Israel information technology report q1 2009

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Published by BUSINESS MONITOR INTERNATIONAL LTD Israel Information Technology Report Q1 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 Q1 2009 Including 5-year industry forecasts by BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication date: February 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. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Israel Information Technology Report Q1 2009 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q1 2009 CONTENTS Executive Summary .........................................................................................................................................5 Israeli IT Sector SWOT.......................................................................................................................................................................................... 7 Israel Telecommunications Sector SWOT .............................................................................................................................................................. 8 Israel Political SWOT............................................................................................................................................................................................ 9 Israel Economics SWOT ...................................................................................................................................................................................... 10 Israel Business Environment SWOT .................................................................................................................................................................... 10 Middle East Regional IT Markets Overview .................................................................................................11 Market Growth And Drivers ................................................................................................................................................................................ 12 Sectors And Verticals........................................................................................................................................................................................... 13 IT Business Environment Ratings................................................................................................................16 Table: Regional IT Business Environment Ratings .............................................................................................................................................. 18 Market Overview.............................................................................................................................................19 Government Authority.......................................................................................................................................................................................... 19 History And Market Structure.............................................................................................................................................................................. 19 Hardware............................................................................................................................................................................................................. 21 Software............................................................................................................................................................................................................... 21 Services................................................................................................................................................................................................................ 22 Industry Developments ........................................................................................................................................................................................ 23 Industry Forecast ...........................................................................................................................................26 Table: Israeli IT Industry (US$mn, unless otherwise stated) – Historical Data & Forecasts .............................................................................. 27 Internet Forecast ................................................................................................................................................................................................. 28 Table: Internet Data & Forecasts........................................................................................................................................................................ 28 Macroeconomic Forecast .................................................................................................................................................................................... 29 Table: Israel – Economic Activity........................................................................................................................................................................ 31 Country Context................................................................................................................................................................................................... 32 Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 32 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 32 Competitive Landscape .................................................................................................................................33 Internet Competitive Landscape .......................................................................................................................................................................... 34 Company Profiles...........................................................................................................................................36 Ness ..................................................................................................................................................................................................................... 36 IBM...................................................................................................................................................................................................................... 38 HP........................................................................................................................................................................................................................ 39 Matrix .................................................................................................................................................................................................................. 