Israel information technology report q3 2010

... any information hereto contained Israel Information Technology Report Q3 2010 © Business Monitor International Ltd Page Israel Information Technology Report Q3 2010 CONTENTS Executive Summary... International Ltd Page Israel Information Technology Report Q3 2010 Executive Summary Market Overview BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010 The Israeli IT market... the Israeli government reaching supply agreements with vendors like Dell and HP © Business Monitor International Ltd Page Israel Information Technology Report Q3 2010 Competitive Landscape The Israeli

Q3 2010 www.businessmonitor.com ISraeL information technology Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 1752-4245 Published by Business Monitor International Ltd. ISRAEL INFORMATION TECHNOLOGY REPORT Q3 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: June 2010 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 © 2010 Business Monitor International. All rights reserved. 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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 Q3 2010 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q3 2010 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 8 Israel IT Sector SWOT ........................................................................................................................................................................................... 8 Israel Telecommunications Industry SWOT ........................................................................................................................................................... 9 Israel Political SWOT .......................................................................................................................................................................................... 10 Israel Economic SWOT ....................................................................................................................................................................................... 11 Israel Business Environment SWOT .................................................................................................................................................................... 11 IT Business Environment Ratings ................................................................................................................ 12 Middle East & Africa Business Environment Ratings ............................................................................................................................................... 12 Table: Regional IT Business Environment Ratings .............................................................................................................................................. 12 Middle East & Africa Regional IT Markets Overview .................................................................................. 15 Israel Market Overview .................................................................................................................................. 21 Government Authority............................................................................................................................................................................................... 21 Government Initiatives......................................................................................................................................................................................... 22 Industry Forecast Scenario ........................................................................................................................... 30 Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) ............................................................................ 32 Country Context ........................................................................................................................................................................................................ 33 Table: Rural/Urban Breakdown .......................................................................................................................................................................... 33 Table: Consumer Expenditure (US$) ................................................................................................................................................................... 33 Internet ..................................................................................................................................................................................................................... 34 Table: Telecoms Sector – Internet – Historical Data & Forecasts ...................................................................................................................... 34 Macroeconomic Forecast ......................................................................................................................................................................................... 35 Table: Israel – Economic Activity, 2007-2014 ..................................................................................................................................................... 38 Competitive Landscape ................................................................................................................................. 39 Company Profiles ........................................................................................................................................... 43 Ness ..................................................................................................................................................................................................................... 43 IBM ...................................................................................................................................................................................................................... 46 HP........................................................................................................................................................................................................................ 47 Matrix .................................................................................................................................................................................................................. 49 Microsoft.............................................................................................................................................................................................................. 51 Country Snapshot: Israel Demographic Data.............................................................................................. 52 Section 1: Population................................................................................................................................................................................................ 52 Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 52 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 53 Section 2: Education And Healthcare ....................................................................................................................................................................... 53 Table: Education, 2002-2005 .............................................................................................................................................................................. 53 Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 53 Section 3: Labour Market And Spending Power ....................................................................................................................................................... 54 Table: Employment Indicators, 2001-2006 .......................................................................................................................................................... 54 Table: Consumer Expenditure, 2000-2012 (US$) ................................................................................................................................................ 55 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q3 2010 Table: Average Annual Wages, 2000-2012 .......................................................................................................................................................... 55 BMI Methodology ........................................................................................................................................... 56 How We Generate Our Industry Forecasts ............................................................................................................................................................... 56 IT Industry ................................................................................................................................................................................................................ 56 IT Ratings – Methodology ......................................................................................................................................................................................... 57 Table: IT Business Environment Indicators ......................................................................................................................................................... 58 Weighting .................................................................................................................................................................................................................. 59 Table: Weighting Of Components ........................................................................................................................................................................ 59 Sources ..................................................................................................................................................................................................................... 59 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q3 2010 Executive Summary Market Overview BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010. The Israeli IT market should gain enough momentum from key sectors to expand at a compound annual growth rate (CAGR) of 6% over BMI’s 2010-2014 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals like financial services and small and medium-sized enterprises (SMEs). Spending is expected to resume single-digit growth in 2010 after a contraction in 2009. In early 2010, there were reports of a pick-up in the flow of projects. Vendors reported that demand had revived in the key financial services vertical, where new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Healthcare, the public sector and utilities were also generating projects. The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during BMI’s five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High internet penetration and growing broadband penetration are drivers for the retail segment, while the financial services sector accounts for about 15% of Israeli IT spending. Industry Developments In 2009, Israel’s high-tech sector suffered as demand for high-tech exports dropped by at least 10-15%, with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israeli government given that high-tech accounted for around 10% of Israel’s economy, with annual sales estimated at around US$25bn. Major IT firms were retrenching in Israel, including SAP, Cisco and HP. IT is viewed as an important policy tool for the Israeli government’s 2008-2010 socio-economic policy framework. In 2009, 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 was expected to emerge as the main priority. As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching supply agreements with vendors like Dell and HP. © Business Monitor International Ltd Page 5 Israel Information Technology Report Q3 2010 Competitive Landscape The Israeli IT services market is competitive, with leading multinational competitors IBM and HP – following its merger with EDS – both estimated to have Israeli IT services market shares of around 10%. HP Israel’s software division hosts HP’s biggest research and development (R&D) centre worldwide, and the company also has significant production facilities in Israel. Leading IT services vendors, including Israeli companies Ness Technologies and Matrix as well as US company IBM, experienced mixed fortunes in the Israeli market in 2009. Ness Israel reported a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. Meanwhile, market leader Matrix reported wins in a number of key sectors including healthcare, financial services, defence and government. In 2010, Microsoft Israel, which as an annual turnover of around US$1bn, hopes that sales of its Windows 7 operating system, launched in October 2009, will boost its sales. