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South Africa Information Technology Report Q3 2007Product Type: Market Research ReportPublished by: Business Monitor International Published: October 2007 Product Code: R302-1343 Description Market OverviewSouth Africa is becoming increasingly prominent within the global IT market and the growth opportunities in various segments are attracting a higher level of attention from vendors. One particular attraction is the now more rapid growth of the IT Services market also boosted by government efforts to win South Africa a larger share of the global outsourcing market. With demand for managed solutions growing rapidly from a more sophisticated corporate sector seeking support for regional expansion, BMI’s Q307 report looks at how IT vendors from IBM to Unisys are planning to increase their presence in the market. The total size of the IT market is expected by BMI to increase from US$7.4bn in 2006 to around US$11.2bn in 2011, with hardware still dominant, but with a growing importance for services and outsourcing in particular. The government’s 2007 budget recognised the importance of ICT, and a number of central and provincial government infrastructure and information society initiatives are expected to boost spending over the next few years. Provincial governments, including Gauteng, have launched important IT projects in 2007 and are following an agenda of using IT to tackle fundamental challenges such as healthcare reform. Spending associated with the 2010 football World Cup is also a significant opportunity. However there are concerns about the transparency of the government’s criteria for contract awards in some cases, while the Black Economic Empowerment charter for the ICT industry continues to be an influential factor for IT vendors. This quarter BMI reports that the government has launched a new ‘scorecard’ in an attempt to make evaluation criteria clearer. While government remains the single largest spender, verticals such as Banking, where all South Africa’s financial institutions face pressure to compete more aggressively, and telecoms, where liberalisation measures are still expected, will provide significant opportunities. IT vendors’ prospects for growth will depend on various wider economic issues. On the economic front, these include regional disparities in computer penetration, huge income disparities and a generally sluggish economy. Lower prices and easier access to credit should continue to drive PC sales, with spending moving beyond PCs and servers to enterprise applications. Increased capital spending by small- and medium-sized businesses (SMBs), declining hardware prices, steady consumer demand, and the increasing popularity of South Africa as an outsourcing destination, will all underpin growth in the forecast period. Industry Developments The recent release of the new Government’s ‘scorecards’ for Black Economic Empowerment gives vendors a clearer idea of how they will be assessed on these criteria. Previously there was some vagueness about how companies received credit for black equity or employment representation, but now new guidelines are available. For example, within the first five years 43% of senior management should come from previously disadvantaged groups. The new scorecards also have implications for IT vendor partnership strategies and procurements in the country. Meanwhile in April President Mbeki launched a new phase of South Africa’s Nepad e-schools programme, a cause with which he has personally associated himself. A new list of schools was launched which will be equipped with computer labs. President Mbeki has been calling for schools in South Africa to push science and technology more forcibly and place a more concerted focus on improving IT skills. Last year Education Minister Naledi Pandor said that there was still a long way to go before South Africa’s 26,000 public schools had the necessary infrastructure to give pupils access to computer-based education. Competitive Landscape At a time of new opportunity in outsourcing and managed services, Unisys Africa is the latest company to reportedly be considering locating a new global BPO facility South Africa. According to reports the company has considered South Africa alongside other popular locations such as India and Hungary, and found that for salaries and infrastructure South Africa compares favourably. Meanwhile, Indian IT Services giant Satyam is another company hoping to benefit from the growing demand as it predicts a more than 75% increase in revenues in 2007. Meanwhile, microchip manufacturer AMD is looking to strengthen its position in a market where its global share of 5% is well below its 29% global average. AMD sees opportunity in the low population penetration rate of computers which reflects a need for cheaper products. Currently AMD microprocessors and graphics cards are imported and the market is dominated by Intel’s more expensive products. AMD now plans to open an office in South Africa, but it has stressed that this will complement rather than replace existing channels. Computer Sales The impending rollout of mobile broadband services in South Africa is expected to provide a new driver for notebook sales in a market which is still focused on a small proportion of the population. HP is among vendors preparing to take advantage, recently showing a number of new notebook models many of which have mobile broadband connectivity options. South Africa's computer market, valued by BMI at US$2.7bn in 2006 is set for steady growth over the forecast period with the main drivers being falling prices