Egyptian promise

Egypt’s IT market is growing fast with channel players enjoying the ride. Putting problems with grey aside, the future’s bright.

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By  Alex Malouf Published  August 25, 2004

Government drive|~|FayyadMokbelCentra.gif|~|Mokbel Fayyad, CEO at Egyptian assembler Centra|~|Egypt is truly a land of mystery to the IT industry. There are 76 million inhabitants and yet what should be a prosperous market has stagnated for so long. Vendors have scratched their heads for years and speculated as to why technology has not taken off in a country with a huge population and a large industrial base. According to Egyptian government statistics, the number of PCs being used in the country rose from 850,000 at the end of 1999, to 1.6 million by November 2003. While the annual growth rate of over 20% may seem impressive, the penetration rate only rose by a single point, from a lowly 1% to 2%. When vendors see that there is only one computer for every 50 people, they are quick to point out that there are huge growth opportunities with masses of potential customers. “Egypt has a young population and currently a very low penetration of general IT usage either in the home or businesses,” observes Karim Fahmy, Intel’s general manager for Egypt and the Levant. “There are lots of people and businesses that haven’t even connected to the internet yet. But the IT scene has progressed from the 1990s when a proper infrastructure base was lacking.” Egypt finally awoke from its IT slumber in 1999 with the founding of the Ministry of Communications and Information Technology (MCIT). The Egyptian government created a body that would promote IT as a national pillar of the economy. This institution marked a new era for Egypt’s emerging tech industry, and gave an impetus to a sector that was lacking a driving influence either in the public or the private sector. With a self-declared goal of creating an ‘information society’, MCIT has gone about encouraging businesses to invest and set up operations in Egypt. Through the development of a liberalised framework for IT companies doing business in Egypt, introduction of tax exemptions for investment into the nation’s technology sector, and free zone status for foreign companies, Egypt began getting the attention it deserved. “MCIT has done a lot of work to build the foundations,” says Moustapha Sarhank, president at security software vendor ISS Middle East. “The ministry has implemented a robust and affordable infrastructure, they have invested a lot in human resource development and they have put together an appealing package to outside investors… [Information Technology] is on the verge of taking off.” The impact MCIT has had on home-grown Egyptian companies has been even more noticeable. Beginning in 2002 the ministry launched a raft of IT initiatives designed to drive PC sales and internet usage throughout the country. With schemes such as a PC for every home and with MCIT’s ambitious goal of shifting six million PCs over seven years, local assemblers have had a ready made market to sell into. Egypt’s local PC assembly industry has not looked back since MCIT’s inception. Looking at the figures for the top sellers in Egypt makes for a remarkable read when set against trends for the wider Middle East. Looking at 2004’s second quarter figures compiled by IDC, of the top five PC brands for desktop form factors, the first, fourth and fifth positions are taken by Egyptian companies — Centra, Metra and Prosilab respectively. Egyptian assemblers are beating off bigger international rivals as they power the nation’s IT infrastructure, but assemblers want to see even more action from the government. “The projects implemented by the MCIT — the likes of a PC for each home and for each student — will create huge demand if developed further,” explains Mokbel Fayyad, CEO at Centra, a major Egyptian assembler. “On the corporate side signs are very positive. Banks and telecoms are increasing their IT purchasing and this will only get higher when MCIT’s new schemes are introduced. As for consumer spending on IT, it could go much higher with the right kind of support. There is still a need for financial assistance when rolling out programmes aimed at the general public, as consumers do still feel the effects of previous economic woes from a few years back.” ||**||Money matters|~|IBMEgypt_Amr-Ghossein.gif|~|Amr Ghoneim, IBM Egypt’s general manager|~|Finance, or a lack of it, has proved to be the one stumbling block to greater IT penetration and sales for both local players and internationals involved in Egypt’s IT sector. Egypt suffered a double whammy during 2001 and 2002 when it was hit by the global economic depression and subsequent depreciation of the Egyptian pound. This shockwave hit every industry, and IT was no exception. Sales for government