Indonesia information technology report q1 2011

Executive Summary The Indonesian IT market should grow at a compound annual growth rate CAGR of 17% over the 2011-2015 period, with a revival in business spending building on momentum fr

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TECHNOLOGY REPORT Q1 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT SWOT 8

Indonesia Telecoms SWOT 9

Indonesia Political SWOT 10

Indonesia Economic SWOT 11

Indonesia Business Environment SWOT 12

IT Business Environment Ratings 13

Asia 13

Table: Regional IT Business Environment Ratings 13

Asia IT Markets Overview 17

Indonesia Market Overview 23

Government Authority 23

Table: Key Ministers And Departments 23

Background 24

Table: Bandung High-Tech Valley SWOT 24

Hardware 25

Table: Computer Spending By Sector, 2007e 27

Software 28

Industry Developments 32

Industry Forecast Scenario 35

Table: Indonesian IT Industry, 2006-2015 (US$mn Unless Otherwise Stated) 37

Country Context 38

Table: Consumer Expenditure, 2000-2010 (US$) 38

Table: Rural & Urban Breakdown, 2005-2030 38

Internet 39

Table: Telecoms Sector – Internet – Historical Data & Forecasts, 2008-2015 39

Macroeconomic Forecast 41

Table: Indonesia – Economic Activity, 2008-2015 43

Competitive Landscape 44

Hardware 44

Software 47

IT Services 48

Internet Competitive Landscape 49

Company Profiles 50

IBM Indonesia 50

Oracle 51

Sigma 52

HP 53

Country Snapshot: Indonesia Demographic Data 54

Section 1: Population 54

Table: Demographic Indicators, 2005-2030 54

Table: Rural/Urban Breakdown, 2005-2030 55

Section 2: Education And Healthcare 55

Table: Education, 2000-2005 55

Table: Vital Statistics, 2005-2030 55

Section 3: Labour Market And Spending Power 56

Table: Employment Indicators, 2001-2006 56

Table: Consumer Expenditure, 2000-2010 (US$) 56

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 57

BMI Methodology 58

How We Generate Our Industry Forecasts 58

IT Industry 58

IT Ratings – Methodology 59

Table: IT Business Environment Indicators 60

Weighting 61

Table: Weighting Of Components 61

Sources 61

Executive Summary

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of 17% over the

2011-2015 period, with a revival in business spending building on momentum from consumer spending in

2010 In 2010, demand for IT products and services recorded double-digit growth, after some

manufacturing organisations had deferred IT procurements in 2009 There was continued spending in the financial sector, which previously accounted for as much as 30% of total spending

Indonesia is expected to be one of the best regional IT market growth prospects over BMI’s five-year

forecast period IT spending is forecast to increase to US$5.1bn in 2011, up from US$4.5bn in 2010 Some fundamental drivers, including low computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory Growing investment in data centres and other ICT infrastructure will drive demand for IT services

By 2015, Indonesia’s hardware-dominated IT market is projected to reach a value of US$9.6bn With information and communication technology (ICT) penetration of around just 20% and development restricted to richer areas such as Java, the market has much growth potential However, the country’s uneven development and digital divide are major barriers to faster growth in this potentially huge IT market

Industry Developments

In 2010, Indonesia’s information society development received a boost when the government said that the immigration office would start to introduce e-passports Indonesia will thus follow in the footsteps of other South East Asian countries like Singapore, Malaysia and Thailand The immigration department plans to distribute 10,000 e-passports in the first phase, with these being mainly available in immigration offices in Jakarta, Semarang and Surabaya

In April 2010, the government said it was ready to eliminate duties on PC components in a bid to assist the local PC industry Nearly all PC components, such as motherboards and graphic cards, used by the industry are imported, which means manufacturers have to pay import duties

The government is rolling out e-learning initiatives, which could cause education’s share of local IT spending to rise from its estimated level of around 4% The ratio of PCs-to-students in public schools is around 1:3,200 The government wants to increase this to 1:20 As there are 53mn students in the

Indonesian schools system, this would require at least 2.5mn computers

Competitive Landscape

PC market leader Acer was targeting an increased share of the Indonesian PC market in 2010 Indonesia

has already become Acer’s largest South East Asian PC market, surpassing Thailand and Malaysia Meanwhile Lenovo, the bestselling computer vendor in the Asia region, announced plans to set up a new subsidiary in Indonesia

The next few years should feature a shift away from packaged proprietary software towards other models,

such as cloud computing Microsoft Indonesia has reported that cloud computing accounts for around 20% of its local revenues and had been growing at about 50% per year In 2010, Telkom partnered with

Microsoft to launch cloud computing services which target SMEs with applications for tax and finance

IT service vendors have reported a growing demand in the telecoms, manufacturing and banking sectors

