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... any information hereto contained Israel Information Technology Report Q2 2009 © Business Monitor International Ltd Page Israel Information Technology Report Q2 2009 CONTENTS Executive Summary... training information workers; © Business Monitor International Ltd Page 25 Israel Information Technology Report Q2 2009 Aid to be given to the less wealthy to make them part of Israel s information. .. Monitor International Ltd Page 41 Israel Information Technology Report Q2 2009 HP Services Revenues Technology services, consulting and integration In 2007, HP Israel reported local computer sales
Published by BUSINESS MONITOR INTERNATIONAL LTD Israel Information Technology Report Q2 2009 ISSN: 1752-4245 Including 5-year industry forecasts Business Monitor International Mermaid House, 2 Puddle Dock London EC4V 3DS UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 email: subs@businessmonitor.com web: http://www.businessmonitor.com © 2009 Business Monitor International. All rights reserved. All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content. Israel Information Technology Report Q2 2009 Including 5-year industry forecasts by BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication date: April 2009 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2009 Business Monitor International. All rights reserved. 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Israel Information Technology Report Q2 2009 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q2 2009 CONTENTS Executive Summary .........................................................................................................................................5 SWOT Analysis.................................................................................................................................................8 Israeli IT Sector SWOT.......................................................................................................................................................................................... 8 Israel Telecommunications Sector SWOT .............................................................................................................................................................. 9 Israel Political SWOT.......................................................................................................................................................................................... 10 Israel Economics SWOT ...................................................................................................................................................................................... 11 Israel Business Environment SWOT .................................................................................................................................................................... 11 Middle East Regional IT Markets Overview .................................................................................................12 Market Growth And Drivers ................................................................................................................................................................................ 13 Sectors And Verticals........................................................................................................................................................................................... 15 IT Business Environment Ratings................................................................................................................17 Regional IT Business Environment Ratings ......................................................................................................................................................... 19 Market Overview.............................................................................................................................................20 Government Authority.......................................................................................................................................................................................... 20 History and Market Structure .............................................................................................................................................................................. 20 Hardware............................................................................................................................................................................................................. 22 Software............................................................................................................................................................................................................... 22 Services................................................................................................................................................................................................................ 23 Industry Developments ........................................................................................................................................................................................ 25 Industry Forecast ...........................................................................................................................................28 Table: Israeli IT Industry (US$mn, unless otherwise stated) – Historical Data & Forecasts .............................................................................. 29 Internet Forecast ................................................................................................................................................................................................. 30 Table: Internet Data & Forecasts........................................................................................................................................................................ 30 Macroeconomic Forecast .................................................................................................................................................................................... 32 Outlook Darkening As Consumer Takes Fright ................................................................................................................................................... 32 Table: Israel – Economic Activity........................................................................................................................................................................ 34 Country Context................................................................................................................................................................................................... 35 Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 35 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 35 Competitive Landscape .................................................................................................................................36 Internet Competitive Landscape .......................................................................................................................................................................... 38 Company Profiles...........................................................................................................................................39 Ness ..................................................................................................................................................................................................................... 39 IBM...................................................................................................................................................................................................................... 41 HP........................................................................................................................................................................................................................ 42 Matrix .................................................................................................................................................................................................................. 44 Microsoft.............................................................................................................................................................................................................. 45 Country Snapshot: Israel Demographic Data..............................................................................................47 Section 1: Population........................................................................................................................................................................................... 47 Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 47 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q2 2009 Section 2: Education and Healthcare .................................................................................................................................................................. 48 Table: Education, 2002-2005 .............................................................................................................................................................................. 48 Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 48 Section 3: Labour Market and Spending Power................................................................................................................................................... 49 Table: Employment Indicators, 2001-2006.......................................................................................................................................................... 49 Table: Average Annual Wages, 2000-2012.......................................................................................................................................................... 49 BMI Forecast Modelling .................................................................................................................................50 How We Generate Our Industry Forecasts .......................................................................................................................................................... 50 IT Industry ........................................................................................................................................................................................................... 50 IT Ratings – Methodology.................................................................................................................................................................................... 51 Table: IT Business Environment Indicators ......................................................................................................................................................... 53 Weighting............................................................................................................................................................................................................. 54 Table: Weighting Of Components........................................................................................................................................................................ 54 Sources ................................................................................................................................................................................................................ 54 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q2 2009 Executive Summary Market Overview Despite an anticipated slowdown in 2009, the Israeli IT market should have enough momentum from key sectors to continue to expand over BMI’s 2008-2013 forecast period. BMI estimates that the local IT market reached an estimated value of US$4.83bn in 2008. The market is forecast to grow at a CAGR of 6% over the forecast period, to reach a projected US$6.5bn in 2013. IT spending still grew in H108 with stronger-than-expected demand from both enterprise and household sectors. However, following a deterioration in H208, BMI believes that growth will ease further in 2009 thanks to the economic slowdown. Rising unemployment, and job insecurity for those in work, will have a negative impact on consumer sentiment, while many companies facing tight credit conditions will likely cut back on IT budgets. The Israel IT market has a number of positive fundamentals, which should keep it in positive territory. Low computer penetration, of around 30%, offers potential for continued growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications, and the new popularity of netbooks. Industry Developments Israel’s high-tech merger activity fell in 2008, as a result of the downturn in the global economy. According to figures from Israel’s Venture Capital Research Centre (JVC), the value of Israel high-tech mergers were down 19% year-on-year (y-o-y) to US$2.64bn. The average deal size was also down, to around US$31mn. The whole year passed without a single high-tech IPO, a first since 2003. IT is viewed as an important policy tool for the Israeli government’s 2008-2010 socio-economic policy framework. The National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to emerge as the main priority. As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement in 2007 with Dell and HP. Competitive Landscape Israel’s leading IT services vendors reported continued growth in 2008, despite the economic crisis. Ness Israel reported revenues, with18.7% top-line growth, year-on-year, to a record US$664.8mn. Ness’s © Business Monitor International Ltd Page 5 Israel Information Technology Report Q2 2009 defence and homeland security business performed particularly well. Meanwhile, Matrix also chalked up a number of successes in 2008, including winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, and a number of public-sector CRM projects. In 2008, SAP reached an agreement with Ness to purchase the latter’s SAP sales and distribution division in Israel. The move paralleled the acquisition by SAP, at the end of 2007, of partner SAP Arabia’s software licences and customer maintenance products. SAP implementations are a major IT services category in Israel, and SAP aims to be closer to its customers and partners. As a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. However, IBM Global Services announced in 2008 that it was establishing a new systems and technology group lab in Israel. Meanwhile, computer vendor Dell reportedly accepted an invitation to establish a new R&D and business centre in Jerusalem. Computer Sales Computer sales in Israel including servers and accessories were valued at an estimated US$1.85bn in 2008, up from US$1.68bn in 2007. The market is forecast to grow at a CAGR of 6% over the 2008-2013 forecast period to reach close to US$2.5bn in 2013. Despite the economic slowdown, PC sales continued to grow in H108 with stronger-than-expected spending in both enterprise and household sectors. The PC market is expected to slow in 2009 as a result of declining consumer and business sentiment, but one area of growth will be lower-priced netbooks which are establishing a position in the market. Software Israel software spending was estimated at US$309mn in 2008, up from US$255mn in 2007. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Spending on software is shifting towards the small- and medium-sized enterprise (SME) segment, which forms the mainstay of the Israeli business sector. Spending on enterprise solutions has grown since 2007, with reviving or emerging areas of opportunity including security, CRM solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. IT Services The IT Services sector had an estimated value of US$1.54bn in 2008, and this is expected to grow at a CAGR of 8.6% over the forecast period to reach US$2.34bn in 2013. The number of new projects is expected to be reduced in 2009 thanks to the anticipated economic slowdown. Government and Defence are two key sectors likely to be a continued source of opportunities, because the factors driving spending in each case are not particularly sensitive to economic downturn. Israel seemingly possesses many advantages as an outsourcing destination – in particular a technologically literate, linguistically skilled © Business Monitor International Ltd Page 6 Israel Information Technology Report Q2 2009 workforce, and low labour costs relative to most developed countries. Despite failing to capitalise in the past, the country is starting to emerge as a desirable location for packaged applications and localisation services. E-Readiness At the end of 2008, Israel had an estimated 4.5mn internet users, representing a penetration rate of 61.9% of the population. Broadband penetration was estimated at 22.6%, or 1.6mn accounts. The government has announced that it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines. © Business Monitor International Ltd Page 7 Israel Information Technology Report Q2 2009 SWOT Analysis Israeli IT Sector SWOT Strengths Weaknesses Opportunities Threats One of the most modern economies in the region, with a highly educated, linguistically skilled workforce, and relatively low labour costs (compared with most developed countries) Strong defence and government spending provides base of IT demand Relatively mature IT market, with services accounting for an estimated 32% of spending in 2008. Despite this, the market for basic IT hardware and software is far from saturated Strong political support, with government having implemented a number of policies to aid in the development, success and expansion of the IT sector The recession at the beginning of the decade created a client mentality of focusing on the bottom line, with enhanced services customer market power adding to pressure on pricing and margins Digital divide, with 3% of bottom income group having home internet access Despite financial crisis, the financial services sector, which accounts for around 15% of spending, will have to spend on compliance with Basel II and other international standards, driving growth Defence and government projects should be relatively less sensitive to the economic downturn Outsourcing, Software as a Service (SaaS) and applications management likely to grow fastest out of IT services, with particular opportunities in financial sector Opportunities for partnership/investment in Israel’s lively local IT company sector Economic downturn and unemployment will lead to weaker consumer and business sentiment Other factors may affect business confidence, notably the security situation Aggressive pricing may continue to constrain growth and put pressure on margins © Business Monitor International Ltd Page 8 Israel Information Technology Report Q2 2009 Israel Telecommunications Sector SWOT Strengths Weaknesses Opportunities Threats Well-developed internet/broadband sector compared with regional peers Liberal mobile market, consisting of four operators Mature market, with strong take-up of value-added and 3G services Mobile penetration rate of over 120% means that growth in the mobile market has slowed considerably and operators must look for alternative revenue sources Lack of competition in all telecom sectors Regulator has been slow to license new services, such as Worldwide Interoperability for Microwave Access (WiMAX) wireless broadband Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects Emergence of rival operator HOT Telecom, made up of main three cable operators – Golden Channels, Matav and Tevel – to compete against Bezeq could provide cheaper services Introduction of number portability and the entry of mobile virtual network operators (MVNOs) to the mobile sector could shake up competition and drive down retail prices for consumers Continued interconnection tariff reduction could have a devastating effect on operators’ revenues Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenues Operators are also hostile to the introduction of MVNOs © Business Monitor International Ltd Page 9 Israel Information Technology Report Q2 2009 Israel Political SWOT Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region Elections are for the most part free and transparent, ensuring that a broad spectrum of political views are represented within government The protracted conflict with the Palestinians means there are persistent security risks, although violence in the West bank has been reduced significantly. Strategies to minimise or end the conflict are domestically divisive Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted Opportunities The Annapolis conference in November 2007 laid the foundations for an eventual peace agreement with the Palestinians, and improved relations with traditionally hostile Arab states, particularly Saudi Arabia Threats The victory of Hamas in the 2006 Palestinian elections, its subsequent takeover of the Gaza Strip, and Israel's military incursion into the territory in December 2008/January 2009 has added to uncertainty. Finding a lasting solution poses a dilemma for Israel, which has previously said it will not talk to the militant organisation The construction of the West Bank barrier and the continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process Iranian president Mahmoud Ahmadinejad has intensified his anti-Israel rhetoric, adding to Israeli concerns about a possible Iranian nuclear weapons programme Strengths Weaknesses © Business Monitor International Ltd Page 10 Israel Information Technology Report Q2 2009 Israel Economics SWOT Strengths Weaknesses Opportunities Threats The policy framework has stabilised in recent years with fiscal deficits brought well under control (although the deficit is set to expand again in 2009) The workforce is highly educated and skilled The country's close ties with the US provide it with substantial financial assistance for economic and military ends The main downside risk to the economy is the security situation. A sharp deterioration can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment The economy is highly exposed to that of the US, in terms of exports, investment and remittances In the long-term, rising levels of employment will underpin private consumption growth FDI stocks amounted to 37% of GDP in 2007, according to UNCTAD, and this should continue to propel growth for some years to come As a net fuel importer, Israel is vulnerable to large price fluctuations; the surge in oil prices in 2008 contributed to rising inflation Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in eurozone, could undermine demand for Israeli exports Israel Business Environment SWOT Strengths Weaknesses Opportunities Threats The business environment is supported by the sound infrastructure and communication networks, as well as transparent legislation The banking system is one of the most sophisticated in the region, and offers a wide range of both consumer and commercial credit products Historic political instability and, more recently, suicide bomb attacks, increase the risk premium of investment in Israel Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector Ongoing cuts will bring the top level of corporate tax down from 29% in 2007 to 25% by 2010 The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade Strike action has proved extremely disruptive to the business environment over the past two years. With economic conditions deteriorating, more strikes are likely to take place in 2009 © Business Monitor International Ltd Page 11 Israel Information Technology Report Q2 2009 Middle East Regional IT Markets Overview BMI projects continued improvement in Internet Penetration regional ICT indicators over the next few (per 100 population) years, driven by investment in broadband and government ICT initiatives. The 90 Middle East divides into two groups in 80 terms of information society 70 development. In the first group are richer 50 40 countries, such as Israel and the UAE, 30 where internet penetration is relatively 20 broadband services. In the more 2013f 60 and more technologically advanced high and many households have access to 2008e 10 0 Egypt Israel Kuwait Qatar Saudi UAE emerging markets such as Egypt, on the other hand, computers remain a luxury e/f = estimate/forecast. Source: BMI for many. The number of internet users is expected Broadband Penetration to grow significantly across the region. (per 100 population) Qatar is projected to advance the most in percentage terms, with penetration rising 35 from about 50% in 2008 to 78% by 2013. 30 Egypt will have nearly 23mn subscribers 25 in that same year, up from 11mn in early 20 2009. The UAE is one of the most 15 advanced states in the region in this respect, with internet penetration seen as reaching 78% within the forecast period. By contrast, Saudi Arabia is forecast to 2007e 2012f 10 5 0 Egypt Israel Kuwait Qatar Saudi UAE achieve a 7% rise in subscribers, but at this rate would still reach only 30%. e/f = estimate/forecast. Source: BMI Similar contrasts are apparent in relation to broadband penetration, which currently ranges from 0.8% in Egypt to 22.6% in Israel. Again, Qatar is forecast to achieve the most dramatic advance, with broadband penetration in the small state exceeding 30% by 2013. Government initiatives are afoot in most places, ranging from wireless broadband in Dubai to plans to deploy optical fibre extensively in countries such as © Business Monitor International Ltd Page 12 Israel Information Technology Report Q2 2009 Kuwait. Broadband penetration is seen as being at about 25% or above in the UAE, Saudi Arabia and Israel by the end of the forecast period, but at only around 3% in Egypt and Kuwait. Internet and broadband penetration growth will receive boosts from continued efforts to liberalise regional telecoms markets. In 2008 the Qatari government announced that eight operators had submitted bids for new fixed-line licences. Egypt also continued liberalisation of its telecoms market last year, and similar moves have been seen in the Kingdom of Saudi Arabia. Broadband penetration has become a driver of PC ownership in some segments, due to the growing variety of multimedia and communication services available. There is plenty of room for PC growth, given the current low levels of computerisation, which are estimated at less than 50% in every country in the region. Governments in the region are allocating significant budgets for e-government development. The UAE launched several new projects in 2008, including an ID card initiative that will be a key element underpinning future information society development. Meanwhile, in June 2008 Saudi Arabia’s governing Shoura Council approved a draft national strategy for the IT industry that aimed to raise the contribution of the industry to GDP to 20% by 2020. Israel has announced that it intends to make a big effort to narrow the digital divide, and there has also been spending on computers in healthcare and a nationwide paperless court initiative. Market Growth And Drivers Despite the global economic slowdown, IT Market Sizes (US$mn) the Middle East appears better placed 2007e than most other regions to withstand the current global economic headwinds. In UAE GCC states, the precipitous fall in oil prices in H208 had a negative effect on Saudi spending in previously fast-growing IT Qatar spending verticals such as oil and gas, Kuw ait construction and real estate. Companies, hit by slowdowns in key export markets and credit tightening, were looking to cut costs. Israel Egypt 0 1,000 2,000 3,000 4,000 5,000 6,000 e = estimate. Source: BMI © Business Monitor International Ltd Page 13 Israel Information Technology Report Q2 2009 However, the region has a number of positive factors to help it avoid IT Market Sizes As % Of National GDPs stagnation. There is increasing economic diversification and strong spending from non-oil sectors such as government, financial and enterprise sectors. By 2012 this should be more evident, with IT’s share of GDP rising in these countries. Other drivers include fairly resilient 2007e-2012f UAE 2012 2007 Saudi Qatar Kuwait consumer demand and ongoing Israel infrastructure projects in major verticals Egypt such as oil and gas, telecoms and power. 