initiatives such as a PC for every home were hit, and sales for 2003 were put at 75,000 units according to one assembler involved in the scheme, way below the government’s targets. MCIT and the IT industry have sought to overcome financial difficulties by implementing installment-based payment for IT hardware and making IT accessible to a much larger audience. “Devaluation of the Egyptian pound hit consumers hard, and this led to inflation in prices in Egypt,” concedes Centra’s Fayyad. “However, what the government has done, how it has structured payment over several years, has contributed greatly to our success and the industry’s in general. When consumers go and buy a low cost good quality PC and are given the choice to pay over two to three years, it is very easy to take the decision to buy.” On the hardware side, the channel is finally witnessing a glimpse of the potential present in Egypt as PC sales soar. “Numbers show that Egypt is now the third biggest country in the Middle East for newly acquired PCs. Last year there were sales of over 170,000 branded computers in this market, and we are not too far behind the UAE and Saudi Arabia,” notes Hany Deraz, director of sales and marketing at distributor Aptec Egypt. For markets that are as price sensitive as Egypt, the desktop is king due to its price-performance ratio. “We do assemble a small proportion of notebooks but it is early days for mobile form factors in Egypt,” says Hazem El Zorkany, vice president for product management at Metra Computer, an Egyptian distributor and assembler. “The majority of computer sales, over 95%, are for desktop machines. While laptop sales may grow with the government’s latest initiative aimed at business executives, desktops remain the mainstay in the market.” Moving away from hardware, spending on other IT sectors such as software is disproportionately low and reflects the relative immaturity of Egypt’s IT market. One explanation for the low level of spending on software is the grey market. Fayyad at Centra estimates that up to 80% of some IT goods are grey or counterfeit. High costs of operating systems such as Windows in a market that suffers from extreme price sensitivity have led some players to champion the cause of shareware such as Linux. “Many Egyptian organisations are introducing Linux in preference to other operating systems,” adds Fayyad. “20% of the cost of the computer comes from Windows. Pioneering Linux, which costs relatively little, could drastically increase PC sales. If end-users save 10% to 20% of the cost of buying a computer then this will mean PCs are priced more attractively to consumers, and we will shift much higher PC volumes.” Lowering or abolishing tariffs is one other solution touted as a way to promote Egypt’s IT base and combat grey practices. It is expected that the new government will take action to remove obstacles to business and strengthen IT. “Certain changes are on hold due to the change in government, but the IT industry expects that within the next six months taxes will be lowered from 5% to 2%,” explains El Zorkany. “When taxes were lowered last year by 5% the market improved significantly.” ||**||Channel changes|~|AhmedSamyHP.gif|~|Ahmed Samy, general manger for HP Egypt|~|If barriers are pulled down, expect to see even more vendors flocking to Egypt. Already the big names of the industry such as HP and IBM are turning towards Egypt and positioning themselves to get a bigger slice of the action buoyed by a low-cost workforce and rising education levels. “Egypt is considered as an emerging market and there are a multitude of opportunities for foreign investors,” notes Amr Ghoneim, IBM Egypt’s general manager. “There is a cost effective labour force that can make the country an ideal investment opportunity. Egypt will soon have the best infrastructure in the region and first-rate human resources — huge assets for us.” Big name PC vendors have a fight on their hands from local assemblers and one distributor active in Egypt doesn’t think they will be able to dislodge local companies from their dominant position for some time to come. “There is always a market for international vendors, but Egypt is a difficult country for A-brands to operate in,” surmises Armagan Demir, vice president for sales and marketing at Empa. “Income levels will not change overnight and buying patterns will remain the same for the next ten years. End-users are going for a more affordable product. We reckon that there are 500,000 PCs sold annually in the market and of that 80% is coming from local assemblers.” There may be a few surprises on the way from internationals for Egypt’s IT market. The country’s public may find themselves buying A-brand names at less than they expect if HP gets its way. The vendor plans to use its Saudi assembly plant to export PCs to Egypt and take advantage of a trading agreement between