Oracle has an agreement with local IT solutions provider PT Sigma Cipta Caraka to provide

outsourcing services E-government is also being looked at by IT service vendors as a potential growth

area Tata Consultancy Services (TCS) said it has targeted the government as a future growth driver in

the Indonesian market TCS’ 15 local clients to date are mainly from sectors such as banking, financial services, telecoms and media

Hardware

BMI estimates 2010 Indonesian computer hardware spending of US$3.6bn, up from US$3.2bn in 2010

The market is forecast to return to double-digit growth this year and to rise to a value of US$6.5bn by

2015 In 2010, consumer demand was reinforced by a revival in business IT hardware spending, which could account for about two-thirds of sales opportunities during the forecast period, with sales value doubling by 2015

Hardware accounts for more than 70% of Indonesian IT spending The main drivers are growing

affordability and more credit availability in a country where only about 10% of the population have access to a PC, compared with more than 30% in some other South East Asian countries such as Malaysia

or Thailand

Software

Indonesia’s software sales are forecast by BMI to reach US$636mn in 2010, up from an estimated

US$535mn in 2010 During BMI’s five-year forecast period to 2015, the software sector CAGR is

forecast at 20% In 2011, migrations to Microsoft’s new Windows 7 operating system should remain a driver, although much will depend on consumer and business confidence One market inhibitor is the continuing software piracy problem, which according to the government’s own figures loses Indonesian software companies more than US$100mn per year

Over the forecast period, enterprise resource planning (ERP) software should continue to be of most interest to small- and medium-sized enterprises (SMEs) as only around 20% of Indonesian SMEs are estimated to make use of IT In addition to cost savings, businesses will look to boost efficiency

and increase the flexibility of responses to customer needs

IT Services

Indonesia’s IT services market is forecast to be worth US$898mn in 2011, recording double-digit growth

from US$769mn in 2010, based on BMI estimates IT services account for 17% of Indonesia’s

hardware-centric IT market sales Hardware deployment services remain the largest Indonesian IT services category with a 20% market share

In 2009, the banking sector still provided opportunities for IT vendors, despite the fallout from the global financial crisis Banks continued with transformation strategies, driven by factors such as new

technologies and services and regulatory compliance However, most opportunities are in fundamental service areas such as system integration, support systems, training, professional services, outsourcing and internet services

E-Readiness

Low telephone line density, high charges and low PC penetration are all significant obstacles to higher internet penetration However, the situation is not all bad, with 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 The government is encouraging fixed wireless deployments, including WiMAX, to bring the internet to more remote areas

The government is also rolling out an internet-based National Education Network, which involves 1,000 network points in five clusters nationwide, designed to facilitate the use of the internet in schools Despite some advances in e-education, constraints remain due to poor infrastructure and a lack of public

awareness in a country where only 20mn people own fixed-line telephones

SWOT Analysis

Indonesia IT SWOT

Strengths ƒ Large potential market

ƒ The market may be entering a faster growth stage It is forecast to grow quicker than most other Association of Southeast Asian Nations (ASEAN) markets over the forecast period to 2014 due to its underdeveloped nature

Weaknesses ƒ Computer penetration is among the lowest in South East Asia, estimated at only 1.5%

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

ƒ Lack of government support and there is still no unified ICT ministry

ƒ History of recent political instability

ƒ Legal concerns, such as intellectual property rights, are a deterrent to foreign direct investment

Opportunities ƒ Some positive trends: computer ownership and internet access are on the rise and the

government is showing signs of taking intellectual property more seriously

ƒ Per capita IT spending to increase by 50% over 2010-2014

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

ƒ Computer sales are predicted to grow faster than almost anywhere else in the ASEAN over the next few years, although from a lower base

ƒ

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

internet access, or drive ICT sector development

ƒ The global economic slowdown may hit key demand segments

Indonesia Telecoms SWOT

Strengths ƒ A rapidly growing mobile sector due to the emergence of greater competition.

ƒ The presence of key strategic investors, including SingTel, ST Telemedia of Singapore, Telekom Malaysia, Maxis of Malaysia, Hong Kong’s Hutchison and the UAE’s Etisalat

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

ƒ Limited mobile spectrum due to overcrowding in the sector following the government decision to open the market to greater competition.

ƒ Mobile broadband spectrum fees remain high for operators, reducing the implementation and variety of tariffs.

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

Opportunities ƒ The mobile market expected to surge over the coming years, reaching nearly 431mn

people over the forecast period.

ƒ The popularity of mobile value-added/data services offers potential to international content providers.

ƒ The growth of 3G will lead to investment opportunities for content providers and distributors

Threats ƒ A government registration scheme could lead to short-term fall in fixed wireless and

mobile users as non-registrants are deactivated.

ƒ The dominance of the prepaid market leading to falling average revenue per user rates.