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. Israel is also an important R&D centre for Microsoft, and in 2010 the company’s Israel R&D centre launched a new unified access gateway (UAG) product. Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.6bn in 2014. Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. Household consumption moved into negative territory in 2009, and although there was a slight recovery in H209, trading conditions remained tough. Software Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses are expected to remain cautious, deferring investments or looking for ‘good enough’ solutions to immediate problems. However, there should still be several growth areas going forward. 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, customer relationship management (CRM) solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key opportunities including defence and healthcare. © Business Monitor International Ltd Page 6 Israel Information Technology Report Q3 2010 IT Services The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.1bn in 2014. In early 2010, there were reports of a pick-up in the flow of projects, but growth is expected to reach a higher trajectory in the second half of our five-year forecast period. Government and defence are two key sectors likely to be a continued source of opportunities, because the factors driving spending in each case are not particularly sensitive to economic vicissitudes. Another key area of opportunity is healthcare IT. Despite failing to capitalise in the past, Israel is starting to emerge as a desirable location for packaged applications and localisation services. E-Readiness Israel’s relatively high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. The government has announced that it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines. Israel’s strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq’s network and will stimulate much greater competition. LLU was due to be implemented by end-2009. © Business Monitor International Ltd Page 7 Israel Information Technology Report Q3 2010 SWOT Analysis Israel IT Sector SWOT Strengths Weaknesses Opportunities Threats ! One of the most modern economies in the region, with a highly educated, linguistically skilled workforce and relatively low labour costs compared with most developed countries. ! Strong defence and government spending provides base of IT demand. ! Relatively mature IT market, with services accounting for an estimated 33% of spending in 2009. Despite this, the market for basic IT hardware and software is far from saturated. ! Strong political support, with government having implemented a number of policies to aid in the development, success and expansion of the IT sector. ! The recession at the beginning of the decade created a client mentality of focusing on the bottom line, with enhanced services customer market power adding to pressure on pricing and margins. ! Digital divide, with 3% of bottom-income group having home internet access. ! Despite the financial crisis, the financial services sector, which accounts for around 15% of spending, will have to spend on compliance with Basel II and other international standards, driving growth. ! Defence and government projects should be less sensitive to the economic downturn. ! Outsourcing, software as a service (SaaS) and applications management likely to grow fastest out of IT services, with particular opportunities in financial sector. ! Opportunities for partnership/investment in Israel’s lively local IT company sector. ! Healthcare IT will be a growing source of opportunity. ! Economic downturn and unemployment will lead to weaker consumer and business sentiment. ! Other factors may affect business confidence, notably the security situation. ! The weaker local currency, and aggressive pricing, may continue to constrain growth and put pressure on margins. © Business Monitor International Ltd Page 8 Israel Information Technology Report Q3 2010 Israel Telecommunications Industry SWOT Strengths Weaknesses Opportunities Threats ! Well developed internet/broadband sector compared with regional peers. ! Liberal mobile market consisting of four operators. ! Mature market with strong take-up of value-added and 3G services. ! Mobile penetration rate of over 120% means that growth in the mobile market has slowed considerably and operators must look for alternative revenue sources. ! Lack of competition in all telecoms sectors. ! Regulator has been slow to license new services, such as WiMAX wireless broadband. ! Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects. ! Emergence of rival operator HOT Telecom, made up of main three cable operators (Golden Channels, Matav and Tevel) to compete against Bezeq, could provide cheaper services. ! Introduction of number portability and the entry of mobile virtual network operators (MVNOs) to the mobile sector could shake up competition and drive down retail prices for consumers. ! Continued interconnection tariff reduction could have a devastating effect on operators’ revenues. ! Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenues. ! Operators are also hostile to the introduction of MVNOs. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q3 2010 Israel Political SWOT ! Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region. ! Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government. ! The protracted conflict with the Palestinians means there are persistent security risks, although violence in the West bank has been reduced significantly. Strategies to minimise or end the conflict are domestically divisive. ! Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. Opportunities ! The Annapolis conference in November 2007 laid the foundations for an eventual peace agreement with the Palestinians, and improved relations with traditionally hostile Arab states, particularly Saudi Arabia. Threats ! The victory of Hamas in the 2006 Palestinian elections, its subsequent takeover of the Gaza Strip, and Israel’s military incursion into the territory in December 2008/January 2009 has added to uncertainty. Finding a lasting solution poses a dilemma for Israel, which has previously said it will not talk to the militant organisation. ! The construction of the West Bank barrier and the continued home-building in some West Bank settlements antagonises the Palestinians and stands in the way of the peace process. ! Iranian President Mahmoud Ahmadinejad’s re-election will add to Israeli concerns about a possible Iranian nuclear weapons programme. Strengths Weaknesses © Business Monitor International Ltd Page 10 Israel Information Technology Report Q3 2010 Israel Economic SWOT Strengths Weaknesses Opportunities Threats ! The policy framework has stabilised in recent years with fiscal deficits brought well under control (although the deficit is set to expand again in 2009). ! The workforce is highly educated and skilled. ! The country’s close ties with the US provide it with substantial financial assistance for economic and military ends. ! The main downside risk to the economy is the security situation. A sharp deterioration can have an immediate impact on domestic confidence, tourism receipts, the exchange rate and foreign investment. ! The economy is highly exposed to that of the US, in terms of exports, investment and remittances. ! In the long term, rising levels of employment will underpin private consumption growth. ! FDI stocks amounted to 37% of GDP in 2007, according to UNCTAD, and remained robust in 2008; this should continue to propel growth for some years to come. ! As a net fuel importer, Israel is vulnerable to large price fluctuations; the surge in oil prices in 2008 contributed to rising inflation. ! Competition from emerging Chinese and Indian producers of high-tech goods and polished diamonds, as well as sluggish growth in the eurozone, could undermine demand for Israeli exports. Israel Business Environment SWOT Strengths Weaknesses Opportunities Threats ! The business environment is supported by the sound infrastructure and communication networks, as well as transparent legislation. ! The banking system is one of the most sophisticated in the region and offers a wide range of both consumer and commercial credit products. ! Historic political instability increases the risk premium of investment in Israel. ! Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector. ! Ongoing cuts will bring the top level of corporate tax down from 29% in 2007 to 25% by 2010. ! The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade. ! Strike action has proved extremely disruptive to the business environment over the past two years. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q3 2010 IT Business Environment Ratings Middle East & Africa Business Environment Ratings 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 BE Rating Regional Ranking UAE 51 95 66 60 72 67 66.6 1 Israel 47 95 64 55 78 69 65.1 2 Kuwait 46 100 65 40 75 61 63.7 3 Qatar 36 100 58 50 75 65 60.3 4 Saudi Arabia 48 85 61 45 64 57 59.4 5 Bahrain 31 85 50 58 77 69 55.6 6 Oman 33 75 48 50 74 64 52.9 7 Turkey 50 55 52 45 51 49 50.8 8 South Africa 53 45 50 35 62 51 50.6 9 Egypt 52 25 42 40 55 49 44.4 10 Lebanon 30 65 42 20 49 38 40.8 11 Scores out of 100, with 100 highest. The IT BE 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 upon growth/size/maturity/govt policy of IT 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 regulatory and IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk ratings. The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings methodology and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report. Source: BMI 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 2014. 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 updated Q310 ratings, the wealthy, high-tech Gulf Cooperation Council (GCC) markets continue to occupy the higher rankings. Factors such as comparatively resilient consumer demand and ongoing infrastructure projects make this region relatively well positioned for growth in the post-credit-crunch era. © Business Monitor International Ltd Page 12 Israel Information Technology Report Q3 2010 However, in most cases we do not see IT spending returning to its pre-crisis rate of growth over our fiveyear forecast period. Despite recent financial concerns, the UAE has the top spot in our Q3 table. Qatar retains second place, with its projected high rate of GDP growth in 2010 keeping it ahead of Kuwait in third. Moving up to second place is Israel, where household computer penetration of around 75% offers potential for continued growth and about 50% of IT spending is accounted for by government and military projects. With the exception of Israel, business environment ratings for our top four markets have been slightly downwardly revised due to ongoing economic uncertainties. Saudi Arabia, Bahrain and Oman occupy the next three places, and – like Qatar – spending is expected to pick up in 2010 following a slowdown in 2009 when businesses and consumers spent cautiously due to the economic slowdown. Economic reform and trade liberalisation will fuel spending on IT by both public sector organisations and enterprises. South Africa’s drop to ninth spot from eighth reflects business environment risks rather than the considerable potential of the country’s IT market; however, this year will see the wind down of some IT infrastructure projects associated with the 2010 FIFA World Cup. Turkey is expected to be a regional IT market outperformer as the focus of demand shifts towards the Anatolian region and the rate of PC penetration rises. Bringing up the field, Egypt’s high growth potential is constrained by income and business environment considerations, while uncertainties continue to surround the Lebanese IT market, with a mixed picture with regards to economic policy. One factor that will keep IT spending growing in this region are the waves of e-government initiatives being implemented. Government accounts for up to 40% of the IT market in some states, and governments in the region have allocated significant budgets for e-services development. First-placed UAE’s Strategic Plan calls for a strengthening of e-government programmes. In Saudi Arabia, too, substantial sums have been allocated for e-government infrastructure development. A number of factors contributed to the slowdown in the UAE and other GCC markets like Oman in 2009, including the impact of a falling population on consumer spending, as numbers of expats returned home. BMI expects this to be a short-term trend, however, and Saudi Arabian population growth, for example, is expected to reach 10% by the end of our five-year forecast period, driving IT spending. In many markets, liberalisation in sectors such as telecommunications and financial services are factors driving demand for IT products and services. The share of the non-oil sector in IT spending is expected to fall slightly in the UAE but to rise in Saudi Arabia, which accounts for 40% of regional IT spending. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q3 2010 However, during BMI’s forecast period, there will continue to be significant spending on new technology-driven solutions in the hydrocarbons sector. Saudi Arabia, Bahrain and Oman rank slightly behind their equally fast-growing GCC peers on grounds of general business environment, but the IT market metrics remain attractive. Saudi Arabia will continue to be a lucrative market for technology products and services, with the country’s youthful population supporting a continued rapid rise in PC and notebook penetration. BMI also takes a positive view of market performance in Bahrain over the 2010-2014 forecast period. A particularly important factor is Bahrain’s growing status as a financial hub. Oman, although like Bahrain one of the smaller markets in the region, should benefit from infrastructure projects in sectors ranging from tourism to ports. Of the non-GCC countries, Israel should have enough momentum from key sectors to expand over BMI’s 2010-2014 forecast period. Our ratings take account of opportunities in verticals like financial services and SMEs, and growing demand for major IT outsourcing solutions. However, in 2010 rising job insecurity for those in work will have a negative impact on consumer sentiment. South Africa is one of the Middle East and Africa’s most significant IT markets in terms of size and growth potential. However, it loses points for Country Structure and Market Risk. The market will be supported by factors such as government projects and investment by sectors such as telecoms. Projected improvement in South Africa’s broadband infrastructure, and international bandwidth, will also be a growth driver. Egypt is expected to be one of the fastest-growing IT markets in the region over the next few years, but has a number of constraints, including low disposable incomes and economic disparities. The market will benefit from youthful demographics, rising PC penetration and improving ICT infrastructure, despite a sub-optimal distribution network outside of Cairo. Lebanon also has some intrinsic advantages, including a cosmopolitan and multi-lingual labour force, and a strategic position for the Levant markets. There is potential for IT vendors in sectors such as telecoms, banking, utilities, real estate and government, but much will depend on the political stabilisation necessary to implement reforms. © Business Monitor International Ltd Page 14 Israel Information Technology Report Q3 2010 Middle East & Africa Regional IT Markets Overview BMI projects continued improvement in Internet Penetration regional ICT indicators over its five-year (per 100 population) forecast period, driven by investment in broadband and government ICT initiatives. The Middle East region divides into two groups in terms of information society development. In the first group are richer and more technologically advanced countries, such as Israel and the UAE, where internet penetration is relatively high and many households have access to broadband services. In more emerging markets such Source: BMI as Egypt, on the other hand, computers remain a luxury for many. The number of internet users is expected Broadband Penetration to grow significantly. Egypt is projected (per 100 population) to advance the most in percentage terms, with penetration rising from about 21.1% in 2010 to 30.6% by 2014 (note: figures may vary elsewhere in report due to updated forecasts after time of writing). Qatar, where the second biggest increase is forecast, will have over 50% penetration by 2014, up from 36.7% in 2010. The UAE is one of the most eready states in the region, with internet penetration seen as reaching 76% within Source: BMI the forecast period. Growth in the number of internet subscribers is also forecast to pick up in Saudi Arabia, with a 24% increase between 2010 and 2014. Similar contrasts are apparent in relation to broadband penetration, which currently ranges from 1.6% in Egypt to 26.2% in Israel. Government initiatives are afoot in most places, ranging from wireless broadband in Dubai to plans to deploy optical fibre extensively in countries such as Kuwait. BMI’s broadband penetration forecasts have been downgraded in many markets as a result of the economic © Business Monitor International Ltd Page 15 Israel Information Technology Report Q3 2010 downturn, with Israel the only country seen as reaching 30% broadband penetration by 2014. The UAE is projected to reach 24%, the second highest among the countries covered by BMI. Internet and broadband penetration growth will receive boosts from continued efforts to liberalise regional telecoms markets. Moves towards telecoms market liberalisation have continued in Qatar, Egypt, Saudi Arabia and other countries. Broadband penetration has become a driver of PC ownership in some segments, due to the growing variety of multimedia and communication services available. There is considerable PC market growth potential as the current level of computerisation is estimated at less than 50% in every country in the region. PC penetration in Egypt is estimated at around 10% and is forecast to rise to around 19% by 2014. Even in Israel, where household penetration was estimated at around 75% in 2008, there is potential for further growth. Governments in the region have allocated significant budgets for e-government development. Egypt aims to make 200 government services available soon online through a new e-government portal. Qatar’s egovernment programme and Hukoomi e-services portal will continue to drive investment in computer hardware across government agencies and client organisations. Meanwhile, Saudi Arabia’s strategy for the IT industry aims to raise the contribution of the industry to GDP of 20% by 2020. Another key policy priority throughout the region is to increase utilisation of IT by businesses and in particular small and medium-sized enterprises (SMEs). One of the Saudi government policies that vendors are capitalising on is the well-known United Instalment Scheme (USI) finance option, which makes high-quality notebooks available to small and medium businesses. Meanwhile, Qatar’s ICT governing body, ictQatar, has made increasing SME utilisation of IT a key policy objective. Market Growth And Drivers 2010 IT Market Sizes IT spending is forecast to bounce back (US$mn, est.) strongly throughout the region in 2010. There is a strong correlation between economic growth and IT spending, and some markets such as Qatar are projected to enjoy high double-digit GDP growth in 2010. Drivers going forward are increasing economic diversification and strong spending from non-oil sectors such as government, financial and enterprise © Business Monitor International Ltd Source: BMI Page 16 Israel Information Technology Report Q3 2010 sectors. By 2014, this should be more evident, with IT’s share of GDP rising in many countries. Other drivers include fairly resilient consumer demand and ongoing infrastructure projects in major verticals such as oil and gas, telecoms and power. An expected recovery in population growth underpins our IT market growth IT Market Sizes As % Of National GDPs 2010f-2014f projections for markets such as the UAE and Kuwait, which saw an exodus of expat workers in 2009. In particular, strong positive population growth gives Saudi Arabia an advantage, with growth expected to reach 10% by the end of our five-year forecast period. Youthful population demographics, retail sector development and rising PC penetration will drive growth. f = forecast. Scores out of 100. Source: BMI Several sectors will offer opportunities for IT vendors. Telecoms liberalisation and a big push towards broadband penetration are expected to drive demand for hardware and systems. Banks are implementing solutions to increase business flexibility and introduce new services, including Islamic banking. In Israel, spending in two of the largest IT verticals, defence and government, proved relatively immune to the economic situation. Another key area for IT spending in many countries is healthcare, with several major projects IT Markets Compound Growth launched. 2010f-2014f (%) Education will also be a significant opportunity. The UAE Ministry of Education announced a AED79mn allocation for 2009 for an initiative to supply computers and internet to state schools. Meanwhile, the Egyptian government is also prioritising campaigns to raise levels of IT use in schools and in June 2009 purchased 10,000 computers for distribution to students and teachers, f = forecast. Source: BMI in what was described as the largest procurement tender by a government body in Egypt. © Business Monitor International Ltd Page 17 Israel Information Technology Report Q3 2010 The highest growing IT market in the MEA IT market over the forecast period is expected to be Egypt, with compound growth of 84% for 2008-2013. There is room for considerable growth in the country in the next few years, given the current low level of computerisation, which is much higher in the business sector than in the population at large. The fastest growth among the GCC countries is expected to occur in Qatar (48%), but demand should be strong throughout the region, with 37% spending growth forecast for both Saudi Arabia and the UAE. Sectors And Verticals Hardware will continue to dominate regional IT spending as the number of personal computer users rises steadily over the forecast period. This will be driven by growing affordability, government initiatives and the popularity of notebooks and netbooks. There could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed from last year. Sales of Microsoft’s Windows 7 operating system and new Intel core technology have the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence. Market Structure (% Of Total IT Market) 2010f 2014f f = forecast. Scores out of 100. Source: BMI Sales of notebooks are growing roughly twice as fast as desktops in many markets, and netbooks were one of the fastest-growing PC market segments during the global economic downturn. Prices are continuing to fall, and this, along with more credit availability, is bringing computers within the reach of many more people. Meanwhile, the advance of ‘big box’ retailing, with larger outlets offering lower prices and more choice, will also stimulate sales. The growth of fixed and mobile broadband penetration will also be a significant driver of demand for notebooks as a connectivity device, after telecoms operators launched new PC bundling deals in 2009 targeted at their subscribers. © Business Monitor International Ltd Page 18 Israel Information Technology Report Q3 2010 Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy instalment payment schemes. Government investment in education and e-services will mean desktop purchases for schools, colleges and government offices. Spending on software as a share of total IT spending is as low as 14% in Egypt and below 20% in a majority of MEA markets. The global economic crisis has led some companies to review IT budgets or look to defer systems updates, but other companies will see IT as a means of achieving greater efficiencies in difficult times. In the current economic climate, business software vendors will pitch efficiency gains, as declining margins encourage companies to focus on reducing costs. Sales of the Windows 7 operating system have the potential to impact positively on the market, and 2010 should, in any event, see a boost from systems upgrades deferred from 2009. BMI predicts plenty of room for growth over the forecast period as numerous untapped sectors still exist. Key verticals will include telecoms, finance, retail, healthcare and the public sector. There has been growing demand in the market for applications tailored towards particular verticals. SMEs are likely to lead spending growth, with manufacturing and trading firms seeking efficiencies by making the transition from manual environments to full automation of back-office systems. Customer relationship management (CRM) will be a growth area, and other high-growth categories are set to include business intelligence, storage and security products. The security software market is very important throughout the region as increased investments in IT hardware over recent years are now driving spending on secure content management technologies. There are some challenges for the regional software market. One key issue is that of illegal software: across the region, up to 80% of software is counterfeit. Another important factor is low income, including the high costs of operating systems such as Windows, which has led to activity to promote open source in countries such as Egypt, championed by IBM and other vendors. BMI predicts that demand for IT services will grow strongly during the 2010-2014 period. The regional IT services market is dominated by demand from oil and gas, government, finance and telecoms sectors, which many markets account for more than half of total spending. In markets like Saudi Arabia, most enterprise application spending still comes from segments such as oil and gas and banks. However, more projects are expected in segments like education and health. Currently, IT services’ share of IT spending ranges from around 25% to 33% in the MEA countries covered by BMI. Support and maintenance account for around one-third of spending on IT services, but demand for more complex services has increased, with large outsourcing deals in the UAE, Israel and elsewhere. There is also demand for services such as hosting, facilities management and disaster recovery. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q3 2010 There is growing demand for services to enable utilisation of models such as hosting and cloud computing. Vendors have reported an evolution in demand for services, with a shift away from the dominance of product implementation and installation to greater interest in managed services, valueadded services, facilities management, hosting and business continuity 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 20 Israel Information Technology Report Q3 2010 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone numerous name changes and received its current name following the election of Benjamin Netanyahu’s government in March 2009. The responsibilities of the ministry are the formation of a national policy towards science and technology, technological analysis and organisation as well as the coordination of research areas. The main priorities for the ministry are as follows: ! Setting up a national policy and priorities for R&D; ! Development of scientific and technological infrastructure; ! Establishment and strengthening of foreign scientific relations; ! Participation in the establishment of research centres, including regional R&D centres; ! Participation in the development of scientific and technological human resources; ! Increasing awareness of science within the public, especially the youth of Israel; ! Developing digital infrastructure (facilitating access to information); ! Consulting the government and its offices in the area of science and technology. Background All major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services 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 21 Israel Information Technology Report Q3 2010 Foreign direct investment (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 telecoms sectors, the high-tech 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. 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 40-50% of their revenues. Government Initiatives Gov@Net – Government intranet − A cross-government intranet planned to connect more than 80 governmental networks and hundreds of institutes. The implementation will create the largest Israeli IP-VPN. The project will allow efficient internal communication and resource sharing. Mercava – Government ERP − Mercava is the largest ever IT project implemented in Israel. It will gradually replace the assortment of unique legacy systems currently operating in governmental bodies with a central, unified enterprise resource planning (ERP) system running on SAP system software. − This project will create a unified language for cross-government activities. Government EIP − This project is intended to promote enterprise portals within the government. Since a cross-government portal will be based on information received from the different bodies, the first step involves the construction of a ministry-level portal. This portal will draw information from Merkava, ministry-specific operational systems and intra-government shared resources. Tehila – Government ISP − The Government ISP project has been operational since 1998, providing essential infrastructure for publicgovernment communication. − To date, 60% of the governmental bodies have voluntarily joined the project. Shoham – E-commerce infrastructure and service − A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a variety of payments and purchases, including the payment of taxes, fees, fines (VAT, vehicle and driving licence fees, traffic fines) and the purchase of tangible goods (government publications). The service processed more than ILS250mn in its first year. Lehava project − Group of initiatives to help close digital divide. © Business Monitor International Ltd Page 22 Israel Information Technology Report Q3 2010 Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.6bn in 2014. Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to uncertainty about a sustainable global economic recovery, but there should still be growth areas. Overall spending should resume single-digit growth, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. There could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed from 2009. The launch of the Windows 7 operating system and new Intel core technology has the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence. Notebooks will remain the main growth area, although the share of netbooks in total notebook sales may have peaked as the price differential compared with full-featured notebooks becomes less significant. The current rate of PC penetration, while high for the region, represents potential for organic growth. Household penetration was estimated at around 75% in 2008. 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 has launched various initiatives to increase computer and internet penetration, including Computer for Every Child, Window to Tomorrow’s World, Tapuah (The Israeli Society for the Advancement of the Information Age) and others. The level of support, however, has been criticised by some industry insiders as too low. The Israeli IT market is relatively mature, but hardware still accounts for around half of the total market, excluding communications hardware. Notebooks are the fastest-growing segment of the market, but in 2008 desktops still took around two-thirds of unit sales. Despite strong growth in demand for notebooks in 2009, the desktop sector is still significant, largely to business and government end-users. Netbooks were a main driver of PC market growth in 2009 but face competition from other form factors. In particular smartphones from Palm, RIM, Apple and other vendors are being offered by vendors as alternative connectivity solutions and often include a Wi-Fi option. 2010 has also seen the emergence of tablet notebooks, spearheaded by Apple’s iPad. Other vendors are expected to follow Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook. NetTabs are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy. NetTabs are expected to be significantly more expensive than smartphones, but © Business Monitor International Ltd Page 23 Israel Information Technology Report Q3 2010 despite a previous mixed record with this form factor, are seen as a growth area in 2010-2011. Another area that vendors will watch is the e-reader market. In 2009, the PC market slowed through a combination of reduced consumer and business confidence. Government IT project investments are usually a major component of Israeli computer hardware demand, but tighter fiscal conditions for the new administration in 2009 placed some budgets under pressure. Retail computer spending had been buoyant in the two years preceding the economic downturn, with drivers including the strong shekel, higher broadband penetration and demand for multimedia applications. Software Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. In recent years, the SME segment, the mainstay of the Israeli business sector, has emerged as an important growth area. Spending on enterprise solutions should continue to grow steadily, with reviving or emerging areas of opportunity including security, CRM solutions and business intelligence. However, in the current economic climate, vendors will continue to pitch the efficiency gains potentially offered by these applications. A 2009 survey of Israeli IT managers suggested that current areas of enterprise demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, ERP implementation and CRM. CRM is a particularly buoyant area, with local IT company Matrix reporting a number of public and private sector successes in 2008, while customers for Microsoft’s Dynamics CRM platform include Israeli health maintenance organisation Maccabi Healthcare Services. The release of the Windows 7 operating system in October 2009 has the potential to impact positively on sales in 2010, despite business caution. This year should, in any event, see a boost from systems upgrades deferred from 2009 when the economic crisis had an impact in public and private sectors. There were signs going into 2010 of a pick-up in project flow. The slowdown had continued into H209, with companies deferring investments, or looking for ‘good enough’ solutions to immediate problems. Vendors will need to convince enterprises of benefits to the bottom line from software investments; however, there should still be several growth areas. Going forward, the security software segment is an important opportunity, projected to be worth tens of millions of dollars. 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. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q3 2010 In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including defence and healthcare. These three sectors are likely to be somewhat immunised against the consequences of the global slowdown. Despite the current financial crisis, regulatory compliance and demand for new services will continue to drive IT spending by banks. Vendors reported in Q110 that the key financial services segment demand had started to see demand recovery. 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 representing around two-thirds of the value of the entire domestic IT sector. Almost all global vendors are active in the domestic market, selling licences alongside 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 segment is estimated at US$1.6bn in 2010 and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.1bn in 2014. In early 2010, there were reports of a pick-up in the flow of projects, which slowed in 2009 due to the economic uncertainty. Vendors reported that demand had revived in the key financial services vertical, where new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Healthcare, the public sector and utilities were also generating projects. In 2010 much will depend on the speed of global economic recovery, particularly in key Israeli export markets. However, vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs and with a focus on cost reduction. Defence and government spending represent a significant component of Israeli IT demand, however, and have some immunity to economic vicissitudes. The relatively robust economy and increased investment by a number of key sectors have driven recent growth, but the number of new projects decelerated in 2009 owing to the economic slowdown. Public sector spending helped to prop up demand, however. Among public sector organisations tendering IT outsourcing contracts in Q409 were the Israeli Ministry of Immigration Absorption and the Israeli Ministry of the Interior. Growth is expected to reach a higher trajectory in the second half of our five-year forecast period. Key Israeli IT services spending verticals include 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. © Business Monitor International Ltd Page 25 Israel Information Technology Report Q3 2010 Along with defence, these two key sectors are likely to be a continued source of opportunities because the factors driving spending in each case are not particularly sensitive to the economic downturn. Indeed, the new administration will likely feel pressure to ramp up government spending to combat lower private consumption and rising unemployment. Another key area of opportunity is healthcare IT. While large organisations still dominate, SMEs have also been investing more and represent a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. Similar factors are driving an increase in demand for managed services, with businesses reluctant to invest in internal IT capabilities, or deterred from doing so by a lack of available skills. Outsourcing Outsourcing has become a bigger factor and was estimated to account for about 20% of IT services spending, or at least US$290mn, in 2010. Key sectors for IT outsourcing include: ! The military, with outsourcing deals such as that awarded to HP by the Israeli Navy for management of its IT infrastructure highlighting the opportunities there. While the value of the HP deal was not made public, it is estimated to be worth several million shekels. ! The financial sector is another lead vertical for outsourcing. In 2006, an outsourcing deal between First International Bank of Israel and EDS Israel was the largest outsourcing contract in the Israeli banking industry and a milestone at the time. Tata Consultancy Services’ decision to open a local branch also underlines the potential attraction of the financial sector, now benefiting from economic recovery and greater security. ! The retail sector offers further opportunities, with IBM Israel having a 10-year outsourcing contract with Clubmarket Marketing Chains, with the contract including computer systems for the supermarket chain’s branches and point-of-sale terminals. Although Israel seemingly possesses many advantages as an outsourcing destination, in particular a technologically literate, linguistically skilled workforce and low labour costs relative to most developed countries, the country has failed to capitalise on these strengths in the past. Aside from Israel’s small size, another issue is security. However, the government is now actively promoting Israel to multinationals, and there has been a spate of call-centre construction. The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services. © Business Monitor International Ltd Page 26 Israel Information Technology Report Q3 2010 Industry Developments IT is an important element of the Israeli government’s socio-economic policy framework for 2008-2010. The National Economic Council 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. 