Hong Kong Information Technology Report Q3 2008

Market Overview BMI expects the Hong Kong IT market to continue growing during the 2008-2012 forecast period, supported by the effects of closer co-operation with booming China, and investment by key verticals.

Eleven years after the handover from Britain to China, Hong Kong faces a challenge to modernise and maintain its regional hub status in sectors from finance to shipping. The banking sector will provide a particular opportunity for vendors as the sector struggles to bring its IT infrastructure closer to the levels of other financial centres. Other sectors currently modernising include shipping.

Overall, the domestic IT market is forecast by BMI to grow to at least US$4.9bn in 2012, at CAGR of nearly 5%. From a vendor's point of view, Hong Kong's status as one of the most wired cities on earth, with over 90% of residential buildings having broadband access, provides a strong driver for spending on IT equipment and peripherals. PC penetration is close to 50%, but the popularity of notebooks with entertainment features is providing a boost to spending in the consumer segment, while the roll-out of popular converged services such as IPTV by telecoms company PCCW also fuels demand.

Hong Kong's future is increasingly tied-up with relations with the mainland. Hong Kong has been included for the first time in the Chinese government's Five Year Plan, for the period 2011-2015. Many vendors now see Hong Kong as a hub to serve thousands of Hong Kong owned businesses throughout the Pearl River Delta region. Hong Kong's small and medium-sized companies (SMEs) are also investing in new applications to help them manage trade with the mainland.

Industry Developments The government 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.

The 2008 version of the government's Digital 21 blueprint for information society development identifies five priority areas. These include facilitating a digital economy; promoting advanced technology and innovation; developing Hong Kong as a hub for technological co-operation and trade; enabling the next generation of public services; and building an 'inclusive' knowledge-based society. The overall vision is of government continuing to play a significant role as a user, supporter and facilitator of ICT and its applications.

Competitive Landscape Vendors are placing solutions for small and medium businesses at the heart of their Hong Kong growth strategies. In 2007, a growing focus on the SME market saw Dell choose Hong Kong as the location for its regional launch of its two new low cost Vostro PCs. Meanwhile, IBM said recently that it would focus on helping Hong Kong enterprises innovate, transform and grow.

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. Salesforce.com is also active in the market and a number of mainland China providers such as 800App.com have emerged.

Additionally, vendors increasingly think of Hong Kong as a hub from which to target the wider Pearl River Delta area, which also includes Guangdong and Shenzhen in the mainland. Microsoft has announced plans to make Hong Kong the centre of a new push to benefit from growth in the area. The strategy was marked by Microsoft's most aggressive investments in Hong Kong since 2002.

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 other offerings helping to fuel demand for desktop and notebook computers. The growing popularity of broadband and wireless applications is driving growth in PC and notebook sales in the consumer segment, and increasing investments from smaller businesses.

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 financial services sector is expected to be a major spender in the forecast period, as Hong Kong looks to defend its position as a regional financial centre, and may account for around 30% of spending. 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. As vendor attention turns to smaller companies, the SaaS model is enjoying increased popularity. Companies are looking to software products in order to provide a competitive edge and improve efficiency and responsiveness to customers.

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.