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Tech Industry

Asia bucks slump in IT services spending

A Gartner Dataquest analyst says that despite the slowdown in IT services spending, the region significantly "continues to outpace" other parts of the world in terms of sales.

By Michelle Tan

SINGAPORE--Despite the global slowdown in IT services spending, the Asia-Pacific region, excluding Japan, is expected to generate revenue of $31 billion this year and $60 billion by 2005.

According to Gartner Dataquest, the region will experience the strongest growth in IT services, making up 5.6 percent of total spending in 2001 and 6.9 percent by 2005.

"The Asia-Pacific services market continues to outpace other regions significantly, with a growth rate double the world average, and nearly three times that of North America," said Jacqueline Heng, Gartner Dataquest senior analyst for IT services in the Asia-Pacific region.

On a global basis, IT services revenue are projected to hit $554 billion in 2001 and $865 billion by 2005.

Although poor economic conditions and the impact from the Sept. 11 terrorist attacks will dampen growth to "single digits" next year, the market researcher said it believes overall demand will bounce back to double-digit growth from 2003 to 2005.

In the Asia-Pacific region, Australia is expected to dominate, with revenue forecast to be $12 billion in 2001 and $21 billion in 2005.

China--which is also the region's strongest growing market--comes next with projected revenue of $4.3 billion in 2001 and $10.3 billion in four years. Other top IT services spenders in Asia are Korea, Singapore and Taiwan.

"In the past, there was an under-penetration of services offered in China. Now, there is an enormous build-up of infrastructure across most sectors--particularly in the telecommunications arena, which is driving a lot of demand for integration services," Gartner Dataquest's Heng said.

"From late 2002, we expect networking, security and e-business initiatives to be strong drivers of demand (in the mainland)," she added, pointing to China's official entry into the World Trade Organization on Dec. 10, its large export sector and booming domestic economy.

One possible "casualty" of China's success is Hong Kong, which has seen its growth slow down "as investment seeps into mainland China," Heng said. However, she noted that Hong Kong is forecast to spend $1.5 billion in IT services this year.

Overall, North America remains the world's biggest market for IT services, with 2001 revenue expected to reach $271 billion. By 2005, revenue is expected to rise to $423 billion--almost half the global figure.

Western Europe comes in second place, with $149 billion in 2001 and over $229 billion by 2005. Meanwhile, Japan's market is expected to grow from about $65 billion in 2001 to $86 billion by 2005.

"Generally, in a downturn, the IT services market performs better than the rest of the IT markets. However, we have to bear in mind that not all IT services vendors are growing at the same rate," Heng said.

"During a recovery, it will usually take two to three quarters for investors in reinvest. During these tougher times, we are expecting to see a change in the nature of the development of these projects, where investors are likely to focus on shorter-term returns instead of longer-term investments," she added.

Overall, development and integration was the largest sector within the IT services industry--a trend that is expected to continue through to 2005. Last year, the sector generated $156 billion in revenue. By 2005, the sector should hit $263.5 billion, according to Gartner Dataquest.

The strongest growing sector will be business process and transaction management (BPTM) services, as companies attempt to reduce the cost of transaction processing in non-core areas by turning to external suppliers, Dataquest added.

In 2000, BPTM achieved revenue of $74.8 billion. It should total $145.2 billion by 2005.

Hardest hit will be the consulting industry, which is expected to grow from $46 billion to $74 billion in 2005. However, Gartner Dataquest said the introduction of Windows XP, demand for customer relationship management, supply chain management and e-commerce services, and the adoption of Web services software should drive growth beginning in 2003.

Looking forward, Gartner Dataquest sees two factors that could impact spending for IT services: the degree of decision-maker confidence and the pace at which suppliers generate demand by implementing technology innovations.

"So far, the overall response (to the slower economy and the war in Afghanistan) has been to avoid risks and delay investment decisions," said Rolf Jester, Gartner Asia-Pacific research director. "If senior executives can reasonably predict how the economy and security situation will play out, they could begin buying IT services again."

"In the meantime, IT services vendors must rely on their 'life preserver' offerings such as payment processing, applications and data center outsourcing, product support services, and security and disaster recovery," he added.

Staff writer Michelle Tan reported from Singapore.