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 projected that the software sector will generate US$3.2bn annually by the end of the decade. The government is hoping that the high-tech sector will generate US$3.0bn for the nation’s economy by 2010. Economic Impact On Israel Tech Sector In H109, Israel’s high-tech sector continued to suffer the effects of the global economic slowdown and credit crunch. Demand for high-tech exports was estimated to have dropped by at least 10-15% with as many as 10,000 sector jobs feared to be at risk. This represents a major concern for the Israeli government given that high-tech accounts for around 10% of Israel’s economy, with annual sales estimated at around US$25bn. The high-tech industry directly employs around 7% of the country’s workforce and an estimated 6-8% have been reportedly laid off since October 2008. In 2009, some major IT firms were laying off staff in Israel, including SAP, or cutting salaries, like HP. Israel’s high-tech merger activity also fell in 2008 as a result of the downturn in the global economy. According to figures from Israel’s Venture Capital Research Centre (JVC), the value of Israel’s high-tech mergers were down by 19% year-on-year (y-o-y) to US$2.64bn. The average deal size was also down to around US$31mn. An even more striking development was that the whole year passed without a single high-tech initial public offering (IPO), a first since 2003. This was due largely to the weakness of the global capital markets, which affected not just investment banks but also venture capital. However, the number of Israeli tech companies involved in mergers in 2008 was just one down on the 2007 figure, at 84 companies, indicating that the supply of promising companies has not dried up. Indeed, current low valuations represent an opportunity for investors, although JVC forecast that Israeli high-tech companies would raise only US$300mn in 2008, down by 62% compared with last year. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q3 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 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. 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 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 a contract to produce 5mn ID cards; however, it is yet to receive the go-ahead from the Knesset, which is deliberating over the passing of the biometric database bill. The ID cards, set to cost Israel US$67.49mn, would use ‘smart’ identification methods involving fingerprints and digital photography. The 2005-2007 masterplan of the government’s ERP project called for implementation in around 90 government units by the end of 2007. The project leveraged mySAP ERP (content delivery software) and had a focus on financial, logistics and human resource components. Dubbed Merkava, the project had cost an estimated ILS800mn since its launch in 1999. 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 Organisation for Economic Co-operation and Development (OECD) country. A 2007 survey found that only 30% of children living in poverty have © Business Monitor International Ltd Page 28 Israel Information Technology Report Q3 2010 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 the Jewish and Arab populations, with 72.5% of the former using the internet in Israel compared with 52.5% of the latter. In order to deal with the digital divide problem, the following measures have been proposed: ! A senior minister for the high-tech sector should be appointed to coordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry; ! Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone; ! Massive investment should be made in the educational system for training information workers; ! Aid to be given to the less wealthy to make them part of Israel’s information industry. © Business Monitor International Ltd Page 29 Israel Information Technology Report Q3 2010 Industry Forecast Scenario BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010, with a return to singledigit growth following a sharp slowdown last year. The market is forecast to reach a projected US$6.1bn in 2014. The Israeli IT market should gain enough momentum from key sectors to expand at a CAGR of 6% over BMI’s 2010-2014 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals like financial services and SMEs. 2010 Outlook Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. In early 2010, there were reports of a pick-up in the flow of IT projects, which slowed in 2009 due to the economic uncertainty. Vendors reported that demand had revived in the key financial services vertical, where new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Healthcare, the public sector and utilities were also generating projects. Businesses will maintain a cautious attitude to IT investments in 2010 due to uncertainty about a sustainable global economic recovery, but there should be growth areas. Trading conditions were challenging in 2009 as vendors such as Dell and HP made retrenchments, while others, such as Cisco, reportedly delayed local investment plans. Ness Technologies was among vendors reporting annualised falls in quarterly profits. There were reports from vendors of IT budget cuts. IT managers were looking to cut costs, and some projects were scaled back in key sectors for IT projects. Other vendors, however, reported continuing opportunities, with fellow local company Matrix managing to increase both local revenues and profits in H109. However, BMI expected conditions to improve the final quarter of the year with a seasonal upturn reinforced by procurements deferred from the first half of the year. In 2010, there could be a boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009. The launch of Microsoft’s Windows 7 operating system also has the potential to help trigger a new cycle of hardware upgrades next year, although much will depend on business and consumer confidence. Market Drivers The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during BMI’s five-year forecast period. Household computer penetration of around 75% offers potential for further 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. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q3 2010 Per capita IT spend is expected to rise from US$638 in 2010 to US$802 by 2014. In 2009, a key factor was unemployment hitting consumer demand for big-ticket electronics goods, with real private consumption growth estimated at -2% in 2009 and just 1% growth in 2010. In Q109, spending on household equipment dropped by 6.7%. In H209, rising job insecurity for those in work retained a negative impact on consumer sentiment, while many companies facing tight credit conditions continued to be cautious on IT budgets. However, spending by a number of key IT spending verticals such as defence and financial services are to some extent insulated from economic vicissitudes. Regulatory compliance will continue to necessitate IT spending by banks. The financial services sector accounts for about 15% of Israeli IT spending. Sectors 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 the First International Bank of Israel. Other sectors of opportunity will include healthcare and telecoms, as well as infrastructure, transport and the small office/home office sector. Opportunities 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. While large organisations still dominate, SMEs have also been investing more and represent a growth opportunity. Many SMEs are waking up to the need to compete through more direct investment in support and service infrastructures. © Business Monitor International Ltd Page 31 Israel Information Technology Report Q3 2010 Summary In summary, although the Israeli economy is vulnerable to the global economic slowdown, BMI believes that it has sufficient strength in key demand verticals to partly offset these downward pressures. The hardware market is forecast to grow from an estimated US$2.2bn in 2010 to US$2.6bn in 2014, with PC sales projected to rise from an estimated US$1.8bn to US$2.2bn. Over the period, software spending is expected to increase from an estimated US$1.0bn to US$1.3bn and services from an estimated US$1.6bn to US$2.1bn. Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f IT market 4,428 4,826 4,633 4,865 5,059 5,287 5,657 6,110 IT market as % GDP 2.7% 2.4% 2.4% 2.2% 2.2% 2.2% 2.2% 2.2% Hardware (computer market sales) 2,125 2,317 2,131 2,211 2,272 2,345 2,478 2,642 Services 1,417 1,544 1,529 1,621 1,703 1,798 1,943 2,119 Software 886 965 973 1,032 1,084 1,144 1,236 1,348 1,679 1,853 1,726 1,791 1,845 1,923 2,052 2,188 191 208 192 199 205 211 223 238 PCs (including notebooks) Servers e/f = estimate/forecast. Source: BMI. ITU (Internet and broadband penetration) © Business Monitor International Ltd Page 32 Israel Information Technology Report Q3 2010 Country Context Table: Rural/Urban Breakdown 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 = forecast. Source: UN Population Division Table: Consumer Expenditure (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 Consumer expenditure per capita 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 e/f = BMI estimate/forecast. na = not available. Source: World Bank – Country data, BMI © Business Monitor International Ltd Page 33 Israel Information Technology Report Q3 2010 Internet Table: Telecoms Sector – Internet – Historical Data & Forecasts 2007 2008 2009e 20010f 2011f 2012f 2013f 2014f 4,240 4,434 4,545 4,610 4,658 4,709 4,744 4,761 No. of Internet Users/100 Inhabitants 59.1 61.9 63.8 64.5 65.3 66.1 66.1 67.1 No. of Broadband Internet Subscribers (‘000) 1,492 1,629 1,739 1,860 1,977 2,078 2,170 2,250 20.8 22.6 24.5 26.2 27.8 29.2 29.2 30.2 No. of Internet Users (‘000) No. of Broadband Internet Subscribers/100 Inhabitants f = BMI forecast. Source: ITU, NHH, BMI 2007 saw y-o-y growth of 9.8% in the number of broadband subscribers in Industry Trends – Internet Sector 2007-2014f Israel, and we estimate that the growth rate for 2008 is a slightly lower 8.9%, taking the number of subscribers by end2008 to 1.6mn. With broadband penetration already over 20%, growth will drop off gradually over the next five years. Israel’s strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and cable companies, with five major e/f = BMI estimate/forecast. Source: BMI ISPs vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms 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. Another development likely to stimulate growth is the introduction of LLU, which will give alternative operators access to Bezeq’s network and will stimulate much greater competition. LLU was due to be implemented by the end of 2009. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q3 2010 By the end of 2014, we forecast a broadband penetration rate of just over 30%, putting Israel in line with some of the world’s most developed broadband markets such as Western Europe and the US. Bezeq is likely to remain the dominant force in the broadband market, although it will face increasing levels of competition. At the end of June 2008, Bezeq had 982,000 broadband subscribers, putting its market share at around 62%. Israel’s high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. Internet use is already widespread, with the International Telecommunication Union estimating that over 50% of the population used the internet by the end of 2005. We forecast internet penetration to rise slowly but steadily over the next few years, reaching 67% by the end of 2014. Macroeconomic Forecast Recovery Gathers Momentum While net exports drove Q409’s strong headline real GDP figure, there are growing indications that Israel’s economic recovery is becoming more broad based, and we have accordingly raised our growth forecasts. Our optimism is slightly tempered by still relatively subdued investment levels, which could weigh on long-term growth. On the back of another strong quarterly growth figure for Q409, we have revised up our real GDP projections for Israel. We now see real growth coming in at 3.4% in 2010, before moderating somewhat to 3.0% in 2011 – we had previously forecast growth of 2.6% in both years. Over the course of our fiveyear forecast period, we project annual growth to average 2.9%. Private consumption, which accounted for approximately 57% of nominal GDP last year, will remain the principal driver of real growth over the coming years. According to the Central Bureau of Statistics’ first estimates, real GDP growth in Israel accelerated to 4.3% quarter-on-quarter (q-o-q) annualised (seasonally adjusted) in Q409, up from 3.0% and 1.2% in Q309 and Q209 respectively. Moreover, after three quarters of negative y-o-y expansion, real GDP growth turned positive to the tune of 1.4% y-o-y in Q409. This brought full-year growth to 0.7% in 2009, above our -0.1% estimate, which is an impressive outturn against the backdrop of the global recession. A number of broad indicators suggest that Israel’s economic recovery still has solid momentum behind it, lending weight to our full-year growth forecast of 3.4%. Indeed, the Bank of Israel (BoI)’s composite State of Economy index continued to head higher in January, rising by 3.4% y-o-y compared to 2.9% the month before. Trade aggregates also show solid growth: on a three-month moving average basis, (nominal) imports and exports were up 13.1% and 18.5% y-o-y respectively in January. © Business Monitor International Ltd Page 35 Israel Information Technology Report Q3 2010 Manufacturing Resurgence Manufacturing sector indicators continue to head in the right direction as well. The manufacturing production index fell by (just) 2.0% y-o-y in November 2009 (on a three-month moving average basis) having bottomed out at -8.9% y-o-y in June. This measure will likely have returned to positive territory by early 2010, especially given developments in the purchasing managers index (PMI), which increased to 65.1 in January, from 63.8 the previous month, and only slightly down on November 2009’s all-time high of 68.8. PMI figures above 50 indicate that the manufacturing sector is growing, and are generally correlated with an expanding overall economy. The index moved above 50 in June 2009, just as real GDP growth was turning positive once more (+1.2% in Q209). Despite Q409’s positive headline figure, we strike a note of caution: real gross fixed capital formation (GFCF) declined sharply (-9.7% q-o-q annualised) over the quarter, and real private consumption growth slowed to 4.4% q-o-q annualised, from 5.1% and 9.5% in Q309 and Q209 respectively. In fact, growth during Q409 was largely driven by net exports: real exports grew 29.5% q-o-q annualised during the quarter, while real imports increased by a smaller 13.1%. By our calculations, this means that net exports contributed 6.5 percentage points (pp) to overall growth of 4.3% in Q409. Taken together, this breakdown of Q409’s GDP figures suggest that domestic demand remains subdued and the V-shaped economic recovery that Israel has experienced so far could well peter out, especially in the event of any external shocks. Net Exports: A Growth Mirage? Real exports and imports fell by 12.5% and 14.0% respectively in 2009. While these sharp drops highlight the negative impact of the global recession on Israeli trade last year, the mathematical upshot of the more acute contraction in imports was that net exports in fact contributed 0.5pp to real GDP growth in 2009. We expect both real exports and imports to bounce back in 2010, and for net exports to still be a key driver of overall real GDP growth, contributing 1.1pp to the headline figure. However, real export growth will not outpace real import growth to the degree witnessed during Q409 indefinitely. Over the last five years, net exports contributed an average of 0.4pp to real growth per annum; we expect a similar contribution from 2011 onwards. Export growth will be limited by virtue of the fact that Israel primarily exports to the weakly expanding developed states: in 2009, the US and the EU accounted for 35.0% and 25.8% of its total exports (in US$ terms) respectively. Given that our global team forecasts growth of just 2.8% and 1.0% in the US and EU respectively this year, the ability of these states to absorb incremental Israeli exports is likely to be constrained. A further risk to Israel’s export-led recovery comes from a ‘double-dip’ global recession scenario, which could potentially be triggered by the gradual withdrawal of monetary and fiscal stimuli across developed and EM states over the coming quarters. In such a scenario, external demand for Israeli goods would wilt, with a concomitant impact on domestic real GDP growth. © Business Monitor International Ltd Page 36 Israel Information Technology Report Q3 2010 Investment Still Subdued Real GFCF contracted by 8.0% in 2009, contributing -1.5pp to real GDP growth, and as the accompanying chart shows, investment is still significantly below H207-H108 levels. Given that a major driver of sustainable long-term growth is GFCF, the fact that growth of this component of real GDP fell back into negative territory in Q409, after two quarters of expansion, is a worrying sign. We would not like to read too much into one quarter’s figures. After all, recent PMI readings do indicate that business confidence is returning. With interest rates still very low by historical standards, we expect investment to pick up over the coming quarters: we forecast real GFCF growth of 4.0% this year. However, the extent of 2009’s contraction in GFCF means that we do not see investment returning to 2008 levels until 2011. Falling Unemployment To Boost Private Consumption Private consumption has traditionally been the chief driver of real growth over recent years, and we expect this state of affairs to continue going forward. This component of GDP grew by 1.5% in 2009 (in real terms); we are forecasting growth of 2.5% and 3.0% in 2010 and 2011 respectively. Private consumption growth will be supported by the falling unemployment rate: since peaking at 7.9% in Q209, it had fallen to 7.4% by Q409. We expect unemployment to drop to 7.0% by end-2010. We also highlight the strong recovery in purchases of durable goods over the course of 2009. After bottoming out in Q109, real consumption in this category increased by 26.2%, 33.7% and 3.1% q-o-q annualised (seasonally adjusted) in Q209, Q309 and Q409 respectively. This suggests that consumers are becoming more confident. Real private consumption growth is primarily driven by two factors: changes in the number of people employed (civilian labour force less those unemployed); and changes in the average real wage rate. The former is driven by changes in the unemployment rate and the labour participation rate (civilian labour force as a % of the total population). Since peaking at 10.9% in Q104, the unemployment rate has trended down (notwithstanding the cyclical increase as a result of the 2008-2009 recession). Meanwhile, the labour participation rate has been on an upward trajectory, increasing from around 54-54.5% at the start of the last decade to 56-56.5% by the end. It has been the increase in the numbers employed that has primarily driven private consumption growth in recent years, with the knock-on effect of depressing real wage growth. Even in mid-2008, before the onset of the domestic recession, real wages were still below their 2001 peak. They have since dropped further. Going forward, there is reason to believe that the growth in the numbers employed could slow as the population ages, thus resulting in a lower labour participation rate. Certainly, increases in the overall population and our expectations for the unemployment rate to fall to an equilibrium level of 6.5% by end-2011 will mean that the change in the number employed is likely to © Business Monitor International Ltd Page 37 Israel Information Technology Report Q3 2010 remain positive. We simply believe that growth of the latter is likely to slow. Real wage growth could begin to increase as employers encounter a structurally tightening labour market. Risk To Outlook As we have highlighted above, the main risk to our positive outlook for Israel is a global ‘double-dip’ scenario, which would badly hurt export growth. Of particular concern is Israel’s exposure to the US economy. We already see US real GDP growth falling from 2.8% in 2010 to 1.8% in 2011 as government spending eases off and the Fed begins to raise interest rates. If actual US growth fell short of these figures, this would not necessarily mean a return to domestic recession, but there is nonetheless a danger that Israeli real growth could dip lower than we expect, particularly in 2011. Table: Israel – Economic Activity, 2007-2014 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 686.0 725.1 766.1 820.2 867.3 913.2 960.3 1,008.3 167.0 202.1 194.8 219.4 231.3 243.5 263.1 284.0 5.2 4.0 0.7 3.4 3.0 2.8 2.7 2.5 23,258 27,653 26,190 29,008 30,062 31,154 33,129 35,237 7.2 7.3 7.4 7.6 7.7 7.8 7.9 8.1 Industrial production 2,3 index, % y-o-y, ave 5.1 7.1 -6.1 5.5 4.8 4.5 4.5 3.5 Unemployment, % of 2,3 labour force, eop 6.7 6.5 7.4 7.0 6.5 6.5 6.5 6.5 Nominal GDP, ILSbn 3 Nominal GDP, US$bn Real GDP growth, % 3 change y-o-y GDP per capita, US$ Population, mn 3 1,3 3 1 2 3 Note: e/f = BMI estimate/forecast. Annual average population; Seasonally adjusted; Sources: Central Bureau of Statistics/BMI © Business Monitor International Ltd Page 38 Israel Information Technology Report Q3 2010 Competitive Landscape Leading IT services vendors, including Israeli companies Ness Technologies and Matrix as well as US company IBM, experienced mixed fortunes in the Israeli market in 2009. Israel’s domestic IT service companies 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. The Israeli IT services market is competitive, with no vendor enjoying a share of more than 15%. Meanwhile, leading multinational competitors IBM and HP are both estimated to have Israeli IT services market shares of less than 10%. Ness Israel reported quarterly revenues of US$133.3mn in Q110, up 6% on the same period of 2009. The company claimed healthy bookings growth and year-on-year (y-o-y) quarterly revenues growth in each of its main segments. The improved Q110 results followed a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. Annual revenues for 2009 were reported at US$547mn. The steepest declines in 2009 were experienced by the company’s Systems Integration and Application Development division, while Software Product Engineering continued to perform well. Despite the overall revenue decline, Q409 results were slightly better than expected amid signs that the projects flow was picking up. In the fourth quarter of 2009, Ness won a five-year ILS42mn (US$11.2mn) outsourcing contract from Israel’s Ministry of Immigration Absorption. Under the deal, Ness will operate and maintain the Ministry’s IT systems, which support 600 users. The company also won an US$11mn outsourcing contact from the First International Bank of Israel and a US$4mn contract from the Israeli Ministry of the Interior. Matrix, the Israeli IT services market leader, also reported some successes in the Israeli IT market in 2009, despite the challenging economic climate, with wins in a number of key sectors including healthcare, financial services, defence and government. In Q309, Matrix reported 100% annualised growth in net profits and 7% growth in operating profits on flat revenue growth. Revenues from core business in the software and solutions sector grew by about 10%. Other strong sectors in 2009 included defence, communications (with at least two major wins) and industrial. Despite the success of several strong local vendors, a share of government tenders is won by international players. Recent tender winners include 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 those of AMD instead. The national smart ID card project has © Business Monitor International Ltd Page 39 Israel Information Technology Report Q3 2010 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. Following the recent merger with EDS, HP is expected to take around 10% of the Israeli IT services market this year. HP Israel’s software division hosts HP’s biggest R&D centre worldwide, and the company also has significant production facilities in Israel. With a total of around 5,000 employees, HP reported computer sales of around US$850mn in 2007. However, as a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. Another foreign investor rumoured to be contemplating cutbacks in Israeli resources was European software company SAP, which has around 900 employees in the country. SAP announced in 2009 that it was to dismiss 6% of its global workforce. However, other foreign investors are continuing to invest. IBM Global Services is increasing its local investment and in 2008 announced that it was establishing a new systems and technology group lab in Israel. The new R&D facility focuses on storage and microchip technology solutions and follows IBM’s acquisition of several IT storage solutions start-ups. Meanwhile, Dell reportedly accepted an invitation from the Israeli government to establish a new R&D and business centre in Jerusalem. In 2008, IBM announced a cooperation 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 2009, enterprise software company Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal’s computer systems relating to credit card management 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal, which is jointly owned by Israel Discount Bank and First International Bank of Israel, concerning the project. In 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter’s SAP Sales and Distribution division in Israel. The acquisition was in line with SAP’s focus on enhancing direct operations in Israel and other high-growth Middle Eastern markets. 