Seven hundred billion dollars is a lot of money, no matter who you are. Just to put things into perspective, besides $700 billion being the amount that the US government is dishing out to its corporations in the hopes of saving them from economic peril, it is also the size that the global consumer electronics industry is said to be worth at the onset of 2009, according to the Consumer Electronic Association (CEA). A big chunk of that consists of the ICT market that governments in the region have been keen to remove from their bookkeeping.
Middle Eastern spending on ICT is expected to rise to more than $95 billion dollars in the next three years in a global marketplace that will top $4 trillion by 2011, according to the World Information Technology Services Alliance (WITSA) and Global Insight. Naturally, much of that $95 billion comes from retail expenditure on ICT products. For example, according to the International Data Corporation (IDC), the UAE spending on retail ICT currently stands at $5.3 billion and is expected to increase to $6.8 billion in the next three years.
Subsequently, the demand for ICT products continues to look promising to first-time buyers as well as existing gadget owners. “What is happening with these [ICT] products is that they are having a higher penetration rate across the population and consumers who already own these products tend to be highly technology oriented people, so the upgrade rate for these products is quite high as well,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon.
Most of the substantial growth in the regional retail ICT demand can be attributed to the effects of the regional super-cycle characterized by the exponential advances in technology, a multitude of suppliers and mass adoption rates in the MENA region. “I think it is the nature of the technology as well as the suppliers lobbying to fulfill market needs and demand that is driving the [ICT] market,” said Cesar Chalhoub, vice president of ITG Holdings. Furthermore, the most pertinent effect that is driving demand in retail ICT markets is the perpetual price cuts that the industry is experiencing, with the knock-on effect on profit margins seemingly the worrying many people. “We don’t have any product that is not growing in 2008,” touted Cherfan. “Mainly, prices are the driving factor behind [ICT] industry growth.”
Since first-time buyers ultimately return to quench their thirst for technology, repeat customers and upgrade rates are proving to be the essential elements that are invigorating regional retail markets in 2009. “We see that existing customers will be the ones carrying the market in 2009 because they are the ones who will be acquiring new products and following new product trends,” explained George Khoury, CEO of Khoury Home, Lebanon’s largest consumer electronics retailer. Also, with the increase in competition resulting from the regional super-cycle and the subsequent oversupply of ICT gadgets to regional markets, customers are becoming more demanding when it comes to product availability. “Customers know what they want and if you don’t have it as a retailer they are going to get it from somewhere else,” said Chalhoub.
Above all, it is purchasing power that drives retail markets and within the ICT market the most significant trend taking hold in 2008 is the increased importance of retail financing. Even with a global credit crunch, regional banks (who are comparatively much better off than their western counterparts) are eager to provide funding to facilitate the ICT purchases of lower income bracket populations across the region. “At the end of the day, cash flow worldwide has increased in banks that did not go subprime or invest in derivatives,” Cherfan explained. “[Banks] need to use that liquidity to be profitable.” Moreover, customers are all too eager to embrace the attitude taken by regional banks. “Retail financing makes up almost 80% of our sales in ICT products in 2008,” said Khoury. The expansion and increased awareness of retail financing in local markets has brought lower income bracket consumers into the fray of ICT consumers and allowed them to purchase products that were previously inaccessible to them. According to Cherfan, “Now, even if you are in a lower income bracket, you will be able to get a credit rating and buy your ICT product.”
The notebook is king
On a sector level, the one that carries the most weight is the LCD sector of ICT gadgets, which is synonymous with growth patterns prevalent on the consumer electronics level. “Anything really related to LCD technology has been doing extremely well in 2008 and has replaced the desktop computer as the driving force behind the ICT boom in 2008,” Khoury stated. “We certainly expect this to continue into 2009.”
Furthermore, notebook computers are the big winners in the retail ICT game in terms of volume and revenue on every level of the business. In the Gulf, year-on-year third quarter laptop shipments grew by more than 95% to 982,000 units, compared to 268,000 desktops according to IDC data. The UAE led the pack with 530,000 units, followed by Saudi Arabia (323,000), Kuwait (65,800), Qatar (34,800), Bahrain (14,600) and then Oman (13,800). Moreover, other countries in the region, like Lebanon, are experiencing similar growth patterns. “In 2008 we have seen more than 100% growth in sales of notebook computers,” Khoury said.
