Indonesia information technology report q1 2009

Market may be entering faster growth stage; forecast to grow faster than most other ASEAN markets over the review period, due to currently underdeveloped nature Weaknesses!. Asia Regiona

Including 5-year industry forecasts

Indonesia Information Technology

Business Monitor International

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All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

Technology Report Q1 2009

Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: February 2009

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT Sector SWOT 8

Indonesia Telecoms Sector SWOT 9

Indonesia Business Environment SWOT 10

Indonesia Political SWOT 11

Indonesia Economic SWOT 12

Asia Regional IT Markets Overview 13

IT Penetration 13

Market Growth And Drivers 15

Sectors And Verticals 16

IT Business Environment Rating 19

Table: Asia IT Business Environment Ratings 21

Market Overview 22

Government Authority 22

History And Market Structure 22

Bandung Hi-Tech Valley SWOT 23

Hardware 24

Table: Computer Spending By Sector, 2007 Estimate 24

Software 25

Services 26

End Users 26

Industry Developments 27

Industry Forecast Scenario 30

Table: Indonesia’s IT Industry – Historical Data And Forecasts (US$mn unless otherwise stated) 31

Internet Forecast 32

Table: Indonesia’s Internet Market – Historical Data And Forecasts 32

Macroeconomic Forecast 34

Table: Indonesia – Economic Activity 37

Country Context 38

Table: Consumer Expenditure, 2000-2012 (US$) 38

Table: Rural/Urban Breakdown, 2005-2030 38

Competitive Landscape 39

Hardware 39

Software 40

IT Services 41

Internet Competitive Landscape 41

Table: Regional Broadband Penetration Overview, 2007 42

Company Monitor 43

IBM Indonesia 43

Oracle 44

Sigma Cipta Caraka (SCC) 45

HP 47

Country Snapshot: Indonesia Demographic Data 48

Section 1: Population 48

Table: Demographic Indicators, 2005-2030 48

Section 2: Education And Healthcare 49

Table: Education, 2000-2005 49

Table: Vital Statistics, 2005-2030 49

Section 3: Labour Market And Spending Power 50

Table: Employment Indicators, 2001-2006 50

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 50

BMI Forecast Modelling 51

How We Generate Our Industry Forecasts 51

IT Industry 51

IT Ratings – Methodology 52

Table: IT Business Environment Indicators 53

Weighting 54

Table: Weighting Of Components 54

Sources 54

BMI expects growth to dip further in 2009 before recovering in 2010 By 2013, the hardware-dominated

IT market should reach a value of US$5.7bn, with Indonesia displaying faster growth than many

Association of Southeast Asian Nations (ASEAN) neighbours With information and communication technology (ICT) penetration of only around 20% and development restricted to richer areas such as Java, the market has much latent growth potential

Private enterprises and particularly small- and medium-sized enterprises (SME) will dominate PC sales, with enterprise resource planning (ERP) and other e-business applications also finding increasing

popularity with the SME market The SME sector of 42.2mn companies will drive demand for basic hardware and applications, as enterprises look to enhance productivity through automating inventory, accounting and other functions

Industry Developments

The government is rolling out new e-learning initiatives, which could see Education’s share of the local

IT spending rise from its estimated level of around 4% The current ratio of PCs to students in public schools is around 1:3200 and the government wants to increase this to 1:20 As there are 53mn students in Indonesia’s schools system, this would require at least 2.5mn computers

There has been some progress in e-government in recent years, but a lack of interoperability among institutions has been identified as a weakness The national government has promoted a policy of

adopting open source software to save costs, and distributed some software for free In addition, there have been a number of pan-departmental initiatives

In 2008 Indonesia’s state enterprises ministry launched an e-procurement system which will standardise procurement in 25 state-owned companies The companies include some of the largest in Indonesia, such

as oil and gas company PT Pentamina and electricity firm PT PLN The new system is expected to be

live by the end of the year

Competitive Landscape

International vendors dominate the Indonesian brand PC market, with Acer the leader in the notebook sector and HP the overall leader A number of local PC and notebooks brands also enjoy increasing success, including Zyrex and Ion In 2008 Dell, the leading desktop supplier in the government and big

corporate segments with around a 12% share, rolled out a new strategy to target Indonesia’s consumers Dell introduced new products and added new channel partners such as its new partnership with retail

network Metrodata

Market leader Microsoft Indonesia reported a 30% year-on-year rise in revenues in its fiscal year 2008,

well above the company’s global average of 18% Microsoft has recently been involved in IT for

