Techaisle Analyst Insights

This is a two part blog article. The first part, published earlier, reviewed the predictions we made for 2015 and the second part, below, focuses on outlook for 2016 and for the longer term (2017 - 2020).

Top 10 Predictions for Year 2016

1. 2016 will see even more intense emphasis on “CIA-Plus”
IT Suppliers will begin to align their offerings with Cloud, IoT, and/or Analytics; products that do not address end-user needs in these areas will be positioned as infrastructure and integration services needed to capitalize on these technologies. This trend, like hybrid IT, will continue into 2017. In 2016, Cloud and Analytics will remain among the top five IT priorities of SMBs and midmarket businesses. IoT will inch its way up into the priority list, though adoption will remain limited.

2. Rise of IoT will be constrained by a lack of real-world examples
From a buy-side perspective, the rise of IoT will need to be fueled by real-world examples showing the benefits of automating tasks and processes within IT and in other sectors. Within the SMB community, we expect sporadic implementation and a lack of concerted effort towards creation of IoT strategy, even though IT suppliers will continue to push forward their solutions hoping to remain top-of-mind in order to claim leadership in this emerging space. Each IT supplier will create its own solution set causing decision and adoption inertia, despite the wave of innovation that we expect to see emerge from the smaller & more agile IoT providers that are able to more easily align IT expertise with real life solutions. Experienced consultants and system integrators in particular will hold sway in matching SMB adopters with suppliers.

3. IoT supplier success will be determined by ecosystem management
On the sell side, the rise of IoT will be accompanied by an intense wave of interest in ecosystem management. It is difficult to buy or sell a “box of IoT”, though providers will claim to provide complete solutions. Parenthetically, this constraint is not limited to IoT. While it is possible to sell a “box of cloud” under the right circumstances, only AWS really manages to do so. And while one can sell a “box of analytics”, the boxes themselves come in a lot of different shapes and sizes. To meet SMB and enterprise buy-side demand for IoT, sellers will assemble coalitions that provide the many products and services that comprise an IoT solution. This will make alliance management a key success factor in the marketplace. The last time alliances determined market leadership; SAP became the global standard in ERP. Niche value added reseller may find a new source of success in IoT.

4. Business transformation will continue to elude analytics users
Analytics users will find that they are not achieving the expected benefits, prompting divergent responses. Some SMBs will find that analytics has not been transformative, and will blame the technology; others will look to move past descriptive and diagnostic views, piloting predictive or prescriptive initiatives. One of these responses is clearly more sensible than the other, but that does not mean it will be universal, at least in 2016. Focus on visualization will increase (mine is better than yours), on how the technology can solve business issues and challenges for SMBs and midmarket customers. Simplified implementation of customer and social analytics will be key drivers of adoption.

5. “Hybrid” will be used more often in conjunction with “IT” than “cloud”
User organizations will accept the notion that their focus on cloud needs to evolve into a focus on hybrid IT, as firms realize that their platforms and management scope must encompass on and off-premise systems. Truthfully, there is still a lot of work to do in cloud adoption. But the nature of the discussion has changed from “what and how do we move to the cloud?” to “what do we do to build an integrated, manageable infrastructure?” In 2016, there will likely no longer be an infrastructure debate about use of cloud, but there will be an important emerging discussion around managing hybrid IT.

6. Collaboration will drive “silo” to the realm of four-letter words
Anywhere, anytime also means any type of collaboration. SMB & midmarket businesses will look for unified shared workspaces that allow employees to enter into the workspace from any entry point to work together, collaborate and interact. Collaboration solutions cannot be deployed on stand-alone platforms – they need to be viewed as a framework for integrating multiple capabilities, native to multiple applications.

HP has split into two – HP Inc. and Hewlett Packard Enterprise (HPE). Almost all SMB relevant products and solutions (except PCs and printers) now reside within the HPE organization. The global small and midmarket businesses, SMB (1-999 employee size) market has been the growth engine for the IT industry at large. The reason is quite simply that SMBs account for over 80 percent of businesses in any country – developed or developing. As per Techaisle, SMBs are forecast to spend US$597 billion on IT in 2015. Their IT requirements range from servers, networking and storage to cloud, mobility, analytics, managed services and collaboration solutions. Today, most SMBs are looking towards IT suppliers that offer appealing value propositions in either of three IT delivery models – traditional infrastructure built on-site from hardware and software components; hosted solutions and/or applications most often purchased on a “pay as you go” model; and, cloud infrastructure delivered on-demand.

