Hong Kong Information Technology Report Q2 2008

Market Overview BMI sees the IT market continuing to enjoy the positive effects of government-driven ICT projects, increasing cross-border trade, and investment in key verticals such as financial services and logistics. The economy is performing well, and the knock-on effects of closer co-operation with booming China continue to provide a boost to the IT spending in the territory. Overall, the domestic IT market is forecast by BMI to increase from US$3.9bn in 2007 to around US$4.9bn in 2012, at CAGR of nearly 5%.

Hong Kong's future is increasingly tied-up with relations with the mainland. In 2007 Hong Kong was included for the first time in the Chinese government's Five Year Plan, for the period 2011-2015. Going forward, the IT market will be sustained by initiatives encouraging the integration of Hong Kong's economy with its large neighbour, and the abolition of taxes on cross-border trade. Hong Kong's small and medium-sized companies (SMEs) are increasingly investing in new applications to help them manage trade with the mainland.

With the aim of defending Hong Kong's status as Asia's 'wired city', the government is also continuing to pledge spending on key ICT initiatives as part of its 'Digital 21' programme. The Hong Kong SAR government has revealed that some HKD5.4bn has been allocated in the 2007-2008 financial year for ICT spending. The economy is also looking quite robust. However, while consumption is set to remain strong, a softening of external demand for Hong Kong exports is a downside risk to growth.

Industry Developments The Hong Kong SAR government has recently announced the 2008 goals for its Digital 21 Strategy, the main blueprint for ICT strategy in Hong Kong. The strategy was first launched in 1998 with the aim of promoting Hong Kong's development as Asia's 'wired' city. In the 2008 version, the overall vision is of government continuing to play a significant role as a user, supporter and facilitator of ICT and its applications.

The government has also allocated some HKD5.4bn in the 2007-2008 financial year for ICT spending.

The money has been earmarked by the government to improve the efficiency and quality of public service delivery. In one initiative the SAR government has decided to invest HKD100mn on having local telecoms company PCCW provide Wi-Fi services in about 350 government venues.

Competitive Landscape With the growing popularity of broadband and wireless applications driving PC sales in the consumer segment, Lenovo is the leader in the PC and notebook market in Hong Kong in terms of both shipments and value. The company has around one quarter of the market, ranking ahead of main rivals like HP, Dell and Acer. Meanwhile, in 2007, US rival Dell chose Hong Kong as the location for its regional launch of its two new low cost Vostro PCs.

The SMB market is another vendor focus, and IBM has placed solutions for small and medium businesses at the heart of its Hong Kong growth strategy for 2008. In a recent briefing for Hong Kong analysts, the company said that it would concentrate on helping Hong Kong enterprises innovate, transform and grow. In addition, it will focus on high value total solutions services and software portfolio growth.

With rising SMB demand for software as well as hardware throughout the region, enterprise software leader SAP is continuing to perform strongly. Asia Pacific Japan (APJ) was the company's fastest growing region last year. In Hong Kong the company's clients in 2007 included the Hong Kong and China Gas Company (Towngas) and Giant Wireless Technology, a leading electronics manufacturing service provider.

Computer Sales According to BMI projections, the computer market will be worth US$1.5bn in 2007, up from US$1.4bn the previous year. Hardware CAGR for the 2007-2012 period should be in the region of 4%, with the growing popularity of broadband helping to support growth in the consumer segment. The Closer Economic Partnership Agreement with the mainland is continuing to expand horizons for smaller enterprises and encourage investments in IT. Meanwhile, a new telecoms service-provider focus on broadband revenues will provide a drive to the consumer segment, with PCCW's IPTV services and a number of other broadband applications helping to fuel demand for desktop and notebook computers. One example of a recent popular service is PCCW's `Newsnapp!' service, which allows users to share and view photos and video clips via a number of channels including a PC.

Software Software sales were worth about US$988mn in 2007, according to BMI estimates, and were expected to rise to just over US$1bn in 2008. Hong Kong is one of the most advanced software markets in the region and has long been an important market for new packaged software product launches. The operator of Hong Kong's subway, the MTR Corporation, is an early adopter of Windows Vista and Office 2007, the launches of which last year provided a boost to software and hardware sales. Companies are increasingly looking to software products in order to provide a competitive edge and improve efficiency and responsiveness to customers. The key financial sector is expected to be a major spender in the forecast period, as Hong Kong looks to defend and expand its position as a regional financial centre against competition from cities like Shanghai.

Services In 2007 the IT services sector is expected to reach a value of about US$1.25bn. IT services CAGR is expected to be around 6% in 2007-2012, with a trend towards larger outsourcing projects in both the public and private sectors evident over the past couple of years. IBM and Hewlett Packard HK (HP) are among those which have won large deals. One of the highest spending verticals should be the financial sector, where IT systems and processes generally lag some way behind Hong Kong's status as a leading global financial centre.

E-Readiness The internet user penetration rate rose to 53% in 2007, but is expected to grow fairly slowly to about 58% by 2012, due to the growing popularity of broadband. The number of users is forecast to reach around 4.4mn. Hong Kong's international bandwidth prices should decline further over the next few years, giving a further boost to the sector. In 2007 the number of broadband subscribers was around 1.9mn; this is expected to rise to around 3.2mn by 2012, higher than previously projected.

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

These will include government offices, libraries and major cultural and recreation centres. Some venues in Hong Kong, such as Cyberport and Hong Kong airport, already have WiFi.

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 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 customer relationship management (CRM). Other ongoing initiatives under the strategy include promoting the Science Park and Cyberport 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 giant 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 giant 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 VC community, favourable e-government policy, or even 'entrepreneurial spirit'. As the Cyberport does enjoy some advantages, including a good location and proximity to the vast mainland market, demands are growing for the government to revive the project.