Opening IT Up

Malaysia

Economic News

22 Jul 2010
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Malaysia's IT industry could be facing a shake up period as it comes to terms with new reforms that will increase competition in the sector at a time when the country's economy is slowing amid the global financial crisis.



One of the 27 segments of the services industry reforms removes the requirement that ethnic Malay partners or Bumiputera hold a 30% stake in firms operating in the sector. As a result, Malaysia's computer and related services industries will have to adapt to a new regime of openness.



Announcing the reforms on April 22, Prime Minister Datuk Seri Najib Razak said the liberalisation of the services sector would create a business environment conducive to attracting investments, technology and generate higher-value employment opportunities.



The reforms will also raise the bar for Malaysian IT companies, requiring them to perform as well if not better than foreign players who may enter the domestic market. This stimulus could provide the drive for local firms to step up investments and raise their skills base, or to consider mergers to strengthen their position against potential overseas competitors.



While facing a more competitive environment, the sector could benefit from the decision to liberalise other parts of the services sector, as long as the reforms attract the increased levels of foreign investment that the government is hoping for.



With the opening up of the services sector also extending to the banking and finance industry, where foreign investors will now be allowed to hold a 70% stake in existing local Islamic finance institutions, it is expected that the demand for IT professionals, hardware and software will increase.



The same can be said for many of the other services sub-sectors covered by the reforms, including the health and social services, tourism services, transport services and business services. Increased foreign investment and expansion should see greater demand for IT to support future growth requirements.



To assist the local industry settle in the new operating environment, funding is being provided from a number of sources. One of these is the Malaysian Industrial Development Authority (MIDA), which is using part of its $28m Services Sector Capacity Development Fund to help local firms develop and carry out training, outreach, upgrade and modernisation programmes; obtain accreditation; and conduct mergers and acquisitions.



In late May, the state manufacturing and services sector promotion agency, provided grant funding of $70,000 to the National ICT Association of Malaysia (PIKOM), to support training activities to increase the capacity and competitiveness of the local outsourcing industry.



The ICT sector also got a boost from the government's stimulus package, released in mid-March. As part of the $16.8bn mini-budget, $840m was set aside to expand and improve broadband infrastructure, with a further $675m provided to support broadband community centres and provision of basic telephony services in rural areas. Both measures are part of the programme to achieve a 50% internet penetration rate in Malaysia by 2010.



David Wong Nan Fay, the chairman of PIKOM, said that the additional funding was a step in the right direction, though new measures may be needed to support the sector and the wider economy.



"The toughest time for the economy may manifest between the third and fourth quarter of 2009, and depending on how much worse things can get, the government may need to come up with further pump-priming measures," he said.



This is borne out of a recent report issued by market research firm IDC, which warned that 2009 will see IT spending in Malaysia fall for the first time in 10 years, predicting a drop of between 1.8 and 3% against last year's figures.



The IDC report, based on a study of first-quarter trends, said that if there are sizeable job cuts in Malaysia's manufacturing, financial and services industries, there would be a subsequent decline in household income expenditure.



"If the trend spreads to major metropolitan areas such as the Klang Valley, IDC expects the consumer spending on IT to drop significantly in the third quarter of 2009," the report said.



On a more positive note, the report said that spending on IT should increase strongly as the Malaysian economy shrugs off the effects of the global downturn as both the public and private sectors look to make strategic investments in IT preparation.



When economic stability returns, Malaysia's IT sector will be operating in a climate of greater competition, one which will require more flexibility but that will also offer more opportunities for those ready to grasp them.

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