HPE – the new incarnation of HP and its focus on SMBs with Flex solutions

Since the launch of its “Just Right IT” portfolio (September 2010) for SMBs, HPE has been striving to better serve its SMB customers by consciously lowering cost of solutions, improving agility in deployment and enabling faster time to value in managing IT assets. Just Right IT includes products, services and solutions specifically engineered for SMBs. The portfolio offers management, data protection, communications and connectivity solutions that are designed and priced "just right" to deliver affordability and value to SMBs. These solutions revolve around HPE’s core offerings of servers, storage and networking which comprises of:

• Servers: ProLiant MicroServer, ProLiant 10 Series Servers, ProLiant 100 Series Servers, ProLiant 300 Series Servers
• Networking: 1950 Switch Series, R100 Wireless VPN Router Series, Cloud Managed Networking, and 2920 Switch Series
• Storage: Solutions for the virtualization, SQL Server, Exchange, File sharing and Backup

In November 2015, soon after the split, HPE announced a new portfolio of ProLiant Generation 9 (Gen9) Servers (ProLiant DL20 Gen9 and ProLiantML30 Gen9) that are specifically engineered for SMBs to help reduce cost and complexity to run the new style of IT, web, collaboration, and business workloads. HPE is hoping that the new server portfolio advances its vision for compute and the future of data center technology.

HPE also announced its Flex solutions which bundles various services around its server, storage and networking products including support services, financial services, ISV software, distribution services, and management. It is specifically targeted at three different segments of SMB market at the low end of which are the SMBs who are “starting out” and at the high-end are the SMBs who are “expanding their business”. This does align well with what Techaisle analysts find in Techaisle’s SMB & Midmarket IT Sophistication Segmentation as shown below.

Looking at the Mashable.com infographic on China’s Internet speed and other stats, we started noticing similarities between where China is now and Korea was 10 years ago. Growth of broadband Internet availability is already remarkable in China, but we only need to look across the Yellow Sea - a one-hour flight - to Korea to see the real potential.

According to an Organization for Economic Cooperation and Development (OECD) report published in July 2012, South Korea's high-speed Internet penetration rate topped 100 percent for the first time among the group's 34 nations, making it #1 in the world for broadband usage. Exceeding 100% is possible based on the connected devices per capita rather than each individual in the country having broadband access. For comparison purposes, the US is at 76%

After a 10 year break, I visited Korea in 2010 for a month-long project with one of the National Universities. In the decade between 2000 and 2010, the level of infrastructure build out and ubiquity of free broadband wireless access, even in the smaller cities, was incredible.

It shouldn’t have come as such a big surprise; Korea has been making deep investments in national communications for over thirty years, beginning with a strategic move in the mid-1980s that separated voice and data traffic, effectively taking data away from the government voice monopoly, Korea Telecom, and giving a data monopoly to a company called DACOM, with the charter to develop a national plan for data networks. The economy was regulated at the time and the political system still very authoritarian. National policies (successive five-year plans initiated by strongman Park Chung Hee) dominated decisions about investments, especially in areas of finance, technology and industrial infrastructure.

One of the strategic initiatives was the national development of Value-Added Networks (VANs) that the conglomerate companies – Samsung, Hyundai, Lucky-Goldstar (LG), etc. - could use to connect their manufacturing operations with suppliers using ISDN technology. This telecom foundation was critical to the contribution of these companies in building an economy that grew from $2.7B in 1962 to $230B in 1989. GDP passed $1.5T (PPP) in 2011.

This brings us back to the point. There are a lot of similarities between China and Korea that could help us understand the potential explosion of Internet adoption and application in the PRC. Among the most relevant are:

Rapid economic growth: Korea’s economy grew at a compounded rate of over 8% between 1962 and 1989, laying the groundwork for it to be the 12^th largest in the world today, despite a population of less than 50M. As seen in the Economist chart here, China’s GDP growth has grown at a rate above 10% since the early 1990s, and although it slowed significantly with the US downturn in 2008, it is still forecast to grow at an 8-9% rate through the end of next year, according to the IMF and major trading houses.

