Hong Kong Information Technology Report Q2 2009

Market Overview Despite current economic headwinds, the Hong Kong IT market is forecast to increase from an estimated US$4.3bn in 2008 to US$5.7bn in 2013. IT and consumer electronics spending was surprisingly robust for much of 2008, but business and consumer sentiment weakened in H208, as the stock market remained 60% off its 2007 peak. Rising unemployment and exposure to the financial crisis are expected to contribute to slower growth in 2009.

Market drivers will include government IT spending, increasing cross-border trade and co-operation. Key sectors of the economy such as financial services are still investing in modernisation as Hong Kong strives to maintain its regional hub status. The market will also be sustained by initiatives encouraging the integration of Hong Kong’s economy with its large neighbour, and the abolition of taxes on cross-border trade.

Hong Kong’s IT market is increasingly defined by its relationship with China. In the 10 years since the handover to Chinese control, around 77,000 Hong Kong-owned or -controlled manufacturing operations have been established in the Pearl River Delta region, representing an increasing opportunity for Hong Kong-based IT companies to provide IT products and services.

Industry Developments Government IT spending will be key to continued market growth and is expected to rise as the government increases spending to try and stimulate the economy. Government IT spending for the 12 months to March 2009 was reported at HKD$5.49bn, up 20% from US$4.09bn the previous year.

The 2008 version of the government’s Digital 21 blueprint for information-society development identified five priority areas: facilitating a digital economy; promoting advanced technology and innovation; developing Hong Kong as a hub for technological co-operation and trade; enabling the next generation of public services; and building an ‘inclusive’ knowledge-based society.

Competitive Landscape Hong Kong PC market leader Lenovo reported a series of disappointing quarterly results last year, culminating in a fourth-quarter loss of US$97mn. In response to the disappointing results, Lenovo announced a restructuring programme focused on improving efficiency and on growth in emerging markets. In early 2009, the company said that it would cut 2,500 jobs, including 450 in China.

Meanwhile, Hong Kong-based IT services provider Automated Systems Holdings recently revealed that it had won more than HKD170mn worth of government tenders within five months. These included large scale projects for the Hospital Authority, which runs Hong Kong’s public hospitals, and the Office of the Government Chief Information Officer, which oversees government IT policy.

The focus on smaller manufacturing companies has led to the rise of Software as a Service (SaaS) in the Greater China region. NetSuite recently set up an office in Hong Kong to target the Pearl River Delta region, and it launched its Hong Kong service in September 2008. NetSuite planned to introduce its One World service in Hong Kong with subscription including customer relationship management (CRM), enterprise resources planning (ERP) and e-commerce applications at around HKD18,000 a month.

Salesforce.com is also active in the market.

Computer Sales According to BMI forecasts, the computer market will be worth US$1.99bn in 2009, up from an estimated US$1.95bn in 2008. Hong Kong spending on computer hardware did not appear to have been too affected by the economic down turn for much of 2008, in contrast to some other countries in the region like Malaysia. BMI anticipates that growth will ease in 2009 before recovering from 2010.

There is still room for organic growth among lower income groups, with government figures suggesting that 25% of Hong Kong households do not have a computer at home. Growing broadband penetration will help to support growth in the consumer segment, along with the promotion of 3G modems. The Closer Economic Partnership Agreement with mainland China is continuing to expand Software Software sales were worth about US$1.1bn in 2008 according to BMI estimates and are expected to be flat in 2009, before growing to US$1.4bn by 2013. Hong Kong boasts one of the most advanced software markets in the region, with software accounting for an estimated 6.0% of IT revenues in 2008. The territory has long been an important market for new launches of packaged software products. The current economic crisis may lead some companies to cut IT budgets or defer systems updates. Other companies, however, may see IT as a way of bringing greater efficiencies and increasing competitiveness in difficult times. Beyond basic ERP applications, growth opportunities include CRM and business intelligence. As vendor attention turns to smaller companies, the SaaS model is enjoying increasing popularity.

IT Services In 2009, the IT services sector is projected to be worth around US$1.3bn, with little growth on the previous year. IT services CAGR is then expected to be 7% in 2009-2013, building on a trend towards larger outsourcing projects in both the public and private sectors evident over the past couple of years.

IBM and HP are among those that have won large deals. The government’s Digital 21 initiative will continue to generate a number of projects, while vendors have reported continued interest from financial services companies, which are now looking at IT as a key element of their strategy for increased operational efficiencies. Other growth opportunities during the economic downturn should include telecoms and healthcare.

E-Readiness The narrowband internet user penetration rate stood at an estimated 57.9% in 2008 and was expected to grow fairly slowly to 62.8% by 2013, owing to the growing popularity of broadband. The number of users is forecast to reach almost 4.6mn by the end of the forecast period. Hong Kong’s international bandwidth prices should continue to decline over the next few years, giving a further boost to the sector. In 2008, the number of broadband subscribers was estimated at just under 2.1mn; this is expected to rise to nearly 3.0mn by 2013.

Hong Kong is strengthening its Wi-Fi strategy as it attempts to keep up with regional leaders such as Singapore and Taiwan. The Hong Kong government has recently committed another HKD220mn over two years to the deployment of a community Wi-Fi network that will serve more than 200 public venues.

These are to include government offices, libraries and major cultural and recreation centres. Some venues in Hong Kong, such as Cyberport and Hong Kong airport, already have Wi-Fi.

Digital 21 In September 2004, the Hong Kong government set up a new Digital 21 Strategy Advisory Committee (D21SAC) as its main advisory board on IT and related matters. Chaired by the commerce, industry and technology secretary, the committee advises the government on strategies and measures to further the goals and objectives set out in the Digital 21 Strategy. The D21SAC replaced its predecessor, the Information Infrastructure Advisory Committee (ILAC), as the highest level government advisory body on IT matters. Under the current phase, the focus is on service quality, including the consideration of lower pricing for e-services and an increasing emphasis on CRM. Other ongoing initiatives under the strategy include promoting the Cyberport and the Hong Kong Science Park more aggressively through trade promotion offices. In December 2007, the government outlined its Digital 21 plan for 2008.

Cyberport The Cyberport was designed to provide the city with a major regional hub that would attract leading IT companies and professionals. The first phase of the HKD13bn project, developed by local company PCCW, was inaugurated in November 2001. After the science park opened in June 2003, it came under criticism for having failed to attract enough tenants to fill the 38,000m2 of office space. This was mitigated slightly when the Dutch electronics firm Philips agreed to rent a floor, and subsequently when Microsoft announced it was moving its 250 Hong Kong-based employees there. However, the high-tech blue-chip companies seem to have lost interest, with commentators pointing to the lack of a mature venture capitalist (VC) community, favourable e-government policy or even ‘entrepreneurial spirit’. As the Cyberport does enjoy some advantages, including a favourable location and proximity to the vast mainland market, there is increasing demand for the government to revive the project.