February 28, 2009

ICT industry guns find silver lining in dark economic cloud

While the economic downturn has definitely hurt the Philippines’ information technology sector, several industry players still see a silver lining in the economic cloud, sentiments aired by software and hardware manufacturers during a recent CyberPress forum in Makati City.

Lauro Vives, chief researcher and founder of the Canada-based IT think-tank XMG, said at the forum that financial pressures are now “affecting both buyers and sellers of IT services,” noting that this has led, in turn to a decreased demand for “people’s talents,” particularly workers in the information and communications technology (ICT) field.

On the brighter side, Vives said, the economic downturn has triggered the “restructuring of the IT and IT services market” and given the ICT workforce an “opportunity to ‘normalize’ its talents globally.”

“We are entering a change in the economic tide and into the era of the ‘new normalcy,’” Vives said, quoting the think-tank’s August 2008 report, which XMG researched for a Fortune 100 client.

Semiconductor demand drop
The local semiconductor industry was the hardest hit by the downturn, which was marked most keenly by the closure of Intel Philippines’ manufacturing facility in Cavite province, among others.

Globally, the downturn began in late 2007 and has since affected consumer and IT spending “in a significant way,” the Semiconductor and Electronics Industries of the Philippines Inc. said in a recent report posted on its website. The Philippine semiconductor market, according to the report, “remains in a state of turbulence.”

SEIPI president Arthur Young said at the forum that, because semiconductors are an integral part of most consumer electronics – such as laptops, desktop computers, cellular phones and the like – the demand for semiconductors has dropped drastically enough to trigger layoffs.

When the downturn began two years ago, Young said, the global semiconductor industry shifted its focus from the United States, Western Europe and Japan to Eastern Europe, China and South America. However, “when the subprime (crisis) happened, everything went down… nothing made sense anymore.”

He also noted that 75 percent to 80 percent of the Philippines’ electronics exports “are in semiconductors.” From an initial drop of four percent, “semiconductor demand fell off the cliff” in the wake of the crisis spurred by the Lehman Brothers fallout.

While Young said SEIPI’s member corporations are all working to “keep our talents within the industry before letting them shift to another industry,” he noted that the industry’s direction in 2009 is now “more challenging,” especially with forecasts that the global demand for personal computers will drop by 50 percent in 2010. He also noted that there are forecasts that the demand for laptop computers will drop as well.

On the more upbeat note, Young also said global think tank forecasts predict “double-digit growth” for sub-laptops, also called ultramobile PCs (UMPCs) or sub-notebooks, in the months to come. “However, fewer semiconductors are needed to make sub-notebooks, so that still translates into a lower demand for semiconductor parts.”

Semiconductor parts include microprocessor chips, diodes, transistors, silicone control rectifiers (SCRs), Triodes for Alternating Current (TRIACs) and light-emitting diodes (LEDs) and the like.

Quoting global ICT think-tank IDC said in its “Worldwide Semiconductor Applications Forecast” covering 55 percent of the largest device applications, the report on the SEIPI website noted that “key device applications such as personal computers, consumer, and mobile phones are all experiencing a significant decline in units shipped.”

IDC vice president for semiconductor research Mario Morales earlier predicted that the downturn for the semiconductor industry “will be prolonged by macroeconomic uncertainty this year,” noting that because demand visibility is low, untilization rates are at “frozen levels” and supplier inventories are growing due to the demand drop-off, “IDC does not expect year-over-year growth for semiconductor revenues until the second quarter of 2010.”

Young noted that, because of all these factors, the first quarter of 2009 is not a good one for the Philippines semiconductor industry, though he expects to see a slight recovery in the second quarter of the year, adding that some “very challenging numbers” on the semiconductor industry’s growth in the first quarter will come out. “2010, on the other hand, will be a good growth year, albeit in single digits… and we expect to see recovery in 2011, when money will be flowing back into the market and we will see double digit growth.”

On a more optimistic note, Young said that, “when the (semiconductor) market turns and this market will turn, companies will look toward asset management and they will be coming to the Philippines for manufacturing.” He also said “Our biggest asset is our workers.”

Challenging environment
For consumer electronics and software, Information Technology Association of the Philippines (ITAP) president and Lenovo Philippines country manager Vicky Agorrilla said the economic downturn has created a “challenging environment.”

Agorrilla noted that the Commission on Information and Communications Technology (CICT) has taken steps to initiate a dialogue with companies in the ICT industry to see how the impact of the economic downturn can be mitigated.

“Now our main concern is keeping the flock together. We will try in every way to help affected (industry) employees find a job in the same industry before we let them out of our yard,” she said. “All (ITAP member firms) will strive to be on the boon side of this boon or bane scenario, cushioning the impact where they can and we are working on a plan to shorten the effect (of the financial crisis) on the nation.”