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

Indonesia Political SWOT

Strengths ƒ Indonesia managed a successful transition to democracy in 2004 In addition, the

2009 parliamentary and presidential elections passed by peacefully, signaling the consolidation of the democratic process

ƒ 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 ƒ 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

ƒ Indonesia’s cultural and ethnic diversity saw the archipelago wracked by separatist rebellion and ethnic violence in the late 1990s and early 2000s, which took great efforts to bring to heel In the event of a new economic crisis, calls for regional secession could re-emerge

Opportunities ƒ President Susilo Bambang Yudhoyono’s Democratic Party had a strong showing in

the 2009 parliamentary elections Coupled with a strong mandate following his election in the same year, the implementation of policies in the legislature should potentially become less problematic

re-ƒ 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 ƒ 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 the Jakarta bombings of July 2009

ƒ 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 ƒ Indonesia’s strategic location between the Indian and Pacific Oceans and its

adjacency to major East-West trade routes make it an important economy in the region

ƒ Indonesia has a low cost and large supply of available labour resources

Weaknesses ƒ Indonesia’s economy is not growing fast enough to reduce joblessness Although

unemployment has been decreasing, the unemployment rate is still relatively high,

at 7.1% in February 2010 Many are forced to work in the informal sector

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

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

business environment, particularly through reform of its unreliable legal system

ƒ 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 ƒ Production at Indonesia’s ageing oil fields has been in decline since the mid-1990s

Thus, the country has become a net importer of crude oil in recent years, adding downward pressure on its current account position But, the resumption of the Cepu field in late 2009 may change this

ƒ 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

Indonesia Business Environment SWOT

Strengths ƒ Indonesia is South East Asia’s largest economy with a nominal GDP of US$500bn

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

ƒ 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 ƒ Corruption remains a major problem Indonesia ranked 110th out of 180 countries

surveyed in Transparency International’s 2010 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption

ƒ Indonesia’s excessive bureaucracy makes it a difficult place to do business

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

Opportunities ƒ 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

ƒ Indonesia has been amending its debt and banking regulations, with the aim of attracting Islamic financial activities

Threats ƒ 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

ƒ Security threats are a concern for investors Despite several of its top leaders having been arrested in recent years, JI, the radical Islamist militant group blamed for the Bali bombings, remains active There is also a low-level threat from

separatist rebels or from intercommunal tensions

IT Business Environment Ratings

Asia

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

markets over our forecast period through to 2015 Our Q111 ratings reflect our consideration of the political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

Across the Asia Pacific region, the onset of the global economic recovery and an upwards trend in

consumer confidence has led to improved trading conditions for IT vendors The Philippines was the only

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

Australia 56 100 71 80 71 75 72.2 1 Singapore 53 100 69 70 85 79 72.1 2 Hong Kong 48 95 65 70 87 80 69.4 3 South Korea 52 75 60 75 71 72 63.8 4 Malaysia 41 50 44 35 77 60 49.1 5

weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry’s broader Country Risk exposure (Country), which is based on BMI’s proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings

methodology and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please

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

market to rise in our Q111 our rankings, but many markets recorded stronger-than-expected y-o-y growth

in computer shipments in 2010

Australia retains its top regional rating this quarter The market received a boost from the confirmation that the new government will continue to implement the National Broadband Network project, which will drive the development of Australia’s digital economy and feed demand for PCs Government tenders will also generate opportunities in years to come in areas such as education, e-government, transport and healthcare

The smaller, but mature, IT markets of Singapore and Hong Kong take second and third spots

respectively in our ratings table, due primarily to their high Country Structure scores Computer sales were strong in Hong Kong in 2010, as the economy recorded positive growth following a contraction in

2009 Hong Kong continues to offer IT investors opportunities associated with its growing links to the vast Chinese market Both Hong Kong and Singapore are expected to emerge as cloud computing hubs, due to growing interest in cloud computing in the region

Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious Intelligent Nation 2015 plan and the standard operating environment IT services spending will be

boosted by the continuing boom in IT-enabled services such as call centres and back-office financial services Other promising sectors for IT services include healthcare, as the government launches a series

of initiatives to develop health technology

On the downside, the continued restructuring of both economies to a more service-oriented model may limit long-term growth prospects, although this also brings opportunities in sectors such as financial services and banking Businesses will probably remain cautious and value-focused over the short term

BMI forecasts per capita IT spending in South Korea, fourth place in the table, will rise from US$780 in

2011 to US$1,000 by 2015, with South Koreans increasingly choosing to spend on IT products due to a substantial increase in their disposable incomes Consumers appear willing to upgrade their PCs and there

is also a trend for households to own more than one computer There will be many key growth areas, including cloud computing and IT outsourcing, which are expected to show a strong demand trajectory

