Philippines Information Technology Report Q2 2008

Market Overview BMI expects the Philippines to be one of the region's high growth IT markets over the next few years, with annual spending increasing from US$1.46bn in 2007 to around US$2.6bn in 2012. Strong consumer growth provides grounds for optimism, despite some potential challenges including the strong peso, and rising wages. The Philippines also remains a favoured destination for BPO operations, which account for around 30% of the IT market, and there is an ambitious five year plan for the sector. Surveys show that most companies expect expenditure on IT to rise and SMB growth is expected to be strong, particularly for hardware.

The government is committed to developing the Philippine's strengths in the ICT area, particularly in the BPO market, investing in training and regional expansion. Government spending to leverage ICT for development purposes in areas ranging from schools to the courtroom will be a significant driver for the market. Consumer segment growth should also continue to be strong, driven by the popularity of notebooks and increased wireless and broadband connectivity. The economy is expected to slow somewhat, however, in 2008, due mainly to external factors.

Overall IT market CAGR is put at 9% for the 2007-2012 period. One theme of the next few years is likely to be geographical expansion with large call centre companies expanding in search of cheaper labour, infrastructure and operational expenses. As costs rise elsewhere, the Cebu region is emerging as a new BPO hub. Other sectors are also important, including financial services, which accounts for around one quarter of sales, and telecoms. Healthcare is also likely to account for more spending.

Special Focus: Southern Philippines Global vendors are placing a new strategic focus on the IT market in the Southern Philippines, which is also becoming an increasingly large recipient of investment from global IT Service vendors such as IBM, Wipro and Accenture. The government is keen to promote regional urban centres as alternative locations for BPO operations. Accenture has opened a new IT outsourcing centre in Cebu, which will have 500 seats and provide application management, systems development and other related services to global clients. The company has already moved some work from Manila to Cebu and says that later it will bring BPO as well as call centre business to Cebu.

Other IT companies have also identified Cebu as a major focus as an IT hub for the expanding Visayas and Mindanao regions. A survey by IBM highlighted the potential of the Southern Philippines market, identifying potential revenues of US$218mn, with most opportunities in services and software development. IBM plans investment in additional sites, manpower, promotions and marketing in the region over the next two years. In November 2006 IBM opened its office for Visayas, providing value added services for customers and a hub for partners to meet.

In September 2006, President Arroyo signed a proclamation designating a 380,000m area in Quezon City a new IT park, along with another facility in Makati City. A few days earlier, two new facilities had been created in Cebu City and Muntinlupa City. Typically, the PEZA grants these facilities incentives under Republic Act No 8748, designed to attract foreign investments, and those establishing facilities in IT centres are generally entitled to income-tax holidays of up to eight years. Other benefits are also available, such as exemption from duties and taxes for various categories of imported capital equipment, and domestic sales allowances equivalent to 30% of sales.

Industry Developments Two years into a five year government plan for the BPO sector, a report by the Commission on ICT (CICT) suggested that the Philippines is falling behind in its target to create a US$13bn industry. The report indicates that only 1/5 of the target has been reached, despite significant progress in the last two years with 236,000 persons hired.

One concern is that rising wages and real estate prices may erode the Philippine's competitiveness, with wage increases running at around 8%. The peso gained more than 6.7% against the US dollar in 2007, causing problems for outsourcing providers who locked into contracts when the peso was low.

Despite these concerns, the Philippines continues to be an important location for global outsourcers, with JP Morgan and Wipro among the latest big names to announce new investments in the Philippines.

Company News IT vendors are reporting a greater demand in the Philippines for branded PCs as opposed to white boxes.

The branded PC share in many other Asian countries is around 50%, but only 20% in the Philippines, indicating considerable room for development. Lenovo has continued to launch new notebook series for consumers, following from the successful ThinkPad, and focusing on Manila, Cebu, and other key cities.

HP is planning to extend its product line to offer more affordable PCs. Acer was the leading vendor in the Philippines last year, with around a 30% share of notebooks.

Aside from the key SME and BPO sectors, a number of other sectors are proving strong for IT vendors, including financial services and banking and logistics. In the financial services segment, BancNet, which operates the Philippines' largest electronic payment network, has implemented SAP HR and SCM modules. BankNet, which provides an electronic payments gateway for 32 member banks, plans to expand the co-operation.

Computer Sales BMI expects total 2008 hardware spending of around US$841mn, up from an estimated US$752mn in 2007. Affordability remains a key criterion for PC purchase, especially among call centre companies, which are a major source of demand. Prices for branded PCs in the Philippines are now below US$800 per unit. Much growth will of course come from increasing PC penetration, which is still less than 5% currently. However, even in the Southern Philippines consumers are now showing a greater appreciation of the enhanced features and legal software that comes with branded computers.

Low price PC initiatives will play a role in driving growth, and in 2007 the CITC (Commission for Information and Communications Technology) launched a new 'PC4All' programme. The programme aims to increase the PC to user ratio by making available more affordable computers, through installation of open source software. The target price for the PCs is around PHP10,000. In addition to the PC4All programme, likely computer sale drivers over the forecast period include education, lower prices, IP telephony, cheaper processors, and entertainment and wireless networking features.

Software BMI expects growth in software spending to continue in 2007, projecting 12% growth from 2007 spending of around US$245mn. This upwards growth path should be maintained over the next few years, with BMI seeing CAGR for the software sector between 2007 and 2012 at 9%. The launch of the new suite of Microsoft software products in 2007, including Microsoft Visa and Office 2007, should provide a boost in the short term. However, open source software is on the rise, with software like Edubuntu, Poppy Linux and Open Office being preinstalled in the PCs to be sold under the new PC4ALL programme. In addition, a bill promoting the use of FOSS (free and open source software) is currently making its way through Congress. In response Microsoft is offering a stripped-down version of Office that retails at about half the price of the full version, although no Tagalog version is available yet. SMEs represent a potentially important segment of demand, but creative methods will be needed to reach this, as with Saleforce.com and Intel's current co-operation with telecom PLDT.

Services Growth in the IT service sector continues to be driven by sustained growth in the IT enabled services sector, particularly BPO and call centre services. BMI forecasts a value of US$713mn in 2008, up from US$637mn in 2007. Due to evolving demand, vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, and basic IT and hardware consulting.

Call centres are, unsurprisingly, projected to be the biggest single source of earnings for IT service providers, accounting for around 30% of revenues.

E-Readiness A survey for the Philippines Institute for Development Studies has found that the Philippines is lagging other Asian countries in terms of IT and internet use in business. The survey found that the Philippines lagged even Thailand and Indonesia, which were relative latecomers to internet deployment. Only one quarter of the Philippines' population of 11mn are able to buy products and services online, and the majority of this business is with US retailers such as Amazon and eBay. Part of this is due to lack of trust in credit cards. The report warned that unless measures were taken to develop ecommerce then Philippine enterprises would continue to lose trade opportunities to other countries. The current administration has declared IT along with Communications as two of the three flagship industries that government would focus on, the other being tourism. The government therefore is to focus its attention now to improve the country's technical and human capabilities.

However, the overall number of local internet users has grown steadily over the last five years, reaching an estimated 11mn in 2007, according to BMI figures. Meanwhile, the number of broadband subscribers was around 945,000 in 2007 and is expected to grow to just over 4mn by 2012. By 2012, internet and broadband penetration rates are expected to be 31% and 4.4% respectively. Falling prices of PCs and internet subscription rates, partly as a result of greater market competition, have driven this growth.

However, low PC and internet penetration rates, along with low telephone density and security concerns, still hold back the development of e-commerce.