Kingdom of Contradictions

Saudi Arabia spends more on information technology than any other country in the Middle East. As such, it boasts some of the most impressive user sites in the region. However, the market is far from developed, which means it provides a host of growth opportunities for those willing to invest in it.

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By  Matthew Southwell Published  June 1, 2003

I|~||~||~|The Saudi information technology market is riddled with contradictions. For example, it boasts some of the most impressive end user implementations in the Middle East, yet has singularly failed to persuade its smaller business to get online. Likewise, it spends the most on IT in the region, but also boasts one of the poorest technology infrastructures.

There are a myriad of reasons for this state of affairs, ranging from slow uptake to cultural issues and commercial inertia. However, it looks as though things are changing. Whether this is due to high level action, looming entrance to the World Trade Organisation (WTO) or simple organic growth, is almost irrelevant.

What is important is that the country’s huge investment in hardware has created a platform on which it can now build, adding value to both the Kingdom and its companies through the deployment of business critical software and services. At the same time, the work of its advanced end users is being acknowledged throughout the Middle East and starting to act as a beacon for other Saudi organisations. As a result of these changes, the Kingdom of contradictions is realising its potential as the region’s largest IT market. Vendors are moving to Saudi Arabia in their droves, while users are snapping up their technology with gay abandon. Here we look at the Kingdom’s hardware, software and networking markets to establish just what stage they are at and how they will evolve in both the short and long term.

||**||II|~||~||~|HARDWARE
Although the hardware market makes up the bulk of IT expenditure within Saudi Arabia, it is far from mature. It is still dominated by desktop PCs and they accounted for 78% of unit shipments in Q103, according to IDC.

However, the desktop market is significantly skewed in Saudi, mainly due to the influence of its tender business. Large government, education and enterprise contracts make up a very large proportion of PC shipments, as they usually buy PCs by the thousand.

“Saudi Arabia is mainly a project driven market; desktops are still widely deployed around the country mainly in big tenders,” says Omar Shihab, research analyst with IDC Middle East & North Africa.
Although there is a lot of money involved in the tender business, it is not a particularly open market as tenders usually specify the brand of PC required. Typically, only tier one vendors are selected. “Most of the time the vendors will be Dell, IBM, HP, then Acer or Fujitsu Siemens. It is pretty much negotiated on price — we are talking about millions of Saudi riyals and they end up getting the big vendors fighting on price,” says Thierry Chamayou, general manager of Aptec Saudi Arabia.

However, the market is changing slowly and the customers writing the tenders are opening up. For example, Al Faisaliah’s PC brand, Zai, has been authorised for bids for most government ministries.

In the small-to-medium sized business (SMB) sector, the current trend is for notebooks and the Kingdom is seeing booming sales. IDC reports growth of 48% for Q103, with laptops making up 19% of PC shipments in the Kingdom.

“The easier internet access is, the more [notebook sales] in Saudi Arabia will grow, especially when you get to wireless hotspots for wireless connection, we are going to see some good growth,” says Samer El-Sayed, general manager of the personal systems group at Hewlett-Packard Saudi Arabia.

“Saudi users want to be connected everywhere, there are a good number of ISPs, and with DSL spreading. We are going to see more notebook users,” he adds.

However, this does not mean that the SMB market does not have huge potential for PC vendors. “Small business in Saudi is still in its early stages. There are huge quantities of desktop tenders, and people are entertaining that and forgetting the small businesses. It is a virgin market,” comments El-Sayed.
With such market opportunities opening up, IDC expects to see more growth throughout 2003. “Spending in Saudi Arabia will not come to a stand still,” says Shihab.

“Large end users will continue to invest in PCs and as our final data for the first quarter show, shipments in notebooks and servers increased approximately 50% and 100% year-on-year. We expect the Saudi PC market to further grow by the end of 2003,” he adds.

||**||III|~||~||~|SOFTWARE
Despite the Kingdom’s focus on hardware, its software market is beginning to take shape. As such, it accounted for around 22% of the Kingdom’s total technology spend last year, according to IDC.

“If you look at year-on-year spending growth of 2002 over 2001, you will see almost 14% IT spending growth in Saudi Arabia. Although that is driven primarily by hardware… [the software market] is growing,” says Jyoti Lalchandani, software & consulting analyst and regional director of IDC Middle.

While increased software spend is only natural after so much investment in hardware, the Kingdom’s companies are also beginning to realise that they have to deploy business critical applications if they are to succeed in the knowledge economy.

“There is a new competitive incentive in the local market… people are pushing forward with ERP. Customers are realising that ERP is a necessity and not a luxury. They have to install this software to improve business performance,” says Addi O. Effendi, business development & sales manager at Al Hoshan Consultants.