Malaysia keeps its fifth place in our regional ratings in Q111 IT spending growth will be driven by a rise

in the PC penetration level from around 35%, rising incomes and a hi-tech-focused national development plan The subsidised rollout of a high-speed broadband network will address a relative lack of ICT infrastructure outside the Klang Valley There are also increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub

In China, factors such as the vast potential rural market, government spending and demand from key verticals such as telecoms should drive growth Over the forecast period, expectations about China’s long-term economic growth will drive IT investments Key sectors 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 in the current environment

Vietnamese IT demand, although with a rather smaller market than that of its leading neighbor to the north, is expected to have several long-term drivers going forward Vietnam’s improving ICT

infrastructure will facilitate the development of the nation’s IT market in a country with just 15% PC penetration Government digital divide programmes to boost internet and digital utility in rural areas will help boost addressable market growth and open PC ownership to a growing number of rural inhabitants Vietnam’s gradual integration into global trade networks such as ASEAN and the WTO has helped to bring down tariff barriers and prices as well as increase opportunities

In the Philippines, the IT market will be driven by further growth in the local IT and business process outsourcing (BPO) sector The Philippines has a lower PC penetration than many other Asian countries and the IT market offers correspondingly high growth potential over the forecast period However, there are challenges such as labour shortages and rising wages

India was another country to record impressive y-o-y computer sales growth of approximately a third in H110 The potential is obvious, with less than 2% of the population owning a computer – about 20% of the level in China Realisation of this long-term growth potential depends on fundamental drivers such as increasing India’s low computer penetration, rising incomes, falling computer prices and the

government’s ambitions to connect the country’s vast rural areas to the rest of the world

The last three markets in our regional ratings have low scores due primarily to business environment factors, despite considerable growth potential In Thailand, the fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including the government’s PC for Education programme and 3G mobile and WiMAX broadband service rollouts

Similarly, with ICT penetration of only about 20% and development restricted to richer areas such as

Java, the Indonesian IT market has much growth potential BMI expects the Indonesian market to be one

of the region’s fastest growing over the five-year forecast period The SME sector will drive demand for basic hardware and applications as enterprises look to enhance productivity

Sri Lanka’s IT market has benefited from the restoration of peace and improvements in the security situation which have helped to release pent-up demand for IT solutions The country had felt the effects

of instability over the years, from disruption of distribution channels and a flourishing grey market to underdeveloped telecoms infrastructure However, the market will feature on IT vendors’ radars as one of the best potential growth prospects in South Asia Computerisation has only just got started in

government services and major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Asia IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives and growing affordability will drive increases in PC penetration

during BMI’s five-year forecast period While some cities and regions stand out, there is an unbalanced

pattern of regional development, with PC penetration in countries such as Singapore being above 50%, while in other countries such as Indonesia, it is less than 2%

The two Asian leaders, China and India, embody the region’s growth potential, as computer ownership remains the preserve of a minority in both countries In China, PC penetration was only around 18% in

2008 – although it was far higher in cities such as Shanghai and Beijing – and projected to pass 30% overall by 2014 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 ownership

Lower price will help to drive higher PC penetration in developing markets The average price of a PC in India has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach of lower-income demographics

Around the region, affordable computer programmes continue to find favour with governments In 2009, China launched a subsidised PC initiative aimed at rural residents Australia’s computers for schools programme had provided almost AUD260mn of computers by the end of 2009 In Indonesia, penetration

of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio

of PCs to students in public schools to 1:20

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in South Korea, Hong Kong and Australia, with estimated 2010 narrowband

penetration rates of 74.3%, 73% and 67.7% respectively Singapore has by far the highest rate of

broadband penetration, which was estimated at 154% in 2010 Meanwhile, the Philippines has the lowest level of internet usage, with just 6.6% narrowband and 4.9% broadband penetration estimated in 2010

The fastest growth is expected in Indonesia, where narrowband penetration is projected to leap from 30%

in 2010 to 61.2% by 2014 India is now above 20% narrowband penetration despite a lack of fixed-line infrastructure, and this should reach 30% by 2014 Fast growth is also projected for Sri Lanka, where penetration is projected to increase from 10.9% to 21.6% by 2014

Some 48.3% of Malaysians had internet access in 2010 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 west

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course to reach 34.3% by 2015, surpassing narrowband penetration of 33.6% In India, where the government designated 2007 as ‘the year of broadband’, penetration should increase eightfold

to reach 8% by 2013 from around 1% currently This is far below government targets, however

Singapore will also see continued strong growth in broadband penetration, which is projected to reach 202% by 2015