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 the latter will also retain its SAP Academy © Business Monitor International Ltd Page 40 Israel Information Technology Report Q3 2010 training centre. In Q109, Ness completed an ILS80mn municipal taxes and water billing and collection project for the Tel Aviv Jaffa municipality, based on SAP solutions. Microsoft Israel has an annual turnover of around US$1bn. In 2010, Microsoft hopes that sales of its Windows 7 operating system, launched in October 2009, will boost sales. In summer 2009, Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. Israel is also an important R&D centre for Microsoft, and in 2010 the company’s Israel R&D centre launched Microsoft’s new unified access gateway (UAG) product for the Windows 2008 Server R2. The UAG product is already used in the Windows 7 operating system to provide PCs with online access to enterprise servers. The product positions Microsoft to make a play for the SaaS market opportunity. Due to the economic downturn, in H109 Microsoft laid off 50 of the approximately 600 workers at its Israeli R&D centre. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft will cooperate with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. Microsoft has a number of other high-profile clients for its CRM solutions, including leading Maccabi Healthcare Services, which deployed a CRM system based on Microsoft’s Dynamics CRM platform. Other local clients include Super-Pharm Israel, the leading drugstore chain, and Tehila, a division of the Israeli Ministry of Finance, which provides IT services for the government of Israel. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. While US companies often have a long history in Israel, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have built their presence in the Middle East over the past few years. Tata opened an Israeli 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 Asia continent, behind South Korea. At end-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 roll-outs. However, the bulk of the MEA region is underdeveloped, with penetration rates under 2%, largely as a result of high tariffs for broadband services, where many operators in the region have a near monopoly in dictating © Business Monitor International Ltd Page 41 Israel Information Technology Report Q3 2010 prices. Moreover, with many ISPs leasing lines from these incumbent operators, they are in turn also charged high rental prices, which are passed on to 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% by 2005. BMI estimates that penetration had risen to almost 64% at end-2009. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q3 2010 Company Profiles Ness Services Israeli company and global provider of end-to-end IT services and solutions. Ness specialises in outsourcing, systems integration and application development, software and consulting as well as quality assurance and training. Recent Developments In Q110 Ness claimed healthy bookings growth and year-on-year (y-o-y) quarterly revenues growth in each of its main segments. Despite an overall revenues decline in 2009, Ness’ Q409 results were slightly better than expected amid signs that the projects flow was picking up. At the end of 2009, Ness won a five-year ILS42mn (US$11.2mn) outsourcing deal from Israel’s Ministry of Immigration Absorption. Under the contract, Ness will operate and maintain the ministry’s IT systems, which support 600 users. The company also won an US$11mn outsourcing contract from the First International Bank of Israel and a US$4mn contract from the Israeli Ministry of the Interior. On September 14 2009, Ness Technologies launched its stock on the Tel Aviv Stock Exchange (TASE), having received approval for the listing from TASE authorities. Ness Technologies common stock will continue to be listed on the NASDAQ exchange in the US (NSTC) and will remain subject to the rules and regulations of NASDAQ and the US Securities and Exchange Commission. Ness hoped that the dual listing would increase its visibility and status in the Israeli market, with almost one-third of the company’s business being for Israeli customers or delivered by an Israeli workforce. The listing came despite a series of disappointing quarterly results in 2009, which added up to a 17% decline in revenues compared with the previous year. The company witnessed a 19% decline in revenues in Q309, following from a 20% decline in Q209, although more than half of this headline decline was due to currency translation from non-dollar revenues. The steepest declines in H109 were experienced by the company’s Systems Integration and Application Development division, while Software Product Engineering continued to perform well. Ness Israel reported record revenues in 2008 despite the global economic headwinds. Ness Israel reported 18.7% top-line growth y-o-y to a record US$664.8mn. Ness’ defence and homeland security business performed particularly well, demonstrating the relative immunity of these sectors to economic downturn. Last year, the company reported improved operating margins in the Israeli market and closed a number of important deals, despite the strong US dollar and weaker local economy. The Defence and Homeland Security 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, which wished to establish direct operations. Ness will continue to partner with SAP as a © Business Monitor International Ltd Page 43 Israel Information Technology Report Q3 2010 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-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 The company will look to strengthen its position as a provider of enterprise solutions, following the acquisition in Q110 of Gilon Business Insights Ltd. Gilon is a provider of business intelligence services in Israel. The acquisition was expected to close during the second quarter. Ness said that it will continue to focus on margin improvements in its Israeli business and reductions in non-core staff. Meanwhile, the company will also continue its policy of streamlining non-profitable/non-strategic operations. During 2010, the company is expected to sell its software distribution business in Europe. The company has already signed an agreement to sell its Asia Pacific integration and application development operations. Ness will also continue to provide outsourcing services from its development centres in India – Bangalore, Mumbai and Hyderabad – and from its centres in Israel, Eastern Europe and the Asia Pacific. Revenues Ness Israel reported quarterly revenues of US133.3mn in Q110, up 6% on the same period of 2009. The improved results followed a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. Annual revenues for 2009 were reported at US$547mn. In Q409, Ness reported revenues of US$146mn, slightly better than expectations, up 11% sequentially and down 13% y-o-y. Israel accounts for around 40% of Ness’s revenues. © Business Monitor International Ltd Page 44 Israel Information Technology Report Q3 2010 Presence With 7,800 employees, Ness maintains operations in 16 countries and partners with more than 100 software and hardware vendors worldwide. Sectors Ness’ Software Product Engineering division was the best performer in Q109 and continued to perform relatively well in the second quarter, with moderate y-o-y revenue growth. The Systems Integration and Application Development division reported disappointing results in the first quarter, but margins improved in Q209 on steady revenues. Ness’ Software Distribution division, which resells third-party enterprise software licences, was described as on target in Q109 but underperformed significantly in Q209, with a moderate sequential revenue decline. In Q109, the company reported US$2.5mn of revenues in licence sales commission from SAP Israel. © Business Monitor International Ltd Page 45 Israel Information Technology Report Q3 2010 IBM Services Global services, business consulting, services, digital media, solutions and IT services. Recent Developments IBM has enjoyed successes in the Israeli retail sector where its clients include supermarket chain Clubmarket, with which IBM has a ILS100mn outsourcing contract. In 2008, IBM launched a cooperation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. In 2008, IBM announced that it was establishing a new systems and technology group lab in Israel. The new R&D facility focuses on storage and microchip technology solutions, following IBM’s acquisition of three local IT storage solutions start-ups in 2008. Among these, 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 developers and researchers to develop solutions for IBM clients in Israel and beyond. Future Plans IBM Global Services plans to launch application hosting and storage services in Israel designed for large enterprises. IBM customers will be able to purchase capacity for their information systems and applications using the services. Revenues IBM revenues in Europe and the Middle East rose by 16% in Q108 to US$8.8bn, the fastest growth of any region. Adjusting for currency, however, growth stood at just 4%. Presence Total IBM staff in Israel has been reported at as many as 2,000, employed at Haifa Labs and its various IBM facilities in Rehovot and Jerusalem. Around 60% of IBM staff are estimated to be employed in services. Sectors IBM is standardising its services offerings for smaller companies in the region, launching IBM Express Managed Services, which includes packaged offerings of application and infrastructure managed services sold through IBM business partners. © Business Monitor International Ltd Page 46 Israel Information Technology Report Q3 2010 HP Services Technology services, consulting and integration. Recent Developments As a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. This followed earlier reports that HP was to invest US$4.1mn to build a new factory to expand its wide-format printer production in Israel. HP said that the new factory in the Caesarea industrial zone would start out with 4,000m2 of production space, which could later be expanded. A large part of HP’s R&D and manufacturing of digital printers is based in Israel. HP continues to look on Israel as a promising location for acquisition targets and has spent around US$6bn to date on high-tech companies in Israel. In 2007, the company spent around US$4.5bn to buy Israeli software support company Mercury. Among other 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 Europe, Middle East and Africa (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 start-ups. 