Infrastructure investment: Korea’s economy was managed through successive five-year plans that directed Bank of Korea investments deep into all areas of infrastructure and heavy industries, and these continue today, in a much more democratic - yet still pragmatic way, with huge projects to position the country as a commercial hub that can grow on the back of China’s emerging leadership role. In order to re-energize China’s economy the government poured over $630B into infrastructure projects in 2008/9. The second round, which seemed a little more cautious represented another $157B this year involving an additional 60 major projects. Even with this level of investment, there is a substantial IT gap that needs to be filled for SMBs to be able to automate effectively. Of the 3.7M SMBs in China, only 56% currently use PCs, while virtually all of Korea’s 3.2M SMBs have at least one PC and an internet connection.

Managed Economy: A large part of Korea’s success came from the ability to resist pressure to open up the economy and maintain a trade balance that spurred growth of a middle class, driven by domestic rivalry in the areas of steel, cars, consumer electronics, construction equipment, etc., followed by an explosion of exports in these areas. Korea’s strategic and geographic and political boundaries during the Cold War allowed them to resist this trade pressure. Situated between Japan, China and the Soviet Union, Korea’s security role superseded global corporate interests in agriculture, manufacturing and heavy industries allowing managed capital flow, political selection of winners, focus, hard work and sacrifice to build a robust economy from the ashes of the Korean Conflict. Also important was that the GDP per Capita only reached $5K in 1989, making it a little difficult to argue for changes that might have a destabilizing effect on the impressive string of results.

Now China has emerged as the new regional miracle and holds strong political, economic and military cards that will allow it to resist similar pressures and continue to exert control over its’ economy. While it remains very vulnerable to external forces such as financial volatility in Europe and the US, it has managed to control the areas of technology adoption and control of the mass (and individual) communications  For example Google’s only true global competition outside the US is Baidu; the leader in the PRC so far, and let’s not forget that Lenovo, the PC brand that IBM sold less than 10 years ago to its’ major Chinese ThinkPad OEM, is poised to overtake HP and Dell this year as the global leader in overall PC shipments, not just notebooks. Another relevant example is that Samsung was a strategic HP OEM for high-end workstations and low-end servers in the 1980s using PA-RISC architecture.  Intel won the war of the processors, making PA-RISC obsolete and Samsung became a global leader in memory chips and disk drives, which is now giving way to solid state memory, a fundamental component in the new generation of tablets PCs and other end-user devices. Oh yeah - Samsung is also a global leader in smartphones, shipping twice as many as Apple did last quarter; 50M vs. 26M. Oh yeah - they also supply Apple with a lot of important components. I would be scared too. But more to the point, Apple manufactures in China, just as IBM did with their flagship Notebook. Ironically, in the last few years Samsung emerged #1 in television shipments and has only been in that game since the late 1980s. This is not an argument for a managed economy - just some observations about long tail trends. My personal opinion is that Korea benefited from resisting pressure to open their economy too soon. I’ll let readers draw their own conclusions here.

Concentrated Population and Vertical Architecture: Korea’s Internet leadership benefited at least as much from the urban architecture as the government policies; maybe more. A small country with a rapidly-growing population and standard of living, Korea was transformed from a country of 1, 2 or 3 story cement block houses to a “Republic of Apartments” since the mid-1980s. In preparation for the 1988 Seoul Olympic Games, thousands of post-Korean War tenements and lower quality housing was razed and hundreds of 20-30 story modern apartment blocks took their place. The current apartment complexes have everything needed for comfortable living, including underground shopping centers and subway stops – almost like small cities. And typically they are modern and very well built - think New York - not $700 a month on the other side of the tracks. By concentrating 20M people into Seoul, the vast majority of whom live in these towering apartment blocks, the challenge of providing the last half-mile can be solved by bringing fiber to the curb and connecting hundreds of families at a time. Now consider that according McKinsey, China will have 221 cities with over a million inhabitants by 2025, adding more urban population than the total US population.

To accommodate this growth, the country needs floor building space equivalent to the land mass of Switzerland, or up to 50K 30-floor+ skyscrapers. If that is not enough to make the point, one of the megacities planned is supposed to combine 9 existing cities in the Pearl River delta into a single megalopolis of 40 million inhabitants, ringing Hong Kong with China’s largest manufacturing center. This optimism has been slightly dampened by the bursting of the property bubble that came with the anticipated growth of the area, lots of empty office space and apartments. Despite the local setbacks, analysts at Goldman Sachs expect a “soft landing”. Personally, I don’t think anyone can accurately predict where any economy will be in two years, but we use the tools we have.