Meanwhile, the growth of Wi-Fi coverage will be

one driver of notebook sales in places such as

Hong Kong, where the government has committed

another HKD200mn to the deployment of a Wi-Fi

network covering more than 200 public venues

IT Growth And Drivers

Most Asian IT markets are expected to report

stronger growth in 2010 Across the region, 2010

should see IT spending a boost from systems

upgrades deferred from the previous year,

although much will depend on business

confidence In some cases, companies had IT

budgets that were not spent due to economic

uncertainty, and in H110 vendors reported a pick-up in project flows

Strong fundamental demand drivers of IT spending meant that there will be continued opportunities Key factors common to most markets include cheaper PCs and reform in sectors such as telecommunications and finance, as well as government initiatives

In the largest market, China, an expansion in consumer credit, as well as a commitment to modernisation

in sectors such as education, healthcare and manufacturing, will help to sustain market growth BMI

expects China’s IT market growth to be maintained by an expansion into the western region, rural areas and lower-tier cities, as well as growing demand from small and medium-sized enterprises (SMEs) IT spending will also receive a boost from government spending and IT projects associated with the

Shanghai World Expo in 2010

2010 IT Market Sizes

US$mn*

* estimate Source: BMI

The long-term potential of India’s IT market is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning particular potential in the lower-end product range India’s IT market appears to be positioned for a strong recovery in 2010 thanks to an improving economy and stronger consumer sentiment as well as government support for modernisation in lagging sectors It is estimated that around 5% of India’s 7.5mn SMEs could implement a technology solution in 2010

Meanwhile, India’s business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

The Philippines is one of the countries currently

benefiting from low-priced 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 as well as

notebook entertainment and wireless networking

features Meanwhile, in Indonesia, the basic

demographics of rising computer penetration

and growing affordability should drive growth

SMEs represent a growth opportunity, as

currently only around 20% of Indonesian SMEs

are estimated to make use of IT Compliance

with government and international regulations will be a driver in financial, manufacturing and other sectors

In more developed markets such as Hong Kong and Singapore, robust retail sales led the way in early

2010 as spending recorded positive growth following a contraction in 2009 In Hong Kong, consumer

spending is expected to remain strong in 2010, as evidenced by the positive early reception for Apple’s

iPad IT market growth will be driven by government IT spending as well as cross-border trade and operation

co-The largest IT market in the region is, unsurprisingly, China, estimated at US$92.5bn in 2010, trailed distantly by Australia (US$19.4bn), India (US$16.1bn) and South Korea (US$16.1bn) Singapore’s IT market (including communications) is the largest as a proportion of national GDP (2.66%), followed by Hong Kong (2.07%)

The fastest-growing IT markets over the forecast period look set to be Sri Lanka and India, with

2010-2014 compound growth of 109% and 104% respectively, driven by increasing PC penetration China is

third, with the IT market growing by an estimated 64% over BMI’s five-year forecast period

IT Market Sizes As % Of National GDPs

2010-2014

Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 42-71% of total spending in all markets in 2010 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

BMI expects a trend of rising hardware investment

to establish itself over the next few quarters The

PC market contracted in many markets in H109,

following a slowdown towards the end of 2008

However, growth had returned in most markets by

the end of 2009 Sales of Microsoft’s Windows 7

operating system and new Intel core technology

also have the potential to help trigger a new cycle

of hardware upgrades in 2010, although much will

depend on business confidence

In mature markets such as Australia and

Singapore, PC sales are dominated by replacement

sales In the former, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households More than 90% of Australian households now have a PC, but

consumers have appeared willing to spend on upgrading their notebook computers, and it is also

becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In much of emerging Asia, demand from 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, with SME demand for servers and networking equipment a significant growth opportunity

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 out PC bundling

offers as part of its broadband packages The Australian government’s National Broadband Network plan should drive development of Australia’s digital economy and services such as online banking and

shopping

Meanwhile, a wave of 3G launches across the region should also provide a stimulus to sales of notebooks,

with Vodafone Hong Kong among service providers offering 3G/HSPA USB modems bundled with

IT Markets Compound Growth

2010-2014f, %

f = forecast Source: BMI

their 3G services However, netbooks and notebooks face competition from other form factors such as

smartphones – from Palm, Research in Motion, Apple and other vendors – and tablet notebooks,

spearheaded by Apple’s iPad

Due in part to high levels of piracy, software’s share of IT spending is relatively low, ranging from

11-25% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but despite

government crackdowns in China and the Philippines, software piracy remains above 70% in most of emerging Asia

Across the region, there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) In general, ERP and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as CRM and business intelligence, where faster growth is possible

The economic slowdown may have encouraged companies to consider cloud computing solutions such as software-as-a-service (SaaS) The hosted application model may already account for between one-fifth and one-quarter of China’s software revenues SaaS has also enjoyed steady growth in the Hong Kong market over the past three years with, according to vendor estimates, around 8% of local enterprises now use an SaaS security solution Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia

Market Structure (% Of Total IT Market)

f = forecast Scores out of 100 Source: BMI

New platforms and services in the telecoms field is a driver for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile,

expanding technology adoption in the logistics industry and public transport will be a source of IT

services projects Sectors such as hospitals and real estate will also provide opportunities

