Malaysia Information Technology Report Q2 2008

Market Overview For the Malaysian IT market, 2008 is expected to be a year of continued growth, despite some risk of impact from the global economic environment. With tax breaks and government initiatives supporting the market, the value of spending on IT products and services is currently projected to increase from US$3.9bn in 2007 to around US$6.0bn in 2012. Rising inflationary pressures in the domestic economy and the risk of a US recession present a downside to our forecast. Despite this there are a number of positives factors.

More flexible financing is encouraging spending on software and hardware by smaller companies.

Greater affordability will support consumer demand for branded goods. The government's 2008 budget announced several initiatives with favourable implications for demand for IT products are services, including a drive to increase broadband penetration to 50% by 2010. There are increasingly attractive opportunities in the IT services area, with demand for outsourcing growing stronger in government, financial services, telecoms and other sectors.

IT spending is expected to have an 8% CAGR over the 2007-2012 period. 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 however, 20mn people still lack access to basic ICT infrastructure. This represents both a challenge and an opportunity in terms of future IT market development.

Industry Developments The government has set a target of Malaysia becoming a net exporter of ICT products by 2020. The chairman of the Multimedia Development Corporation (MDeC) said that Malaysian companies would have to become more innovative in order to achieve this aspiration. MDeC also recently signed an agreement with local IT association Pikom to co-operate on a more focused promotion of Malaysia's outsourcing capabilities.

Malaysia's 2008 budget also included a number of ICT-relevant incentives. In one significant measure, the budget provided broadband service providers with discounts on consumer access devices including PCs. Meanwhile, there are also tax deductions for employers who buy new PCs and pay for their employees' broadband connections. The government also pledged to spend MYR45mn on providing internet services to rural schools Competitive Landscape Local PC brands are looking at new sales channels and strategies as they try to contend with the growing dominance of foreign brands, particularly in the notebook market. In 2007 current markets leaders, including HP, Dell, Lenovo, Acer and Toshiba, increased their collective market share by about 6% in 2007 at the expense of local companies. In response, local vendors are fighting back.

Malaysia's financial services and banking sectors are continuing to provide good opportunities for IT Services vendors. Recently, local IT services giant Hei Tech Padu won a five-year services contract from Bank Simpanan Nasional. The contract was reportedly worth MYR32mn. Meanwhile, CIMB Bank last year signed a MYR70mn outsourcing agreement with IT titan EDS.

Business Intelligence is seen as an opportunity. HP recently collaborated with SAS Institute on a Business Intellience Competency Centre (BICC) based in HP's Kuala Lumpur office. Meanwhile, IBM has recently set up its first software development lab in Malaysia, focusing on solutions for communications service providers.

Computer Sales Overall hardware spending was estimated at around US$2.3bn in 2007, and is expected to rise to more than US$2.5bn in 2008, with computer sales including notebooks and accessories at nearly US$2bn.

Hardware CAGR is put at around7% for 2006-2011. New government initiatives to drive broadband penetration to 50% by 2010 should have spill-over benefits for PC penetration and sales. Consumer demand is one of the major drivers of spending in the notebook segment at the moment, with falling prices opening up new low-income tiers of the market. With household PC penetration in Malaysia still low, particularly in rural areas, the PC market should have plenty of room for growth over the forecast period, sustained by new funding for ICT in education and a number of e-government initiatives. The current high level of mergers and acquisitions activity is driving spending in the enterprise sector, where IT consolidation is still largely seen as being about hardware.

Software For 2007, software sales were calculated by BMI at US$686mn, and with SMEs becoming more significant consumers of packaged software thanks in part to more flexible payment schemes, revenues are expected to grow to US$770mn in 2008. Software CAGR from 2007-2012 should be in the region of 9%. The Malaysian packaged software market is predominantly occupied by multinational software vendors; however, many local software vendors are also rapidly gaining market share, and benefiting from local stock market listings. Indeed, the software market is somewhat diffuse, with software vendors often establishing partnerships and alliances to provide end users with complete solutions. Basic e- business applications such as 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 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. In 2008, leading telecoms company Maxis has launched two solutions specifically targeting SMEs with affordable solutions.

Microsoft is a partner in the initiative. PC penetration is relatively high among Malaysian SMEs, by regional standards, creating potential demand for software and services. However, according to Maxin only around 5% of Malaysian SMEs have fully automated IT and communications operations. Indeed, according to local market estimates, only around 30% of Malaysian SMEs have any form of enterprise level ICT solutions, with costs remaining the biggest barrier to further penetration.

The government recently said that it wants to see SMEs contribute 50% of GDP from the current 32%, with the application of new technologies key to achieving this goal. The policy objective highlights a key strategic area in the local market for vendors who are increasing their efforts to serve this segment. 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. Despite all this, it is still the case that the majority of SMEs view ICT as 'a good thing', rather than a necessity.

IT Services IT services spending is projected to pass US$1bn in 2008, up from US$886mn in 2007. Over the 2005- 2010 period, IT services CAGR is expected to be around 10%, benefiting from overall improvements in business and consumer confidence. 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. Vendors are therefore anticipating strong growth, with Logica CMG expecting more than 35% revenues growth in Malaysia last year, and announcing new investments.

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 MVNO (mobile virtual network operator) model in Malaysia is creating opportunities in that sector.

E-Readiness Malaysia is developing at a steady rate on most 'e-society' indicators, with 44% of Malaysians having internet access in 2007, while PC penetration is now more than 20%. In 2007 Telekom Malaysia has announced the one-millionth customer for its Streamyx broadband service, marking this with the launch of a 4.0 Mbps package. 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 9.6mn by 2012, and to encourage faster penetration the government has awarded WiMax licences to a number of service providers including ISP Jaring.