in 2009, up from US$1.2bn in 2008. The financial crisis and government retrenchment seem likely to have an impact this year, with a number of projects being cancelled or postponed. Government accounted for 10-15% of IT spending in 2007. Project size is increasing, with more projects valued at more than US$1mn and some US$100mn plus deals, notably in the financial sector. Banks are looking to streamline and consolidate data centres, and in 2007 IBM signed a landmark US$121mn deal with Saffin Bank to modernise its IT infrastructure. Among other drivers, the government is determined to help Malaysia capture a greater share of the regional outsourcing and shared services market. The popularity of the mobile virtual network operator (MVNO) model in Malaysia is creating opportunities in that sector.

E-Readiness Malaysia is developing at a steady rate on most ‘e-society’ indicators. 46% of Malaysians had internet access in 2008, while PC penetration is now more than 25%. The government is pursuing programmes to reduce the digital divide between urban and rural areas. The Ministry of Rural and Regional Development is co-operating with the Ministry of Science, Technology and Innovation and Malaysia’s IT industry association on plans to establish more community PC centres in the country this year. Nearly 2,000 such centres are already managed by the Economic Planning Unit (EPU). The programme recognises that many of those who do not own a PC at present are capable of ownership and are hoping to use the programme to draw them in.

The growing popularity of broadband after a slow start is set to be an important drive of PC penetration over the next few years. The number of broadband subscribers is projected to increase to around 11.3mn by 2013. To encourage faster penetration, the government has awarded WiMax licences to a number of service providers, including ISP Jaring. Recently Telekom Malaysia was awarded the MYR11.31bn contract to roll out a high speed broadband network. The government will invest MYR2.4bn and Telekom the rest. This money is only for the first phase and the project will be implemented over 10 years.

Author:
Mike King
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