Speaking in her capacity as Lenovo Phils. country manager, Agorrilla added that Lenovo is working to “stay focused on our fundamentals of staying as close to your customers as possible, responding to their needs and understanding their spending, investing in innovation, maintaining efficiency and focusing on high-growth markets.”

“Lenovo considers the Philippines as an emerging market and is looking outside Manila, particularly in the direction of Cebu,” she noted, adding that “consumers are expected to favor products that come with low total cost of ownership, because hardware cost is just a superficial cost – consumers also have to look at the other costs, such as maintenance, IT management manpower and electricity.”

Lenovo’s strategy for circumventing the downturn, she said, is to “provide a total solution” to small and medium enterprises (SMEs) that includes security and IT support as part of its efforts to “maintain an industry-leading brand, enhance focus on the local market and outgrow the industry.”

BPOs still in the pink
Business Process Outsourcing Association of the Philippines (BPAP) CEO Oscar Sanez also spoke at the forum, saying that outsourcing remains in the pink despite the downturn and that BPAP expects the country’s sunrise industry to experience growth figures in the double digits of between 20 percent and 30 percent.

BPOs now have a workforce of “close to 400,000 people across the country,” Sanez said, noting that the BPO space is doing “very well. Lucky for us, this global crisis is encouraging many companies to outsource their business processes” as corporate cost-cutting efforts continue globally.

Sanez also predicted growth in “non-voice” BPOs, such as back-office processes, human resource development services, medical transcription, legal back-office work and the like. “In fact, non-voice BPO revenue totals $1 billion, three times bigger than (the revenue) for voice (BPO) – indicating big potential gains for the Philippines.”

Sanez also said the BPAP and the government are pooling resources to improve curriculum development efforts, competency assessment tools and some P350 million for scholarships for 60,000 beneficiaries to ensure that the country’s BPO labor pool maintains and improves the advantages it already enjoys – high education and skill levels and fluency in the English language.

BPAP and SEIPI will also be pooling their resources and efforts to “launch a major, major campaign to be picked up by major touch-points to reach more CEOs,” he said. This campaign will bring to greater prominence the “Filipino knowledge worker” for both the BPO and the semiconductor industries.

With continuing investments in both educating and marketing the Filipino technology workforce from both the manufacturing and service ends of the spectrum, Sanez hopes to see another 110,000 jobs created within the year.

Virtualization for savings
Microsoft finance director Raymond Ong said at the forum that Microsoft’s internal IT department has “migrated to a virtualized environment,” a move that has generated $10 million in savings for the software giant. “Our annual conference and internal meetings have been converted to virtual meetings to bring down travel costs.”

Besides reducing costs, Microsoft is also “helping customers save costs through virtualization, software assurance, e-learning vouchers, software optimization packages” and the like,” Ong said. “We encourage our customers to look at and implement virtualization to save on electricity, hardware and space costs. We also encourage and help them deploy technology to stay ahead of the curve.”

Core business and innovation
For now, the “holding pattern” for firms in the ICT arena is to tend to core businesses, Vives said: “Nearly 68 percent of chief information officers (CIOs) put IT budgets on hold and approximately 89 percent put their (business innovation) plans on hold just to make sure their businesses continue to run.”

However, Vives also warned that the economic climate dictates that vendors and service providers in the ICT sector need to “evolve or die,” even as he cited XMG research indicating that 75 percent of contract renegotiations “are at least reconsidering repatriation, back-sourcing or selectively outsourcing (jobs) to other providers.”

“Good financial planning is key” to surviving the financial crunch, Vives said, noting that the trend of “doing more with less” and cutting spending is likely to continue, even as the decreased demand for IT manpower may lead to more IT jobs “shed through 2009.”

The “total industry headcount growth forecast for the Philippines (dropped) from 23 percent from 2005 to 2008 to 13.5 percent compound annual growth rate through to 2010,” Vives said.

These figures point to the restructuring of the ICT services market so that the IT industry “will be subsumed by BPO” industry by 2011, Vives predicted. On-demand business models will also “make a comeback like never before,” a trend buttressed by the upswing in demand for software as a service (SaaS), open source software use and similar, web-based IT services.

He also predicted that pricing models for systems integration and outsourcing will be driven by “true gain-sharing” and that “IT co-location and managed delivery” will become mainstream by 2012, “with 17 percent growth” projected this year.

Vives also predicted that the local telecommunications industry’s newest battleground will be in the arena of value-added services.

All in all, the ICT industry’s economic downturn survivors “will be focused, responsive to clients, resilient and variable in the way they think,” Vives noted, adding that “successfully turning crisis into opportunity depends more on closely integrating technology and the business.” ALMA ANONAS-CARPIO

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