Singapore Information Technology Report Q2 2008

Market Overview With the ambitious 'Intelligent Nation 2015' plan as a framework, Singapore's IT market is projected to continue on an upwards path, despite a more uncertain economic outlook in 2008. The total size of the domestic IT market is expected by BMI to increase from US$4.1bn in 2007 to around US$5.1bn in 2012.

The main downside to our forecast scenario is a downturn in the US economy, which could have an impact on demand in the domestic manufacturing and external-oriented services sectors. However, despite being a mature market by regional standards, growth in the Singaporean IT market is continuing to exceed analyst expectations.

The government was a major source of IT spending in 2007, with a budgeted level of SGD730mn of projects, and this is already continuing in 2008 with the US$1.3bn Standard Operating Environment tender award. Growth in notebooks sales has given relatively strong momentum to the PC segment as a whole and has stimulated new vendor retail tactics. There were also signs last year that business spending was also on the increase, with IT budgets of smaller and medium firms increasing relative to revenues, and collectively accounting for around one-half of total Singaporean IT spending. However, continued moderation in global growth and a restructuring of Singapore to a more service-oriented economy may limit growth prospects.

Industry Developments The Infocomm Development Authority's (IDA) 10-year iN2015 master plan came into effect in 2006, and has the objective of establishing an 'intelligent nation' powered by ICT by 2015. Since the launch of the Singaporean ICT Masterplan iN2015 in June 2006, a number of programmes and initiatives have been rolled out collectively by the Government and Industry. The government will spend SGD2bn over the next five years to upgrade its IT systems under the plan, IDA recently opened the bidding for a contract worth up to US$750mn to build the national broadband network. The rollout is due to be completed by 2015. The tender period will close on 25 March 2008, but a second tender will then open in Q208 to select an operating company to mange traffic flows on the network.

The IDA also unveiled a detailed roadmap last year for its related iGOV 2010 programme. The iGOV 2010 plan has the objective of raising the service and efficiency levels of civil servants with the latest technology. Major spenders to date have included the IDA, along with the Ministry of Defence and the Defence Science and Technology Agency. The IDA oversees tech purchases for the public sector.

Company News The US$1.3mn Standard Operating Environment (SOE) project recently awarded to the EDS-led One Meridian consortium has been described by IDA as the largest government infocomm to date in terms of scope, scale and value. Four consortia had been qualified at the pre-tender state: iN'spire led by HP, NexGenea led by NEC Solutions, oneMeridian led by EDS, and One Team led by NCS. Leading up to the decision, the NCS consortium, which included IBM as a major partner, had been favoured to win, but there were reports of disagreements among the consortium partners.

Singapore's status as a regional IT hub received a major boost in 2007 when Dell announced plans to split its world headquarters between the city state and its current Austin, Texas base. The new move will make Singapore its global support hub for both manufacturing and distribution. Some 300-400 jobs are likely to be added in the Singaporean region alone. Among other IT companies investing in Singapore last year, EMC opened a new South Asia Development Lab (SADL) inside Changi Business Park.

Focus: Financial Vertical Opportunities Singapore's banking sector has been successful over the last few years in attracting a new wave of investment by multinationals in outsourced operations, thus creating opportunities in this sector for IT vendors. With bank deposits in the Asia Pacific region projected by Deloitte to exceed US$1trn by 2010, financial services providers have an increasing need to deploy advanced technology to streamline and enhance end-to-end operations. In the last couple of years, Credit Suisse has announced the creation of 900 outsourced jobs, including IT functions, in Singapore, as part of an exercise to cut costs in backoffice operations; Merrill Lynch announced plans to add 800 back-office jobs in Singapore; and Barclays Bank is another global player centralising its AP functions in Singapore.

The government is keen to encourage the trend, with the IDA stating that Singapore can use its ability to harness IT to be a 'showcase for innovations in the financial services industry'. Internet and telephone banking have already swept through the region, but now the ability to integrate data warehouses and manage information relating to different customer segments - and from front-office delivery systems to trading platforms and distribution channels - is becoming increasingly important. The bank's decisions are a boost to the Singaporean government, which has been concentrating on higher-end businesses and offering financial incentives to multinationals to create a hub for international banks and funds. A further attraction of Singapore is its superior infrastructure, compared with other destinations in the region.

Computer Sales Spending on IT hardware is expected to rise to around US$1.9bn in 2008 from around US$1.8bn in 2007, as healthy economic growth leads a pick up in the IT market. In 2007, spending on PCs continued to exceed analyst expectations for this mature market. According to the latest report of the IDA, 74% of Singaporean households now have a PC and, following PC demand growth of close to 20% in 2001-2005, this level of saturation would be expected to act as a constraint. However, consumers have appeared willing to spend on upgrading their notebook computers. Moreover, there still exists a significant digital divide in Singapore, particularly between income groups, something that represents a source of potential demand given the government's intention to address the issue. Given overall high rates of penetration, the increasing number of products and services available on the internet is likely to be a major driver of demand for computer hardware.

Software Software accounted for about 15% of the domestic IT market in 2007 with estimated spending of US$614mn. As the market focus moves from hardware to services and solutions, the share of the IT market accounted for by software should rise to 17% by 2011, with enterprises seeking greater leverage from their investments. ERP and other e-business products will find increasing popularity with the SME market, as enterprises look to enhance productivity through the automation of essential functions. As evidence of the importance of this segment to vendors, Microsoft is offering SMEs six different options to migrate to the Windows Vista operating system, along with a variety of financial packages.

IT Services IT services accounted for about 40% of the domestic IT market in 2007, with spending of US$1.6bn, up from US$1.5bn in 2006. CAGR for the segment is estimated at 5% over the 2007-2012 period. The BPO market is currently growing at a double-digit rate, and the IDA said that it would devote US$12mn in 2006 and 2007 to developing Singapore's BPO industry. Finance and accounting will remain the most important BPO categories, with Singapore currently enjoying revived popularity as a BPO location for financial sector organisations. The government is to tender a major outsourcing contract in 2008, following large deals in the private sector in recent years, with companies such as Singapore Airlines.

Local companies are also following the trend, with Singapore Computer Systems (SCS) recently handing business continuity and disaster-recovery solutions provider SPRING Singapore a three-year deal to outsource its infrastructure and applications.

E-Readiness Internet penetration in Singapore is estimated at around 66% in 2007, and broadband penetration at around 22%. The National Broadband Network is at the core of the government's 'Intelligent Nation 2015' project. The contract for the first phase of the project, which will link businesses, schools, hospitals and homes, involves 45% of the network being rolled out within three years and the entire network by 2012. The second phase of the project will place an emphasis on pervasiveness and the provision of wireless access at affordable rates.

The NBN will be capable of offering high speeds of 1Gbps or more, and aims to provide affordable broadband for 95% of all homes and businesses by 2012. Broadband has become an increasing important driver of PC and notebook sales in mature market such as Singapore, with vendors such as Acer and HP rolling out new models with popular multimedia and entertainment features.

Key Issues For Investors

??Further government-enforced reductions in labour costs and mandatory corporate contributions to pensions; ??Cuts to corporate and income taxes if the government sticks to its budgetary commitment to lower business costs; ??Competitiveness is at risk of being eroded by cheap labour in China.