There are other similarities such as national pride, a hungry population that is willing to sacrifice, work ethic and cultural bonds, but for the sake of brevity we don’t need to go into a lot of detail here.

The Elephant in the Room: Most people would agree the biggest single risk to China following Korea’s lead on Internet adoption is whether the government can hold the population down while they become increasingly affluent and aware of the personal freedoms and opportunities in other advanced economies. In Korea, the catalyst for the explosive growth between 1990 and 2007, when per capita GDP reached $20K from $5K, was the first peaceful transfer of power to a civilian government. All of the Internet adoption and high tech growth followed this major political reform, and would have been very unlikely without it.  As described in our post about Managed Services adoption in the PRC Mid-Market, there is very quick adoption of the best new technologies (as long as they do not pose too much risk to the powers that be).  China could take a much faster path to prosperity by relaxing the political control on personal freedoms - but speed is not the priority and the problem with making political predictions is that it is much too complicated to get right. But it only takes one person, a Gandhi, Gorbachev, Aquino, or in China's case Deng Xiaoping to make history jump instead of crawl. It is good to keep in mind that stranger things have happened; none of the experts predicted the fall of the Soviet Union in 1992 and nobody could have imagined Korea bailing out Russia – the patron of their arch rivals in North Korea.

As might be more evident in this post, I am a Korea watcher, not a China watcher. For an expert view on what is happening in China related to Internet adoption and social issues, this TED presentation by Michael Anti (aka Jing Zhao)  is a good place to start.

In a very interesting move, Apple announced that they would invest in returning some production to the US. At first blush, this seems like a bold tactic  which will certainly improve Apple’s brand reputation in the wake of long-standing criticism for moving skilled manufacturing jobs to China, where worker pay and conditions are bad enough to drive some to suicide. And as the number one technology company in the world it is also heartening to see some jobs come back home, but there are a few caveats:

The Apple MacBook is the top of the line notebook with a premium price point, out of reach for most small businesses unless there is strong justification, such as for professional designers and developers who need to pay double that of a similarly equipped Wintel device to do their work effectively. That share of the market has always been small relative to Wintel machines, both desktop and notebook. Apple manufactured Macs in the US until the mid-nineties, after most competitors had moved production offshore. The caveats include 1) whether this experiment will grow to the more strategic iPhone and iPad product lines, and obviously, 2) whether Apple can turn a profit that makes the decision stick after the first $100M is spent.

Apple cites the inability to find the level of skills and manufacturing equipment in the US to be able to turn out production rapidly and with high quality. No doubt Foxxconn, Apple’s Chinese production partner, who already operates some plants in the US, will be looking to expand operations here. They had issues ramping up production to meet demand for the new iPhone and there were hiccups, followed by reports of Foxxconn negotiating multi-billion dollar deals in Brazil, to manufacture there. Regardless of how that materializes, today’s announcement will dampen some criticism that would accompany the final press releases from Sao Paolo.

Enter the Dragon

Another reason this makes sense to us is that China’s technology vendors are on the rise – no surprise there. But consider that within 7 years of buying the ThinkPad brand and manufacturing rights, Lenovo has become the #1 PC vendor in the world in unit shipments, (#1 by Gartner, #2 by IDC) squeezing 10% out of the global share in a stagnant market in the last few years alone while jumping to 30% share in China, 3X the nearest competitor.  It was also announced today by Reuters that Apple fell to #6 in the Chinese smartphone market, which is growing in leaps and bounds to 60M units per quarter, with intense domestic competition and Samsung leading the pack. Lenovo is number 2 in the smartphone market as well as having the overwhelming first place position in PCs mentioned earlier, #5 smartphone seller Huawei, is gobbling up global market share in the telecom equipment market at an alarming rate.