Education initiatives, announcing a cooperation with telecoms company PT Telkom and local software company PT Pesona Edukasi on an educational software development program

Meanwhile in the enterprise applications segment, leading global vendor SAP has said that it was

optimistic that it could maintain its recent 60% annual growth momentum in Indonesia, despite the global economic slowdown In 2008 the company predicted that it would surpass the 90 contracts secured in

2007 However, it admitted that most growth potential currently would come from up-selling to existing customers

Computer Sales

Hardware accounts for more than 70% of Indonesia IT spending Computer sales (including notebooks

and peripherals) will be worth nearly US$2.2bn in calendar year 2009, according to BMI estimates, up

from US$1.9bn in 2008 Growth slowed a bit in 2008 and is seen as easing further in 2009 before ticking

up again in 2010 Spending on IT hardware is likely to slow from some organisations, particularly in the financial sector, or amid trading companies with exposure to export markets affected by the global

economic slowdown However the low levels of computer penetration in both consumer and

manufacturing segments mean that there is still plenty of momentum for growth

Software

For 2009, software sales are projected by BMI at US$114mn, up from an estimated US$113mn in 2008,

despite the continuing piracy problem, which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year Indonesia is currently ranked as the country with the fourth-highest level of software piracy in the world, at around 88% Given these developments, over the 2008 2013 period, software sector CAGR is forecast at 14% Application software accounts for more

IT Services

Indonesia’s IT services market is expected to be worth US$635mn in 2009, recording y-o-y growth of

15% from US$564mn in 2008, based on BMI estimates Hardware deployment services remain the

largest Indonesian IT services category, with approximately a 20% share Currently, opportunities are mainly in fundamental services such as system integration, support systems, training, professional

services, outsourcing and internet services Sector CAGR over the 2008-2013 period is expected to be around 13%

E-Readiness

Only about 18% of Indonesians have internet access currently, translating into around 41mn users Low telephone line density, high charges and low PC penetration are all significant obstacles However, the picture is not all bad, as there are signs of faster growth in user numbers, and recent surveys have shown that among a very small elite, there is fast adoption (by regional standards) of broadband and a

willingness to pay for video conferencing, security and other additional features BMI estimated that

there were around 1.4mn broadband users in 2007, representing a 0.6% penetration rate The government

is encouraging fixed wireless deployments, including WiMax, to bring internet to more remote areas

The government is rolling out an internet-based National Education Network, which involves 1,000 network points in five clusters nationwide and is designed to facilitate the use of internet in schools Despite some advances in e-education, constraints remain due to poor infrastructure and lack of public awareness in a country where only 20mn people own fixed-line telephones

SWOT Analysis

Indonesia IT Sector SWOT

Strengths ! Large potential market

! Market may be entering faster growth stage; forecast to grow faster than most other ASEAN markets over the review period, due to currently underdeveloped nature

Weaknesses ! Computer penetration among the lowest in South East Asia, estimated at only

around 1.5%

! Underdeveloped telecommunications infrastructure, due to years of government control and slow progress in deregulation

! Lack of government support Still no unified ICT ministry

! History of recent political instability

! Legal concerns such as intellectual property rights a deterrent to foreign investment

Opportunities ! Some positive trends: computer ownership and internet access is on the rise, and

government is showing signs of taking intellectual property more seriously

! Per-capita IT spending to increase by 50% between 2008 and 2013

! Opportunities exist in services such as system integration, support systems, training, professional services, outsourcing and internet services

! Computer sales predicted to show faster growth than almost anywhere in ASEAN over the next few years, although from a lower base

Threats ! Continuing lack of government action to support increased PC penetration and

internet access, and drive ICT sector development

! Global economic slowdown may hit key demand segments, including Banks

Indonesia Telecoms Sector SWOT

Strengths ! Fast growing mobile sector due to the emergence of greater competition