0 As a result, IT market growth is expected 1 2 3 e/f = estimate/forecast. Source: BMI to remain in positive territory in most places in 2009. Youthful population demographics, retail sector development and rising PC penetration will drive growth. Growing regional competition and opportunities, with the development of the Arab Free Trade Zone will encourage spending. Several sectors will offer opportunities despite the economic headwinds. IT Markets Compound Growth, (%) 2008e-2013f Telecoms liberalisation and a big push towards broadband penetration are UAE expected to drive demand. Banks are implementing solutions to increase Saudi business flexibility and introduce new Qatar services, including Islamic banking. In Kuw ait Israel, spending in two of the largest IT verticals, defence and government, should be relatively immune to the economic situation. Another key area for Israel Egypt 0 20 40 60 80 IT spending in many countries will be healthcare, with several major projects e/f = estimate/forecast. Source: BMI launched. The highest growth MEA IT market over the forecast period is expected to be Egypt, with compound growth of 65% for 2008-2013. There is room for considerable growth in the country in the next few years, given the current low level of computerisation, which is much higher in the business sector than in the population at large. Other high growth markets are expected to include Kuwait (64%) and Qatar (64%). © Business Monitor International Ltd Page 14 Israel Information Technology Report Q2 2009 Market Structure (% of Total IT Market) 2008e 2013f 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Egypt Israel Kuw ait Qatar Saudi UAE Hardw are Softw are (Russia = softw are + services) Services e = estimate. Source: BMI Egypt Israel Kuw ait Qatar Saudi UAE Hardw are Softw are (Russia = softw are + services) Services f = forecast. Source: BMI Sectors And Verticals Hardware will continued to dominate regional IT spending as the number of personal computer users rises steadily over the forecast period. This will be driven by growing affordability, government initiatives and the popularity of notebooks and netbooks. Notebook shipments grew about 50% in the Gulf last year, with the notebooks the main product category driving retail segment growth, as consumer sales feel the benefits of aggressive channel promotions. The economic slowdown and credit tightening may have an impact on hardware spending in the enterprise sector, as companies look to cut costs. However, PC prices are continuing to fall, and this – along with more credit availability – is bringing computers within the reach of many more people. Meanwhile, the advance of ‘big box’ retailing, with larger outlets offering lower prices and more choice, will also stimulate sales. Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy instalment payment schemes. Strong demand for notebooks is another key factor driving growth, although desktops remain important for small and medium-sized enterprises (SMEs) and other groups. Government investment in education and e-services will mean desktop purchases for schools, colleges and government offices. Spending on software as a share of total IT spending is as low as 14% in Egypt and below 20% in a majority of MEA markets. Despite the difficult economic environment, which will encourage companies to focus on the bottom line, Demand from the oil and gas segment was hit in H208, but BMI predicts plenty of room for growth over the forecast period as numerous untapped sectors still exist. Key verticals will include telecoms, finance, retail, healthcare and the public sector. © Business Monitor International Ltd Page 15 Israel Information Technology Report Q2 2009 SMEs are likely to lead spending growth, with manufacturing and trading firms seeking efficiencies by making the transition from manual environments to full automation of back-office systems. Customer relationship management (CRM) will be a growth area, as fewer than 2% of SMEs in the Middle East region having a specialised CRM application in place. Other high-growth categories are set to include business intelligence, storage and security products. Security software is a growing opportunity, with the UAE currently the largest market. There are some challenges for the regional software market. One key issue is that of illegal software: across the region up to 80% of software is counterfeit. Another important factor is of course low income, and the high costs of operating systems such as Windows, which has led to activity to promote open source in countries such as Egypt, championed by IBM and other vendors. BMI predicts that IT Services will remain in positive territory during the 2008-2013 period. However, the economic situation is likely to have an effect in some key verticals, particularly real estate and oil and gas. In H208 there were reports of IT managers in various sectors looking to cut costs, although in some cases the emphasis was more on scaling back projects rather than cancellation. In the government sector, budgets have often already been commissioned, and so the effects are more likely to be felt in the second half of 2009 and in 2010. Currently, IT Services’ share of IT spending ranges from around 24% to 32% in the MEA countries covered by BMI. Support and maintenance account for around one-third of spending on IT Services, but , demand for more complex services has increased, with large outsourcing deals in the UAE, Israel and elsewhere. There is also demand for services such as hosting, facilities management and disaster recovery. Even in less mature markets such as Egypt, larger customers are becoming more demanding in terms of their IT expectations. © Business Monitor International Ltd Page 16 Israel Information Technology Report Q2 2009 IT Business Environment Ratings BMI’s Middle East and Africa (MEA) IT Business Environment Ratings compare the potential of the key regional markets over our forecast period, through to 2013. The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and government projects. Q209 once again includes Turkey in the MEA ratings, in addition to Europe, reflecting its strategic importance for vendors in both regions. In our updated Q209 rankings, the wealthy, high-tech Gulf Co-operation Council (GCC) markets continue to occupy the higher positions, with factors such as comparatively resilient consumer demand, and ongoing infrastructure projects, meaning that this region is better placed than most to withstand that global economic slowdown. The top four countries remain the same, with only a small change in the order. For the second quarter running, the UAE has the top spot, while Kuwait reclaims second place, swapping positions with Qatar, which moves down in third. Still in fourth place is Israel, where spending in government and defence verticals and growing PC and broadband penetration should be enough to prevent stagnation, despite an expected further easing in 2009. Saudi Arabia, Bahrain, Turkey and Oman occupy the next four places and – like Qatar and Saudi Arabia – are expected to remain in positive territory. A key factor will be continued opportunities in sectors such as government, education and telecommunications, even as spending declines in other sectors more affected by the economic headwinds such as construction and real estate. PC sales slowed in Turkey in the middle of 2008, as the global credit crunch hit consumer spending, but the fundamentals of low computer penetration and rising incomes should keep the market on an upwards path. South Africa’s relatively lowly ninth spot reflects business environment risks, rather than the potential of the country’s IT market, which will receive stimulus from infrastructure initiatives. Bringing up the field, Egypt’s high growth potential is constrained by income and business environment considerations, while Lebanon is still recovering from the events of 2006. A key variable for IT spending in this region is economic diversification. Some economies in the Middle East, such as Kuwait’s, remain highly dependent on oil. In the UAE, however, some 80% of GDP is accounted for by the non-oil sector, and in Qatar around 38%. In many countries, liberalisation in telecommunications and financial services are factors driving demand for IT products and services. The share of the non-oil sector in IT spending is expected to fall slightly in the UAE but to rise in Saudi Arabia, which accounts for 40% of regional IT spending. However, there will continue to be significant spending on new technology-driven solutions in the hydrocarbons sector. Another factor that will keep IT spending growing despite the economic downturn, is the waves of egovernment initiatives being implemented in states like Kuwait, the UAE and South Africa, among © Business Monitor International Ltd Page 17 Israel Information Technology Report Q2 2009 others. First-placed UAE has continued to roll out e-services in 2008, following the recently announced UAE Strategic Plan, which called for a strengthening of e-government programmes. The UAE’s federal government is attempting to emulate the best practices of the local governments. In Saudi Arabia, too, substantial budgets have been allocated for e-government infrastructure development. Government accounts for up to 40% of the IT market in some states, which is a ratings risk given frequent bureaucratic inertia and resistance to reform. Over time, this risk should be reduced by economic diversification as technology-using sectors such as financial services, communications and real estate invest in new solutions. Qatar is a good example, with the government recently outlining new ICT investment plans and the foundation of a new technology park. Saudi Arabia, Bahrain and Oman rank slightly behind their equally fast growing GCC peers on grounds of general business environment, but the IT market metrics remain attractive. Saudi Arabia will continue to be a lucrative market for technology products and services, with the country’s youthful population supporting a continued rapid rise in internet, PC and notebooks penetration. BMI also takes a positive view of market performance in Bahrain over the 2008-2013 forecast period, in line with our GDP and oil price projections. A particularly important factor is Bahrain’s growing status as a financial hub. Oman, although like Bahrain one of the smaller markets in the region, should also benefit from an emphasis on diversification, which is encouraging infrastructure projects in sectors ranging from tourism to ports. Of the non-GCC countries, Israel – in fourth place – should maintain its IT market momentum despite exposure to adverse global economic conditions. Nearly 50% of IT spending is accounted for by government and military projects, which are less likely to be affected by a short-term slowdown. Israel’s IT market is also benefiting from record-breaking foreign investment, as well as growing demand for major IT outsourcing solutions. Investments by financial sector organisations are on the rise. South Africa is one of the Middle East and Africa’s most significant IT markets in terms of size and growth potential. However, the country loses points for country structure and market risk, where we took account of factors such as high unemployment and an uncertain environment surrounding government tenders. The energy crisis and weakening external demand may precipitate a more cautious spending approach by some organisations, but the market will be supported by factors such as the 2010 Football World Cup, government digital divide projects and sectors such as telecoms. Lebanon has strong intrinsic advantages, including a cosmopolitan and multi-lingual labour force, and a strategic position for the Levant markets. However, fulfilment of the market’s undoubted potential will depend on a functioning government being able to take the steps necessary to enable this. Meanwhile, Egypt is expected to be one of the fastest growing IT markets in the region over the next few years, but has a number of constraints, including low disposable incomes and economic disparities. The country has the potential to rise up the regional rankings over time as computer penetration rises. © Business Monitor International Ltd Page 18 Israel Information Technology Report Q2 2009 Regional IT Business Environment Ratings Limits of Potential Returns Risks to realisation of returns IT Market Country Structure Limits Market Risks Country Risk Risks IT BE Rating Regional Ranking UAE 49 90 63 60 74 68 64.9 1 Kuwait 52 90 65 40 76 62 64.0 2 Qatar 40 100 61 50 77 66 62.5 3 Israel 48 80 59 55 68 63 60.5 4 Saudi Arabia 49 70 56 45 59 54 55.6 5 Bahrain 37 80 52 55 70 64 55.5 6 Oman 38 65 48 45 67 58 50.8 7 Turkey 57 50 54 45 40 42 50.6 8 South Africa 53 45 50 35 54 46 49.1 9 Egypt 49 25 41 40 65 55 44.9 10 Lebanon 35 60 44 20 32 27 38.8 11 Source: BMI. Scores out of 100, with 100 highest. The IT BE Rating is the principal rating. It is comprised of two subratings 'Limits of Potential Returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting respectively. In turn, the 'Limits' Rating is comprised of Food & Drink Market and Country Structure, which have a 70% and 30% weighting respectively and are based upon growth/size/maturity/govt. policy of IT industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating is comprised of Market Risks and Country Risk which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q2 2009 Market Overview Government Authority Government Authority Ministry of Science, Culture and Sport Minister Ghaleb Majadele The Ministry of Science, Culture and Sport was established in 1982 as the Ministry of Science and Development; it has undergone numerous name changes, receiving its current name in 2006. The responsibilities of the ministry are the formation of a national policy towards science and technology, technological analysis and organisation, and the co-ordination of research areas. The main priorities for the Ministry of Science, Culture and Sport are as follows: Setting up a national policy and priorities for research and development (R&D); Development of scientific and technological infrastructure; Establishment and strengthening of foreign scientific relations; Participation in the establishment of research centres, including regional R&D centres; Participation in the development of scientific and technological human resources; Increasing awareness of science within the public, especially the youth of Israel; Developing digital infrastructure (facilitating access to information); and Consulting the government and its offices in the area of science and technology. History and Market Structure All the major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services (IGS) regional subsidiary in Petach Tikva, and employs around 2,000 staff at its Haifa Labs and various IBM facilities in Rehovot and Jerusalem. HP has as many as 4,000 employees and has long offered services and support through its subsidiary HP-OMS. Other vendors such as Oracle and EDS also have a sizeable presence. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q2 2009 FDI first started to play a key role in Israel's economy in the mid-1990s, as the country's high-tech sector underwent a rapid expansion. Together with the opening up of the financial and telecom sectors, the hightech sector succeeded in attracting large FDI flows. The government’s policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new R&D facilities. Indeed, today, Israel has more offshore R&D centres of US high-tech companies than any other country. Local companies also have a significant presence in the Israeli IT market, with seven of the top 10 IT services firms being Israeli. Major players include Matrix, Ness Technologies and Malam Group, with Israel typically accounting for between 40% and 50% of their revenues. Table: Government Initiatives Gov@Net – Government intranet A cross-government intranet planned to connect over 80 governmental networks and hundreds of institutes. The implementation will create the largest Israeli IP-VPN. The project will allow efficient internal communication and resource sharing Mercava – Government ERP Mercava is the largest-ever IT project implemented in Israel. It will gradually replace the assortment of unique legacy systems currently operating in governmental bodies with a central, unified ERP system, running on SAP software This project will create a unified language for cross-government activities Government EIP This project is intended to promote enterprise portals within the government. Since a cross-government portal will be based on information received from the different bodies, the first step involves the construction of a ministry-level portal. This portal will draw information from ‘Merkava’ (see Industry Developments), from ministry-specific operational systems, and from intra-government shared resources Tehila – Government ISP The GISP project has been operational since 1998, providing essential infrastructure for public-government communication To date, 60% of the governmental bodies have voluntarily joined the project Shoham – e-commerce infrastructure and service A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, which includes the payment of taxes, fees, fines (VAT, vehicle and driving licence fees and traffic fines) and the purchase of tangible goods (government publications). The service processed over ILS250mn in its first year Lehava project Group of initiatives to help close digital divide © Business Monitor International Ltd Page 21 Israel Information Technology Report Q2 2009 Hardware Computer sales in Israel including servers and accessories were valued at an estimated US$1.85bn in 2008, up from US$1.68bn in 2007. The market is expected to grow at a CAGR of 6% over the 2008-2013 forecast period to reach close to US$2.5bn in 2013. Despite the economic slowdown, PC sales continued to grow in H108 with stronger-than-expected spending in both enterprise and household sectors. However, BMI believes that growth will be slower in 2009 with an economic slowdown and unemployment hitting consumer demand for high-tech goods. Retail spending has been buoyant in the past two years, with drivers including the strong shekel, higher broadband penetration, and demand for multimedia applications. Despite strong growth in demand for notebooks, the desktop sector is still unsaturated and accounted for as much as 75% of PC sales in 2007, largely to business and government end-users. Going forward, the PC market is expected to slow, through a combination of reduced consumer and business confidence. These factors were apparent in H208, but because of the upwards trend in the first half of the year, total PC sales were still up overall in 2008, at around 439,000. One area of growth will be lower-priced minicomputers, or netbooks, which are establishing a position in the market. The current low rate of PC penetration represents potential for organic growth. PC penetration was only 26.4% in 2005, while digital divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of whom have internet or home PC access, compared with 90% in the top income group. The Israeli government is taking various measures aimed at increasing computer and internet penetration – Computer for Every Child, Window to Tomorrow’s World, Tapuah (The Israeli Society for the Advancement of the Information Age) and others. The level of support, however, has been criticised by some industry insiders as too low. The Israeli IT market is relatively mature, but hardware still accounts for around half of the total market (excluding communications hardware). Notebooks are the fastest growing segment of the market, but desktops still dominate with around two-thirds of unit sales. Government and defence tenders are a significant constituent of demand. Government IT project investments started to rise in 2007, with IT budgets being restored after many years of cuts. Software Israel software spending was estimated at US$309mn in 2008, up from US$255mn in 2007. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. In recent years the SME segment, mainstay of the Israeli business sector, has emerged as an important growth area. Spending on enterprise solutions has grown since 2007, with reviving or emerging areas of © Business Monitor International Ltd Page 22 Israel Information Technology Report Q2 2009 opportunity including security, CRM solutions and business intelligence. In the current economic climate, vendors will look to pitch the efficiency gains potentially offered by these applications. A recent survey of IT managers suggested that current areas of high demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, ERP implementation and CRM. CRM is a particularly buoyant area, with local IT company Matrix reporting a number of public- and private-sector successes in 2008, while customers for Microsoft’s Dynamics CRM platform include Israeli health maintenance organisation (HMO) Maccabi Healthcare Services. The security software segment is also an important opportunity, projected to be worth tens of millions of dollars in 2009. Israel has become more aware about the growing threat and sophistication of cyber attacks, and has been encouraging government and private-sector organisations to take action. Spending is likely across all sectors, with security content and threat management the current priorities. In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. These three sectors are likely to be somewhat immunised against the consequences of the global slowdown. Despite the current financial crisis, regulatory compliance and demand for new services, requirements will continue to drive IT spending by banks. Similarly, defence spending on new systems is likely to be maintained given the current security situation. Software comprises an important part of Israel’s industrial production and exports, with software exports of around US$3bn being comparable to about two-thirds of the entire value of the domestic IT sector. Almost all global vendors are active in the domestic market, selling licences, along with integration and applications services. Global vendors control more than three-quarters of the market, with SAP in first place. In the past, the Israeli SME segment was dominated by local software companies. Now, international players, including market leaders like SAP and Oracle, are entering with appropriate software packages. Microsoft is also designing a software package for this market segment. Services The IT Services sector had an estimated value of US$1.54bn in 2008, and this is expected to grow at a CAGR of 8.6% over the forecast period to reach US$2.34bn in 2013. The relatively robust economy and increased investment by a number of key sectors have driven recent growth, although the number of new projects is expected to be reduced in 2009 owing to the economic slowdown. Spending has been particularly strong in the financial sector, where international regulatory compliance and structural and market reforms have driven substantial IT investment. The sector accounts for around 25% of total IT services spending, while the government accounts for another quarter. Along with © Business Monitor International Ltd Page 23 Israel Information Technology Report Q2 2009 defence, these two key sectors are likely to be a continued source of opportunities because the factors driving spending in each case are not particularly sensitive to economic downturn. In H208 there were reports of IT managers scaling back projects by 10%-20% but in the near-term budgets have often already been commissioned, and so the effects are more likely to be felt in the second half of 2009 and in 2010. Much will depend on the speed of global economic recovery, particularly in key Israel export markets. While large organisations still dominate, SMEs have also been investing more. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. Similar factors are driving an increase in demand for managed services, with businesses reluctant to invest in internal IT capabilities, or deterred from doing so by a lack of available skills. Outsourcing has become a bigger factor and is estimated to account for up to 20% of IT services spending, or about US$300mn in 2008. Some key sectors include: The military, with outsourcing deals such as that awarded to HP by the Israeli Navy for management of its IT infrastructure highlighting the opportunities there. While the value of the HP deal was not made public, it is estimated to be worth several million shekels. The financial sector is another lead vertical for outsourcing. In 2006, an outsourcing deal between First International Bank of Israel and EDS Israel was the largest outsourcing contract in the Israeli banking industry and a milestone at the time. Indian consultancy giant Tata’s recent decision to open a local branch also underlines the potential attraction of the financial sector, now benefiting from economic recovery and greater security. The retail sector offers further opportunities, with IBM Israel having a 10 year outsourcing contract with Clubmarket Marketing Chains, with the contract including computer systems for the supermarket chain’s branches and point-of-sale terminals. Although Israel seemingly possesses many advantages as an outsourcing destination – in particular a technologically literate, linguistically skilled workforce, and low labour costs relative to most developed countries – the country has failed to capitalise on these strengths in the past. Aside from Israel’s small size, another issue is security. However, the government is now actively promoting Israel to multinationals, and there has been a spate of call-centre construction. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q2 2009 Industry Developments IT is an important element of the Israeli government’s socio-economic policy framework for 2008-2010. The National Economic Council recently submitted a policy agenda to the Government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to emerge as the main priority for the government. The digital divide is both a symptom and an aggravator of relative poverty. Economy Impact on Israel Tech Sector Israel’s high-tech merger activity fell in 2008, as a result of the downturn in the global economy. According to figures from Israel’s Venture Capital Research Centre (JVC), the value of Israel high-tech mergers were down 19% y-o-y to US$2.64bn. The average deal size was also down, to around US$31mn. An even more striking development was that the whole year passed without a single high-tech IPO, a first since 2003. However, the number of Israel tech companies involved in mergers was just one down on the 2007 figure, at 84 companies, indicating that the supply of promising companies has not dried up. Indeed current low valuations represent an opportunity for investors, although JVC forecasts that Israel high-tech companies will raise only US$300mn this year, down 62% from last year. Israel’s Digital Divide It has been estimated that Israel currently has around 600,000 children living below the poverty line. The gini coefficient has been estimated as among the highest of any OECD country. A 2007 survey found that only 30% of children living in poverty have internet or home PC access, compared with 90% in the top income group. Alarm at such statistics has helped to make tackling the digital divide central to the government’s key policy goal of reducing poverty. There is also an ethnic dimension to digital inequalities. Recent research by the University of Haifa showed a consistent gap in internet access between Jews and Arabs, with 72.5% of Jews in Israeli using the internet, compared with 52.5% of Arabs. In order to deal with the digital divide problem, the following measures have been proposed: A senior minister for the high-tech sector should be appointed to co-ordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry; Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone; Massive investment should be made in the educational system for training information workers; © Business Monitor International Ltd Page 25 Israel Information Technology Report Q2 2009 Aid to be given to the less wealthy to make them part of Israel’s information industry. Leveraging IT For Growth IT will also be harnessed to the second goal of achieving balanced, long-term growth. Israel’s software sector has long been one of the country’s economic pillars and a magnet for inward investment. Recently released figures underlined that IT represents a crucial part of Israel's economy. The Israeli Association of Electronics and Software Industries (IAESI) projected that the software sector will generate US$3.2bn annually by the end of the decade. According to recent figures, electronics and software exports had already reached US$1.87bn in 2006. The government is hoping that the high-tech sector will generate US$3.0bn for the nation’s economy by 2010. Offshoring Israel is also working hard to ensure that it benefits from the global offshoring trend, which it sees as an area of potential. Despite the political and security situation, Israel has recently marketed its IT skills with some success, and attracted outsourcing operations from major IT corporations such as Intel, IBM and Microsoft, as well as Motorola. One factor in this, of course, has been incentives that the Israeli government started to offer back in 2006, with subsidies of up to ILS1,000 per employee per month. Several major public- and private-sector outsourcing deals have also highlighted the growing importance of outsourcing. However, there are fears of a skills bottleneck. In 2007, the government said that Israel hopes to produce 10,000 engineers a year by 2010, up from the present graduation rate of 4,900 – small numbers by the standards of China, India and the US, but a big challenge for Israel. The number of jobs in the sector rose to around 61,000 in 2006, according to the government’s Central Bureau of Statistics. Engineering salaries in Israel are about half those in the US, but double those in India. E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government project. The 2005-2007 master plan of the government’s ERP project called for implementation in around 90 government units by the end of 2007. The project leveraged mySAP ERP – content delivery software – and had a focus on financial, logistics and human resource components. Dubbed ‘Merkava’, the project has cost an estimated ILS800mn since its launch in 1999. At the beginning of 2007, about 40 government units and more than 3,000 users were estimated to have been covered. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement last year with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. © Business Monitor International Ltd Page 26 Israel Information Technology Report Q2 2009 Meanwhile, the Israeli government was progressing with its plans to roll out Smart ID-card systems intended to cover the entire population. With an urgent need for the government to update technology and strengthen authentication systems, the original target was to introduce 2.5mn Smart ID cards. In December 2008 HP was awarded the contract to produce five million ID-cards, however it is yet to receive the go ahead from the Knesset who are deliberating over the passing of the biometric database bill. The ID-cards – set to cost Israel US$67.49mn – would use ‘smart’ identification methods which involve fingerprints and digital photography. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q2 2009 Industry Forecast Despite an anticipated slowdown in 2009, the Israeli IT market should have enough momentum from key sectors to continue to expand over BMI’s 2008-2013 forecast period. BMI estimates that the local IT market reached an estimated value of US$4.83bn in 2008. The market is forecast to grow at a CAGR of 6% over the forecast period, to reach a projected US$6.5bn in 2013. IT spending still grew in H108 with stronger-than-expected demand from both enterprise and household sectors. This continued the trend of 2007 with enterprises increasing outlay on IT, while spending in traditional sectors such as government and military remained strong. However, following a deterioration in H208, BMI believes that growth will ease further in 2009 thanks to the economic slowdown. A key factor will be unemployment hitting consumer demand for high-tech goods, with real private consumption growth projected to fall to 1.5% in 2009, and just 1.03% in 2010. Rising job insecurity for those in work will also have a negative impact on consumer sentiment, while many companies facing tight credit conditions will likely cut back on IT budgets. Some other factors will also contribute slower IT spending growth. The resurgent US dollar, while good for Israeli exporters, will, if present trends continue, impact on the affordability of US-imported technology products. However, the Israel IT market has a number of positive fundamentals, which should keep it in positive territory. Low computer penetration, of around 30%, offers potential for continued growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications, and the new popularity of ‘mini’ computers. Meanwhile, spending by a number of key IT spending verticals such as defence, and financial services, should be to some extent insulated from the economic crisis. Regulatory compliance will continue to necessitate IT spending by banks, despite the regulatory crisis. The financial services sector accounts for about 15% of Israeli IT spending. Another 50% of IT spending is accounted for by government and military projects, which will have a relatively low sensitivity to economic downturn compared with the commercial sector. Government IT and digital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging from government e-services portals to healthcare. The government remains determined to preserve this country’s status as a high-tech powerhouse and drive ‘knowledge economy’ development. While the defence sector is, and is expected to remain, the single most important vertical, investments by financial-sector organisations should mean more large outsourcing deals, such as the 2006 contract win by EDS from First International Bank of Israel (FIBI). Other sectors of opportunity will include © Business Monitor International Ltd Page 28 Israel Information Technology Report Q2 2009 healthcare and telecoms, as well as infrastructure, transport and the small office/home office (SOHO) sector. As a result of this activity, IT Services are expected to display the highest growth over the forecast period. Growing enthusiasm for outsourcing is putting Israel on the map, with some recent large tenders such as HP’s contract for outsourced management of the Israeli navy’s IT infrastructure. The economic slowdown may reinforce this trend in some respects. Israel is also emerging as a location for some business process outsourcing (BPO) functions helped by government incentives. However, much depends on there being a sustained improvement in the economy, as well as the overall political environment. In summary, although the Israeli economy is vulnerable to the global economic slowdown, BMI believes that it has sufficient strength in key demand verticals to partly offset these downward pressures. The hardware market is forecast to grow from an estimated US$2.3bn in 2008 to US$3.0bn in 2013, with computer sales projected to rise from an estimated US$1.9bn to US$2.5bn. Over the same period, software spending is expected to increase from an estimated US$965mn to US$1.4bn, and services from an estimated US$1.5bn to US$2.2bn. The push for broadband should provide impetus for urban consumer demand, with the number of broadband subscribers forecast to reach 2.3mn in 2013. Table: Israeli IT Industry (US$mn, unless otherwise stated) – Historical Data & Forecasts 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f IT Market 4,062 4,428 4,826 4,971 5,319 5,744 6,146 6,515 IT Market as % GDP 2.9% 2.7% 2.6% 2.6% 2.6% 2.6% 2.7% 2.8% Hardware (Computer market sales) 2,031 2,125 2,317 2,336 2,447 2,642 2,827 2,960 Services 1,259 1,417 1,544 1,591 1,755 1,896 2,028 2,187 Software 772 886 965 1,044 1,117 1,206 1,291 1,368 1,625 1,679 1,853 1,892 1,982 2,146 2,318 2,451 183 191 208 210 220 238 254 266 PCs (including notebooks) Servers e/f = BMI estimate/forecast. Source: BMI, EITO, World Bank, ITU, EU, IDC, Gartner © Business Monitor International Ltd Page 29 Israel Information Technology Report Q2 2009 Internet Forecast Table: Internet Data & Forecasts No. of Internet Users ('000) No. of Internet Users/100 Inhabitants No. of Broadband Internet Subscribers ('000) No. of Broadband Internet Subscribers/100 Inhabitants 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 4,073 4,279 4,556 4,779 4,911 4,969 5,030 5,076 57 59 62 64 65 65 66 67 1,346 1,506 1,663 1,835 1,994 2,116 2,222 2,313 18.9 20.8 22.6 24.5 26.2 27.8 29.2 30.4 e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI Industry Trends – Internet Sector (2005-2013) continues, with the market increasing by 25.5% year-on-year (y-o-y) to 1.23mn 5,000 broadband lines as of year-end 2005, 4,800 4,400 1,500 4,200 1,000 in 2006, with the market growing by just 4,000 over 10% to around 1.35mn 3,800 by 9.8% to reach 1.51mn subscriptions. 2013f 2012f 2011f 0 2010f picture in 2007, with the market growing 3,600 2006 subscriptions, and there was a similar 500 2009f experienced in 2004. Growth moderated 2,000 4,600 2007 albeit not as strongly as the 54.8% rise 2,500 2008e Growth in broadband subscriptions Internet Users ('000) Broadband Internet Subscribers ('000), right axis We estimate growth of 8.9% in 2008, with the number of subscriptions in e/f = BMI estimates/forecasts. Source: ITU, BMI excess of 1.66mn. Israel’s strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecom infrastructure and minimal regulatory intervention. The availability of VoIP services is likely to fuel further demand, as consumers seek to take advantage of cheap international and national calling rates. Looking into 2009 and beyond, we expect high, though falling, single-digit annual growth for the next few years, but we expect growth to have slowed to just 5.2% by 2012 and further to 4.4% by 2013. By the end of 2013, we forecast a penetration rate of about 30%, putting Israel in line with some of the world’s most developed broadband markets, © Business Monitor International Ltd Page 30 Israel Information Technology Report Q2 2009 such as Western Europe and the US. Bezeq is likely to remain the dominant force in the broadband market, although it does face competition from alternative asymmetric digital subscriber line (ADSL) providers and the cable companies. At the end of June 2007, Bezeq had 924,000 broadband subscribers, putting its market share at around 65%. Israel’s high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. Internet use is already widespread, with International Telecommunications Union (ITU) data indicating that over 50% of the population used the internet by the end of 2005, a figure that had risen to 59.1% by the end of 2007. In 2008, BMI estimates that the internet penetration rate stood at 61.9%. We forecast this will rise slowly but steadily over the next five years, reaching 66.9% by the end of 2013. © Business Monitor International Ltd Page 31 Israel Information Technology Report Q2 2009 Macroeconomic Forecast Outlook Darkening As Consumer Takes Fright BMI View: The Israeli downturn is spreading from exports and investment to consumer spending. Despite likely government efforts to re-inflate the economy, we see real GDP contracting by 1.8% in 2009. Israel has almost certainly already entered recession, and we are forecasting a full-year contraction of real GDP of 1.8%. This has been revised down from our previous forecast of -0.2% on the back of deteriorating signals both from inside Israel and from the wider world, which have led us to reassess our forecasts for exports and private consumption in particular. Looking further ahead, we anticipate a fairly robust recovery for the Israeli economy, with real growth of 2.0% pencilled in for 2010, and a further 2.1% in 2011. Recent Data Paint Bleak Picture The most recent economic data reveals that the Israeli economy began contracting in the final quarter of 2008. Real GDP was down by 0.5% y-o-y during the quarter, and we believe that it will contract further during Q109, pulling the economy officially into recession. The downturn was led by a sharp decline in consumer spending, down 3.6% y-o-y. In contrast, gross fixed capital formation remained positive, to the tune of 0.5%, while general government spending was up by an impressive 19.0%, as efforts at fiscal stimulus swung into action. However, the outlook is fairly bleak. In January, the Bank of Israel's State of the Economy index experienced its sharpest decline since records began, falling by 1.2% month-on-month (m-o-m). This was