41 Microsoft.............................................................................................................................................................................................................. 42 Country Snapshot: Israel Demographic Data..............................................................................................43 Section 1: Population........................................................................................................................................................................................... 43 Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 43 Section 2: Education And Healthcare.................................................................................................................................................................. 44 Table: Education, 2002-2005 .............................................................................................................................................................................. 44 Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 44 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q1 2009 Section 3: Labour Market And Spending Power .................................................................................................................................................. 45 Table: Employment Indicators, 2001-2006.......................................................................................................................................................... 45 Table: Average Annual Wages, 2000-2012.......................................................................................................................................................... 45 BMI Forecast Modelling .................................................................................................................................46 How We Generate Our Industry Forecasts .......................................................................................................................................................... 46 IT Industry ........................................................................................................................................................................................................... 46 IT Ratings – Methodology.................................................................................................................................................................................... 47 Table: IT Business Environment Indicators ......................................................................................................................................................... 48 Weighting............................................................................................................................................................................................................. 49 Table: Weighting Of Components........................................................................................................................................................................ 49 Sources ................................................................................................................................................................................................................ 49 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q1 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 a value of US$4.82bn in 2008. The market is projected to grow at a compound annual growth rate (CAGR) of 7.6% over the forecast period, to reach US$6.96bn 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, BMI believes that growth will ease in 2009 thanks to the economic slowdown and unemployment hitting consumer demand for high-tech goods. The Israel IT market has a number of positive fundamentals, which should counterbalance the economic headwinds. Low computer penetration, of around 30%, represents potential for organic growth. Meanwhile, some areas of spending by a number of key IT spending verticals, such as defence and financial services, should have a degree of immunisation from the economic crisis. Industry Developments 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. It has been estimated that Israel currently has around 600,000 children living below the poverty line. The gini coefficient is among the highest of any country within the Organisation for Economic Co-operation and Development (OECD). 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. There is also an ethnic dimension to digital inequalities. In order to deal with the digital divide problem, several specific measures have been proposed. 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. © Business Monitor International Ltd Page 5 Israel Information Technology Report Q1 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 posted good results for the first three quarters in 2008, despite the global economic storm. The company reported 6% top-line growth, despite the sale of two business units. Ness’s defence and homeland security unit performed particularly well. Meanwhile, Matrix also chalked up some successes in 2008, including a number of public-sector customer relationship management (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. Computer Sales Computer sales in Israel including servers and accessories totalled an estimated US$1.85bn in 2008, up from US$1.68bn in 2007. The market is expected to grow at a CAGR of around 7% over the 2008-2013 forecast period to reach US$2.6bn in 2013. Given the economic slowdown, PC sales growth was stronger than expected in H108. 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 as a result of declining consumer and business sentiment, but one area of growth will be lower-priced mini-computers, or netbooks, which are establishing a position in the market. Software Israeli 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 9% 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 relatively robust economy and increased investment by a number of key sectors have driven recent growth, although the number of new © Business Monitor International Ltd Page 6 Israel Information Technology Report Q1 2009 projects is expected to be reduced in 2009 thanks to the anticipated economic slowdown. A number of major outsourcing deals have highlighted the growing opportunity. 