! Presence of key strategic investors including SingTel, ST Telemedia of Singapore, Telekom Malaysia and Maxis of Malaysia, Hong Kong’s Hutchison, UAE’s Etisalat

! Increased competition in fixed wireless market following the award of nationwide licences to Bakrie and Mobile-8

Weaknesses ! Security and corruption issues still make Indonesia a risky investment climate

! Geographical nature (densely forested archipelago) makes nationwide network coverage highly difficult

! Low teledensity rates, especially in the fixed-line sector

! Operators struggling with raised costs after the government forced companies to charge a fee based on costs rather than share part of their revenues

Opportunities ! Mobile market to surge over the coming years, reaching nearly 282mn in 2012

! Popularity of mobile value-added/data services offers potential to international content providers

! Growth of 3G telephony to show opportunities for content providers and distributors

Threats ! Government registration scheme did lead to short-term fall in fixed wireless, and

mobile users as non-registrants are deactivated

! Dominance of prepaid market leading to falling ARPU rates

! Cellcos could put too much emphasis on 3G mobile network expansion when consumer demand is unproven at the expense of 2G growth

Indonesia Business Environment SWOT

Strengths ! Indonesia is South East Asia's largest economy with a nominal GDP of US$450bn,

and is the world's fourth-most populous country with almost 240mn people It thus offers investors a vast home market in which to do business

! Indonesia is also a founding member of the Association of South East Asian Nations (ASEAN) As a member of ASEAN's Free Trade Area (AFTA), Indonesia is committed to lowering tariff and non-tariff barriers to trade

Weaknesses ! Corruption remains a major problem Indonesia ranked 126th out of 180 countries

surveyed in Transparency International's 2008 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption

! Indonesia's excessive bureaucracy makes it a difficult place to do business

Among Asian economies, Indonesia has the longest period (105 days) to start a business Labour laws are also considered excessive

Opportunities ! The Yudhoyono administration has gradually been reforming the business

environment, particularly by strengthening the legal system and fighting corruption

If sustained, this would boost investor interest in Indonesia

! Indonesia has been amending its debt and banking regulations in early 2008, with the aim of attracting Islamic financial activities

Threats ! Recent high-level business disputes between the government and foreign investors

demonstrate that even after investments become up-and-running, there is still scope for legal problems or obstacles posed by legal wrangling

! Security threats are a concern for investors Despite several of its top leaders having been arrested in recent years, Jemaah Islamiah, the radical Islamist militant group blamed for the Bali bombings, remains active There is also a low-level threat from separatist rebels or from inter-communal tensions

Indonesia Political SWOT

Strengths ! Indonesia managed a successful transition to democracy in 2004 If the 2009

parliamentary and presidential elections pass peacefully, this would signal a relatively smooth path as far as democratic consolidation is concerned

! The military's role in politics has gradually been reduced The prospects of a military coup – which seemed a real possibility in the late 1990s and early 2000s – have diminished substantially

Weaknesses ! Indonesia's domestic political scene is characterised by a proliferation of minority

parties, and formal and informal coalitions are necessary to govern and legislate Moreover, the efficiency of state institutions is encumbered by bureaucracy and corruption

! Indonesia's cultural and ethnic diversity saw the archipelago wracked by separatist rebellion and ethnic violence in the early 2000s, which have only recently been brought to heel In the event of a new economic crisis, calls for regional secession could re-emerge

Opportunities ! Susilo Bambang Yudhoyono's victory in the 2004 presidential election has led to a

much stronger political commitment to open and accountable government, and has supported Indonesia's foreign policy co-operation with the rest of the world at a time when extremism has been on the rise

! Indonesia's status as the world's most populous Muslim country leaves it well positioned to speak out on global Islamic issues, and act as a bridge between the Middle East and the Asia-Pacific region

Threats ! Regional militant group Jemaah Islamiah (JI) poses a lingering threat to security in

Indonesia JI is blamed for a series of attacks, including the Bali bombings of October 2002 and other such incidents, including in Jakarta

! The fact that Indonesia subsidises basic goods means that when the government raises prices, there is a risk of public unrest, or at least a political backlash