The IT services segment accounts for 17-40% of spending in the Asian markets covered by BMI The

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2010,

a brightening business climate should mean more opportunities in key IT-spending verticals such as financial services, telecoms, government, healthcare and logistics

Government spending will account for a larger share of spending in many markets In China, government stimulus packages have helped to drive IT-related investments, while in Singapore, government ICT projects such as SOE2 provide significant opportunities, with the government planning to invest around SGD1.73bn in ICT projects in its last fiscal year through March 2010 Australia’s National E-Health Transition Authority has targeted the creation of a ‘paperless environment’ for the health sector and was also expected to launch a standardised reporting system scheme in 2010 Meanwhile, the Hong Kong government’s Digital 21 initiative will continue to generate spending

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 Main spenders across the region include banks and financial institutions

as well as governments Even in emerging markets such as 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

In many countries, the number and size of local outsourcing deals are increasing Outsourcing could account for as much as 30% of China’s IT services spending by 2013, while in India there have been

some large contracts such as that awarded by Idea Cellular to IBM Singapore – where the government

was to tender a major outsourcing contract in 2008 – and Hong Kong have both seen a trend towards larger outsourcing projects in the public and private sectors

Indonesia Market Overview

Government Authority

In November 2006, President Susilo Bambang Yudhoyono announced the establishment of a new body to provide strategic direction for the country’s IT development The National ICT Council is chaired by the president and is tasked with formulating IT policy The other main task for the council is to coordinate a cross-departmental e-government initiative at all levels It also includes ministers representing 10 other ministries, including finance, law, education, trade and research and technology The council has been tasked with implementing a large and ambitious programme of ICT initiatives, including completing the Palapa Ring Project, which is to cover 50% of Indonesian cities It has responsibilities related to e-

procurement and applying IT to education The council has a working team with experts drawn from the business community and IT associations, as well as from the government

Other relevant government bodies and ministers for the IT sector include:

Table: Key Ministers And Departments

Key Departments

Badan Koordinasi Penanaman Modal (BKPM) Ministry for Investment/Investment Coordinating Board

Badan Pengkajian dan Penerapan Tehnologi (BPPT)

Ministry for Research and Technology/Agency for the

Assessment and Application of Technology Departemen Perindustrian dan Perdagangan

Departemen Perhubungan Department of Communications

Background

The government has a target of providing telephone and IT services to all rural areas in Indonesia by

2015 The programme is being promoted by the Ministry for the Development of Disadvantaged Regions Under the 1999 Telecoms Law, all telecoms operators and service providers in Indonesia have an

obligation to universal service, but in reality there are considerable challenges in providing connections, given the dispersed nature of Indonesia’s population and the country’s difficult terrain

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

to several universities

Table: Bandung High-Tech Valley SWOT

Strengths ƒ BHTV has many top universities, research centres technology related corporations.

ƒ More than 500,000 hi-tech workers.

ƒ Some tax incentives.

Weaknesses ƒ Inadequate government incentives.

ƒ Weak telecommunications infrastructure.

ƒ No international airport.

Opportunities ƒ A rapidly growing number of small start-up companies.

ƒ The government has talked of new packages to attract investors and cut red tape.

Threats ƒ Competition from other ‘Silicon Valleys’ in the region, eg: Malaysia MSC, and even

elsewhere in Indonesia, eg: Bali Camp.

The financial crisis in 1997, when there was a 70% fall in the value of the rupiah against the US dollar and 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 planned investments were cancelled

The economy has gradually recovered However, the development of the local IT market, despite inherent potential, is restrained by a number of factors, including poor telecommunications infrastructure, partly as

a result of slow progress in deregulation and liberalisation Deregulation has been slow in other sectors of the economy as well, with the local business environment highly bureaucratic even by regional standards Another problem has been the lack of government support for the market and domestic sectors, as shown

by the lack of a dedicated IT ministry Programmes to increase computer ownership and internet access

have been modest in scale and lacking in effect compared with elsewhere in the region, and it remains to

be seen whether this will change under the latest Yudhoyono administration Legal issues such as IP rights have also been barriers to foreign investment, while the level software piracy remains among the highest in the world

Hardware

BMI forecasts 2011 Indonesian computer hardware spending of US$3.6bn, up from US$3.2bn in 2010

The market is forecast to return to double-digit growth this year and to rise to a value of US$6.5bn by

2015 Shipments in 2010 bounced back strongly after growth in 2009 had been sustained largely by the popularity of low-cost netbooks

In 2011, Indonesia is again expected to be one of the fastest growing regional PC markets, driven again

by notebooks Migrations to Microsoft’s Windows 7 operating system retain the potential to help trigger

a new cycle of hardware upgrades, although much will depend on business and consumer confidence

