Philippines Information Technology Report Q3 2008 - www.companiesandmarkets.com adds new report.

2008-09-12 23:17:02 - Philippines Information Technology Report Q3 2008 - a new market research report on www.companiesandmarkets.com

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Market Overview

BMI expects the Philippines to be one of Asia’s high growth IT markets over the next few years, with annual spending increasing to around US$2.6bn in 2012. The market is driven by the Philippines’s status as a destination for BPO operations and call centres, which account for around 30% of the IT market. There is an ambitious five year plan for the sector to be worth US$13bn by 2010. Surveys show that most companies expect expenditure on IT to rise and small and medium-sized business (SME) growth is expected to be strong, particularly for hardware. Overall IT market CAGR is put at 9% for the 2007–2012 period. One IT market trend is geographical expansion, as large call centre companies seek cheaper labour, infrastructure and operational expenses.

The Cebu and Mindanao regions are emerging as new BPO hubs. The Southern Philippines is also home to around 70% of the country’s SMEs, while other sectors, including financial services, which accounts for around one-quarter of sales, telecoms and healthcare, are also important. The market will face a number of challenges, however, including rising costs in the BPO sector, skills bottlenecks, and a weaker external environment. The government is committed to developing the Philippine’s strengths in the ICT area, and is investing in training and regional development. Government spending to leverage ICT in areas ranging from schools to the courtroom will be a significant driver. Consumer segment growth should continue to be strong, driven by greater affordability, the popularity of notebooks and increased wireless and broadband connectivity.

Special Focus: Southern Philippines

Global vendors are placing a new strategic focus on the IT market in the Southern Philippines. Vendors such as IBM, Wipro and Accenture have invested in new facilities. The government is keen to promote regional centres as alternative locations for BPO operations. Accenture has opened a new IT outsourcing centre in Cebu, which will have 500 seats and provide application management, systems development and other related services to global clients. The company says that it will bring BPO as well as call centre business to Cebu. A survey by IBM highlighted the potential of the Southern Philippines market, identifying potential revenues of US$218mn, with most opportunities in services and software development. IBM plans investment in additional sites, manpower, promotions and marketing in the region over the next two years. The Mindanao region is home to a large number of small firms and manufacturing plants.

Industry Developments

The Philippine’s Business Processing Association, BPAP, remains optimistic that the industry will reach its target of US$12-13bn by 2010. A report earlier this year cast doubt on the Philippine’s ability to achieve the government target, set two years ago. The report, by the Commission on ICT (CICT), suggested that the only 1/5 of the target had been reached to-date. In a recent statement, BPAP asserted that the industry could achieve the required 50% annual growth. The industry wants the government to continue to ensure that tax incentives are in place to continue to attract investors to the Philippines.

An estimate of the number of call centres in the Philippines runs from 90 to 120+. Industry associations have also asked the government to look at ways to help the industry with power costs, which are a major variable. Call centres account for as much of 30% of local IT spending. One key part of the government’s agenda for ensuring continued growth is to attract investment to new regions. Mindanao has emerged recently has a popular destination for BPO investment, as operating costs are still considerably lower. To date much of the investment has focused on the regional centres of Davao and Cagayan de Mindanao has 25% of the national population, but fewer than 10% of call centres.

Company News

HP and Acer are the leading PC brands in a market where white boxes still dominate. While the white box is still estimated to account for around 75% of the local PC market, the branded PC share in many other Asian countries is around 50%, indicating considerable room for development. Prices for branded PCs in the Philippines are also falling, and are now down to around US$800 per unit. HP Philippines is targeting 20% growth in 2008, and plans to extend its product line to offer more affordable PCs. Affordability is a key criterion, especially for call centre companies. Meanwhile, challenger Asus hopes to achieve a 15% market share this year through following a strategy of localisation and more product launches and marketing. Vendors are targeting the high growth SME sector in the Philippines. IBM Philippines said that SMEs will be a major focus for it in the country, commenting that they have found ‘huge potential’. Meanwhile, Microsoft sees the SME segment as a promising potential market for its recently launched Windows Server 2008 and Microsoft SQL Server 2008. Microsoft said that it is targeting 10% annual growth in the local server market.

Computer Sales

BMI expects total 2008 hardware spending of around US$841mn, up from an estimated US$752mn in 2007. Affordability remains a key criterion for PC purchase, especially among call centre companies, which are a major source of demand. Prices for branded PCs in the Philippines are now below US$800 per unit. Much growth will of course come from increasing PC penetration, which is still less than 5% currently. However, even in the Southern Philippines consumers are now showing a greater appreciation for the enhanced features and legal software that comes with branded computers. Low price PC initiatives will play a role in driving growth, and in 2007 the CITC (Commission for Information and Communications Technology) launched a new ‘PC4All’ programme. The programme aims to increase the PC to user ratio by making available more affordable computers, through installation of open source software. The target price for the PCs is around PHP10,000. In addition to the PC4All programme, likely computer sale drivers over the forecast period include education, lower prices, IP telephony, cheaper processors, and entertainment and wireless networking features.

Software

BMI expects 12% growth in software spending in 2008, from 2007 spending of around US$245mn. This upwards growth path should be maintained, with BMI projecting CAGR for the software sector between 2007 and 2012 at 9%. The software piracy rate as reported by the Business Software Association was 69% in 2007, down slightly from 71% in 2006. There is significant potential in the relatively untapped SME sector, particularly in the Southern Philippines, which is receiving attention from vendors like Oracle, IBM and Microsoft. Vendors are exploring new channels to reach this segment, such as Saleforce.com and Intel’s current co-operation with telecom PLDT. Open source software is on the rise, and is being preinstalled in the PCs to be sold under the new PC4ALL programme. In addition, a bill promoting the use of FOSS (free and open source software) is currently making its way through Congress. In response Microsoft has launched a stripped–down version of Office that retails at about half the price of the full version.

Services

Growth in the IT service sector continues to be driven by sustained growth in the IT enabled services sector, particularly BPO and call centre services. BMI forecasts a value of US$713mn in 2008, up from US$637mn in 2007. Due to evolving demand, vendors are having to pay more attention to value-added services such as technical support and product troubleshooting and basic IT and hardware consulting. Call centres are, unsurprisingly, projected to be the biggest single source of earnings for IT service providers, accounting for around 30% of revenues.

E-Readiness

A survey for the Philippines Institute for Development Studies has found that the Philippines is lagging other Asian countries in terms of IT and internet use in business. The survey found that the Philippines lagged even Thailand and Indonesia, which were relative latecomers to internet deployment. Only one quarter of the Philippines’ population of 11mn are able to buy products and services online, and the majority of this business is with US retailers such as Amazon and eBay. Part of this is due to lack of trust in credit cards. The report warned that unless measures were taken to develop ecommerce then Philippine enterprises would continue to lose trade opportunities to other countries. The current administration has declared IT along with Communications as two of the three flagship industries that government would focus on, the other being tourism. The government therefore is to focus its attention now to improve the country’s technical and human capabilities. However, the overall number of local internet users has grown steadily over the last five years, reaching an estimated 11.3mn in 2007, according to BMI figures. Meanwhile, the number of broadband subscribers was just below 1mn in 2007 and is expected to grow to over 4mn by 2012. By 2012, internet and broadband penetration rates are expected to be 33.4% and 4.5% respectively. Falling prices of PCs and internet subscription rates, partly as a result of greater market competition, have driven this growth. However, low PC and internet penetration rates, along with low telephone density and security concerns, still hold back the development of e-commerce.

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