Indonesia Economic SWOT

Strengths ! Indonesia's strategic location between the Indian and Pacific Oceans and its

adjacency to major East-West trade routes make it an important regional economy

! Indonesia has a cheap and large supply of available labour resources

Weaknesses ! Indonesia's economy is not growing fast enough to reduce joblessness Around

8.5% of the country's 111.5mn-strong workforce were unemployed in February

2008, according to official figures Many are forced to work in the informal sector

! Indonesia's physical infrastructure is considered substandard The archipelagic nature of the country makes it difficult to weave national infrastructure together

Opportunities ! Indonesia could attract much-needed foreign investment by strengthening its

business environment, particularly through reform of its unreliable legal system

! Indonesia stands to benefit from the rise of Islamic financing, having adopted new legislation in early 2008 designed to tap into this rapidly expanding sphere

Threats ! Production at Indonesia's ageing oil fields has been in decline since the mid-1990s

Thus, the country has 'temporarily' become a net importer of crude oil for months at

a time in recent years This poses a clear risk to the current account position

! Indonesia is perceived as one of Asia's riskier destinations This leaves the economy vulnerable to sudden capital outflows at times of risk aversion, which can lead to sharp swings in the currency

Asia Regional IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will drive

increases in PC penetration during BMI’s

forecast period, to 2012 While some

cities and regions stand out, there is a

general pattern of unbalanced regional

development, with PC penetration in

countries like Singapore above 50%,

while in other countries, for example

Indonesia, it is less than 2%

The two giants of the region, China and

India, embody the IT market’s growth

potential, as computer ownership remains

the preserve of a minority In China, PC penetration was only around 14% in 2007 but is expected to double to around 24% by 2012 Much of the growth will come from smaller towns and rural areas, while penetration is considerably higher in cities such as Shanghai In India, less than 2% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased PC ownerships

Elsewhere in the region, in countries such

as Indonesia and the Philippines,

affordable computer programmes are

finding favour with governments In the

Philippines, where penetration is

currently around 5%, the government

launched a new PC4All programme in

2007 In Indonesia, penetration of around

2% could double by 2012 if government

initiatives are followed through

A similar broad range is found with

internet penetration India and Indonesia

Internet Penetration

(per 100 population)

0 10 20 30 40 50 60 70 80 90 100

e/f = estimate/forecast Source: BMI

Broadband Penetration

(per 100 population)

0 5 10 15 20 25 30 35 40

e/f = estimate/forecast Source: BMI

now both have above 13% penetration, despite a lack of fixed-line infrastructure in those countries Both have deployed fixed wireless technologies as one alternative solution, and overall penetration should pass 30% in both by 2012 The fastest growth is projected for India

Singapore should also see strong

momentum, and is projected to record

more than 90% internet penetration by

2012 This is due partly to the Infocomm

Development Authority (IDA)’s

ambitious ‘Intelligent Nation’ initiative

Across the region, government

programmes are an important driver of

ICT penetration The Chinese

government has a five-year plan to make

the internet available in every

administrative village in central and

eastern China, and every township in the

Hong Kong India Indonesia Malaysia Philippines Singapore

e = estimate Source: BMI

Market Growth And Drivers

Through much of the region, government

programmes to deepen and broaden ICT

access in under-penetrated regions and

demographics are among the factors

driving market growth Other factors

include cheaper PCs, and reform in

sectors such as telecommunications and

finance, and well as generally favourable

economic prospects

In China, BMI expects IT market growth

to be maintained by an expansion into

Western China, rural areas and lower-tier

cities, as well as growing more demand from SMEs Sectors driving double-digit IT spending growth currently include telecoms, finance, government, energy, education and transport IT spending will also receive a boost from IT projects associated with the 2008 Beijing Olympics and the Shanghai World Expo in 2010

In India, market drivers include the government’s ambitions to connect the vast rural areas to the outside world, coupled with falling computer prices The average price of a PC has nearly halved over the past few years to less than US$250, partly thanks to tax incentives for local manufacturers India’s BPO industry is growing at around 40% per annum and will continue to generate opportunities for vendors of

