Sri Lanka Information Technology Report Q3 2010

Market Overview ; Sri Lanka’s IT market is estimated to be worth US$336mn in 2010, just 2% the size of India’s, but is expected to grow to more than US$700mn within the five-year forecast period. The computer market has comfortably been growing at a double-digit CAGR for the past several years, yet penetration remains below 1%. Computerisation has only just got started in the government service.

Sri Lanka’s IT market has considerable latent potential, but has been handicapped over the years by the country’s economic instability, due largely to the long-running civil war. This has impacted the market in multiple ways, from disruption of regional and distribution channels to the negative effect on the economic and incomes growth and the underdevelopment of the country’s telecoms infrastructure. In 2010, the consumer PC segment will benefit from lower interest rates and more credit availability, while the Computers for Education programme will continue to receive government investment in 2010. The projected 2010-2014 CAGR of 20% would make Sri Lanka one of the fastest-growing markets in the region, albeit from a low base.

Industry Developments ; The decision by the Sri Lankan government announced in H110 to reduce import duties on electronic goods by around 3.5% should result in a further reduction of local market PC prices. The move will lead to a reduction in tax on imported CPUs, thus leading to lower prices for locally assembled computers. In 2010, the government plans to roll out another 1,500 computer labs for Sri Lankan schools. This is in addition to the 3,500 that have already been constructed in both rural and urban areas, with around 6,000 planned in total. The government designated 2009 as the year of IT (and English) in Sri Lanka. At the end of the year, the country continued to roll out new IT and education-related initiatives.

The Sri Lankan government’s e-Sri Lanka strategy outlines the country’s vision for information society development and forms the basis for initiatives related to ICT development. A key measure was the establishment of the ICTA, which has led ICT projects on various fronts. In recent years, plans for largescale deployment of broadband have been announced utilising digital subscriber line (DSL) as well as Wi-Fi, and fixed-wireless solutions such as WiMAX.

Competitive Landscape ; Greater economic stability in Sri Lanka will enable an expansion of domestic computer production. In May 2010, Sri Lankan manufacturer Singer launched its new Singer X series of affordable notebooks and netbooks onto its domestic market, targeted at rural users. A number of other Sri Lankan PC brands, including Panora, Maya and Kobian, have established a niche in their domestic market. In 2010 Microsoft Sri Lanka is promoting its cloud-computing solutions, which it believes could be a transformative software delivery model for Sri Lankan enterprises. Hidramani Group, one of Sri Lanka’s largest apparel manufacturing companies, recently announced that it was running a cloud computing pilot on Windows Live Initiative.

The nascent IT services market is dominated by local IT distributors that have built IT services offerings around portfolios of brands such as HP, SAP and IBM. International vendors such as HP and IBM operate mainly through partners rather than having a direct presence. IBM appointed a new country manager for Sri Lanka in 2009 and described Sri Lanka as a significant growth market within its South Asia unit.

Computer Sales ; Sri Lanka’s addressable computer hardware market is estimated at US$233mn in 2010 and is projected to reach around US$467mn in 2014. At least 350,000 computers were sold in Sri Lanka in 2009, despite the economic slowdown. This annual total could increase to more than 650,000 by the end of the forecast period with growing demand for affordable notebooks.

Sri Lanka’s IT market will stay hardware dominated, with spending on hardware accounting for an estimated 71% of Sri Lanka’s IT spending in 2009. There is considerable growth potential as the current level of computerisation is low, with PC penetration estimated at below 5%. The average price of a PC has already dropped over the past few years to less than US$300, bringing computers within the reach of lower income demographics.

Software ; Sri Lankan spending on software remains rather low, with an estimate of the addressable market at US$40mn in 2010. The estimated 11% share of the total IT spend, accounted for by software, reflects the relative immaturity of Sri Lanka’s IT market. However, the domestic software market is expected to grow at a CAGR of around 23% over the forecast period until 2014. One significant market restraint is the high level of software piracy, with nine out of 10 software packages in use thought to be unlicensed. The core business software demand is for applications such as enterprise resource planning (ERP), as well as basics like email. Local channels have estimated around 400 ERP installations in the country currently.

Services ; IT services are estimated at around US$62mn in 2010, accounting for about 17% of Sri Lanka’s total spending on IT. The market is dominated by demand from government, finance and telecoms sectors, which account for at least half of total spending. The provision of IT services is still typically built around hardware sales, with the growing base of installed hardware and software systems the foundation for an expansion of services provision. The consulting element should become more significant over the forecast period. The economic situation, and credit tightening, is likely to have an impact on projects in some key verticals.

E-Readiness ; Sri Lanka suffers from a very low level of internet penetration, at just 6.4% at the end of 2008. Broadband penetration was 0.5%. This low penetration level reflects the parlous state of Sri Lanka’s telecoms infrastructure as a result of years of civil war. This situation has been identified by the government as a major barrier to future social and economic development.

Progress is expected over the five-year forecast period, with internet penetration reaching 26%, and broadband penetration 13%. In recent years, the government has announced broadband infrastructure rollout plans and also encouraged the deployment of technologies such as WiMAX and Wi-Fi. However, adoption remains limited.