Growing up: Services play an increasingly important role in a market that already has a strong hardware segment

The economy’s sizeable industrial cluster of electronics production has contributed to making Thailand’s IT sector one of the most dynamic, even by the region’s high standards. Its global leadership in hard drive and computer production, for instance, has provided fertile ground for software developers. Meanwhile, local demand continues to signal a high growth trajectory for all things electronic, making Thailand the largest software market in South-east Asia, according to the Business Software Alliance (BSA), an association of global software firms.

MARKET STRUCTURE: Successive governments have declared IT a top priority, with the third such information and communications technology (ICT) master plan, which runs to 2020, aiming to upgrade both networks and hardware to maintain Thailand’s competitiveness in the ASEAN free market set to emerge in 2015. Various government entities are involved in the sector, including the Ministry of Science and Technology (MOST), which envisions an extensive supporting role for the home-grown IT industry. The National Electronics and Computer Technology Centre (NECTEC) acts as an incubator and research centre for hardware, while Software Park Thailand (SPT) encourages software development and the Software Industry Promotion Agency (SIPA) under the Ministry of Information and Communication Technology (MICT) promotes local software start-ups and their linkages to multinationals.

Private sector representation is made up of four distinct associations, all of which sit under the umbrella Thai Federation of Information Technology. The Association of the Thai Software Industry (ATSI) represents more than 130 commercial software companies, both foreign and local, and focuses on standards, while the Association of Thai ICT Industry is a broader-based grouping of hardware, software, distribution and reseller companies that focuses on trade. The Computer Association of Thailand and the Telecommunications Association of Thailand are narrower-based associations. While well-structured, the sector has at times struggled with broader ICT issues affecting all bodies.

MARKET SIZE: Spending in the ICT sector, including telecoms, as a whole is expected to reach $16.8bn in 2012 (roughly 5% of GDP), representing year-on-year (y-o-y) growth of 10.5%, according to telecoms research firm IDC. Hardware sales account for roughly 70% of this, while IT services and software sales make up the remainder. Total spending on IT products and services reached $6.5bn in 2011, growing 9.3% y-o-y according to SIPA, which expects the sector to sustain 9% growth in years ahead. The government and corporate sector accounted for 71.3% of IT spending in 2011, while households and small and medium-sized enterprises (SMEs) accounted for the remaining 28.7%, the SPT has reported.

HARDWARE: However, when it comes to the sales of hardware, consumers account for two-thirds of all personal computer (PC) sales, according to SIPA. The market leader in PCs, particularly laptops, in recent years has been Acer. The Taiwanese firm continues to lead with its aggressive pricing strategy, registering about 20% growth in 2011. In line with its competitors, Acer has reported that the retail segment accounts for 65% of its sales.

Computer hardware revenues rose from $3.8bn in 2010 to $4.1bn in 2011, according to SIPA. This growth came despite the fact that floods hit the country in the final quarter of the year, dampening consumer demand and also constraining supply, with Thailand accounting for 40% of global hard drive production. Indeed, computer manufacturers like Acer and Dell have estimated that the Thai market for new PCs slumped by 20% in the fourth quarter of 2011, on the back of spikes in hardware prices linked to the floods. Acer has forecast a further 15-20% contraction in the first quarter of 2012 as worldwide hardware sales stabilise, but the market is expected to bounce back in the second half of 2012.

Setting aside the temporary disruptions in 2011, the Thai market more generally has room for continued growth, with computer penetration standing at just 29%. The potential for expansion is especially true in smaller cities outside of Bangkok. Perhaps not surprisingly, some hardware retailers have recently focused their expansion on provincial centres in the north, north-east and south, including Hat Yai, Khon Kaen, Chiang Mai and Korat.

Another potential avenue for growth is to target the older population. “While we see IT penetration reaching about 90% in the 12- to 18-year-old segment, adoption by the over-50s segment has stagnated at around 5%,” Somchai Sittichaisrichart, the managing director of SiS Distribution (Thailand), told OBG. SiS is one of the largest wholesale IT distributors in Asia, with about 15% of the Thai market.

PORTABLE DEVICES: As in other Asian markets, smartphones and tablet computers have gotten off to a strong start in Thailand. Indeed, the country has proven a particularly dynamic market, with smartphones and tablets selling in higher volume than PCs for the first time in 2012, according to IDC Thailand. Taiwan’s Acer and South Korea’s Samsung have been particularly keen on slashing prices for their tablets since the start of 2011, hoping to take sales from Apply, the market leader. Some 400,000 tablets were sold during 2011, a figure that is expected to more than double in 2012, in part thanks to the government’s plan to distribute tablet computers to first-year schoolchildren (see analysis).