IT products and services

IT Market Sizes As % Of National GDPs

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Source: BMI

As mentioned above, the Philippines is

one of the countries currently benefiting

from low price PC programmes

(PC4ALL), which provide opportunities

for vendors to penetrate the low-income

segments Other regional computer sale

drivers over the forecast period include

education, lower prices, IP telephony,

cheaper processors, and notebook

entertainment and wireless networking

features

In more developed markets, such as Hong

Kong and Singapore, demand for PCs has

generally exceeded analysts’ expectations in recent quarters, despite the adverse global economic

situation The Singaporean government has continued to be a major source of IT spending in 2008, with the US$1.3bn Standard Operating Environment tender award Spending by SMEs is also on the rise in both Hong Kong and Singapore, and will account for up to 40% of IT spending during the forecast period

The largest IT market in the region is, unsurprisingly, China, estimated at US$57.8bn in 2007, trailed distantly by India (US$12.8bn) and Singapore (US$4.1bn) Singapore’s IT market (including

communications) is the largest as a proportion of national GDP (2.8%) followed by Malaysia (2.2%)

The fastest-growing IT market over the forecast period looks set to be India with 2007-2012 compound growth of 84%, taking first place due largely to low PC penetration China is second, with the IT market growing by an estimated 75% over the forecast period

Sectors And Verticals

Regional IT markets will remain hardware-centric, with hardware accounting for between 45% and 69%

of the total spending in all markets However, spending on software and services will grow faster

Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more features

IT Markets’ Compound Growth

2006-2011 (%)

0 20 40 60 80 100 China

Hong Kong India Indonesia Malaysia Philippines Singapore

Source: BMI

In both emerging and more mature

markets the growing popularity of

broadband will help to support computer

sales China Telecom is among regional

telecoms companies to have rolled PC

bundling offers as part of its broadband

packages Telecom providers such as

PCCW in Hong Kong continue to launch

new bandwidth-greedy applications that

fuel demand for new desktop and

notebook computers

In much of emerging Asia, smaller towns

and rural areas will provide the main

source of growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period SME demand for servers and networking equipment provides a significant growth opportunity

Due in part to high levels of piracy,

software’s share of IT spending is

relatively low, ranging from 11% to 25%

among countries covered by BMI

Efforts are being made to tackle the issue

of piracy, but despite government

crackdowns in countries in China and the

Philippines, software piracy remains

above 70% in most of emerging Asia

Previously most SMEs in the region tend

not to pay enough attention to software

However, there is a growing trend for

smaller companies to seek greater

efficiency by using IT to improve productivity and reduce costs, including labour costs The mid-market business has therefore become a key driver for most vendors’ overall business growth

In general, regional markets are evolving from an emphasis on basic enterprise resource planning (ERP) applications, to more strategic modules such as customer relationship management (CRM) and business

Market Structure

2006 (% of total IT market)

2006

0 20 40 60 80 100 120

f = forecast Source: BMI

analytics The financial sector is expected to be a major spender in the forecast period, particularly in Hong Kong as the territory looks to defend its financial hub status

The IT services segment accounts for between 15% and 40% of spending in the Asian markets covered by

BMI Main spenders across the region include banks and financial institutions and governments Even in

emerging markets like India, IT vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

Regionally, hardware deployment services remain the largest IT services category, with other

fundamental services including system integration, support systems, training, professional services, outsourcing and internet services

In many countries, the number and size of local outsourcing deals is increasing Outsourcing could account for as much as 30% of China’s IT services spending by 2012, while in India there have been

some large contracts such as that awarded by Idea Telecom to IBM Singapore, where the government is

to tender a major outsourcing contract this year, and Hong Kong, have both seen a trend towards larger outsourcing projects in the public and private sectors

IT Business Environment Rating

BMI’s new Asia IT Business Environment Ratings compare the potential of a selection of the region’s

markets over our forecast period, through to 2013 The Ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government spending projects

In 2008 the global economic slowdown had a marked but varied impact across Asian IT markets, with spending declining sharply in some states like Malaysia, but holding up relatively well in others like Hong Kong The more mature IT markets of Singapore and Hong Kong take the top two spots in our Q109 rankings table, due primarily to their high country structure scores Both of the two regional giants, China and India, saw dips in consumer IT spending in Q208, but both have strong market drivers which should ensure continued growth