precipitated by the continued fall in trade and services revenues. The services exports index dropped by 2.3% m-o-m in January, in addition to the 11.8% fall in December. Likewise, the index of goods exports declined in January, but at a slower rate than December – 0.9% against 7.3% respectively. Imports tell a similar story. The imports component of the State of the Economy index dropped by a massive 20.0% in December, falling a further 0.4% in January. We see exports contracting by around 3.0% in real terms this year, and the weaker exchange rate means that the US$ value of export sales will drop by significantly more than this. However, as illustrated by the aforementioned imports index, demand for foreign goods is dropping off even more quickly, meaning that the balance of payments is likely to remain in surplus in 2009. Indeed, the accompanying chart shows the narrowing of the trade deficit in January, and with the services account due to stay positive, we have pencilled in a current account surplus equal to 1.3% of GDP. © Business Monitor International Ltd Page 32 Israel Information Technology Report Q2 2009 Consumer Demand Weakening That said, the sharp reversal in import growth illustrates the contraction in Israeli domestic demand. True, the weakening currency will have played a role in reducing demand for foreign goods and services, but changes in domestic industrial output have not kept pace with the decline in imports, indicating an erosion of demand for goods. Industrial output declined in October and November (in y-o-y terms) and rose only slightly – by 2.5% – in December. At the same time, the value of manufacturing sales revenue fell steadily during the final quarter of the year, suggesting that producers are being forced to slash their prices in order to shift their stock. Revenues were down by 12.8%, 5.5% and 5.8% y-o-y in October, November and December respectively. With government consumption buoyed by increased spending, the contraction in domestic demand stems predominantly from declining household consumption. In light of the latest data releases, we have revised down our projections for the latter component of GDP, and now see it declining by 2.0% across the whole year. The contraction is likely to be sharper in the first half, with the possibility of some recovery in H2. However, growth will remain weak, and we are forecasting an expansion of just 1.0% in 2010. There are several reasons for our bearish attitude. First is the knock-on effect of slowing export demand and the general decline in economic activity on unemployment, which is likely to rise. The jobless rate stood at 6.4% in Q408, on a par with Q3 but up from 5.9% in the first quarter of the year. We see unemployment ticking up to 6.8% by the end of the year, although a rate of over 7.0% is certainly not out of the question. Second, the sharp decline in interest rates does not appear to be having any major impact on consumer behaviour, although this may feed through later in the year. The Bank of Israel's headline rate hit an all-time low of 0.75% in March yet this is not being passed on to borrowers. Indeed, the average mortgage rate has actually increased, rising from a recent low of 3.45% in May to 4.13% in January. This brings us to the next point: weaker activity in the housing market. Although Israel's property sector is certainly not in the same dire straits as the likes of the US or the UK, recent figures certainly indicate a slackening of demand, which is consistent with more cautious consumer behaviour and banks' reticence to lend. In January 2009, just 884 dwellings were sold, implying an annualised rate of 10,965, compared with a 2008 peak of 15,890 in August. The average time that new properties have been on the market before sale has also risen steadily over the past six months, from 8.1 in August to 12.0 in January. That said, there have been suggestions that the sharp contraction in construction activity could cause prices to rise later in 2009, as supply shrinks faster than demand. Furthermore, Israel's population continues to grow at a fairly robust pace, providing a steady stream of demand for residential real estate that will support the market in the long term. Government Likely To Stick To Stimulus Plan The only component of GDP likely to experience any significant real growth this year is government © Business Monitor International Ltd Page 33 Israel Information Technology Report Q2 2009 spending, although our forecasts are subject to some revision once the new government is in place and the 2009 budget has been agreed. For now, Netanyahu's economic priorities for his first 100 days in office include passing the budget (including some changes to reflect the ongoing financial crisis) and looking at ways to tackle rising unemployment. Neither of these objectives give a clear indication regarding spending. Netanyahu has said separately that he intends to cut taxes, but whereas during his previous stint as finance minister, he coupled this with spending cuts, such a move may not be as easy this time round. Indeed, he has been careful not to commit himself early on to any radical action, warning that the economic situation is likely to get worse before it gets better. Nor has he promised to make any major changes to the fiscal stimulus package agreed by the previous administration in late 2008. Furthermore, the global zeitgeist is definitely in favour of higher government spending and it would be very difficult politically for the new prime minister to cut back on expenditure, particularly when he is likely to enjoy a very slim majority in the Knesset and partner several parties (most notably Shas) that advocate increased government spending. As such, we have for now maintained our previous budget forecasts, which point to a deficit of 3.7% of GDP in 2009, narrowing only slightly to 3.4% in 2010. Risks To Outlook With the impetus for the current downturn coming from outside, Israel's future outlook is also closely linked to external developments. Our core scenario is for a global contraction of 1.7% in 2009, reverting to 1.7% growth in 2010. However, any further downward revisions to this year's forecast due, for example, to further US weakness on the back of renewed financial sector bankruptcies, would have a negative impact on Israeli exports. We believe that Israeli financial institutions are unlikely to ease lending conditions until the rest of the world does, and with both the US and European banking sectors still in a fragile state, credit to businesses and consumers will remain tight for the foreseeable future. Table: Israel – Economic Activity Nominal GDP, ILSbn 1 Nominal GDP, US$bn 2 Real GDP growth, % change 1 y-o-y GDP per capita, US$ Population, mn 1 1 Unemployment, % of labour 1 force, eop 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 597.8 640.8 673.5 714.3 737.8 763.4 795.0 828.2 862.4 133.21 143.90 164.17 199.15 186.73 190.85 203.85 212.37 226.95 6.5 5.2 5.3 5.5 -1.8 2.0 2.1 2.4 2.6 19055 20220 22664 27014 24907 25031 26736 27853 29766 6.99 7.12 7.24 7.37 7.50 7.62 7.62 7.62 7.62 9.0 8.1 6.7 6.3 6.8 6.7 6.5 6.4 6.2 1 2 Note: e/f = BMI estimate/forecast. Source: Central Bureau of Statistics. Central Bureau of Statistics/BMI Calculation. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q2 2009 Country Context Table: Consumer Expenditure, 2000-2012 (US$) 2000 2007 2008e 2009f 2010f 2012f Consumer expenditure per capita 9,998 12,148 13,693 14,610 14,950 16,598 Poorest 20%, expenditure per capita 2,849 3,462 3,902 4,164 4,261 4,731 Richest 20%, expenditure per capita 22,445 27,273 30,740 32,800 33,563 37,263 Richest 10%, expenditure per capita 28,793 34,988 39,435 42,078 43,056 47,803 Middle 60%, expenditure per capita 8,231 10,002 11,274 12,029 12,309 13,666 12,993 17,451 18,074 na na na Poorest 20%, expenditure per capita 3,703 4,973 5,151 na na na Richest 20%, expenditure per capita 29,168 39,177 40,576 na na na Richest 10%, expenditure per capita 37,418 50,258 52,053 na na na Middle 60%, expenditure per capita 10,697 14,368 14,881 na na na Purchasing power parity Consumer expenditure per capita e/f = BMI estimates/forecasts. na = not available. Source: World Bank, country data, BMI Table: Rural/Urban Breakdown, 2005-2030 2005 2010f 2020f 2030f Urban population, % of total 91.7 92.0 92.2 93.0 Rural population, % of total 8.3 8.0 7.8 7.0 6,168 6,731 7,626 8,524 557 584 643 637 6,725 7,315 8,269 9,161 Urban population, total, ‘000 Rural population, total, ‘000 Total population, ‘000 f = forecasts. Source: UN Population Division © Business Monitor International Ltd Page 35 Israel Information Technology Report Q2 2009 Competitive Landscape The top three IT services vendors, Israeli companies Ness Technologies and Matrix, and US firm IBM, have at least one-third of the local market. Israel’s domestic IT service giants have strong advantages owing to local knowledge and contacts. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenues. Ness Israel reported record revenues in 2008, despite the global economic headwinds. Ness Israel reported 18.7% top-line growth, year-on-year, to a record US$664.8mn. Ness’s defence and homeland security business performed particularly well, demonstrating the relative immunity of these sectors to economic downturn, with some major tenders including for a fighter jet cockpit-based intelligence system. However, Ness admitted that its NessPro Israel Software Distribution house had been affected by the bad economy. Among local tenders won in 2008 was a contract from Israel’s Ministry of Construction and Housing valued at US$7mn. In 2007, Ness also won a number of strategically significant projects, including an eight-year US$120mn outsourcing contract (including hardware) with the First National Bank of Israel, which continued in 2008. Meanwhile, Matrix also chalked up a number of successes in 2008, including winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, and a number of public-sector CRM projects. In Q308, Matrix’s software division, which accounts for around 75% of revenues, recorded a 12% rise, despite the bad economy. Company revenues were up around 11% y-o-y in that quarter, to ILS352.8mn. In 2008, Matrix reported tender wins in a number of sectors including defence, communication and industrial. In 2007 the roster of achievement included implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital-market companies, and a large-scale integration project for the Airport Authority. Despite the success of several strong local vendors, a share of government tenders is won by international players. Recent tender winners include both Dell and HP, whose local suppliers have a contract to supply desktops and laptops to the government. The government receives favourable prices under the terms of the agreement, which include a strong service element. Despite Intel’s substantial presence in Israel, the tender did not include Intel processors, but instead those of AMD. The national Smart ID card project has also been an important area for major IT vendors such as IBM, HP and Sun, with 11 different vendors involved at various stages since 2001. A number of multinationals are well embedded in the Israeli market. HP Israel’s software division hosts HP’s biggest R&D centre worldwide and the company also has significant production facilities in Israel. With a total of around 5,000 employees, HP reported computer sales of around US$850mn in 2007. However, as a result of the economic slowdown, HP announced in March 2009 that it was shutting down © Business Monitor International Ltd Page 36 Israel Information Technology Report Q2 2009 several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. Another foreign investor rumoured in 2009 to be contemplating cutbacks in Israel resources was European software giant SAP, which has around 900 employees in the country. SAP had announced early in 2009 that it was to lay off 6% of its global workforce. However, other foreign investors are continuing to invest. IBM Global Services is increasing its local investment, and in 2008 it announced that it is establishing a new systems and technology group lab in Israel. The new R&D facility will focus on storage and microchip technology solutions, and follows IBM’s acquisition of several IT storage solutions start-ups. Meanwhile, computer vendor Dell reportedly accepted an invitation from the Israel government to establish a new R&D and business centre in Jerusalem. In 2008, IBM announced a co-operation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. IBM’s clients in the retail sector include supermarket chain Clubmarket, with which IBM has an ILS100mn outsourcing contract. EDS Israel, which employs more than 900 people, has won contracts from many organisations including the Ministries of Health, Transport and Education, and an estimated US$80mn deal with ECI Telecom. In 2008, SAP reached an agreement with Ness to purchase the latter’s SAP sales and distribution division in Israel. The move paralleled the acquisition by SAP AG, at the end of 2007, of partner SAP Arabia’s software licences and customer maintenance products. SAP implementations are a major IT services category in Israel and SAP aims to be closer to its customers and partners. However, SAP will continue to work with Ness as a systems integrator, and Ness will also retain its SAP Academy training centre. The acquisition was in line with SAP’s focus on enhancing direct operations in Israel and other high-growth Middle Eastern markets. Microsoft Israel has an annual turnover of around US$1bn. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft will cooperate with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. Microsoft has a number of other high-profile clients for its CRM solutions, including leading Israeli HMO Maccabi Healthcare Services, which deployed a CRM system based on Microsoft’s Dynamics CRM platform. Other local clients include Super-Pharm Israel, the leading drugstore chain in the country, and Tehila, a division of the Israeli Ministry of Finance, which provides IT services for the government of Israel. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. While US companies often have a long history in Israel, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have built their presence in the Middle East over the past few years. Tata opened an Israel office in 2006. Satyam has also experienced strong growth in the © Business Monitor International Ltd Page 37 Israel Information Technology Report Q2 2009 Middle East region and is looking to grow its consulting and outsourcing businesses by 100% over the next few years. Internet Competitive Landscape Once again, Israel tops the regional broadband penetration rate, and retains the second most developed broadband market in the Asian continent, behind South Korea. At the end of 2005, Israel’s household penetration rates stood at 65%, against South Korea with 75%. Following in Israel’s footsteps is Bahrain. The Kingdom has increasingly focused on raising take-up of ADSL services through various promotions, such as reducing tariff prices by as much as 50%, and projects involving greater network rollouts. However, the bulk of the MEA region is under-developed, with penetration rates under 2%, largely as a result of high tariffs for broadband services, where many operators in the region have a near monopoly in dictating prices. Moreover, with many ISPs leasing lines from these incumbent operators, they are in turn also charged high rental prices, which are passed onto the end user. Israel experienced dramatic growth in the number of internet users in recent years, with penetration rising from around 17% in 2000 to 56.4% in 2005. BMI estimates that the penetration rate had risen to 61.9% at the end of 2008. © Business Monitor International Ltd Page 38 Israel Information Technology Report Q2 2009 Company Profiles Ness Services Revenues Israeli company and global provider of end-to-end IT services and solutions. In the first three quarters of 2008, Ness Israel reported unaudited revenues of US$175.3mn, within global revenues for that period of US$494.4mn. In Q308, global revenues of US$160.4mn represented an 18% rise y-o-y. Ness Technologies achieved 2007 revenues of US$557-565mn. Israel accounts for around 40% of Ness’s revenues. Recent Developments Presence Ness Israel reported record revenues in 2008, despite the global economic With 7,800 employees, Ness headwinds. Ness Israel reported 18.7% top-line growth, year-on-year, to a maintains operations in 16 record US$664.8mn. Ness’s defence and homeland security business countries, and partners with over performed particularly well, demonstrating the relative immunity of these 100 software and hardware sectors to economic downturn, Last year the company reported improved vendors worldwide. operating margins in the Israeli market, and closed a number of important deals, despite the strong US dollar and weaker local economy. The defence and homeland security (TSR) division performed particularly well, recording a number of tender wins with both Israeli and foreign clients. Ness claimed that it was not too exposed to the crisis in the banking system, with few of the most afflicted US banks featuring among its clients. However, the company admitted that its NessPro Israel Software Distribution house had been affected by the economic downturn. In Q308, Ness completed the sale of its SAP sales and distribution division in Israel to SAP AG, which wished to establish direct operations. Ness will continue to partner with SAP as a systems integrator. Ness will also retain its SAP Academy training centre, and continue to support SAP and its customers in the market. In 2008, Ness Technologies won a US$7mn tender from Israel’s Ministry of Construction and Housing, under the terms of which Ness will develop and operate a new system for managing housing assistance programmes. The Ministry’s old system will be replaced with one that will be capable of handling 250,000 users. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q2 2009 Ness also implemented a core banking system at the First National Bank of Israel. Following on from previous work for the bank, Ness will deploy an SAPbased system for mortgage management. Ness has been on the rise with several landmark deals in the past two years. These included an eight-year US$120mn outsourcing contract (including hardware) with the First International Bank of Israel, in which Ness is serving as lead sub-contractor to EDS. Ness also made the headlines for a 10-year multimillion outsourcing contract with Israel’s Yellow Pages, which, although far smaller at approximately US$8.5mn, was one of the largest projects in Israel at that time. The project was subsequently extended. Since as long ago as 1988, Ness Technologies has been leading a major project to computerise Israel’s judicial system, heading a team of 120 workers representing 10 subcontractors, including IBM, Taldor and Microsoft. Future Plans Sectors For 2008, Ness issued revenue guidance in the range of US$670- 695mn. Ness specialises in outsourcing, Ness has said that it will continue to focus on margin improvements in its Israel business, and reductions in non-core staff. Ness will continue to provide outsourcing services from its development centres in India – Bangalore, Mumbai and Hyderabad – and from its centres in Israel, Eastern Europe and systems integration and application development, software and consulting, and quality assurance and training. Asia-Pacific. © Business Monitor International Ltd Page 40 Israel Information Technology Report Q2 2009 IBM Services Revenues Global services, business consulting, services, digital media, solutions and IT IBM revenues in Europe and the services. Middle East rose 16% in Q108 to US$8.8bn, the fastest growth of any region. Adjusting for currency, however, growth stood at just 4%. Recent Developments Presence In 2008, IBM launched a co-operation agreement with Retalix to develop an Total IBM staff in Israel has been integrated management solution for grocery and convenience store retailers. reported at as many as 2000, IBM’s clients in the Israel retail sector include supermarket chain Clubmarket, employed at Haifa Labs and its with which IBM has an ILS100mn outsourcing contract. various IBM facilities in Rehovot In 2008, IBM announced that it was establishing a new systems and technology group lab in Israel. The new R&D facility will focus on storage and microchip technology solutions, following IBM’s acquisition of three local IT and Jerusalem. Around 60% of IBM staff are estimated to be employed in services. storage solutions start-ups in 2008. Most recently, IBM acquired privately held Diligent Technologies for a sum rumoured to be around US$200mn. IBM’s software lab in Israel was established in 2008, representing what the company called a ‘strong vote of confidence’ from IBM for the software development capabilities in the country. The facility consists of three strategic software development teams currently operating in Rehovot and Jerusalem, and will focus on the areas of search, metadata management and collaborative real-time technologies. In total, IBM Israel now has three research labs, including the long-established Haifa Research Lab and the System Development Lab, and altogether employs 650 researchers and developers to develop solutions for IBM clients in Israel and beyond. Future Plans Sectors IBM Global Services plans to launch application hosting and storage services IBM is standardising its services in Israel designed for large enterprises. IBM customers will be able to offerings for smaller companies in purchase capacity for their information systems and applications using the the region, launching IBM Express services. Managed Services, which includes packaged offerings of application and infrastructure managed services sold through IBM business partners. © Business Monitor International Ltd Page 41 Israel Information Technology Report Q2 2009 HP Services Revenues Technology services, consulting and integration. In 2007, HP Israel reported local computer sales of around US$850mn. In the same year, HP claimed to become the first IT company to exceed US$10bn quarterly revenues in the region. In Q108, HP’s Europe, Middle East and Africa (EMEA) revenues were up 15% to US$12.3bn, Recent Developments Presence As a result of the economic slowdown, HP announced in March 2009 that it Has around 5,000 employees, 730 was shutting down several wide digital printer production lines at its HP Indigo of whom are employed at HP’s plant in Kiryat Gat. This followed earlier reports that HP was to invest software division, which hosts US$4.1mn to build a new factory to expand its wide-format printer production HP’s biggest R&D centre in Israel. HP said that the new factory in the Caesarea industrial zone would worldwide. 2 start out with 4,000m of production space, which could later be expanded. A large part of HP’s R&D and manufacturing of digital printers is based in Israel. HP continues to look on Israel as a promising location for acquisition targets, and has spent around US$6bn to date on high-tech companies in Israel. In 2007, the company spent around US$4.5bn to buy Israeli software support company Mercury. Among other recent local acquisitions was NUR Macroprinters, an Israel-based manufacturer of industrial wide-format digital inkjet printers. HP paid around US$117.5mn to acquire all of the company’s assets. In 2007, HP announced a re-designation of the HP EMEA framework starting May 2007, with greater focus being placed on the Middle East. HP is the leader in the PC segment, and is continuing to drive sales through its worldwide marketing campaign ‘The Computer is Personal Again’ and through an increasing product portfolio. In 2007, HP gained kudos for its landmark contract from the Israeli military for outsourced management of the navy’s IT infrastructure. The value of the deal is estimated to be worth several million shekels and highlights the importance of defence spending for the market. HP has recently spent on acquisitions in the Israeli software sector, and announced plans for a new International Technology District (ITD) which will offer support to Israeli start-ups. HP hopes that the new ITD will develop strategic relations with around 300 Israeli startups. In 2007, HP announced a series of initiatives designed to expand HP partner businesses in the region. The core of the campaign is an enhanced partner © Business Monitor International Ltd Page 42 Israel Information Technology Report Q2 2009 strategy focusing on four areas: predictability, partnering, profitability and portfolio. Future Plans Sectors Today, HP’s focus is on more personalised campaigns, which drive higher HP is the leader in the PC cross-sell. Like IBM, it is now leveraging its capabilities into the SME segment. segment and drives sales through On the enterprise side, HP adopts personalisation not only per customer but its worldwide marketing campaign also per user within each customer, focused on a number of key target ‘The Computer is Personal Again’ accounts. and through an increasing product portfolio. HP is leveraging its capabilities into the SME segment. HP’s plans for the market focus on developing new solutions partnerships that offer greater value for the customer. HP offers support services through a subsidiary company, HP-OMS, which offers 24/7 support. However, help-lines are hard to come by. © Business Monitor International Ltd Page 43 Israel Information Technology Report Q2 2009 Matrix Services Revenues A leading systems integrator in Israel, Matrix is the largest company in the In Q108, Matrix saw a 7.5% rise in Formula Group and trades on the NASDAQ as FORTY. Shareholders include revenues to ILS192.3mn. Matrix Bank Leumi and Migdal. saw a revenue rise of 9.6% in fullyear 2007, to around ILS1.3bn. Net profits for the year were reported at ILS79.5mn. Recent Developments Presence In Q308, Matrix’s software division, which accounts for around 75% of Employs around 3,500 IT revenues, recorded a 12% rise, despite the bad economy. Company revenues professionals. were up around 11% y-o-y in that quarter, to ILS352.8mn. In 2008, Matrix reported tender wins in a number of sectors including defence, communication and industrial. Specific successes included winning an ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public-sector CRM projects. Successes in 2007 included the implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital market companies, and a large-scale integration project for the Airport Authority. Matrix also won a tender from the Ministry of Finance to make government forms available online. The project, which focuses particularly on tax forms, is expected to cost around ILS2mn spread over two years, with the option of further expansion. Matrix is also focusing on the growing outsourcing market with government as well as corporate IT departments, and has recently appointed a new sales and marketing manager for its Talpiot division. The division has a dedicated software development centre, with around 25 projects currently claimed to be underway. Future Plans Sectors Services include implementing integration projects, developing and marketing The fastest-growing revenues software technologies and products for business systems, providing segment in 2007 was software infrastructure and consulting services, outsourcing contracts, training and services, which was up 13% on assimilation and acting as a distributor for global leading software products, 2006. Matrix has won projects hardware solutions and IT infrastructures. from many government organisations including the Ministry of Defence, the Israeli Knesset (Senate) and others. Other key sectors include energy, transport and public health. © Business Monitor International Ltd Page 44 Israel Information Technology Report Q2 2009 Microsoft Services Revenues Software, and consulting and support services. Microsoft Israel has an estimated annual turnover of around US$1bn. Microsoft expects double-digit growth in its Middle East revenues over the next three-to-five years. Revenues have increased 25% annually for the past five years. Presence In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated A workforce of 200 in Ra’anana at around ILS15mn. Microsoft will cooperate with Matrix to specify and and Haifa. implement a Microsoft Dynamics CRM 4.0 solution. Last year Microsoft also launched a co-operative training project with the government focused on equipping Israelis with the skills to enter technology-related industries. The project is expected to provide 250,000 Israelis with training, with a special focus on under-represented groups. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. The company reported some big wins in the local market in 2007, in both the public and private sectors. Leading Israeli HMO Maccabi Healthcare Services deployed a CRM system based on Microsoft’s Dynamics CRM platform. The system was designed to integrate all existing IT administrative systems for the healthcare group, which has more than 5,300 clinics in Israel and covers around one-quarter of Israel’s population. The system was developed with the help of integrator Eyron.net. In 2007, Microsoft Israel was also selected by Super-Pharm Israel, the leading drugstore chain in Israel, to roll out a portal project based on Microsoft Office Share Point Portal Server 2003. The portal was due to have been rolled out to more than 120 stores by the end of 2007. Microsoft now sees services as an important contributor to raising customer satisfaction and generating product demand, and is changing the way it runs its services operations in two significant ways. First, it plans to align services more closely with its enterprise sales force. Second, Microsoft is creating a stronger role for its services operation in providing product support to enterprise customers. Future Plans Sectors Microsoft Corporation is continuing its efforts to sell software upgrades to the In the early 1990s, Microsoft Israeli government, despite Israel's decision to stop buying Microsoft made Hebrew one of the central applications, and amid calls for an antitrust commission investigation into languages at Microsoft's Microsoft’s ‘monopoly’ status. development centre at Redmond. © Business Monitor International Ltd Page 45 Israel Information Technology Report Q2 2009 Since then, all Microsoft programs have been translated into Hebrew, at a cost of US$100mn. © Business Monitor International Ltd Page 46 Israel Information Technology Report Q2 2009 Country Snapshot: Israel Demographic Data Section 1: Population Population By Age , 2005:2030 (m n, total) Population By Age , 2005 (m n) 70-74 70-74 6 0-64 60 -6 4 50-54 50-54 4 0-44 40 -4 4 3 0-34 30 -3 4 2 0-24 20 -2 4 10-14 10-14 0-4 0-4 -0.4 -0.2 0.0 Male 0.2 0.4 -0.8 -0.6 -0.4 -0.2 0.0 2030 Female 0.2 0.4 0.6 2005 Source: UN Population Division Table: Demographic Indicators, 2005-2030 2005 2010f 2020f 2030f Dependent population, % of total 36.7 35.6 37.3 36.7 Dependent population, total, ‘000 2,538 2,648 3,092 3,365 Active population, % of total 63.3 64.3 62.6 63.2 Active population, total, ‘000 4,373 4,783 5,178 5,799 Youth population*, % of total 27.1 26.0 24.5 21.9 Youth population*, total, ‘000 1,873 1,939 2,031 2,008 Pensionable population, % of total 9.6 9.5 12.8 14.8 Pensionable population, total, ‘000 665 709 1,061 1,357 f = forecasts. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 47 0.8 Israel Information Technology Report Q2 2009 Section 2: Education and Healthcare Table: Education, 2002-2005 2002/03 2004/05 110 110 Gross enrolment, secondary 93 93 Gross enrolment, tertiary 57 58 Adult literacy, males, % na 98.5 Adult literacy, females, % na 95.9 Gross enrolment, primary Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO Table: Vital Statistics, 2005-2030 2005 2010f 2020f 2030f Life expectancy at birth, males (years) 77.5 78.4 80.1 81.2 Life expectancy at birth, females (years) 81.6 82.6 84.0 85.2 Life expectancy estimated at 2005. f = forecasts. Source: UNESCO © Business Monitor International Ltd Page 48 Israel Information Technology Report Q2 2009 Section 3: Labour Market and Spending Power Table: Employment Indicators, 2001-2006 2001 2002 2003 2004 2005 2006 2,503 2,547 2,610 2,679 2,740 2,810 2.8 1.7 2.4 2.6 2.3 2.5 38.4 38.4 38.6 39 39.1 39.4 Employment, '000 2,265 2,284 2,330 2,401 2,494 2,574 – % change y-o-y 1.9 0.8 2.0 3.0 3.8 3.2 – male 1,236 1,238 1,258 1,300 1,340 1,384 – female 1,029 1,046 1,073 1,101 1,154 1,190 — female, % of total 45.4 45.8 46.0 45.8 46.2 46.2 Total employment, % of labour force 90.4 89.7 89.2 89.6 91.0 91.6 Unemployment, '000 234 262 280 278 246 236 – male 121 138 143 137 125 119 – female 113 124 137 141 122 118 – unemployment rate, % 9.4 10.3 10.7 10.4 9.0 8.4 Economically active population, '000 – % change y-o-y – % of total population Source: ILO Table: Average Annual Wages, 2000-2012 Local currency 2000 2006 2007 2008e 2009f 2010f 2012f Total 81,492 89,592 92,210 94,331 95,606 97,137 100,273 Non-agricultural 82,584 90,612 91,176 93,273 94,534 96,048 99,149 103,980 113,913 114,622 117,258 118,843 120,746 124,645 7.4 3.4 2.9 2.3 1.3 1.6 1.6 Total 19,983 20,358 22,771 25,155 26,557 26,982 28,649 Non-agricultural 20,251 20,589 22,516 24,873 26,259 26,680 28,328 Manufacturing 25,498 25,884 28,306 31,269 33,012 33,541 35,613 Total, purchasing power parity 25,969 30,546 32,710 33,203 na na na Manufacturing Wage growth, % y-o-y US$ e/f = BMI estimates/forecasts. na = not available. Source: ILO, BMI © Business Monitor International Ltd Page 49 Israel Information Technology Report Q2 2009 BMI Forecast Modelling How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part in all of our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. IT Industry Forecasts There are a number of criteria that drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are naturally affected by consideration of a variety of internal and external political and economic factors. © Business Monitor International Ltd Page 50 Israel Information Technology Report Q2 2009 Within best-practice techniques of time-series modelling, BMI’s quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: Overall economic context, and GDP and demographic trends; Underlying ‘information society’ trends; Projected GDP share of industry; Maturity of market structure; Regulatory developments and government policies; Developments in key client sectors such as telecommunications, banking and e-government; Technological developments, and diffusion rates; Exogenous events. Estimates are calculated using BMI’s own macroeconomic and demographic forecasts. IT Ratings – Methodology Our approach in BMI’s IT Business Environment Ratings is threefold. First, we seek accurately to capture the operational dangers to companies operating in this industry globally. Second, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were traditionally evaluated on a subjective basis. Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the IT industry. Overall, the ratings system, which integrates with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings System Conceptually, the ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from © Business Monitor International Ltd Page 51 Israel Information Technology Report Q2 2009 the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. Indicators The following indicators have been used. Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets. © Business Monitor International Ltd Page 52 Israel Information Technology Report Q2 2009 Table: IT Business Environment Indicators Indicator Rationale Limits to potential returns Market structure IT market value, US$bn Sector value growth, % year-onyear (y-o-y) Denotes breadth of IT market. Large markets score higher than smaller ones Denotes sector dynamism. Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales – compared to services/software – indicates that the overall IT market is immature Country structure Urban-rural split GDP per capita, US$ Urbanisation is used as a proxy for development. Predominantly rural states therefore score lower A high GDP per capita supports long-term industry prospects Overall score for country structure is also affected by the coverage of the power transmission network across the state Risks to potential returns Market risks Intellectual property (IP) laws ICT policy Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country risk Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment Short-term financial risk Rating from BMI’s CRR, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding Trade bureaucracy Legal framework Bureaucracy Corruption Rating from CRR to denote ease of trading with the state Rating from CRR denotes the strength of legal institutions in each state – security of investment can be a key risk in some emerging markets Rating from CRR denotes ease of conducting business in the state Rating from CRR denotes the risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete Source: BMI © Business Monitor International Ltd Page 53 Israel Information Technology Report Q2 2009 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted. Table: Weighting Of Components Component Weighting Limits of potential returns 70% – IT market 65% – Country structure 35% Risks to realisation of potential returns 30% – Industry risks 40% – Country risk 60% Source: BMI Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication Union (ITU), officially released company results and figures, and international and national industry news agencies. © Business Monitor International Ltd Page 54 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... be made in the educational system for training information workers; © Business Monitor International Ltd Page 25 Israel Information Technology Report Q2 2009 Aid to be given to the less wealthy to make them part of Israel s information industry Leveraging IT For Growth IT will also be harnessed to the second goal of achieving balanced, long-term growth Israel s software sector has long been one of... in the way of the peace process Iranian president Mahmoud Ahmadinejad has intensified his anti -Israel rhetoric, adding to Israeli concerns about a possible Iranian nuclear weapons programme Strengths Weaknesses © Business Monitor International Ltd Page 10 Israel Information Technology Report Q2 2009 Israel Economics SWOT Strengths Weaknesses Opportunities Threats The policy framework has stabilised... programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement last year with Dell and HP The government chose Microsoft search technology to power its government services portal, gov.il © Business Monitor International Ltd Page 26 Israel Information Technology Report Q2 2009 Meanwhile, the Israeli government was progressing with its plans to roll out Smart... 2013 © Business Monitor International Ltd Page 31 Israel Information Technology Report Q2 2009 Macroeconomic Forecast Outlook Darkening As Consumer Takes Fright BMI View: The Israeli downturn is spreading from exports and investment to consumer spending Despite likely government efforts to re-inflate the economy, we see real GDP contracting by 1.8% in 2009 Israel has almost certainly already entered recession,... place in 2009 © Business Monitor International Ltd Page 11 Israel Information Technology Report Q2 2009 Middle East Regional IT Markets Overview BMI projects continued improvement in Internet Penetration regional ICT indicators over the next few (per 100 population) years, driven by investment in broadband and government ICT initiatives The 90 Middle East divides into two groups in 80 terms of information. .. (64%) and Qatar (64%) © Business Monitor International Ltd Page 14 Israel Information Technology Report Q2 2009 Market Structure (% of Total IT Market) 2008e 2013f 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Egypt Israel Kuw ait Qatar Saudi UAE Hardw are Softw are (Russia = softw are + services) Services e = estimate Source: BMI Egypt Israel Kuw ait Qatar Saudi UAE Hardw are Softw are (Russia = softw... US$67.49mn – would use ‘smart’ identification methods which involve fingerprints and digital photography © Business Monitor International Ltd Page 27 Israel Information Technology Report Q2 2009 Industry Forecast Despite an anticipated slowdown in 2009, the Israeli IT market should have enough momentum from key sectors to continue to expand over BMI’s 2008-2013 forecast period BMI estimates that the local... Israel s small size, another issue is security However, the government is now actively promoting Israel to multinationals, and there has been a spate of call-centre construction The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services © Business Monitor International Ltd Page 24 Israel Information Technology Report Q2. .. Monitor International Ltd Page 18 Israel Information Technology Report Q2 2009 Regional IT Business Environment Ratings Limits of Potential Returns Risks to realisation of returns IT Market Country Structure Limits Market Risks Country Risk Risks IT BE Rating Regional Ranking UAE 49 90 63 60 74 68 64.9 1 Kuwait 52 90 65 40 76 62 64.0 2 Qatar 40 100 61 50 77 66 62.5 3 Israel 48 80 59 55 68 63 60.5 4 Saudi... depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report © Business Monitor International Ltd Page 19 Israel Information Technology Report Q2 2009 Market Overview Government Authority Government Authority Ministry of Science, Culture and Sport Minister Ghaleb Majadele The Ministry of Science, Culture