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. However, Israel 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. Israeli IT Sector SWOT Strengths Weaknesses Opportunities Threats ƒ 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) ƒ Strong defence and government spending provides base of IT demand ƒ 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 ƒ Strong political support, with government having implemented a number of policies to aid in the development, success and expansion of the IT sector ƒ 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 ƒ Digital divide, with 3% of bottom income group having home internet access ƒ 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 ƒ Defence and government projects should be relatively less sensitive to the economic downturn ƒ Outsourcing, Software as a Service (SaaS) and applications management likely to grow fastest out of IT services, with particular opportunities in financial sector ƒ Opportunities for partnership/investment in Israel’s lively local IT company sector ƒ Economic downturn and unemployment will lead to weaker consumer and business sentiment ƒ Other factors may affect business confidence, notably the security situation ƒ Aggressive pricing may continue to constrain growth and put pressure on margins © Business Monitor International Ltd Page 7 Israel Information Technology Report Q1 2009 Israel Telecommunications Sector SWOT Strengths Weaknesses Opportunities Threats ƒ Well-developed internet/broadband sector compared with regional peers ƒ Liberal mobile market, consisting of four operators ƒ Mature market, with strong take-up of value-added and 3G services ƒ Mobile penetration rate of over 120% means that growth in the mobile market has slowed considerably and operators must look for alternative revenue sources ƒ Lack of competition in all telecom sectors ƒ Regulator has been slow to license new services, such as Worldwide Interoperability for Microwave Access (WiMAX) wireless broadband ƒ Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects ƒ 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 ƒ 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 ƒ Continued interconnection tariff reduction could have a devastating effect on operators’ revenues ƒ Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenues ƒ Operators are also hostile to the introduction of MVNOs © Business Monitor International Ltd Page 8 Israel Information Technology Report Q1 2009 Israel Political SWOT Strengths ƒ Government members are some of the most accountable in the region ƒ Elections are free and transparent, for the most part, ensuring that a broad spectrum of political views is represented within government ƒ The protracted Israeli/Palestinian conflict means there are persistent security risks, and strategies to minimise or end the conflict are domestically divisive ƒ Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted Opportunities ƒ 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 ƒ The victory of Hamas in the 2006 Palestinian elections and subsequent takeover of the Gaza Strip added to uncertainty and poses a dilemma for Israel, which has previously said it will not talk to the militant organisation (compounded by the recent conflict in the Gaza strip, which can only add to volatility on both sides) ƒ 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 ƒ Iranian President Mahmoud Ahmadinejad has intensified his anti-Israel rhetoric, adding to Israeli concerns about a possible Iranian nuclear weapons programme Weaknesses © Business Monitor International Ltd Page 9 Israel Information Technology Report Q1 2009 Israel Economics SWOT Strengths Weaknesses Opportunities Threats ƒ The policy framework has stabilised in recent years with fiscal deficits brought well under control ƒ The workforce is highly educated and skilled ƒ The country's close ties with the US provide it with substantial financial assistance for economic and military ends ƒ 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 ƒ The economy is highly exposed to that of the US, in terms of exports, investment and remittances ƒ Rising levels of employment will underpin private consumption growth ƒ Foreign direct investment (FDI) stocks amounted to 37% of GDP in 2007, according to the United Nations Conference on Trade and Development (UNCTAD), and should continue to propel growth for some years to come ƒ As a net fuel importer, Israel is vulnerable to large oil price fluctuations; the surge in prices in the first nine months of 2008 contributed to rising inflation ƒ Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports Israel Business Environment SWOT Strengths Weaknesses Opportunities Threats ƒ The business environment is supported by sound infrastructure and communication networks, as well as transparent legislation ƒ The banking system is one of the most sophisticated in the region, and offers a wide range of both consumer and commercial credit products ƒ Historic political instability and, more recently, suicide bomb attacks, increase the risk premium of investment in Israel ƒ Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector ƒ Ongoing cuts are set to bring the top level of corporate tax down from 29% in 2007 to 25% by 2010 ƒ The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade ƒ 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 10 Israel Information Technology Report Q1 2009 Middle East Regional IT Markets Overview BMI projects significant improvement in Internet Penetration regional ICT indicators over the next few (per 100 population) years, driven by rising incomes and government programmes. The Middle 70 East divides into two groups in terms of 60 information society development. In the 50 first group are richer and more 40 technologically advanced countries, such 30 as Israel and the UAE, where internet 20 penetration is relatively high and many 10 such as Egypt, on the other hand, computers remain a luxury for many. rankings with 30mn subscribers projected UAE 2007 And 2012 by 2012. However, even relatively advanced societies such as Israel have 30 room to develop, with internet 25 penetration in the country projected to 20 increase from the current 58% to 65% by 15 forecast period. Saudi Broadband Penetration (per 100 population) to grow significantly. Egypt will lead the achieve a 7% rise in subscribers over the Q atar e/f = estimate/forecast. Source: BMI The number of internet users is expected 2012. Saudi Arabia is also expected to Kuwait services. In the more emerging markets Israel 0 Egypt households have access to broadband 2006e 2011f 2007e 2012f 10 5 broadband, where penetration currently UAE Saudi Arabia Q atar Kuwait Israel A similar growth trend is expected for Egypt 0 e/f = estimate/forecast; Source: BMI ranges from 0.5% in Egypt to close to 20% in Israel. Egypt is forecast to achieve the most dramatic advance, with broadband penetration exceeding 7% by 2012. Government initiatives are afoot across the region, ranging from wireless broadband in Dubai to plans to deploy fibre extensively in countries such as Kuwait. Internet penetration will receive a boost from continued efforts to liberalise regional telecoms markets. In 2008 the Qatari government announced that eight operators had submitted bids for new fixed line © Business Monitor International Ltd Page 11 Israel Information Technology Report Q1 2009 licences. Egypt will also continue liberalisation of its telecoms market this year, and similar moves have already been seen in countries such as Saudi Arabia. Growing broadband penetration has become a driver of PC ownership in some segments, due to the variety of multimedia and communication functions it enables. There is plenty of room for PC growth, given the current low levels of computerisation, which are often much higher in the business sector than in the population at large. Finally, governments in the region are allocating significant budgets for e-government development. The Saudi Arabian government, for example, has demonstrated a significantly increased financial commitment to e-government strategies and initiatives across all ministries. In the UAE, the federal government is stepping up the pace. Despite progress, big challenges remain, particularly in excessive bureaucracy and lagging education systems. Market Growth And Drivers High oil prices underpin a generally favourable economic environment for IT Market Sizes (US$mn) 2007e growth in much of the region. However, there is increasing economic UA E 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 Saudi A rabia Qatar Kuw ait share of GDP rising in these countries. Israel A number of factors will drive growth in IT spending. In oil rich Gulf Co- Egypt 0 1,000 2,000 3,000 4,000 5,000 operation Council (GCC) countries, having received windfalls from record e = estimate. Source: BMI high oil prices, governments are continuing with programmes of modernising the oil sector. Oil and gas companies are looking to optimise cost structures. However, other sectors also have money to spend on IT. Banks are implementing solutions to increase business flexibility and introduce new services, including Islamic banking. Telecoms liberalisation and a big push towards broadband penetration are also expected to drive demand. Governments are getting in on the act, with an increasing number of state institutions offering online services. © Business Monitor International Ltd Page 12 Israel Information Technology Report Q1 2009 IT markets in the region should achieve 4.5 figures. Notebook sales are now growing 4.0 at something like twice the speed of 3.5 3.0 2.5 major driver of computer sales. In the 2.0 business sector, smaller companies are 1.5 marketing and other functions. 0.0 UAE finance and logistics, as well as 0.5 Saudi Arabia achieve efficiencies in such areas as 1.0 Egypt realising the opportunities to apply IT to Q atar desktops in most countries, and are the 2007e 2012f Kuwait ranging from high single into double IT Market Sizes As % Of National GDPs Israel compound annual growth rates (CAGRs) e/f = estimate/forecast. Source: BMI The highest growth Middle East and African (MEA) IT market over the forecast period is expected to be Egypt, with compound growth of 82% for 2007-2012. 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 countries are expected to include Kuwait (82%) and Qatar (71%), due to a confluence of many of the major growth drivers in the region, such as high oil prices, modernisation programmes and booming property and telecoms sectors. Sectors And Verticals Hardware dominates regional IT spending. While software and services IT Markets’ Compound Growth (%) 2007-2012 will increase their share of spending, hardware spending will remain strong as UA E the number of personal computer users rises steadily over the forecast period. This will be driven by growing affordability, government initiatives and Saudi A rabia Qatar Kuw ait the popularity of the notebook. Israel PC prices are continuing to fall, and this Egypt – along with more credit availability – is 0 20 40 60 80 100 bringing computers within the reach of many more people. Government Source: BMI 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 © Business Monitor International Ltd Page 13 Israel Information Technology Report Q1 2009 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. Market Structure (% of total IT market) 2007e and below 20% in a majority of MEA manufacturing (mainly oil and gas), followed by the finance sector. Other key segments are telecoms and the public sector. 2007e Hardw are 2007e Sof tw are UAE Key verticals will include process Saudi Arabia numerous untapped sectors still exist. Israel growth over the forecast period as 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Egypt markets. BMI predicts plenty of room for Q atar IT spending is as low as 14% in Egypt Kuwait Spending on software as a share of total 2007e Services SMEs are likely to lead spending growth, with manufacturing and trading firms e = estimate. Source: BMI seeking efficiencies by making the transition from manual environments to full automation of back-office systems. During the next five years, in addition to customer relationship management (CRM) and enterprise resource planning (ERP), high-growth categories are set to include business intelligence, storage and security products. Security software is also a growing opportunity, with the UAE currently the largest market. Market Structure (% of total IT market) 2012f Hardw are 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, fastest growing segment of the region’s IT market, with strong double-digit 2012f Sof tw are UAE BMI predicts that IT services will be the counterfeit. Another important factor is Egypt championed by IBM and other vendors. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Israel region up to 80% of software is Saudi Arabia 2012f is that of illegal software: across the Qatar regional software market. One key issue Kuwait There are some challenges for the 2012f Services f = forecast. Source: BMI growth in many countries. Currently services’ share of IT spending ranges from around 24% to 32% in © Business Monitor International Ltd Page 14 Israel Information Technology Report Q1 2009 the MEA countries covered by BMI. Sustained high oil prices will drive spending on large IT projects by government, as well as in industries such as oil and gas, transport and utilities. Support and maintenance account for around one-third of spending on IT services. However, 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 15 Israel Information Technology Report Q1 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. In our first 2009 rankings the wealthy, high-tech Gulf Co-operation Council (GCC) markets continue to occupy the higher positions, despite the precipitous fall in oil prices in H208. The wave of investments triggered by the oil revenue windfalls of the past couple of years will continue for the moment to sustain the IT market. The top four countries remain the same, although our ratings reflect a slight deterioration in business environment. The UAE with its rapidly growing population keeps top spot for the third consecutive quarter, while Qatar retains second place from last quarter, ahead of Kuwait in third. Still in fourth place is Israel, where the IT market should have enough momentum from key sectors to continue to expand despite the economic headwinds. Saudi Arabia and Bahrain are next in our table and – like Qatar and Saudi Arabia – will continue to feel the benefit of economic diversification programmes and liberalisation in key sectors, such as telecommunications. Turkey and South Africa’s relatively lowly seventh and eighth spots reflect business environment risks, rather than the undoubted latent potential of these country’s IT markets. 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 influencing 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 GCC countries, government’s have used oil revenues to fund development of other sectors such as manufacturing, and this should provide a source of opportunity for IT sector investors in the years ahead. 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 in IT opportunities is the waves of e-government initiatives being implemented in states like Kuwait, the UAE and South Africa, among others. First-placed UAE has continued to roll out eservices 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 © Business Monitor International Ltd Page 16 Israel Information Technology Report Q1 2009 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 the grounds of business environment, but the IT market metrics remain attractive. Saudi Arabia will continue to be a lucrative market for technology products and services, with few signs as yet that the government intends to cut back on infrastructure investments. As with several other countries in the region, the country’s youthful population supports a continued rapid rise in PC penetration. BMI also takes a positive view of market performance in Bahrain over the forecast period, with the banking, telecoms and real estate sectors accounting for a significant and growing portion of investment in IT. Oman, although like Bahrain one of the smaller markets in the region, should benefit from an emphasis on diversification, which has encouraged IT spending in sectors ranging from tourism to ports, with IT as a key component 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 likely to have some immunity to the economic slowdown. Israel’s IT market is also benefiting from record-breaking foreign investment, as well as growing demand for major IT outsourcing solutions. 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. Egypt is expected to be one of the fastest growing IT markets in the region over the next few years as household computer penetration rises, despite a number of constraints, including low disposable incomes and economic disparities. Lebanon also 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. © Business Monitor International Ltd Page 17 Israel Information Technology Report Q1 2009 Table: 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 rating Regional ranking UAE 53 90 66 60 69 65 65.9 1 Qatar 45 100 64 50 7 66 64.8 2 Kuwait 52 90 65 40 70 58 62.9 3 Israel 52 80 62 55 71 64 62.5 4 Saudi Arabia 53 70 59 45 65 57 58.6 5 Bahrain 37 80 52 55 69 63 55.3 6 Turkey 58 50 55 45 43 44 51.6 7 South Africa 55 45 51 35 60 50 51.0 8 Oman 42 60 48 45 60 54 49.8 9 Egypt 52 25 42 40 65 55 46.1 10 Lebanon 35 60 44 20 37 30 39.7 11 Scores out of 100, with 100 the highest. The IT Business Environment Rating is the principal rating. It comprises two sub-ratings: 'Limits of potential returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting, respectively. In turn, the 'Limits' rating comprises 'IT market' and 'Country structure', which have a 70% and 30% weighting, respectively, and are based on the growth/size/maturity of the IT industry and government policy towards the industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating comprises 'Market risks' and 'Country risk', which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry's regulatory and IP regulations (Market) and its broader risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please consult the appendix at the end of the report. Source: BMI © Business Monitor International Ltd Page 18 Israel Information Technology Report Q1 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: ƒ Setting up a national policy and priorities for research and development (R&D); ƒ Development of scientific and technological infrastructure; ƒ Establishment and strengthening of foreign scientific relations; ƒ Participation in the establishment of research centres, including regional R&D centres; ƒ Participation in the development of scientific and technological human resources; ƒ Increasing awareness of science within the public, especially the youth of Israel; ƒ Developing digital infrastructure (facilitating access to information); and ƒ 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 19 Israel Information Technology Report Q1 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 ƒ 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 ƒ 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 ƒ This project will create a unified language for cross-government activities Government EIP ƒ 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 ƒ The GISP project has been operational since 1998, providing essential infrastructure for public-government communication ƒ To date, 60% of the governmental bodies have voluntarily joined the project Shoham – e-commerce infrastructure and service ƒ 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 ƒ Group of initiatives to help close digital divide © Business Monitor International Ltd Page 20 Israel Information Technology Report Q1 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 7.2% over the 20082013 forecast period to reach US$2.62bn 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, but one area of growth will be lower-priced mini-computers, 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). 