and more ready credit availability, combined with more distribution channels and government initiatives. The market is expected to grow to around US$2.86bn in 2007, and grow at a CAGR of 7% between 2006-2010. Falling prices, driven by the strengthening rand, are causing PC unit sales to rise, along with aggressive retail promotions. The increasing popularity of notebooks in the overall sales mix is helping to compensate for the downward price movement. The SMB segment is lively, while replacement sales in the larger company sector have begun to pick up in 2006 and this should continue into 2007. However, the market remains extremely price sensitive and dependent on government spending, with the purchase of a computer beyond the majority of the population, despite the introduction of a number of cheap PC programmes. While growth is modest, the desktop market is benefiting from increasing business spending and 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 internet penetration, including the Johannesburg public broadband network programme. Software In April 2007, nine computer resellers were forced to pay compensation to Microsoft after being caught installing unlicensed software on stock which they were selling. The move is welcome evidence that the country is prepared to take software piracy more seriously in a country in which 36% of all business software is reportedly unlicensed. South Africa’s software market is maturing, with growth of around 7% in 2006 to a total market value of more than US$1.3bn, despite the issue of software piracy which still accounts for around 36% of software. The higher end of the market is maturing to the point where a new concern for integrated platforms is emerging and likely to be a driver of spending over the next few years. Larger companies have also begun to demonstrate an interest in business intelligence systems to support decision making. The market is expected to grow to around US$1.4bn in 2007, and to have a CAGR of around 10% over the 2006-2011 period. A number of government departments, including the State Information Technology Agency and the Presidential National Commission on Information Society for Africa’s Development, have signalled their intention to fully embrace open-source proprietary software vendors, such as Microsoft, are responding by introducing lower-priced ‘streamlined’ software to drive lower-cost computing. The financial vertical should be a strong source of opportunity, with banks moving to integrate their IT systems and look to enhance their ability to launch new products and services rapidly, as well as ensuring good recovery plans and security. IT Services The growing popularity of South Africa as a global outsourcing destination is creating opportunities for IT vendors and attracting new investments. The government is keen to win a larger share of the global outsourcing spend for the country and it has been estimated that the call centre industry in South Africa may create over 100,000 jobs by 2010. Traditionally the barrier to faster development of this sector has been South Africa’s relatively high telecommunications costs, but the situation is generally considered to have improved. The IT services market was worth an estimated slightly more than US$2.5bn in 2006, and is expected to grow to more than US$2.8bn in 2007. CAGR for the 2006-2011 period is estimated at 8%. Underlined by the government’s recent stated intention to develop South Africa’s capabilities in the business process outsourcing (BPO) area, outsourcing will continue as one of the most significant revenue generators over the next few years. However, traditional services such as desktop support remain the mainstay of the market, while applications services support is less developed. Historically, South African IT departments have generally preferred to keep everything in-house, but today there seems to be growth in demand for outsourcing of network functions, as well as for basic hardware support and maintenance services. E-Readiness Despite the opportunities, prospects for the IT market remain constrained by high communication costs and uneven infrastructure development. The government has pledged to launch a new series of initiatives in 2007 to tackle this issue, including a new policy on broadband spectrum licensing that may positively influence growth. However, there are doubts as to whether the government has the will to tackle the key question of termination rates and pricing implications. It has been revealed that new tests for wireless broadband (WiMAX) will be shortly. WiMAX is attracting attention from telecoms carriers and policy makers as a cost-effective alternative to DSL for broadband access for areas where a wired solution is difficult. Internet penetration in South Africa is by far the highest on the continent with around 4mn users, representing around 8.8% of the population. The proportion of households with internet access is estimated to grow to 18.9% in 2006, from 11.3% in 2004. However, broadband penetration is currently below 3% with only around 1.5mn users. Despite the ongoing high of relatively high communications charges, e-business in South Africa is expanding and deepening, providing more opportunities for IT vendors. Dell is just one vendor to report a significant increase in online purchasing in the past few months, and South African businesses appear to becoming more aware of the benefits of e-business as compared with traditional sales channels. Dell reported a 13.4% increase in online trade since August 2006. Table of Contents
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