Having moved out of the luxury item category, notebooks are now emerging in the region as the next big product that will carry the retail market. “The portable computer is still the major item of consumption in our markets,” Chalhoub pointed out. “Notebooks are the most important product for 2008… and this is expected to continue in 2009,” added Cherfan. The most important element affecting the sales of notebook computers in the region is price. The super-cycle effect has taken a stranglehold on the notebook industry that has seen prices plummet in recent years spurring on mass market demand. “Price is the main impetus for this growth in notebook computers in 2008,” says Khoury. “In the recent past, the price range for laptops used to start at $1,200. Today laptop computers start at $400 or $500.”
Printing getting pressed
Despite all the rosy signs of growth amid lower prices, not all ICT products are doing well. Different explanations apply to different products but the overriding theme of products that are suffering is that they are doing so as a result of the ICT super-cycle. In particular, printers have been hardest hit as the need for printed materials on the consumer end of the sector has decreased dramatically with the increase in data transmission capabilities across the region. “Output devices such as printers are suffering more because materials are more focused on transmission. Internet and communications have taken away the need to print,” Chalhoub said.
Another area that is feeling the weight of the super-cycle is the mobile phone sector. Even though turnover has increased
Q&A: Anssi Vanjoki
Executive vice president & general manager, Multimedia Nokia Corporation
E Where, would you say, are we in terms of technology?
Today, anything that is about emotions and feelings, like words or pictures, can be digitized. And if it can be digitized, it will be digitized. Then it can be put on the Internet and as technology progresses, everything, all feelings, all emotions, all literature and entertainment, all music, everything will be put in this cloud called the Internet. With devices that are able to use all that digital information, this can become as real to me as the physical environment or the analogue information around me wherever I am. The unnecessary use of analogue methods for creating and sharing the concepts of the abstract that the human being can understand is going to change, and we will be living, instead of just in physical reality, in an augmented reality, a virtuality as real to us as the world.
E Isn’t music a bit different? It’s not exactly always around us.
Music has universality everywhere. But it is also a business with rights holders, who are monetizing this feeling that I get when I listen to music. That has been broken. Much of it has been stolen. We aim to get it back to its owners and creators, and to ensure that this business and ecosystem is going to continue.
E How do you do that?
The Middle East is no exception to the world. There is the question of lawfulness and morals. Do you want to be a criminal? If you became a criminal by accident, because you did not know better, but then end up paying, you are not a criminal anymore. Given that, then, all the music you consume is going to become legal.
E But why develop a new music platform instead of using or linking to existing ones?
Because the platforms we have seen so far are inadequate, they are not offering what we believe the consumers are willing to have, but I want to emphasize that our strategies are not exclusive. The whole software is open source. We are inviting other people to join in rather than trying to sort of cut them out. Nokia is about connecting people. Nokia is not only offering commercial content to people but enabling people to create their own content and to share it in interesting ways with their friends.
to an average of 18 months, according to Cherfan, the outlook for the mobile phone sector does not look propitious. Having done well in previous years, mobile phone sales are now looking flat. Net income for Sony Ericsson fell 48% during the first quarter of 2008 and the company later stated that growth in 2009 would be “flattish”. Regionally, other companies, like LG, are falling short in 2008. “We’re not meeting our target this year,” stated K.W. Kim, CEO of LG Electronics Middle East and Africa, in an interview with Gulf News.
Cherfan explained that companies that concentrated on volume models had been growing until the market became saturated in 2008, at which point only the companies that invested in higher-end models continued to do well. “We expect 2009 and 2010 to become more and more difficult in the telecom sector with only one or two major players emerging,” he said.
It is not a presumptuous claim to state that everything in the retail ICT market will continue to be fine. However, the industry is by no means immune to the wider effects of a global recession. According to IDC data, in 2009 the IT markets in the Middle East and Africa will experience a growth of 8.5%. That figure is down from 14% in 2008 and the 12% prediction before the onset of the latest phase of the international financial crisis. Although the retail market is somewhat shielded from the IT market as a whole, since most of the spending cuts will be on the commercial side of the industry, retail sales and growth are bound to be affected as well. “Things will really reposition themselves back to a real environment and get out of a virtual growth cycle,” said Chalhoub. Cherfan added that, “The super-growth across the board in our region will definitely slow down.”
Comparatively speaking, the ICT sector (and in particular the retail side of the business) are better off than many other industries, which are still reeling from the effects of the global financial crisis. The need and the desire for ICT products look to remain strong as the region continues to regard technological advance as a necessity that cannot be forgone. The clicking will continue.