Government cost-cutting will hurt M'sian IT sector

Move by Malaysian government to reduce its spending on new computers and IT-related equipment could harm country's local industry, say market watchers.
Written by Lee Min Keong, Contributor

MALAYSIA--Information technology vendors and service providers have expressed concerns the government's recent austerity drive, freezing computer purchases, may ignite a devastating ripple effect on the local IT sector.

"Such a move can potentially create a domino effect, and everyone who has the herd mentality may follow suit, and this will impact every aspect of the IT industry," said David Wong, chairman of Association of the Computer and Multimedia Industry Malaysia (Pikom).

He told ZDNet Asia that while Pikom agrees the government should scrutinize its IT investments more closely in light of current economic conditions, it must be "more strategic and selective in the cuts".

Wong explained in an e-mail interview: "All of us, including the public sector, should be cautious and not encourage a 'panic' spending cut.

"The government must also be conscious of not curtailing programs that are planned to shift the economy into the higher value chain [as] this is crucial to the country in the long run," he said.

On the back of widespread public discontent on the country's recent hefty petrol price hike, Prime Minister Abdullah Ahmad Badawi on Jun. 9 announced a federal government austerity drive to save up to 2 billion ringgit (US$616.6 million) a year from various cost-cutting measures. These included a 10 percent cut in ministers' entertainment allowance and a freeze in the acquisition of new cars, office equipment and computers, and a reduction in the purchase of printing equipment.

Two days later, the Penang state government announced it had postponed the purchase of laptop computers and printers for the 40 state-assemblymen as well as the state assembly speaker. Chief Minister Lim Guan Eng said the decision would save the northern state more than 300,000 ringgit (US$92,040).

However, it is not clear if the federal government's cost-cutting initiative extends to the purchase of software and a slew of ICT projects, which run into hundreds of millions of ringgit.

According to IDC's forecasts, IT spending by the Malaysian government registered at 1.34 billion ringgit (US$411.1 million) in 2007, or 11.9 percent of the country's total IT spending.

Wong said PIKOM was "surprised" by the government's move to cut back on its computer purchases. "However, we hope that the cut is minimal and will not cause any impact on productivity and efficiency of government services," he said.

He noted that the local IT sector will experience a slowdown in growth as government spending on ICT contributes a major portion of the total industry revenue. Pikom is expecting Malaysia's ICT growth this year to drop to between 6 percent and 7 percent, instead of 10 percent as forecasted earlier in the year, he said.

Wong said: "It will affect sub-sectors such as hardware, software, consultancy and implementation services. The hardware sector is expected to experience a slowdown due to the lower purchasing power of consumers and businesses, which are taking a very cautious stance on Capex (capital expenditure) and Opex (operating expenditure)."

Industry players react
Several international hardware and software vendors were aghast with the government's move to freeze IT investments. However, they were unwilling to openly criticize the decision for fear of jeopardizing future business dealings with the public sector.

"This development will certainly affect public sector sales, not just in Penang [state] but also at the federal level," said a senior manager of a global software vendor, who declined to be named.

"Cutting government IT expenditure could impact government operations on the productivity front and, at the same time, might prove to be a road bump in its goal to create a knowledge economy," he said in an e-mail interview.

U.S. PC maker Dell Computer, however, was not perturbed by the government's move to halt computer purchases. Pang Yee Beng, the company's Malaysia general manager, was not surprised by the move, noting that the government "does what it believes is in the best interests of the people".

Pang told ZDNet Asia: "Dell's business will not be severely affected as we possess a diverse client portfolio from governments and large corporations to small-medium businesses and the consumer markets.

"Dell will continue to engage the [Malaysian] government at all levels in leveraging efficiency and solutions which work best for them," he said in an e-mail interview.

Pang, however, acknowledged the possibility of such cost-cutting measures spilling over to the private sector. He said it would be difficult to determine which IT sectors would be most affected by the government's move "as services and solutions are often interlinked".

When contacted, Microsoft Malaysia declined to say how the government's decision would affect the software giant's business in the coming year. "It is still too early to gauge the impact of this move on the IT industry," Azizah Ali, Microsoft Malaysia's general manager of public sector group, said in an e-mail interview.

"In this period of high fuel prices, it is IT which offers the best solution in line with government's austerity drive," Azizah said, pointing to the local government's use of unified communications (UC) to cut down on travelling expenses.

"Various ministries, government-linked companies and public institutions of higher learning, had invested in UC since its launch some eight months ago. It has enabled [Malaysia's] public sector employees to collaborate without leaving their desks, and hence, saving both traveling cost and time," she added.

Lee Min Keong is a freelance IT writer based in Malaysia.

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