Market Overview
Israel’s IT sector is currently benefiting from record-breaking foreign investment, a growing demand for major IT outsourcing solutions, and government IT and digital divide initiatives. However, much depends on a sustained improvement in the economy as well as the overall political and security environment. Despite the conflict with Lebanon, IT budgets and investments generally continued to increase in 2006. Government spending remains a key driver of IT sector spending as underlined by the recent government agreement with the Israeli distributors of Dell and HP to supply both desktops and laptops. A number of major outsourcing deals for both Israeli and foreign, particularly US, vendors point to growing rewards in this area.
With BMI upwardly revising its forecast for economic growth, BMI expects the total size of the IT market to increase in this period from US$4.1bn in 2006, to around US$6.2bn in 2011. Despite the security uncertainties, foreign company investments by the likes of IBM and Google have also testified to the enduring attractions for foreign IT investors of Israel’s high-tech sector. The government remains determined to preserve Israel’s status as a high-tech powerhouse and government spending and contracts remain an important element of overall market spending. IT services are expected to display the fastest growth over the forecast period, with growing enthusiasm for outsourcing and with Israel also starting to emerge as a location for some business process outsourcing (BPO) functions.
While the defence sector will remain the single most important vertical, investments by financial sector organisations are on the rise, driven partly by a number of regulatory factors. For the household sector, high internet penetration and growing broadband penetration remain further strong drivers, with growing interest in multimedia and mobile computing applications. Going forward, in the enterprise sector, the client emphasis became much on cost-reduction and the bottom line, but there are signs that this is now beginning to change. The security situation will likely influence spending, with plans already being implemented for roll out of national Smart ID card systems, and the military looking to invest in new IT infrastructure.
Competitive Landscape
Israel’s domestic IT Service vendors are on the rise spurred by a growing domestic market. Ness Technologies has been prominent in this trend with several landmark deals in the past two years. These included an eight year US$120mn outsourcing contract (including hardware) with the First International Bank of Israel, in which Ness is serving as lead sub-contractor to EDS. Fellow Israeli IT giant Matrix is also focusing on the growing outsourcing opportunity, and has appointed a new sales and marketing manage for its Talpiot division which focuses on this business.
While Israel’s domestic giants have a strong market position many foreign, particularly US, vendors are also well embedded in the market. Among these is EDS Israel which was established as early as 1995 and now employs more than 900 people. Among the other major players, HP revealed last year that it had won a landmark contract from the Israeli Navy for outsourced management of the navy’s IT infrastructure. Meanwhile, IBM Global Services is also increasing its investment in the market following some cut backs a couple of years ago.
While US companies are particularly well established, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have been building up their presence in the Middle East over the past couple of years. Tata opened an Israel office in 2006.
Industry Developments
Israel is working hard to ensure that it benefits from the global offshoring trend and captures a larger share of the market. Some commentators have questioned why companies should consider relatively high cost Israel for outsourcing given that most outsourcing is at bottom about costs reduction. However, Israel has been marketing its IT skills and with some success as it has attracted outsourcing from major IT corporations such as Intel, IBM, Microsoft as well as Motorola. One factor in this of course has been incentives that the Israeli government started to offer in 2006, with subsidies of up to ILS1000 per employee per month.
In 2006, despite the political and security situation, Jerusalem’s campaign to attract more multinational investment in outsourcing development was rewarded with more than 500 new jobs for offshore outsourcers. Israeli high tech M&As also enjoyed a boom year in 2006, with the most notable deal being the acquisition of Mercury by HP for US$4.5bn. According to the IVC 2007 Yearbook, M&A activity involving Israeli companies that were either acquired or merged totalled US$10.58bn in 2006, substantially higher than for previous years.
Computer Sales
Despite the expectation of continued growth in computer unit sales, a general focus on cost cutting and the bottom line mean that revenues growth, while still positive, may slow. This is exemplified by the server market where the middle market segment is declining with the growing popularity of less expensive servers. Computer sales in Israel (including servers and accessories) are forecast at US$1.69bn for 2007, up from US$1.58bn in 2006. The market is expected to grow at a CAGR of 8% over the 2006- 2011 forecast period, to around US$2.3bn by 2011. Growth will be driven by a generally buoyant economy which is encouraging stronger-than-expected IT hardware spending in both enterprise and household sectors.
There are a number of drivers of household spending on computers, including the growing popularity of mobile computing, and broadband penetration and multimedia applications. Despite strong growth in demand for notebooks, the desktop sector is still unsaturated. PC penetration was only 26.4% in 2005, while digital divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top income group.
Software
Increased IT budgets should mean growth in spending on enterprise solutions in 2007, with reviving or emerging areas of opportunity including customer relationship management (CRM) solutions, as well as business intelligence management. Overall, software spending is estimated to be US$886mn in 2007, which would be up from US$772mn in 2006. The packaged software segment is expected to grow at a CAGR of 11% over the forecast period. Spending on software is shifting towards the small-medium enterprise (SME) segment, which forms the mainstay of the Israeli business sector.
A recent survey of IT managers suggested that areas of high demand in 2007 would include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation, and CRM. In terms of verticals, the financial sector is very hot at the moment, with other areas to watch including defence and healthcare. Global vendors control more than three-quarters of the market, with SAP in first place.
IT Services
The IT services sector had a value of around US$1.3bn in 2006, and this is expected to grow strongly to US$2bn by 2010. The recent major outsourcing deal awarded to HP by the Israeli Navy for management of its IT infrastructure has highlighted the growing importance of outsourcing. In 2006, an outsourcing deal between First International Bank of Israel and EDS Israel was the largest outsourcing contract in the Israeli banking industry and a milestone at the time. The retail sector offers further opportunities, with IBM Israel last year announcing a recent extension of its ILS100mn outsourcing contract with Clubmarket Marketing Chains.
Although Israel seemingly possesses many advantages as an outsourcing destination, in particular a technologically literate, linguistically skilled workforce, and low labour costs relative to most developed countries, the country has failed to capitalise on these strengths in the past. However, the government is now actively promoting Israel to multinationals, and Israel is starting to emerge as a location for packaged applications and localisation services.
E-Readiness
In 2006, Israel had around 4.1mn internet users, representing a penetration rate of around 57% of the population. Broadband penetration was around 18.3%, or around 1.3mn accounts. The government has repeatedly announced that it intends to make a big effort to narrow the digital gap. In order to deal with the problem, the following measures have been proposed: - A senior minister for high-tech should be appointed to co-ordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry;
- Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone;
- Massive investment should be made in the educational system for training information workers;
- Aid to be given to the less well-off to make them part of Israel’s information industry.
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