Hardware accounts for more than 70% of Indonesian IT spending In 2010, the fastest growth segment was the consumer segment, which accounts for about 25% of computer demand The main drivers are growing affordability and more credit availability Prices for notebooks and desktops are falling, with desktop prices now as low as US$400, while notebooks start from about US$700 These trends are expected to allow PC penetration to rise in a country where only about 10% of the population have access

to a PC, compared with more than 30% in some other South East Asian countries such as Malaysia or Thailand

While the consumer segment is only about a quarter of the whole market, it is growing fast and has

become an increasing focus of attention for many vendors, including Lenovo and Dell About a third of

the market is accounted for by non-branded, locally assembled PCs Notebooks are now growing faster than the PC market as a whole, with 40% growth projected for 2010 as notebooks account for about 38%

of total PC demand

Data from Indonesia’s Department of Trade showed that the value of imported laptops reached

US$461mn during January-November 2009, up by 30.4% compared with the figure for the whole of

2008 Demand for notebooks is being driven by lower prices, smaller unit sizes, lightweight functionality and entertainment and wireless networking features

The real PC volume sales driver during the economic slowdown in 2009 was netbooks, which achieved triple-digit shipments growth and sold over 400,000 units Low prices and additional mobility were the main factors behind their success Netbooks are popular as basic connectivity devices and with internet penetration still below 10% there is plenty of room for further growth Sales are expected to increase in

2010, but the advance is unlikely to match that of 2009, especially with the emergence of tablet

notebooks However, growth of up to 40% has been projected by some vendors in 2010, with the increase trailing off thereafter

Netbooks and notebooks face competition from other form factors In particular, smartphones from Palm, Research In Motion (RIM), Apple and other vendors are being offered by vendors as alternative

connectivity solutions and often include a Wifi option Other vendors are expected to follow Apple in releasing net tablet devices which have a form factor between the size of a smartphone and a

netbook However, for the moment tablets are expected to remain a niche segment in the Indonesian market

NetTabs are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy NetTabs are expected to

be significantly more expensive than smartphones, but despite a previous mixed record with this form factor, are seen as a growth area in 2010-2011 Another area that vendors will watch is the e-reader market

In 2011, consumer spending is expected to be reinforced by a revival in business IT hardware spending that could get stronger as the years go on 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 Sales to this segment are projected to double by 2015 Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in data centres

According to a survey by market research firm IDC, PC demand from major companies with more than

500 employees was expected to grow more than 21% in 2010 to 366,255 units, growing faster than the larger SME segment There could be a boost, particularly in the second half of the year, from computer hardware tenders delayed from 2009 The launch of Microsoft’s Windows 7 operating system also has the potential to help trigger a new cycle of hardware upgrades in 2010, although much will depend on

business confidence

Business spending on IT hardware was hit in 2009 as local firms cut budgets due to falling domestic and external demand Trading companies with exposure to export markets affected by the global economic slowdown deferred some hardware replacements in H109 However, the low levels of computer

penetration in manufacturing segments mean there are still plenty of opportunities for growth The biggest opportunity is from SMEs, which in 2009 were estimated to have accounted for nearly 80% of business

PC demand, with sales of more than 900,000 computers There will be increased demand too for storage products, as organisations in sectors such as government, financial services and banking, and

manufacturing, explore potential efficiencies and cost-savings from virtualisation

Table: Computer Spending By Sector, 2007e

US$mn

e = estimate Source: BMI

Government spending has been relatively small compared with regional peers such as Singapore and India, but it could increase as a share of spending Education provides a small but steadily growing source

of demand, accounting for 3-4% of sales, but this could also grow with the government targeting the purchase of 2.5mn computers

Locally assembled computers made up about 60% of the total, even though imported components face tariffs ranging of 5-20%, which pre-assembled computers escape There have been calls for the

components tariff to be abolished The low-end price tier will continue to dominate and will account for about 80% of sales, reinforced by the growing popularity of netbooks

Software

Indonesia’s software sales are forecast by BMI to reach US$636mn in 2010, up from an estimated

US$535mn in 2010 During BMI’s five-year forecast period to 2015, the software sector CAGR is

forecast at 20% In 2011, migrations to the Windows 7 operating system, released in October 2009, retain the potential to make an impact

Application software accounts for more than 40% of the total software market and is the largest portion, followed by systems infrastructure According to government data, there are 30-35mn Indonesian

companies that still do not use IT-based solutions, representing a huge potential market

In the applications segment, the single largest element is back-office applications, accounting for around two-thirds of sales ERP software continues to be of most interest to the SME market as enterprises look

to enhance productivity through the automation of essential functions Only about 20% of Indonesian SMEs are estimated to make use of IT