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. Future Plans Today, HP’s focus is on more personalised campaigns, which drive higher cross-sell. Like IBM, it is now leveraging its capabilities into the SME segment. On the enterprise side, HP adopts personalisation not only per customer but also per user within each customer, focused on a number of key target accounts. Revenues 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 EMEA revenues were up 15% to US$12.3bn. Presence Has around 5,000 employees, 730 of whom are employed at HP’s software division, which hosts HP’s biggest R&D centre worldwide. © Business Monitor International Ltd Page 47 Israel Information Technology Report Q3 2010 Sectors HP is the leader in the PC segment and drives sales through its worldwide marketing campaign ‘The Computer is Personal Again’ 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-hour support. However, helplines are hard to come by. © Business Monitor International Ltd Page 48 Israel Information Technology Report Q3 2010 Matrix Services A leading systems integrator in Israel, Matrix is the largest company in the Formula Group and trades on the NASDAQ as FORTY. Shareholders include Bank Leumi and Migdal. Recent Developments Matrix reported some continuing successes in the Israeli IT market in 2009, despite the challenging economic climate, with wins in a number of key sectors including healthcare, financial services, defence and government. Among tender wins in the Israeli market was a project to implement a core system in three hospitals, a software and hardware upgrade for a leading credit card company and a large-scale testing project for a government organisation. The company also reported a number of new projects in Q109, including several financial sector implementations. The company credited its continued profitability, in the face of the global economic slowdown, in part to preparatory measures taken at the end of 2008. The company had cut operational expenses, including senior management salaries, and exercised what it described as ‘extreme caution’ in tenders. In 2008, Matrix reported tender wins in a number of sectors including defence, communication and industrial. Specific successes included winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public sector CRM projects. Successes in 2007 included the implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital market companies and a large-scale integration project for the Airport Authority. Matrix also won a tender from the Ministry of Finance to make government forms available online. The project, which focuses particularly on tax forms, is expected to cost around ILS2mn spread over two years, with the option of further expansion. Matrix is also focusing on the growing outsourcing market with government as well as corporate IT departments and has recently appointed a new sales and marketing manager for its Talpiot division. The division has a dedicated software development centre, with around 25 projects currently claimed to be under way. Future Plans Services include implementing integration projects, developing and marketing software technologies and products for business systems, providing infrastructure and consulting services, outsourcing contracts, training and assimilation, and acting as a distributor for global leading software products, hardware solutions and IT infrastructures. Revenues In Q309 Matrix reported 100% annualised growth in net profits and 7% growth in operating profits on flat revenue growth. Revenues from core business in the software and solutions sector grew by about 10%. Company revenues were ILS350mn compared with ILS353mn in the same quarter of 2008. In Q209, Matrix reported an approximately 12% growth in profits and 15% in operating profits from core businesses compared with the same quarter of the previous year. Company © Business Monitor International Ltd Page 49 Israel Information Technology Report Q3 2010 revenues were ILS355.7mn compared with ILS353.9mn in the the same quarter of 2008. Matrix also reported a decent quarter in Q109 despite the deceleration in economic growth. Turnover was up to ILS375mn in that quarter, from ILS326mn in the same period for the previous year, representing growth of around 15%. Operating profits were also up, by around 6.7%. Presence Employs around 3,500 IT professionals. Sectors Software services remain the company’s core area, accounting for around 68% of total revenues in Q209, up from 64% in Q109. In 2009, Matrix won a number of projects in the financial services sector, including a CRM-based system for management of collection processes from a major bank and significant product deals for several financial institutions. The company also reported wins in the communications sector, including storage and testing projects as well as the defence sector. Matrix won projects from many government organisations including the Ministry of Defence, the knesset (senate) and others. Other key sectors include energy, transport and public health. © Business Monitor International Ltd Page 50 Israel Information Technology Report Q3 2010 Microsoft Services Software, consulting and support services. Recent Developments In summer 2009, Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. Meanwhile, Microsoft also continues to make progress in the enterprise software segment. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft cooperated with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. The company also reported some big wins in the local market in 2007, in both the public and private sectors. 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 drug store chain, 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 end-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. Firstly, it plans to align services more closely with its enterprise sales force. Secondly, Microsoft is creating a stronger role for its services operation in providing product support to enterprise customers. Future Plans In 2010, Microsoft hopes that sales of its Windows 7 operating system, launched in October 2009, will boost local sales. Microsoft is continuing its efforts to sell software upgrades to the Israeli government, despite Israel’s decision to stop buying Microsoft applications amid calls for an antitrust commission investigation into Microsoft’s ‘monopoly’ status. Revenues 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 A workforce of 200 in Ra’anana and Haifa. Sectors In the early 1990s, Microsoft made Hebrew one of the central languages at Microsoft’s 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 51 Israel Information Technology Report Q3 2010 Country Snapshot: Israel Demographic Data Section 1: Population Population By Age, 2005:2030 (mn, total) Population By Age, 2005 (mn) 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 0-4 -0.4 -0.2 0.0 Male 0.2 0.4 -1.0 -0.5 0.0 2030 Female 0.5 1.0 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 = forecast. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 52 Israel Information Technology Report Q3 2010 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 = forecast. Source: UN Population Division 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, male, % na 98.5 Adult literacy, female, % 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 2010 2020 2030 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 85.2 Life expectancy estimated at 2005; f = forecast. Source: UNESCO © Business Monitor International Ltd Page 53 Israel Information Technology Report Q3 2010 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 © Business Monitor International Ltd Page 54 Israel Information Technology Report Q3 2010 Table: Consumer Expenditure, 2000-2012 (US$) 2000 2007 2008f 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 f = BMI forecast. na = not available. Source: World Bank, Country data; BMI calculation Table: Average Annual Wages, 2000-2012 Local currency 2000 2006 2007 2008f 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$ f = BMI forecast. na = not available. Source: ILO, BMI © Business Monitor International Ltd Page 55 Israel Information Technology Report Q3 2010 BMI Methodology 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 56 Israel Information Technology Report Q3 2010 Within best-practice techniques of time-series modelling, BMI’s quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: ! Overall economic context, and GDP and demographic trends; ! Underlying ‘information society’ trends; ! Projected GDP share of industry; ! Maturity of market structure; ! Regulatory developments and government policies; ! Developments in key client sectors such as telecommunications, banking and e-government; ! Technological developments, and diffusion rates; ! Exogenous events. Estimates are calculated using BMI’s own macroeconomic and demographic forecasts. IT Ratings – Methodology Our approach in BMI’s IT Business Environment Ratings is threefold. First, we seek accurately to capture the operational dangers to companies operating in this industry globally. Second, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were traditionally evaluated on a subjective basis. Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the IT industry. Overall, the ratings system, which integrates with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings System Conceptually, the ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from 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 57 Israel Information Technology Report Q3 2010 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 58 Israel Information Technology Report Q3 2010 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 59 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... should be made in the educational system for training information workers; ! Aid to be given to the less wealthy to make them part of Israel s information industry © Business Monitor International Ltd Page 29 Israel Information Technology Report Q3 2010 Industry Forecast Scenario BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010, with a return to singledigit growth following... becoming more demanding in terms of their IT expectations © Business Monitor International Ltd Page 20 Israel Information Technology Report Q3 2010 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone numerous name changes and received its current name following the election... Ltd Page 22 Israel Information Technology Report Q3 2010 Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast at US$2.2bn in 2010, up from US$2.1bn in 2009 The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.6bn in 2014 Businesses are expected to maintain a cautious attitude to IT investments in 2010 due to... construction The work seems to be paying off, with Israel starting to emerge as a desirable location for packaged applications and localisation services © Business Monitor International Ltd Page 26 Israel Information Technology Report Q3 2010 Industry Developments IT is an important element of the Israeli government’s socio-economic policy framework for 2008 -2010 The National Economic Council submitted a... Page 12 Israel Information Technology Report Q3 2010 However, in most cases we do not see IT spending returning to its pre-crisis rate of growth over our fiveyear forecast period Despite recent financial concerns, the UAE has the top spot in our Q3 table Qatar retains second place, with its projected high rate of GDP growth in 2010 keeping it ahead of Kuwait in third Moving up to second place is Israel, ... International Ltd Page 23 Israel Information Technology Report Q3 2010 despite a previous mixed record with this form factor, are seen as a growth area in 2010- 2011 Another area that vendors will watch is the e-reader market In 2009, the PC market slowed through a combination of reduced consumer and business confidence Government IT project investments are usually a major component of Israeli computer hardware... Palestinians and stands in the way of the peace process ! Iranian President Mahmoud Ahmadinejad’s re-election will add to Israeli concerns about a possible Iranian nuclear weapons programme Strengths Weaknesses © Business Monitor International Ltd Page 10 Israel Information Technology Report Q3 2010 Israel Economic SWOT Strengths Weaknesses Opportunities Threats ! The policy framework has stabilised in recent... 2008, down by 62% compared with last year © Business Monitor International Ltd Page 27 Israel Information Technology Report Q3 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 marketed its IT skills with some success and attracted outsourcing operations... with large outsourcing deals in the UAE, Israel and elsewhere There is also demand for services such as hosting, facilities management and disaster recovery © Business Monitor International Ltd Page 19 Israel Information Technology Report Q3 2010 There is growing demand for services to enable utilisation of models such as hosting and cloud computing Vendors have reported an evolution in demand for services,... mini-computers © Business Monitor International Ltd Page 30 Israel Information Technology Report Q3 2010 Per capita IT spend is expected to rise from US$638 in 2010 to US$802 by 2014 In 2009, a key factor was unemployment hitting consumer demand for big-ticket electronics goods, with real private consumption growth estimated at -2% in 2009 and just 1% growth in 2010 In Q109, spending on household equipment dropped