Malaysian IT spending felt perhaps the biggest impact from the global economic headwinds, with a number of government projects postponed However, IT spending in the country will benefit from

broadband rollouts and a new SME modernisation fund In the Philippines IT spending was relatively robust in 2008 and despite some downside risks, the IT market will be driven by further growth in IT and business process outsourcing (BPO) Bringing up the field, Indonesia has vast potential, but there were signs in 2008 of a number of organisations cutting IT budgets, particularly in the large financial vertical

Singapore and Hong Kong are relatively small IT markets, but each has a strong fundamental driver which provides some relative immunity against current economic trends Hong Kong continues to offer investors in the IT field opportunities associated with its co-operation with China Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious ‘Intelligent Nation 2015’ plan and the Standard Operating Environment Country risks are judged as low in both markets, reflecting generally good regulatory and market environments

On the downside, the continued restructuring of both economies to a more service-oriented economic model may limit long-term growth prospects, although this also brings opportunities in sectors such as financial services and banking These markets remain vulnerable to current global economic trends as export demand weakens and high inflation dampens consumer confidence The turmoil in financial markets may affect the important banking vertical in both markets, with heavy job cuts already

announced For these reasons, Singapore and Hong Kong will face a challenge to their positions in our regional rankings in future quarters

In China, there were also signs in 2008 of PC sales growth slowing, but the fundamentals of rising

incomes and low PC penetration support continued expansion The market has benefited from major IT projects associated with the 2008 Beijing Olympics and the Shanghai World Expo in 2010 Major sectors driving double-digit IT spending growth currently include telecoms, government, energy, social security, education and transport However, there are still risks associated with IP rights protection and piracy, and

a lack of business environment transparency Pressure on hardware prices is also a risk

Both Malaysia and the Philippines have strong growth potential, which the governments of both states are determined to maximise through a number of initiatives In Malaysia, greater affordability should support growing consumer PC demand in Malaysia, and the subsidised rollout of a high-speed broadband network will address a relative lack of information and communication technology (ICT) infrastructure outside the Klang Valley The Philippines is set to be a high growth market, and remains a favoured destination for BPO operations Government spending should also be a driver However, there are risks in the strong peso, and challenges such as labour shortages and rising wages

IT market growth dipped in India in H208, with sales of both desktops and notebooks down, and key financial sector outsourcing clients caught up in the financial crisis However, the potential of the market

is plain, with less than 2% of the population owning a computer, about one fifth the level in China Similarly, with ICT penetration of only around 20% and development restricted to richer areas such as Java, the Indonesian IT market has much latent growth potential

Table: Asia IT Business Environment Ratings

Limits of potential returns Risks to realisation of returns

IT market

Country structure Limits

Market risks

Country risk Risks

IT rating

Regional ranking

Scores out of 100, with 100 the highest The IT Business Environment Rating is the principal rating It comprises

two sub-ratings: 'Limits of potential returns' and 'Risks to realisation of returns', which have a 70% and 30%

weighting, respectively In turn, the 'Limits' rating comprises 'IT market' and 'Country structure', which have a

70% and 30% weighting, respectively, and are based on the growth/size/maturity of the IT industry and

government policy towards the industry (Market) and the broader economic/socio-demographic environment

(Country) The 'Risks' rating comprises 'Market risks' and 'Country risk', which have a 40% and 60% weighting,

respectively, and are based on a subjective evaluation of industry's regulatory and IP regulations (Market) and its

broader risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings The ratings structure

is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to

enable clients to consider each rating individually or as a composite For a list of the data/indicators used, please

consult the appendix at the end of the report Source: BMI

community and IT associations, as well as government

Other relevant government bodies and ministers include:

Key Ministers

Key Departments

Badan Koordinasi Penanaman Modal (BKPM) State Ministry for Investment/Investment Co-ordinating Board

Badan Pengkajian dan Penerapan Tehnologi (BPPT)

State Ministry for Research and Technology / Agency for the Assessment and Application of Technology

Departemen Perindustrian dan Perdagangan

History And Market Structure

an obligation to universal service, but in reality there is a considerable challenge in providing connections given the geographically dispersed nature of Indonesia’s population and challenging terrain