the two countries. “With the initiatives that HP is working on today, local assemblers will not have such a price advantage,” says Ahmed Samy, general manger for HP Egypt. “We are not saying that an international vendor will lower prices to match those offered by a local outfit. There will always be a premium but we are reducing this as much as we can to provide customers with value. This is the difference between buying a first-rate international product and one from a local company.” Local assemblers may prove hard to knock off their pedestals, but vendor activity in the market has caused a channel commotion and is invigorating Egypt’s IT sector. “Many of our partners based in Europe and the wider Middle East are now moving into Egypt,” adds HP’s Samy. “These companies have a wealth of operational experience that is being put to use in Egypt. They are helping to develop the country’s IT industry by applying their own services and logistics practices brought in from abroad. This knowledge transfer is already adding more value to IT in Egypt.” Consolidation among local IT companies is also coming more and more into play as they look to compete against international companies. MCIT estimates that there are over 1,000 IT businesses in Egypt, and local companies are considering merging to gain the critical mass that they need to take on the major vendors. “Large assemblers are better placed to fight off A-brands, win government contracts and build profitability through economies of scale. Four or five major companies or suppliers will emerge and this process has already started,” explains Metra’s El Zorkany. ||**||Pan-Arab market|~|Minister-DrAhmedNazif.gif|~|Dr. Ahmed Nazif, Egypt's new Prime Minister|~|Egypt has already started to take on the appearance of a regional hub for assembly after the merging of several major players. The most notable of these is ‘Arabian PC’, a joint Kuwaiti-Egyptian venture led by the Kharafi group with capital of over US$20m. In its first stage of development, the venture aims to produce a million PCs a year for the whole Middle East region. While it may seem ambitious, the end goal of both local and international IT players is to use Egypt as a base for export across the region. “There is great potential for exporting IT products and services to the entire region, especially in the software market,” notes Ghoneim at IBM. Some companies have already begun to exploit the advantages of being based in Egypt to sell their product abroad. “Centra started to work in Iraq around six months back. We assigned a distributor and they are building an infrastructure at present,” reveals Fayyad. “We are in Syria and we are also going to move into Sudan and Libya during the next few months. But this is not just for hardware. Plans are underway to develop software for the wider Middle East region, and we have penciled in a 2005 launch date to push this new range.” Foreign involvement is bringing about much needed change in Egypt’s nascent IT market, but as Ghoneim at IBM points out, the government will remain the driving force for change: “The channel is shifting, it is developing and it is becoming much more competitive. But it is not the investment from abroad that is changing the local market or driving demand. What is really transforming this country’s IT sector is MCIT.” Egypt’s channel has been brimming with excitement and expectation after the appointment of the new cabinet in July, led by Dr Nazif, the former minister for MCIT. There is already talk of a raft of changes that will be made to facilitate business for the IT sector after the new cabinet is bedded in. El Zorkany explains: “Reforms are currently on hold but after a few months you will see action. There are so many issues to address, including bureaucracy and duties. But Dr Nazif is going to push IT through the whole community. He will take off all taxes and tariffs from software and hardware, and change how business is done in Egypt.” In a speech at the ITU Africa event given before he was appointed Prime Minister, Dr Nazif explained his hopes for IT in Egypt: “We have seen a lot of changes in the Egyptian economy since January. The currency has stabilised and as far as the ICT industry is concerned, it has weathered the situation very nicely. The years 2002 and 2003 were a bottleneck for us but there is growth within the industry. The number of new companies established between 2002 and 2004 doubled, and the number of new professional jobs created exceeded 25,000. We are also export-oriented and Egyptian companies are becoming bolder outside the country. I see very good prospects for the ICT industry this year.” If his words are anything to go by, and the IT industry in Egypt believes they are, then expect a revolution in the IT channel as the sleeping giant finally awakens. ||**||

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