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Market Overview BMI projects that the Israeli IT market will have a value of US$4.7bn in 2009. The market is forecast to grow to reach a projected US$5.9bn in 2013. The Israeli IT market should have enough momentum from key sectors to expand over BMI's 2009-2013 forecast period despite a contraction this year.
Major IT vendors reported challenging trading conditions in H109; a key factor has been unemployment hitting consumer demand for electronics goods. In H209 rising job insecurity for those in work is expected to have a negative impact on consumer sentiment, while many companies facing tight credit conditions will continue to be cautious about IT spending. However, BMI tentatively expects conditions to improve in the final quarter of the year.
The Israeli IT market has a number of positive fundamentals that should keep it in positive territory over BMI's five-year forecast period. Spending by a number of key IT spending verticals such as defence, and financial services, should be to some extent insulated from the economic crisis. Low computer penetration, of around 30%, offers potential for continued growth.
Industry Developments
In H109, 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 socioeconomic policy framework. The National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to emerge as the main priority.
As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching a supply agreement in 2007 with Dell and HP.
Competitive Landscape The Israeli IT services market is competitive, with leading multinational competitors IBM and HP both estimated to have Israeli IT services market shares of below 10%. Following its merger with EDS, US giant HP is projected to take around 10% of the Israel IT Services market this year. 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 Israeli IT services vendors experienced mixed fortunes in H109. Market leader Matrix reported wins in a number of key sectors including healthcare, financial services, defence and government. 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. It reported a good quarter in Q109 despite the deceleration in economic growth. Ness Israel, by contrast, reported a 25% decline in revenues for Q209, although two-thirds of this was due to currency translation.
In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning the future of a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems, some 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal concerning the project. Meanwhile, in 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP sales and distribution division in Israel.
Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at US$2.2bn in 2009, down from US$2.3bn in 2008. The market is expected to grow at a compound annual growth rate (CAGR) of 4% over the forecast period to reach US$2.6bn in 2013. The Israeli government has launched various initiatives to increase computer and internet penetration.
However, it is believed that spending will contract in 2009 with an economic slowdown and unemployment hitting consumer demand for electronics goods. Household consumption moved into negative territory in 2009, with spending on household equipment down by 6.7% in Q109, and although BMI forecasts a slight recovery in H209, trading conditions will remain tough.
Software
Israeli software spending is projected at US$993mn in 2009, up from US$965mn in 2008. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses are expected to remain cautious in H209, deferring investments, or looking for good enough solutions to immediate problems. However, there should still be several growth areas.
Spending on software is shifting towards the small and medium-sized enterprise (SME) segment, which forms the mainstay of the Israeli business sector. Spending on enterprise solutions has grown since 2007, with reviving or emerging areas of opportunity including security, 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.
IT Services
The IT services segment is estimated at US$1.6bn in 2009, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.0bn in 2013. In H109, there were reports of IT managers scaling back projects, and vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs.
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 downturn. 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 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 is due to be implemented by end-2009.
Israel Information Technology Report Q4 2009: http://www.companiesandmarkets.com/r.ashx?id=97J5ON5BF169561
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