While the investments made by large companies, such as Aramco, Sabic and NADEC, are well documented, the software spend of the Kingdom’s small-to-medium sized business (SMBs) is not. However, this does not mean that it is not happening.

For example, Ifitkar Nadeem, senior e-business analyst, Centre for Economic & Management Systems, King Fahd University for Petroleum & Minerals (KFUPM), believes ERP spending is on the rise in the midmarket segment.

“The current market trend is for ERP deployments and there is an increasing number of medium sized companies that are implementing it,” he says.
Not only are more SMBs investing in ERP applications, but the type of software they are buying is also changing. In fact, the Kingdom’s the old age tradition of relying on locally developed back office suites is being replaced by a move to implement brand name solutions.

“When buying an ERP solution, most companies look at Oracle, JD Edwards or SAP and sometimes they look at Baan and IFS. Further down the market, users also look at Sage and Great Plains [Microsoft Business Solutions],” says Nadeem.

||**||IV|~||~||~|One reason for this shift in buying practices is a change in attitude towards Arabic software. In the past, locally developed ERP apps found favour due to their superior native language support, but now users are realising that they often lose out in other areas by opting for such solutions. “Companies are less interested in Arabised solutions and will opt for solutions such as SAP and Oracle over locally developed applications. This trend is becoming more [apparent] because of the headaches caused by Arabised solutions,” says Nadeem.

Despite the maturation of Saudi’s software buying practices, the Kingdom is still young in terms of implementations. This means that basic ERP is still very much the order of the day. For example, Khalid Suleiman, managing director of IFS Arabia, reports that less than 5% of Saudi companies with a tier one app make full use of more than five ERP modules.

“Interest in extended ERP has only just stared to pick up and even Aramco has only recently implemented a business warehouse. Saudi companies need data extraction, warehousing and mining, but it is a challenge to implement and run such solutions. And, because it is a sizeable project, most companies are currently just watching the market,” adds Nadeem.

In fact, most market pundits believe that extended ERP will only take off when the Kingdom’s companies have no choice but to invest in such solutions. Suleiman believes this point will come when Saudi Arabia joins the WTO and competition in the local market becomes a reality.

||**||V|~||~||~|NETWORKS
Saudi Arabia completed yet another stage of its e-government plan recently with the Ministry of Commerce’s completion of a 2200 node network. Connecting the ministry’s head office and 36 distributed branches and locations around the Kingdom, the infrastructure will form the basis for future IT implementations designed to enhance employee efficiencies, communications and IT skills.

The Ministry’s project, however, is not unique within Saudi. Similar network and IT implementations are being replicated within other government departments and large organisations. Consequently, the Saudi market is yielding the strongest regional growth opportunities for networking vendors.

Cisco’s regional manager for Saudi Arabia, Dr Marwan Al-Ahmadi, says the total IT spending in Saudi is around US$3 billion and represents 50% of the total GCC countries spending.

It is the large vertical sector companies that are undoubtedly setting the pace in terms of technology and getting connected. Vendors report great demand for Gigabit Ethernet solutions, while enterprises with mutiple affiliates or groups are investing in metropolitan area networks (MANs) and migrating towards 10 Gigabit Ethernet.

||**|||~||~||~|Convergence is also gaining momentum within the Kingdom, as enterprises look to reduce communication costs by running Voice over IP (VoIP) and implementing IP telephony solutions. Consequently, enterprises are examining their core infrastructure to ensure that it is capable of supporting network convergence. This is leading many of the larger enterprises to invest in the latest horizontal and fibre cabling solutions.

“Enterprises are very aware of the latest technologies and the need to pursue these technologies. So from the infrastructure side they are looking to maximise their bandwidth and are investing in fibre and Cat 6 on the horizontal side,” says Dominic Morris, country manager, connectivity solutions, Avaya Saudi Arabia.

Wireless solutions are also proving popular as they provide a practical and cost sensitive solution to quality and infrastructure concerns. “Wireless is taking off, especially as fibre is still very costly. The solution is to go wireless,” says Walid Al-Najjar, country sales manager, Foundry Networks, Saudi Arabia.

Due to Saudi’s massive market potential, the networking vendors are ramping up their investments. For example, 3Com is in the final stages of establishing an office in Riyadh, Avaya has appointed a dedicated country manager for its Systimax range of solutions, while Foundry also has plans to augment its local staff as demand increases.

Given the vast IT market size of Saudi, however, it is surprising that the vendors are only now dedicating more time and resources to the Kingdom. The vendors, however, argue that this is down to market maturity and that they are only now witnessing the growth required to justify direct investment.
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