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 9% over the forecast period. Spending on software is shifting towards the 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. 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 © Business Monitor International Ltd Page 21 Israel Information Technology Report Q1 2009 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 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 a value of an estimated 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. 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. © Business Monitor International Ltd Page 22 Israel Information Technology Report Q1 2009 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. The military is a key sector, 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. 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. 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: © Business Monitor International Ltd Page 23 Israel Information Technology Report Q1 2009 ƒ 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; ƒ Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone; ƒ Massive investment should be made in the educational system for training information workers; ƒ 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. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q1 2009 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. 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 involves fingerprints and digital photography. © Business Monitor International Ltd Page 25 Israel Information Technology Report Q1 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 7.6% over the forecast period, to reach a projected US$6.96bn 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, BMI believes that growth will ease in 2009 thanks to the economic slowdown and unemployment hitting consumer demand for high-tech goods. A number of factors are likely to contribute to the slowing of IT spending growth going forward. The resurgent US dollar, while good for Israeli exporters, will, if present trends continue, impact on the affordability of US-imported technology products. Rising unemployment and job insecurity for those in work will have a negative impact on consumer sentiment. Meanwhile, many companies facing tight credit conditions will likely cut back on IT budgets. However, the Israel IT market has a number of positive fundamentals, which should support growth going forward. Low computer penetration, of around 30%, offers potential for organic 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 26 Israel Information Technology Report Q1 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. 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$2.32bn in 2008 to US$3.16bn in 2013, with computer sales projected to rise from an estimated US$1.85bn to US$2.62bn. Over the same period, software spending is expected to increase from an estimated US$309mn to US$421mn, and services from an estimated US$1.54bn to US$2.34bn. The push for broadband should provide impetus for urban consumer demand, with the number of broadband subscribers forecast to reach 2.3mn in 2013. Table: Israeli IT Industry (US$mn, unless otherwise stated) – Historical Data & Forecasts 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 4,062 4,428 4,826 5,212 5,629 6,023 6,505 6,960 2.9 2.7 2.5 2.4 2.3 2.2 2.2 2.2 Hardware (Computer market sales) 2,031 2,125 2,317 2,450 2,589 2,771 2,992 3,162 Services 1,259 1,417 1,544 1,668 1,858 1,988 2,147 2,337 Software 227 255 309 300 334 358 386 421 1,625 1,679 1,853 1,984 2,097 2,250 2,454 2,618 183 191 208 220 233 249 269 285 IT Market IT Market as % GDP PCs (including notebooks) Servers e/f = BMI estimate/forecast. Source: BMI, EITO, World Bank, ITU, EU, IDC, Gartner © Business Monitor International Ltd Page 27 Israel Information Technology Report Q1 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) 25.5% year-on-year (y-o-y) to 1.23mn broadband lines as of year-end 2005, 5,000 albeit not as strongly as the 54.8% rise 4,800 4,400 1,500 4,200 1,000 over 10% to around 1.35mn 4,000 subscriptions, and there was a similar 3,800 We estimate growth of 8.9% in 2008, 2013f 2012f 0 2011f by 9.8% to reach 1.51mn subscriptions. 3,600 2006 picture in 2007, with the market growing 500 2010f in 2006, with the market growing by just 2,000 4,600 2007 experienced in 2004. Growth moderated 2,500 2009f continues, with the market increasing by 2008e Growth in broadband subscriptions Internet Users ('000) Broadband Internet Subscribers ('000), right axis with the number of subscriptions in excess of 1.66mn. Israel’s strong e/f = BMI estimates/forecasts. Source: ITU, BMI 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, such as Western Europe and the US. Bezeq is © Business Monitor International Ltd Page 28 Israel Information Technology Report Q1 2009 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 means 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. Macroeconomic Forecast Global Slowdown To Hit Home Growth will slow dramatically in 2009 owing to falling demand for Israeli exports, sluggish consumer spending and negative investor sentiment. Increased government spending should spare the economy from recession, however, with annual growth expected to come in at 1.3%. We have slashed our 2009 growth forecast for Israel in light of the sharp deterioration in the global economic outlook since our last Business Forecast Report. We are now forecasting real GDP growth of just 1.3% for the coming year, rising to 1.9% in 2010 and 2.1% in 2011. Even when external conditions improve, we believe that the days of annual growth in excess of 5%, enjoyed since 2004, are over and Israel's growth patterns will in future resemble those of developed states such as the US or Western Europe. In the short to medium term, the risks to our forecasts are weighted to the downside. Globally, the bad news just keeps on coming and a deeper- or longer-than-expected downturn in the US would have a knock-on effect on the Israeli export sector and on FDI. The Slowdown Begins… These trends were already in evidence in Q308. Real GDP growth slowed to 2.3% y-o-y, down from 4.2% in Q2 and 5.4% in Q1. The Bank of Israel (BoI) estimates that the economy has not grown at all during the final quarter of the year. We have stuck with our full-year estimate of 4.0% growth, although the final figure may come in slightly lower. The state-of-the-economy index recorded its fifth consecutive month of negative growth in October, falling by 0.4% from the previous month. Deteriorating demand for Israeli exports was illustrated by the index of manufactured exports, which fell by 5.2% y-o-y in the same month, while domestic