We have written several times about the rising competition from China in the hardware manufacturing end of the IT market, and of its’ growing importance as the second largest PC, and largest Smartphone market in the world, with a billion users and 60 million units sold per quarter. As shared with our readers in a September article about Internet adoption and managed economies, China and Korea have many similarities that make for a reasonable scenario of things to come. Take it from someone who lived 15 years in Asia and has been watching Korea for 30 – the voracious appetite for material wealth, pragmatic style of government and East Asian capitalism will leave no stone unturned. Take Samsung for example: between 1990 and now they have become the number one maker of TVs in the world, starting from scratch and displacing the Japanese faster than they displaced American manufacturers, #1 in memory chips and some other semiconductors, #1 in Smartphone handsets (almost double Apple in unit shipments), a global leadership position in screen technology, squeezing Sharp, Toshiba and others for the keys to the future standard, and a global frontrunner in CE and white goods. These guys are US Steel in their heyday. And they are a major supplier to Apple for the most important products. And the legal battles are not over yet, according to this CNET News video. They have Foxxconn on the left and Samsung on the right. With friends like these who needs enemies?



CNET on Samsung Apple Lawsuit.

Strategically Apple’s move is understandable, at least from the outside looking in. Steve Jobs’ genius for aesthetic design, usability and commitment to quality helped create the PC revolution, arguably the single most important technological advance aside from the Internet since the Industrial Revolution. It also got him ousted from Apple as decisions about long term architecture were made. Although Apple always had (and still has) a very loyal following in the computing arena, they did not gain more than 10-12% market share from 1980 to 2000. This meant that Apple had to drive enough margin to support R&D for operating systems, a proprietary microprocessor, end user applications and non-standard chassis and other components.  By contrast, the rest of the PC market leveraged standards and Scale Economies as investments were diffused in the market. The Microsoft standard OS and a maturing suite of interoperable applications were the lynchpin of the ecosystem and resulted in hundreds of companies joining the competitive fray. White box and private label manufacturers sprang up everywhere, eventually producing branded competitors like Dell and Compaq who were selling practically as fast as they could produce. By 1996 Apple was being counted out by many analysts as an also-ran. Eventually in 1997, Jobs was brought back in to save the company, which was considered a very risky personal move at the time.

In his second stint as CEO, Jobs turned Apple around and helped solve a problem that almost put the recording industry into insolvency; how to make money in the music business when new technologies allowed free files to be distributed at will and pirated on a global scale. Apple introduced iTunes in conjunction with EMI, and solved the Digital Rights Management issue. Under Jobs they had to kowtow to Redmond and adopt compatible MS Office Application Suites, which were not interoperable to that point – no swapping files between Apple and Microsoft users, and move to an Intel architecture. Despite several earlier failures, such as the Newton, Apple achieved a breakout hit with the iPod, and iTunes began printing money. Next came the iPhone, which almost immediately become the third largest handset brand in the market, followed by iPad in 2010, and several versions of iPhones. The products have produced a ravenous worldwide customer base and made Apple the most valuable (tech) company in history with a half-trillion dollar war chest.

The point is that Apple’s meteoric rise is more a function of the transition to CE and Smartphones than its’ leadership in computing and now they are in a bind; they are stretching their existing supply chain, they rely on advanced manufacturing resources and skilled labor that have been developed offshore, their largest potential market (China) is controlled by arch-rival Samsung, with whom they are in a nasty legal battle and depend on for key components. Prepare to Repel Boarders.

Next Chapter in the Bits vs. Atoms Saga

Apple’s success with iTunes came as a result of a property of the Internet that is now at the root of their problem: value moves at the speed of light when it can be digitized, and even when that value is in the form of an optimized supply chain, there are physical limits imposed by materials and the movement of products that ultimately make manufacturing a challenging business. On one hand you have companies like Apple, who source, manufacture, sell and distribute 125 million smartphones, along with millions of other devices. On the other hand there are companies like Google, whose value can be delivered over a network, relying on increasingly large server farms and unfettered access to electricity, but with much less need for operational infrastructure. Cisco and Oracle are another example although not as stark. Huawei is exerting substantial pressure on US firms as a global competitor and causing Congressional sabre rattling, as we noted here.  Telecom equipment has been a hardware-oriented business but is less at risk because of innovation toward software and network integration – moving toward bits and away from atoms, demonstrated by Cisco's recent alliance with Citrix. Earlier we discussed Lenovo, which has overtaken first Dell and now HP and is the global leader in PC unit shipments.

As noted, we think moving some manufacturing back to the US will bring some benefits, not least of which is the PR value of bringing some jobs back home. It is slightly diluted by the fact that production of the most important product lines will not be possible for some time to come and does not decrease reliance on Foxxconn or really help with the Samsung conundrum. However if the experiment succeeds and a profitable advanced manufacturing sector can be developed and others follow suit it will be a very good thing for all of us in the technology industry.