Inventory is an application entry point for many businesses, but among existing users the market is evolving, with a move from basic ERP applications focused on operational efficiency to more strategic modules such as CRM, business analytics and risk compliance Business intelligence is expected to be an

emerging opportunity over BMI’s five-year forecast period, although the market is still at the education

stage

In 2009, economic uncertainties led some organisations to defer systems updates, although others saw IT

as a strategic tool for increasing competitiveness in difficult times There should be a boost in 2010 from systems upgrades delayed from last year Compliance with government and international regulations is a long-term driver in the financial sector, manufacturing and other sectors

The next few years should feature a shift away from packaged proprietary software towards other models, such as cloud computing and OSS Improved broadband infrastructure will also assist the popularisation

of the rented software model Given the focus at many businesses of controlling costs, new IT delivery models such as software-as-a-service (SaaS) and platform-as-a-service (PaaS) are expected to grow in

popularity Microsoft Indonesia has reported that cloud computing accounts for around 20% of its local

revenues and it has been growing at about 50% per year

More vendors are looking for channel partners to help them offer cloud computing and rented software services to local cooperatives and SMEs, which are seen as the main market for such services in

Indonesia New cloud computing offerings from Telcos and IT companies are leading to increased

competition in this segment, which should fuel further demand from end-users to utilise this technology

In addition to cost savings, businesses will look to boost efficiency and increase the flexibility of

responses to customer needs Large businesses are most likely to put IT applications such as mail, phone systems and document management into a cloud Applications for tax and finance regulations are also potential candidates for cloud computing However, enterprise applications that require a high level of customisation, or that are subject to regulatory or data-sensitivity constraints, are more likely to stay on-premise

One market inhibitor is Indonesia’s continuing software piracy problem, which according to the

government’s own figures loses Indonesian software companies more than US$100mn a year In 2009, the level of piracy rose again (by 1%) to 86%, according to the Business Software Alliance (BSA) Indonesia was ranked as the country with the 12th highest level of software piracy in the world last in

2009 The BSA has forecast that losses from software piracy in the Indonesia market will rise again in

2010 and reach US$900mn

Under the licensing 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 Windows operating system and 117,480 copies of the Office package for a total price of US$41.9mn

However, the deal has attracted growing criticism from the open-source lobby in Indonesia, which said the memorandum of understanding (MoU) serves as a barrier to entry for software producers other than Microsoft and impedes the development of the domestic software industry A number of government departments already use OSS In July 2009, the mayor of Surabaya said the city had launched an OSS pilot scheme, with all municipal offices using the software

Data from the Indonesian Telematics Software Association show 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 forecast to be worth US$898mn in 2011, recording double-digit growth

from US$769mn in 2010, based on BMI estimates IT services account for only 17% of Indonesia’s

hardware-centric IT market sales

The Indonesian IT services market is dominated by the financial services and banking sector, as well as telecoms Together, these two industry verticals account for around 50% of spending of IT services Banking is emerging as the most important vertical, responsible for roughly 30% of IT spending,

followed by telecoms and government

Services sector CAGR over 2011-2015 is expected to be around 18% Improvements in Indonesia’s telecoms and ICT infrastructure are expected to drive long-term growth in the size of the Indonesian IT services market Commercial data centres are being built around the country by Indonesian telecoms

service providers such as PT Indosat and PT Teleko The development of these facilities is linked to

growing roll-out by public sector and commercial organisations of e-government or e-commerce services

Meanwhile, the Palapa national fiber ring project is nearing completion, meaning that all main islands within the Indonesian archipelago will be connected with fibre optic backbone capacity The roll-out of additional submarine cables to locations such as Australia, Hong Kong and Singapore is also in progress

or at least under planning

One potential demand driver will be organisations looking for help with to utilise efficiencies from cloud computing such as SaaS and Infrastructure-as-a-Service Particular areas of opportunity for cloud

computing include banking and retailing as organisations in those fields look to save money on hardware investments

Hardware deployment services remain the largest Indonesian IT services category, with an approximate 20% share Growth opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services

Government spending remains relatively small compared with regional peers such as Singapore and India, but is expected to increase in 2010 as a proportion of total IT spending The education sector provides a small but steadily growing source of demand, accounting for 3-4% of sales, which could

increase further (see below)

In 2009, the global economic crisis and credit tightening had an effect on demand in some key IT

spending verticals, but spending in these important industry segments generally held up better than expected

Special Focus: Banks

In 2009, the banking sector still provided opportunities for IT vendors, despite the fallout from the global financial crisis Banks continued with transformation strategies that were driven by factors such as new

technologies and services, as well as regulatory compliance PT Bank Bumiputera Indonesia migrated

to a new IT system with a US$5mn investment The migration also involved ATM network expansion and integration with third-party systems

Banking has emerged as one of the key IT market sectors and the Indonesian Federation of Private Domestic Banks (Perbanas) estimates that the sector spent US$1.47bn on IT in 2008 The Indonesian