Hong Kong Information Technology Report Q3 2010

Market Overview ; The Hong Kong IT market is forecast to grow from around US$4.6bn in 2010 to US$5.7bn in 2014. Sales were strong in Q110, with retail demand leading the way as the economy recorded positive growth following a contraction in 2009. The government sector is expected to be the key driver, along with stronger demand from the corporate and small and medium-sized enterprise (SME) segments. IT market growth is forecast at 5% in 2010, but much will depend on continued business and consumer confidence in the economic recovery. In 2010, consumer spending is expected to remain strong, as evidenced by strong demand for Apple’s iPad. Private consumption grew by 6.5% in Q110, while imports also increased.

The IT market will be supported by initiatives encouraging the integration of Hong Kong’s economy with mainland China and the abolition of taxes on cross-border trade. Recent integration of PCs with wireless networking technologies, as well as the roll-out of 3G mobile networks and popular converged services such as internet protocol television (IPTV), are also drivers.

Industry Developments ; In February 2010, Hong Kong Financial Secretary John Tsang’s maiden budget was broadly positive for local IT market growth, as the government looked to strengthen the economic recovery. The HKD317.2bn (US$40.82bn) budget was composed of higher expenditure and one-off relief measures to support domestic demand and lower-income households. Government fiscal stimulus, including tax relief, was aimed at boosting consumer confidence. In 2009, projects being implemented by Hong Kong public sector organisations included development of a city-wide system for sharing electronic health records and an e-procurement system for the office of the Chief Information Officer. Moves to increase the number of mainland Chinese residents visiting Hong Kong by making it easier for them to apply for visas provided a boost to the Hong Kong computer market during the economic slowdown. Many mainlanders visit Hong Kong to purchase notebook computers, digital cameras and other devices. The visa reform was widely perceived as a gesture by Beijing to help Hong Kong fight the economic crisis.

Competitive Landscape ; This year is projected to see the rise of tablet notebooks, spearheaded by Apple’s iPad. The iPad enjoyed strong sales in Hong Kong over the Easter weekend shopping period, with retailers reporting brisk sales. The units being sold had been imported unofficially and cost about 50% more than in the US market. Other vendors are expected to follow Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook.

One current feature of the IT services competitive landscape is the increasingly aggressive move of telecoms service providers into the IT services space. In May 2010, PCCW Solutions launched its own cloud computing service. Local telecoms company PCCW has forecast that the service will break even within one year, and the banking and retailing fields are seen as key areas of potential.

In January, Hong Kong Broadband Network, the broadband subsidiary of local telecoms company City Telecom, announced that it had formed a partnership with I-Consulting Group to introduce managed services. Meanwhile, COL, the IT services arm of telecoms operator Wharf T&T, has launched a partnership with US software giant Oracle to deliver human resource process outsourcing.

Computer Sales ; We forecast the Hong Kong computer hardware market at US$2.1bn in 2010, with 5% growth from 2009. In H209, the market rebounded as consumer spending recovered to grow by an impressive 4%. However, the most popular area of the computer market was netbooks, which were estimated to have accounted for 20-25% of Hong Kong notebook sales in 2009.

Computer sales are expected to maintain an upward trajectory in 2010, with robust consumer demand support by a revival in corporate and SME investment. The Closer Economic Partnership Agreement with mainland China is continuing to expand horizons for smaller enterprises and encourage IT investments.

Software ; Software sales are forecast at US$1.1bn in 2010 and are expected to reach around US$1.4bn by 2014. Hong Kong boasts one of the most advanced software markets in the region and software accounts for around 25% of IT revenues. Indeed, the territory has long been an important market for new launches of packaged software products.

The release of Microsoft’s Windows 7 operating system has the potential to stimulate the market. Beyond basic enterprise resource planning (ERP) applications, business segment growth opportunities include customer relationship management (CRM) and business intelligence. As vendors’ attention turns to smaller companies, the software-as-a-service (SaaS) model is enjoying increasing popularity in Hong Kong.

IT Services ; In 2010, the IT services sector is forecast at around US$1.4bn, up from US$1.3bn the previous year. IT services revenues are then projected to grow at a 2010-2014 compound annual growth rate (CAGR) of 5%. The market is expected to build on a trend towards larger outsourcing projects evident in both the public and private sectors over the past couple of years: IBM and HP are among those to have won large deals.

The government’s Digital 21 initiative will continue to generate a number of projects, while one of the highest IT spending verticals should be the financial sector, where IT systems and processes still generally lag some way behind Hong Kong’s status as a leading global financial centre. The IT services industry benefits from Hong Kong’s excellent telecoms infrastructure, with Hong Kong being the first city to fully digitise its fixed-line telecoms networks.

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 PCCW, was inaugurated in November 2001. After the science park opened in June 2003, it came under criticism for failing 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 Microsoft announced it was moving its 250 Hong Kong-based employees there. However, high-tech blue chip companies seem to have lost interest, with commentators pointing to the lack of a mature venture capitalist community, favourable egovernment 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.