The local computer hardware market enjoyed a growth rate of 15-20% per year during the 1990s, with several foreign computer companies establishing production plants in Indonesia, and substantial imports, despite a competitive market for locally assembled personal computers At the height of the 1990s boom, the government established Bandung High-Tech Valley (BDHT), located a few hours outside Jakarta The valley is an important centre for telecommunications and engineering, in addition to being home to several universities

Bandung Hi-Tech Valley SWOT

Strengths ! Many top universities, research centres, tech-related corporations

! More than 500,000 hi-tech workers

! Some tax incentives

! Weak telecommunications infrastructure

! No international airport

Opportunities ! Fast-growing number of small start-up companies

! Government talking of new package to attract investors and cut red tape

Threats ! Competition from other ‘silicon valleys’ in the region, e.g Malaysia MSC, and

even from within Indonesia (e.g Bali Camp)

The financial crisis of 1997 – which saw a 70% fall in the value of the rupiah against the US dollar, alongside other far-reaching economic and political consequences – had a large impact on the IT market Several multinationals withdrew credit from local distributors, and there was some cancellation of

by the lack of a dedicated IT ministry Programmes to widen computer ownership and internet access have been modest in scale and lacking in effect, compared to elsewhere in the region, and it remains to be seen whether this may change with the new government Legal issues such as intellectual property rights

have also been a barrier to foreign investment Furthermore, the software piracy rate remains among the highest in the world

Hardware

Hardware accounts for more than 70% of Indonesia IT spending Computer sales (including notebooks

and peripherals) will be worth nearly US$2.2bn in calendar year 2009, according to BMI estimates, up

from US$1.9bn in 2008 Growth slowed a bit in 2008 and is seen as easing further in 2009 before ticking

up again in 2010

Spending on IT hardware is likely to slow from some organisations, particularly in the financial sector, or amid trading companies with exposure to export markets affected by the global economic slowdown However the low levels of computer penetration in both consumer and manufacturing segments mean that there is still plenty of momentum for growth

The main drivers are growing affordability and more credit availability Prices of both notebooks and desktops are falling, with desktop prices now as low as US$400, while notebooks start from around US$700 Notebooks are now growing faster than the PC market as a whole Demand for notebooks is being driven by lower prices as well as smaller and lighter form factors and entertainment and wireless networking features Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in data centres

While the consumer segment is only around one quarter of the whole, it is growing fast and has become a

growing focus of attention for some vendors, including Lenovo and Dell Around one third of the market

is accounted for by non-branded, locally assembled PCs HP is the brand leader with around 15%,

followed by Acer with around 10% Acer is the leader in the notebook segment

Table: Computer Spending By Sector, 2007 Estimate

Locally assembled computers were about 60% of the total, even though imported components face tariffs ranging between 5% and 20%, which pre-assembled computers escape There have been calls for the components tariff to be abolished

While the consumer market is growing, the business sector looks set to continue to account for around two-thirds of sales opportunities during the forecast period Government spending remains relatively small compared with regional neighbours such as Singapore and India Education provides a small, but steadily growing, source of demand, accounting for 3-4% of sales, and this could grow with the

government targeting the purchase of 2.5mn computers

Software

For 2009, software sales are projected by BMI at US$114mn, up from an estimated US$113mn in 2008,

despite the continuing piracy problem, which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year Indonesia is currently ranked as the country with the fourth-highest level of software piracy in the world, at around 88%

Given these developments, over the 2008 2013 period, software sector CAGR is forecast at 14%

Application software accounts for more than 40% of the total software market currently, and is the largest portion, followed by systems infrastructure Within the applications segment, the single largest segment is back-office applications, accounting for around two-thirds of sales

Inventory is an entry-point applications for many businesses, but the market is evolving from an emphasis

on basic ERP software focused on operational efficiency, to more strategic modules such as CRM,

business analytics and risk compliance

Under the current agreement between the government and Microsoft (which has 90% of the operating

system and office software market in the country), the government reportedly agreed to purchase 35,496 licensed copies of the MS Windows operating system and 117,480 copies of the MS Office package for a total price of around US$41.9mn

