Malaysia Information Technology Report Q3 2007: Industry Research Report

Malaysia Information Technology Report Q3 2007

Published Date: October 2007

Published By: Business Monitor International

Page Count: 36

Order Code: R302-1330

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Market Overview

As the time of the 2007 Budget approaches, Malaysia’s IT market is showing good development but is faced with the challenge of going to the next level. The total size of the domestic IT market is forecast by BMI to increase from US$3.3bn in 2006 to around US$5.5bn in 2011. With new momentum in broadband from the award of WiMAX licences earlier this year, a renewed campaign for IT in education and growing consumer demand, there are several growth drivers. PC penetration is expected to exceed 50% by 2012, more than twice the current level. For IT vendors, the focus is on an increasingly sophisticated domestic IT market which is expected to have a double digit CAGR over the 2006-2011 forecast period.

Some sectors offer particular opportunities. IT spending by professional services organisations is increasing at an annual CAGR of more than 10%, while a booming construction segment, Islamic Banking, and government education initiatives are also sources of spending. There are increasingly attractive opportunities in the IT services area, which is seeing larger value projects such as the US$121mn deal recently signed by IBM with Saffin Bank. Spending will benefit from improved business and consumer confidence, as well as government and education initiatives. Meanwhile, a new generation of SMBs have now often had more exposure to IT and are more sophisticated in their understanding of how IT can add value.

However, as the MSC project enters its second decade, under new leadership and with a funding boost from the 2007 Budget, the government is faced with the challenge of defending Malaysia’s status as a regional technology hub against increasing regional competition. Red tape and bureaucracy as well as a perceived skills shortage in some areas are key issues that will need to be overcome to ensure the continued development of the MSC and Cyberjaya projects, and the IT market as a whole. ICT remains a cornerstone of the government’s campaign, launched in 1991, to raise Malaysia to developed-world status by 2020.

Industry Developments

With National Budget 2008 scheduled to be tabled in Parliament on September 2008, the government is soliciting ideas and suggestions to encourage the development of the IT sector. One measure being discussed is that employers should be granted a deduction for the cost of a new PC that is given to an employee for his or her own use. The measure is designed to assist in furthering the use of IT in business, one of the government’s objectives. The connecting theme for his year’s budget is ‘enhancing competitiveness and sharing economic prosperity’.

Meanwhile, the government’s drive to bridge the urban-rural digital divide is continuing with two new rural ICT projects in Sarawak. The government has said that it plans to build more infrastructure to bridge the divide. Among plans are establishing community knowledge centres and providing access to egovernment applications, learning and information exchange. While at time of press the sites were still being identified, the project will be modelled on the E-Bario project in Miri which involved the active participation of rural communities.

The government is also focusing on training to ensure that there are no bottlenecks to the expansion of the Multimedia Development Corporation (MDeC). In recent years a mismatch between ICT graduates and employers has been identified. According to MDeC more than 6000 IT professionals have been trained in the last two years to meet industry needs. Last year MDeC, which is under the Science, Technology and Innovation Ministry, set up a Knowledge Development Institute specifically to look at industry needs. One area that was identified was that of creative multimedia.

Competitive Landscape

Local research shows that the Malaysian SME community spent an increasing amount last year on ICT, although this was mainly confined to basic automisation of front and back office operations. 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. Meanwhile, the growing professional services segment in Malaysia is providing a good opportunity. According to local estimates, ICT expenditure is growing at an annual CAGR of at least 10%. The news that one of Malaysia’s major financial institutions, CIMB Bank, has signed a MYR70mn outsourcing agreement with IT titan EDS has focused attention on the growing local market for outsourced IT services. With the increasing maturity of local companies has come a growing understanding of the importance of applying IT to ensure greater efficiency and competitiveness.