Intense competition among the major smartphone vendors, particularly more affordable models using Google’s Android operating system (OS), has led to a sharp drop in prices. Average prices have fallen from BT10,000 ($319) in 2010 to BT8900 ($284) in 2011 and are expected to reach BT6500 ($208) in 2012. GfK, a global market research firm, estimates that Android’s share of the mobile OS market has grown from 9% during the first quarter of 2011 to about 50% by year-end, moving it to first place ahead of Apple’s iOS, Blackberry and Symbian.

SOFTWARE & SERVICES: The growth in mobile data usage has been matched by strong consumer demand for social networking and web-based applications. Of the country’s estimated 20m internet users, 6.7m used Facebook and 450,000 used Twitter in 2011. According to Nielsen, Thailand ranked fourth in South-east Asia in terms of average length of time spent online, at approximately 17 hours a week in 2011, compared to Singapore’s 25 hours, the Philippines’s 21.5 hours and Malaysia’s 19.8 hours.

However, the government and financial sector businesses such as banks still represent the bulk of demand for software and services, given the widespread availability of pirated software within the consumer segment. Value has continued to be generated resoundingly by services rather than software sales, which stood at BT84.2bn ($2.7bn) in 2011, according to SPT. Services, which account for 22% of all IT spending, have meanwhile grown rapidly from $1.2bn in 2010 to $1.5bn in 2011.

SIPA estimates that 76.5% of the value of Thailand’s software industry is proprietary, while 23.5% is open source. Yet the grey market for consumer software has continued to thrive in light of uneven enforcement of intellectual property (IP) legislation. Pirated software accounted for 73% of the total market, according to International IP Alliance. The BSA estimates that curbing piracy by 10 percentage points over four years would add $1.3bn to GDP, generate an additional $73m in tax revenues and create over 2000 net new jobs. Although enforcement has lagged, the situation has been somewhat unexpectedly improved thanks to the effects of currency appreciation, which has pushed formal prices down and helped curb grey-market sales.

LOCAL DEVELOPERS: Despite this significant informal market, MOST estimates that the value of the local software industry has grown 23% annually since 2004, with more than 3000 companies registered. The government hopes to boost Thai software vendors’ share of the market, which stood at 20% of total sales in 2008. SIPA launched a “Buy Thai First” campaign to promote domestic firms and is lobbying the government to give tax breaks to local software developers. The aim is to attain 50% market share for local developers by the end of 2012.

The industry employs roughly 40,000 registered IT workers, 45% of whom work in programming, according to the ATSI, a figure the government hopes to boost to 50,000 in the coming years. “Thailand has the distinct advantage of having a relatively cheap labour with high-quality software skills,” Chalermpon Punnotok, the CEO of CT Asia Robotics, a call centre software and robotics developer, told OBG. “The historical challenge has been poor image, since Thailand does not have many strong homegrown firms in the IT sector.”

One area of expansion has been the domestic mobile applications market. Indeed, the government’s Telecommunications Research and Industrial Development Institute has estimated that this segment grew from BT6.3bn ($20m) in 2010 to BT9.8bn ($312.6m) one year later. And local developers are active in this area, too, having already launched more than 530 mobile applications worth an estimated BT500m ($16m), according to the SPT.

With the global market for mobile applications worth some $7bn, there is potential for additional growth, and the authorities expect faster internet connections to drive expansion in the local market. “You can already see that with the launch of high-speed data networks like TrueMove H, there are more and more applications showing up on platforms like the Apple App Store, from Thai developers,” Anudit Nakorntap, the minister of ICT, told OBG.

STATE SUPPORT: A number of government organisations, including SPT, NECTEC and public universities such as King Mongkut’s Institute of Technology Ladkarabang, have joined forces with private firms like Microsoft, Intel Microelectronics and Samart to pool resources for mobile application developers. The project, known as “Mobile Technology for Thailand”, offers business incubation services, marketing, training and testing services for developers. Meanwhile, the government’s Small and Medium Enterprise Development Bank of Thailand has targeted local software developers, offering loans of BT50, 000-500,000 ($1595-15,950) for up to seven years.

Thailand has also attracted multinationals in the IT sector. Thompson Reuters’s software centre has been based in Bangkok since 2001, employing 1300 IT professionals. DST, a US-based business process outsourcing firm that first set up in Thailand in 1993, employs 800 IT personnel for consultancy, support and development services worldwide. For foreign companies in the software sector, the BOI extends eight-year tax exemptions, as well as an exemption on import duties for machinery and equipment.