However, the deal has attracted growing criticism from the Open Source lobby in Indonesia, which claimed that the MoU serves as a barrier to entry to software producers other than Microsoft and impedes the development of the domestic software industry A number of government departments already use open source systems

Data from the Indonesian Telematics Software Association (Aspiluki) suggested that 60% of software in use in Indonesia – including in the government sector – is sourced from foreign producers

Services

Indonesia’s IT services market is expected to be worth US$635mn in 2009, recording y-o-y growth of

15% from US$564mn in 2008, based on BMI estimates Currently, IT services account for only 17% of

Indonesia’s hardware-centric IT market sales Hardware deployment services remains the largest

Indonesia IT services category, with approximately a 20% share Growth opportunities are mainly in fundamental services such as system integration, support systems, training, professional services,

outsourcing and internet services Sector CAGR over the 2005-2010 period is expected to be around 13%

End Users

The Indonesian IT market is dominated by two verticals, financial services and banking, and telecoms, which together account for around 50% of spending Banking as a whole is emerging as the single most important vertical, accounting for around 30% of IT spending, followed by telecoms and the government

Government spending remains relatively small compared with regional neighbours such as Singapore and India The education sector provides a small, but steadily growing, source of demand, accounting for 3-4% of sales, and this could increase (see Industry Developments),

The consumer segment is growing, but the business sector looks set to continue to account for more than 70% of sales opportunities during the forecast period Vendors are also increasingly eying the SME opportunity

Special Focus – Banks

The Indonesian Software Association has estimated that the banking sector may spend over US$1.05bn

on ICT in 2008, accounting for as much as 30% of spending by some estimates In recent years banking has emerged as one of the key IT market sectors, and the Indonesian Federation of Private Domestic Banks (Perbanas) forecast spending of around US$1.47bn last year

Bank IT spending is increasingly dominated by the group of 10 largest banks, such as PT Bank Mandiri, Bank Central Asia, Bank Negra Indonesia, etc These collectively account for an estimated US$630mn

of spending If anything, this dominance is predicted to increase over the next few years, with Bank Panin, one of the 10, recently announcing that it had a budget of US$30mn for IT last year By contrast, the remaining medium and small banks are likely delay spending as they await regulation of Bank

The Banking Industry has become highly concerned with DRC services – such a service was deemed

mandatory by Central Bank of Indonesia To a lesser extent there is also demand from telecoms

operators

In the last couple of years, Islamic Banking has been accounting for an increasing share of the Banking IT spend, as an increasing number of the local population and businesses choose to do business with banking institutions that comply to the principles of Islamic Banking The increasing opportunity presented by

Islamic banking in Indonesia was highlighted last year by the news that PT Bank IFI is converting to be

a Sharia bank One local company which has develop an expertise in this area has been Sigma, which has developed its Sigma SHARIAH product, a core banking system marketed as following the principles of Islamic banking

SMEs

Enterprises account for 70-80% of all sales in the country, while SMEs make up more than 90% of businesses Total annual spending by SMEs on ICT has been estimated to be as high as US$7bn, although this includes telecommunications and internet costs However, IT spending has been growing at a double digit rate over the past few years, and is expected by vendors to accelerate in 2008

Around 50% of Indonesian SMEs are start-ups or have less than five employees, but many are

considering expansion This will be a driver for IT spending, with firms looking to connect branch

offices There is also more interest in basic security solutions

Industry Developments

E-Government

Indonesia’s state enterprises ministry is rolling-out an e-procurement system that will standardise

procurement in 25 state-owned companies The companies include some of the largest in Indonesia, such

as oil and gas company PT Pentamina and electricity firm PT PLN The purpose of the move to

e-procurement is to promote transparency in tenders The new system, which was expected to be live by the end of 2008, will enable all parties to monitor all information on tender processes The government is also planning revision of the Law on Goods and Services Procurement to reflect the changes

There has been some progress in e-government in recent years, but a lack of interoperability among institutions has been identified as a weakness Djoko Agung Harijadi, e-government director at the Department of Communications and Informatics, said recently each government institution was busy developing its own platforms in isolation His comments echoed the appraisal by the latest UN e-

government survey, which ranked Indonesia a lowly 106th on this indicator The government has said that