Computer 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. Vendors including Acer, HP and Toshiba are all responding by introducing entry level notebooks and conducting aggressive pricing and marketing campaigns. Analysis shows that notebooks sales grew twenty times as fast as desktop sales in 2006, while overall shipments grew at around 20%. Desktops are expected to account for less than half the market in 2006. Despite the popularity of lightweight design notebooks, desktop PCs with LCD screens are maintaining a strong position in the market. Naturally, the consumer market is far from homogenous, with penetration higher in urban areas, among men, and among ethnic Chinese, with these disparities likely to be targets of future government initiatives.

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 the government’s push for ICT in education and a number of e-government initiatives. Overall hardware spending was around US$2bn in 2006, and is expected to rise to just short of US$2.2bn in 2007, with computer sales including notebooks and accessories around US$1.7bn. Hardware, CAGR is put at around 9% for 2006-2011. The current high level of M&A activity is driving spending in the enterprise sector, where IT consolidation is still largely seen as being about hardware.

Software

Open Source in Malaysia received a boost recently with the opening of an open source laboratory in Cyberjaya. The new centre is a cooperation between MDeC and Basic Bay Dnn Bhd. The intention is to develop thirty open source projects over the next two years. 2006 software sales were calculated by BMI at US$581mn, and with the new suite of Microsoft products released earlier this year expected to provide a boost to demand, revenues are expected to grow to US$653mn in 2007. SMEs are becoming significant consumers of packaged software as more flexible payment schemes such as the one offered by RHB Bank bring solutions from vendors such as HP and Microsoft within the reach of smaller companies. Software CAGR from 2006-2011 should be in the region of 12%.

The Malaysia 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.

Special Focus: SMBs

Small and medium businesses (SMBs) are increasingly being seen as a key IT vertical demand sector in Malaysia, with vendors bringing forth propositions and solutions to meet their needs. According to local financial analysts, Malaysian SMBs were expected to spend close to US$2bn in 2006, representing a steady rise from an estimated US$1.8bn in 2005. Around 90% of Bursa Malaysia companies fall in the SMB category. While most remain cost conscious, as described elsewhere, there appears to be increasing appreciation of the value that IT can add in terms of winning and serving customers more effectively. Due to a decade-long focus on expansion, and increasingly open markets, many SMBs are now facing a more complex environment. In addition, as informatisation among smaller businesses rises, SMBs are becoming more comfortable at purchasing directly from manufacturers, not merely for hardware, but also services such as after-sales support. PC penetration is relatively high among Malaysian SMBs, by regional standards, creating potential demand for software and services. Despite all this, it is still the case that the majority of SMBs view ICT as ‘a good thing’, rather than a necessity. According to local market estimates, currently, only around 30% of Malaysian SMBs have any form of enterprise level ICT solutions, with costs remaining the biggest barrier to further penetration.

IT Services

IT services spending, excluding telecommunications related spending, is forecast to reach around US$843mn in 2007, up from US$743mn in 2006. Over the 2005-2010 period, IT services CAGR is expected to be around 15%, benefiting from overall improvements in business and consumer confidence. A wave of M&A activity is generating large projects in sectors such as financial services, oil and gas, telecoms, and agriculture. 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 Logic CMG expecting more than 35% revenues growth in Malaysia this year. The popularity of the MVNO (mobile virtual network operator) model in Malaysia is creating opportunities in that sector. IT Services therefore offers strong potential over the next few years and vendors look to integrated and standardise business processes.

E-Readiness

Malaysia is developing at a steady rate on most ‘e-society’ indicators, with 44% of Malaysians having internet access in 2006, while PC penetration is now more than 20%. Malaysia’s ICT sector took some positives from the National Budget 2007 which saw the Multimedia Development Corporation (MDeC) receive an enlarged MYR154mn budget. The 2007 budget followed a year of significant developments in 2006. These included 9th Malaysian Plan, under which some US$3.3bn has been assigned to develop the IT sector during the period 2006-2010.

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 7.4 million by 2011, and to encourage faster penetration the government has awarded WiMax licences to a number of service providers including ISP Jaring.

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