Strong support from, and collaboration with, government agencies has also played a role in developing home-grown software capacity in Thailand. MOST’s Software Park in Bangkok, which hosts more than 55 software companies and has incubated 50 start-ups, has been joined by similar initiatives upcountry, including Software Park Phuket, Korat Software Park and E-Saan Software Park.

CLOUD COMPUTING: These facilities, supported by partnerships with the likes of Microsoft, Intel and Yakimayo, show the beginnings of software clustering that could benefit from the further development of cloud computing. Indeed, cloud computing services offered by data warehouse operators have gained in popularity during the past two years, with significant spending by both Thai and foreign companies, as well as the government.

A major push for cloud computing has come from the public sector. The Electronic Government Agency (EGA), previously known as the Government Information Technology Service, has been in the process of establishing a government IT network that will connect over 1000 government agencies and offices across the country since early 2011. Then in May 2012, the EGA and MICT jointly launched the first government cloud service. Within the next five years, more than half of state organisations are expected to use this new system, known as the “G Cloud”. According to the MICT, cloud computing is expected to cut the government’s costs considerably, both in providing IT services to all government departments and by allowing more online services to be offered to citizens. The MICT expects the government’s total ICT bill – which stood at about BT50bn ($1.6bn) in 2011 – to be cut by at least 30% once the pilot programme, covering an initial 10 agencies, is generalised to all departments. Improved online services could also financially benefit the public. “We estimate that some 800 government services can be conducted or at least facilitated online, which will save both time and money for Thai citizens seeking to interact with the government through such e-services,” Anudit told OBG.

Meanwhile private service providers have also entered the cloud computing market. Equipment and services vendors have increasingly been pairing up with system integrators and internet service providers (ISPs) to provide customised solutions on the market. TCC Technology, owned by conglomerate Thai Charoen Corporation Group, operates two data centres, one in downtown Bangkok and the other in Bangna-Trad near Suvarnabhumi airport. It plans further capacity expansion both within the capital and in provincial centres with high-tech ambitions like Chiang Mai. It is also investing BT200m ($6.38m) to upgrade and expand the Bangna-Trad facility and cut power consumption by 40% compared to the industry average. Meanwhile, Hitachi and NTT, both from Japan, provide cloud services to Japanese companies in Thailand, aiming to gradually broaden their clientele as demand develops.

INVESTMENTS: This segment of the market has attracted increasing investments by established telecoms companies. ISPs like CS Loxinfo and Internet Thailand (INET) are increasingly entering the market, leveraging direct international gateway connections to clients. INET data centre has partnered with a number of software firms to provide “software-as-a-service” to clients worldwide, and driving down prices to as low as BT80 ($2.52) a month in Thailand. Meanwhile, ServeNET, a dedicated server provider, has established facilities in north Bangkok.

True Internet Data Centre, part of True Corporation, has developed cloud computing along with SPT and over 20 local software firms on a similar pay-per-use model since 2010, extending its reach among Thai businesses. Revenues for the company amounted to more than BT250m ($8m) in 2011. True will also provide cloud services in partnership with Microsoft and local software firm Senior Com, while INET holds the contract for Microsoft’s exchange and web hosting platforms.

For domestic firms the need for back-up and virtual services has been underscored by events like the riots of 2010 and recent floods. Although only 21% of companies in Thailand have used cloud computing (on par with Malaysia, but behind the 23% in Singapore), 30% of companies surveyed by SIPA in 2011 indicated they had plans to move their infrastructure needs to a virtual platform.

While the floods in late 2011 affected global supplies of hard drives and slowed the expansion of data centres globally, they also encouraged more Thai firms to host services on remote servers. NECTEC thus migrated its live traffic information service “Traffy” and the “Thaiflood.com” website to CS Loxinfo’s centre in late 2011. The government is also encouraging the use of cloud computing for Thailand’s 2.8m SMEs in a bid to cut software and IT costs, extending between BT200,000 and BT400,000 ($6380-12,760) in subsidies to individual firms for their migration to cloud computing services.

Limitations in bandwidth speeds have constrained early attempts at cloud computing, although planned upgrades in the country’s broadband infrastructure are expected to ease some bottlenecks. Power supply could also be a determining factor for data warehouses, with the International Telecommunications Union forecasting that the energy consumption of cloud computing will grow from around 2% of global energy demand currently to 12% by 2030.

OUTLOOK: Despite the economy’s considerable pool of qualified software developers and established hardware production base, growth in the IT sector has been constrained by infrastructure limitations on the telecoms side. As average bandwidth capacity is increased and the last telecoms mile is bridged in coming years, IT penetration is set to reach its full potential in this tech-savvy market. Meanwhile, private vendors are expected to address the demand within the commercially attractive youth segment, while the government is set to play a key role in making IT equipment available to younger students.