consumers also cut back on imports, most notably of durable goods. We see private consumption growth slowing considerably in 2009 to just 1.5% (in real terms), compared with an estimated 4.6% in 2008. Rising unemployment – jobless figures rose to 6.4% of the civilian workforce in Q308, up from 5.7% the previous quarter – will constrain spending in some households and © Business Monitor International Ltd Page 29 Israel Information Technology Report Q1 2009 encourage greater prudence even in those not affected by job cuts. In theory, recent interest-rate cuts should stimulate consumer spending – at 2.5%, the BoI's headline rate is at its lowest level since its records began in 1995 (when the rate was set at 17.0%). However, with banks unwilling to lend, the Israeli consumer is not feeling the impact in terms of cheap credit. The government's recently promised ILS6bn in bank guarantees, plus the announcement of guarantees for personal pensions, may go some way to loosening up the credit market and calming consumer fears, but we expect private consumption to remain constrained throughout 2009. A lack of credit will also have a negative effect on investment spending, with growth in gross fixed capital formation (GFCF) forecast to slump to just 2.0% in 2009 (from 7.0% in 2008), rising to 4.4% in 2010 as business sentiment picks up and the export sector begins to recover. A severe drop-off in foreign investment inflows will also play its part in dampening GFCF growth. In Q308, investment by nonresidents fell by 16.5% y-o-y, while in October alone, foreign investors withdrew US$1.1bn from the Israeli stock market. Admittedly, October marked the height of investor risk aversion towards emerging markets, but now that this money has been withdrawn, we do not expect investors to venture back to the Israeli market in large numbers any time soon, given the poor domestic outlook. Exports to Take a Hit Given the heavy exposure of the Israeli export sector to the US market, this is likely to be the area of the economy worst affected by global conditions. As discussed above, the index of manufactured exports has gone into decline and we believe that things will get worse as the US recession intensifies. We are forecasting that the US economy will contract by 2.0% in 2009 (compared with our earlier, but already negative, prediction of a 0.2% contraction), suggesting that the Israeli export sector will struggle throughout the coming year and recover only slowly in 2010. Exports will receive some respite from a weaker exchange rate, something that the BoI is now actively pursuing through its daily foreign exchange (forex) purchases. According to the bank, forex reserves hit US$37bn at the end of November 2008 and the US$100mn daily purchasing schedule is set to continue until this figure reaches at least US$40bn (the BoI's upper-end target is US$44bn). This implies further downside pressure on the shekel over the coming months. At the time of writing, the unit was hovering around our end-2008 target of ILS3.90/US$1 and we are forecasting a rate of ILS4.00/US$1 by the end of 2009 (which could mean depreciation beyond that point, followed by a slight recovery later in the year). The weaker exchange rate will make imports more expensive and, coupled with already weak consumer sentiment, this will drag down growth in the imports component of real GDP. That said, we believe that import growth will still outpace the expansion in real exports, meaning that, overall, the negative impact of net exports on GDP growth will increase in magnitude. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q1 2009 Government To The Rescue? Given this gloomy picture, it is unsurprising that the government has stepped in to try to shore up economic growth, with its ILS21.7bn fiscal stimulus package. In GDP terms, we expect government expenditure to expand by 4.0% in real terms, the highest growth rate of all GDP components. Spending growth is forecast to remain high in 2010, when its infrastructure investment programme really kicks in. As a result, we see government spending rising as a proportion of real GDP from 26.1% in 2007 to 27.3% by 2010. If successful, the ramping up of public-sector spending should feed through into private consumption (through job creation) and investment spending (greater demand for local firms in areas such as construction). However, there are still political questions hanging over the stimulus package, which at the time of writing had still to be approved by parliament. Table: Israel – Economic Activity 2004 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f Nominal GDP, 1 ILSbn 554.0 589.0 633.1 665.1 716.2 747.0 776.1 808.2 841.9 876.0 Nominal GDP, 2 US$bn 123.63 131.25 142.16 162.10 184.77 189.11 201.59 218.43 227.54 236.76 4.8 6.5 5.2 5.3 4.0 1.3 1.9 2.1 2.4 2.5 18,013 18,774 19,976 22,379 25,081 25,242 26,457 28,668 29,864 31,074 6.86 6.99 7.12 7.24 7.37 7.49 7.62 7.62 7.62 7.62 10.2 9.0 8.1 6.7 6.4 6.8 6.7 6.5 6.4 6.2 Real GDP growth, 1 % change y-o-y GDP per capita, 1 US$ Population, mn 1 Unemployment, % of labour force, 1 end of period 1 2 e/f = BMI estimate/forecast. Source: Central Bureau of Statistics, Central Bureau of Statistics, BMI © Business Monitor International Ltd Page 31 Israel Information Technology Report Q1 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 32 Israel Information Technology Report Q1 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 a good first three quarters in 2008, despite the global economic headwinds. Ness Israel reported 6% top-line growth, despite the sale of two business units. Ness’s defence and homeland security business performed particularly well, with some major tenders including for a fighter jet cockpitbased 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 Beseq, and a number of public-sector CRM projects. The company reported a 7.5% rise in revenues in Q108 to ILS192.3mn, a slower rate than in the equivalent period of 2007. The roster of achievement 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. 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 reported computer sales of around US$850mn in 2007, while the company’s software division hosts HP’s biggest R&D centre worldwide. 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. © Business Monitor International Ltd Page 33 Israel Information Technology Report Q1 2009 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 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. Microsoft also reported some highprofile local wins 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. In 2007, Microsoft Israel was also selected by Super-Pharm Israel, the leading drugstore chain in the country, to roll out a portal based on Microsoft Office Share Point Portal Server 2003. Microsoft also completed a project for Tehila, a division of the Israeli Ministry of Finance, which provides IT services for the government of Israel. 