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Stress test for ICT

2008/06/08

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

Delesh Kumar.

C.J. Ang.

Silver lining in economic woes
By Izwan Ismail

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

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

Delesh Kumar, principal consultant, Frost & Sullivan:

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

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

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

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

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

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

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

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

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

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

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

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

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

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