The US economic downturn is expected to impact growth of major sectors of the global economy, including information and communications technology (ICT). Already there are talks of a possible slump in global ICT spending this year, as consumer buying power weakens. Can the local ICT industry weather the storm?

Delesh Kumar.

C.J. Ang.

Silver lining in economic woes
By Izwan Ismail

Recent United Nations economic projections indicated that the world economy is on the brink of a downturn and expected to grow at only 1.8 per cent this year, down from 3.8 per cent last year. Economists are saying that the deepening credit crisis in major economies triggered by the declining value of the US dollar, persistent global imbalances and soaring prices of oil and other commodities pose considerable risks to economic growth in both developed and developing countries.

Here, Tech&U talks to an analyst and an industry respresentative on how such gloomy news will impact the local information and communications technology (ICT) industry.

Delesh Kumar, principal consultant, Frost & Sullivan:

The ICT industry in Malaysia in the past few years has been driven primarily by local growth than regional demand. But a slowdown or cutback in expenditure from the enterprise segment can be expected, particularly in the banking and manufacturing sectors, which will be affected by the global economic slowdown.

The banking and manufacturing sectors are among the biggest spenders on ICT services in Malaysia. So, any reduction in their budgets will have an impact, especially on the ICT sector, which is heavily dependent on enterprise spending.

ICT companies that are most susceptible and likely to be affected are system integrators which focus on the banking and manufacturing sectors. ICT companies focusing on the public sector also may be affected due to the Government’s cost-cutting measures to counter higher spending on fuel and food subsidies.

Among the main initiatives to counter the slowing economy is to focus on solutions that can assist companies in managing or better managing their internal operating costs such as virtualisation.

In an economic downturn, the drive by most companies to reduce costs will present fresh opportunities. Providing more managed or outsourcing services such as data storage will allow, for example, system integrators to reduce clients’ costs while improving their service offerings.

The Government can also play a role to help companies weather the storm. One key initiative that could be implemented is to further liberalise the telecommunications market to drive adoption of broadband services. This could further drive the market for consumer products and shift the current focus of the ICT industry from the enterprise segment to the consumer segment.

The Government could also provide further financial incentives and regulatory flexibility for companies to expand into regional markets, especially developing economies with a large population where domestic growth from consumer spending shields them somewhat from any major external impact.

C.J. Ang, president, Association of the Computer and Multimedia Industry Malaysia (Pikom):

Based on a recent Bank Negara report on the first quarter 2008 economic performance, the local economy is resilient enough to withstand a regional slowdown.

This applies also to the local ICT industry. As domestic demand picks up, the impact of a sluggish US economy and regional economies is minimised.

However, should the global economic downturn hit Malaysia, companies that are likely to be affected are those with exposure to the US market. In the ICT industry, this would be companies involved in supplying to MNCs (multinational companies) operating manufacturing plants in the country. I do not see any major impact on other sectors.

In the short term, weather the storm, as any slowdown will be temporary. Over the longer term, companies should expand into other markets.

On this note, Pikom has been assisting members in finding new markets through our affiliation with Asocio (Asian-Oceanian Computing Industry Organization) and Witsa (World Information Technology and Services Alliance), and working closely with Matrade (Malaysia External Trade Development Corporation) and MDeC (Multimedia Development Corporation).

The slowing market could also be an opportunity for some companies. A slowing market may provide services in niche areas. Expand to other markets, diversify the risks.

Tap on innovative service, cost management

THE information and communications technology (ICT) industry will likely be affected as much as any other sector by a slowdown in the overall economy. If companies find revenues under pressure, their first response will be to defer discretionary expenditure, says Ovum Plc’s research director, public sector Dr Steve Hodgkinson.

That’s why he foresees companies increasingly “making do” with what they have rather than renewing or replacing ageing hardware and software assets.

“Project activity will start to be more aimed at productivity improvement and cost-cutting, and less aimed at service improvement. This may lead to a slowing demand for consulting services, systems integration and software,” he says.

Organisations also are expected to pursue standardisation, consolidation and rationalisation of IT infrastructure along with virtualisation to reduce operating costs and boost asset utilisation.

Besides that, they may seek to consolidate and rationalise their vendor relationships and negotiate more for enterprise-wide contracts to capture economies of scale.

To soften the impact of the economic slowdown, Hodgkinson points out that ICT companies will need to develop better ways to sell the value proposition of their offerings in terms of efficiency benefits for clients.

“A key opportunity is to develop out-of-the-box solutions for clients that simplify the challenge of dramatically lowering the cost of providing an application or operational service,” he says.

He adds that trends such as software-as-a-service and platform-as-a-service will likely accelerate as innovative companies experiment with ways to make fixed costs variable and source for capacity to leverage on economies of scale.

The Government also can play a role by implementing projects to improve services and re-engineer core business processes – providing the much-needed revenues for local ICT companies while at the same time stimulating innovation in areas that can generate export earnings for the country.

“A key area for public sector agencies to invest in is improved support for knowledge workers – office productivity, collaboration, and document or records management – to boost policy and service innovation and support joined-up government initiatives,” Hodgkinson says.

“Improvements in these core processes will create a significant productivity dividend for the public sector in the future and also generate demand for ICT services and technologies that can help sustain the ICT industry during a downturn.”