South Africa Information Technology Report Q3 2008: Industry Research Report

South Africa Information Technology Report Q3 2008

Published Date: July 2008

Published By: Business Monitor International

Page Count: 42

Order Code: R302-3607

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Market Overview

The IT market is projected to continue to expand during the 2008-2012 period, despite slower economicgrowth this year. The total size of the South African IT market is expected by BMI to increase fromUS$8bn in 2007 to around US$11.6bn in 2012. The energy crisis, and weakening external demand, mayprecipitate a more cautious spending approach by many organisations, but the market will be supportedby factors such as the 2010 Soccer World Cup, government digital divide projects, and strong demandfrom sectors such as Telecoms. As a result, IT spending CAGR is expected to be in the region of 8%during the forecast period.

The 2010 World Cup and other major infrastructure projects such as the Gautrain rapid rail link, provide aframework for faster spending growth during the forecast period. IT services will be the fastest growingsegment of spending. Underlined by the government’s recent stated intention to develop South Africa’scapabilities in the business process outsourcing (BPO) area, outsourcing will continue as a significantrevenue generator over the next few years. However, consumer demand for computers is graduallyincreasing, driven by the popularity of notebooks with entertainment features, and growing broadbandpenetration.

The government has given ICT an important role in its Accelerated Shared Growth initiative, and theState Information Technology Agency (SITA) is currently overseeing tenders in areas ranging fromfinancial systems to healthcare. Meanwhile, provincial governments, particularly Gauteng, areincreasingly following an agenda of using IT to tackle fundamental challenges such as healthcare reform.The Black Empowerment Charter for the ICT sector will have an important bearing on IT vendoractivities in the country, and international vendors are keen to prove their credentials under those criteria.

Industry Developments

President Mbeki said in a recent speech that ICT would be an important part of the government’sAccelerated and Shared Growth Initiative for South Africa (ASGI-SA). The government’s developmentplan is aimed to stimulating faster economic growth. National and provincial governments havepositioned ICT as an important part of South Africa’s strategy to drive economic growth across allsectors.

A number of significant government-led initiatives will boost spending on IT in 2008. Most high-profileof all, the 2010 World Cup is on the horizon, and like similar events such as the 2006 Asian Games inQatar, is likely to lift the IT market. Benefits will include not just investments in IT systems directlylinked to the games, but those driven by associated investments in areas such as infrastructure withprojects like the Gautrain rail link.

The government is keen to win a larger share of the global outsourcing spending for South Africa and ithas been estimated that the call centre industry may create over 100,000 jobs by 2010. Traditionally thebarrier to faster development of this sector has been South Africa’s relatively high telecommunicationscosts, but the situation is generally considered to have improved. The trend is demonstrated by reportsthat companies such as Unisys Africa are considering locating a new global BPO facility in South Africa.

Competitive Landscape

Declining prices have made life harder for many PC vendors, particularly smaller ones, but many vendorsnow see new opportunities in South Africa’s retail PC market. HP has steadily expanded its focus on thissegment. Eighteen months ago it launched its Pavilion entertainment notebook series in the country, andhas seen it become a bestseller. Meanwhile, Lenovo recently announced a new distribution partnershipwith national retailer Incredible Connection to target the consumer segment.

The growth of the managed services and BPO segment is attracting new vendor investments. IBM hassaid it plans to invest more than US$120mn in Africa, including building a lab and training graduates. HPhas said that it is looking for ways to ‘fast track’ its services strategy in South Africa. Meanwhile, IndianIT services giant Satyam hopes to reach US$11mn annual revenues and break into the top five ITservices companies in the country.

Local vendors have been favoured in a number of recent government IT contracts tendered by IT agencySITA, some of which have proved controversial. One of the largest software tenders in South Africa’shistory was recently awarded to Gijima by the Department of Home Affairs to build a citizen-centricapplication to support the Department’s ‘Who Am I’ online services. Local companies such as BusinessConnexion, Dimension Data and Telkom have all been selected as preferred bidders for recent ITservices tenders.

Computer Sales

South Africa’s computer market, valued by BMI at US$2.9bn in 2007, is set for steady growth over theforecast period, but is one of the slower growing segments of the IT market. The main drivers will befalling prices and more ready credit availability, combined with more distribution channels andgovernment initiatives. The market is expected to grow at a CAGR of 7% between 2007 and 2012. Themarket remains extremely price sensitive and dependent on government spending, with the purchase of acomputer beyond the majority of the population, despite the introduction of a number of cheap PCprogrammes. While growth is modest, the desktop market is benefiting from increasing business spendingand attractive bundles promoting home digital entertainment, which has fuelled overall desktop growth.Sales of both desktops and notebooks should benefit from initiatives to drive broadband and internetpenetration, including the Johannesburg public broadband network programme.

Software

South Africa’s software market is maturing, with growth of around 8% in 2007 to a total market value ofmore than US$1.4bn, despite the issue of software piracy, which still accounts for around 36% ofsoftware. The higher end of the market is maturing to the point where a new concern for integratedplatforms is emerging and likely to be a driver of spending over the next few years. Larger companieshave also begun to demonstrate an interest in business intelligence systems to support decision making.

The market is expected to grow to more than US$1.6bn this year, and to have a CAGR of around 9% overthe 2007-2012 period. A number of government departments, including the State Information TechnologyAgency and the Presidential National Commission on Information Society for Africa’s Development, areencouraging open-source software in tenders. Proprietary software vendors, particularly Microsoft, areresponding by introducing lower-priced ‘streamlined’ software to drive lower-cost computing. Thefinancial vertical should be a strong source of opportunity, with banks moving to integrate their ITsystems and look to enhance their ability to launch new products and services rapidly, as well as ensuringgood recovery plans and security.

IT Services

The IT services market was worth an estimated slightly more than US$2.9bn in 2007. The market isexpected to grow to more than US$3.1bn in 2008. CAGR for the 2007-2012 period is estimated at 8%.The roll out of government initiatives at national and province level, and growing popularity of SouthAfrica as a global outsourcing destination is creating opportunities for IT vendors and attracting newinvestments. Underlined by the government’s recent stated intention to develop South Africa’scapabilities in the business process outsourcing (BPO) area, outsourcing will continue as one of the mostsignificant revenue generators over the next few years. However, traditional services such as desktopsupport remain the mainstay of the market, while applications services support is less developed.

E-Readiness

Internet penetration in South Africa is by far the highest on the continent with more than 7mn users,representing upwards of 15% of the population. The proportion of households with internet access isestimated to grow to 27% by 2012. However, broadband penetration is currently little more than 3%, withonly around 1.5mn users.

Despite the opportunities, prospects for the IT market remain constrained by high communication costsand uneven infrastructure development. The government launched a new series of initiatives in 2007 totackle this issue, including a new policy on broadband spectrum licensing that may positively influencegrowth and plans for a second national operator. However, there are doubts as to whether the governmenthas the will to tackle the key question of termination rates and pricing implications.

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