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 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 © Business Monitor International Ltd Page 34 Israel Information Technology Report Q1 2009 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 35 Israel Information Technology Report Q1 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 reported a solid financial start to 2008, with revenues up 27% y-o-y in Q1 With 7,800 employees, Ness to US$159.7mn, and this continued in the next two quarters, despite the global maintains operations in 16 economic slowdown. The company reported improved operating margins in countries, and partners with over the Israeli market, and closed a number of important deals, despite the strong 100 software and hardware US dollar and weaker local economy. The defence and homeland security vendors worldwide. (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. 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 SAP- © Business Monitor International Ltd Page 36 Israel Information Technology Report Q1 2009 based 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 37 Israel Information Technology Report Q1 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 38 Israel Information Technology Report Q1 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 HP is to invest US$4.1mn to build a new factory to expand its wide-format Has 4,000 employees, 730 of printer production in Israel. HP said that the new factory in the Caesarea whom are employed at HP’s 2 industrial zone would start out with 4,000m of production space, which could software division, which hosts later be expanded. A large part of HP’s R&D and manufacturing of digital HP’s biggest R&D centre printers is based in Israel. worldwide. 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 strategy focusing on four areas: predictability, partnering, profitability and portfolio. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q1 2009 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 40 Israel Information Technology Report Q1 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 Matrix reported a number of successes in 2008, including winning an ILS20mn Employs around 3,500 IT project to implement a CRM system at long-time customer Bezeq, as well as a professionals. 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 41 Israel Information Technology Report Q1 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 has launched a co-operative training project with the A workforce of 200 in Ra’anana government focused on equipping Israelis with the skills to enter technology- and Haifa. 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. Since then, all Microsoft programs have been translated into Hebrew, at a cost of US$100mn. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q1 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 43 0.8 Israel Information Technology Report Q1 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 44 Israel Information Technology Report Q1 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 45 Israel Information Technology Report Q1 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 46 Israel Information Technology Report Q1 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: ƒ Overall economic context, and GDP and demographic trends; ƒ Underlying ‘information society’ trends; ƒ Projected GDP share of industry; ƒ Maturity of market structure; ƒ Regulatory developments and government policies; ƒ Developments in key client sectors such as telecommunications, banking and e-government; ƒ Technological developments, and diffusion rates; ƒ 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 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 47 Israel Information Technology Report Q1 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 48 Israel Information Technology Report Q1 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 49 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... the passing of the biometric database bill The ID-cards – set to cost Israel US$67.49mn – would use ‘smart’ identification methods which involves fingerprints and digital photography © Business Monitor International Ltd Page 25 Israel Information Technology Report Q1 2009 Industry Forecast Despite an anticipated slowdown in 2009, the Israeli IT market should have enough momentum from key sectors to continue... Monitor International Ltd Page 32 Israel Information Technology Report Q1 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... 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 © Business Monitor International Ltd Page 33 Israel Information Technology Report Q1 2009 In 2008, IBM announced a co-operation agreement with Retalix to... management, firewalls, ERP © Business Monitor International Ltd Page 21 Israel Information Technology Report Q1 2009 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... take place in 2009 © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2009 Middle East Regional IT Markets Overview BMI projects significant improvement in Internet Penetration regional ICT indicators over the next few (per 100 population) years, driven by rising incomes and government programmes The Middle 70 East divides into two groups in terms of 60 information society... 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 19 Israel Information Technology Report Q1 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 service processed over ILS250mn in its first year Lehava project ƒ Group of initiatives to help close digital divide © Business Monitor International Ltd Page 20 Israel Information Technology Report Q1 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 7.2% over.. .Israel Information Technology Report Q1 2009 Israel Economics SWOT Strengths Weaknesses Opportunities Threats ƒ The policy framework has stabilised in recent years with fiscal deficits brought well under control ƒ The workforce... lack of available skills © Business Monitor International Ltd Page 22 Israel Information Technology Report Q1 2009 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 The military is a key sector, with outsourcing deals such as that awarded to HP by the Israeli Navy for management of its IT infrastructure highlighting the... 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: © Business Monitor International Ltd Page 23 Israel Information Technology Report Q1 2009 ƒ A senior minister for the high-tech sector should be appointed to co-ordinate