Indonesia information technology report q1 2014

BMI Industry ViewBMI View: The Indonesian IT market is forecast to be one of the outperforming markets globally over the medium term, on the back of strong economic growth, a low PC pene

Q1 2014 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q1 2014

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2013

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BMI Industry View 7

SWOT 9

IT 9

SWOT 11

Political 13

Economic 15

Business Environment 17

Industry Forecast 18

Table: Indonesia IT Industry - Historical Data And Forecasts (IDRmn) 18

Broadband 23

Table: Internet - Historical Data And Forecasts, 2010-2017 23

Macroeconomic Forecasts 25

Economic Analysis 25

BI, Government Measures Still Insufficient 25

BI To Remain Vigilant 26

Stimulus Unlikely To Prevent Growth Slowdown 28

Table: Indonesia - Economic Activity 29

Industry Risk Reward Ratings 30

Table: Asia Pacific IT Risk/Reward Ratings - Q1 2014 32

Market Overview 34

Hardware 34

Software 41

IT Services 45

Industry Trends And Developments 49

Regulatory Development 53

Table: Key Ministers And Departments 53

Competitive Landscape 57

International Companies 57

Table: Lenovo Indonesia 57

Table: Intel Indonesia Corporation 58

Table: Microsoft Indonesia PT 59

Table: IBM Indonesia 60

Local Companies 61

Table: Performance PT Multipolar Technology Tbk (MLPT) 61

Table: Walden Global Services (WGS) 62

Table: Aprisma Indonesia 62

Table: ALTiUS ERP 63

Company Profile 64

Sigma 64

Regional Overview 67

Demographic Forecast 72

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 73

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 74

Table: Indonesia's Key Population Ratios, 1990-2020 75

Table: Indonesia's Rural And Urban Population, 1990-2020 75

Methodology 76

Industry Forecast Methodology 76

Sources 77

Risk Reward Rating Methodology 78

Table: It Risk Reward Rating Indicators 79

Table: Weighting Of Components 80

BMI Industry View

BMI View: The Indonesian IT market is forecast to be one of the outperforming markets globally over the

medium term, on the back of strong economic growth, a low PC penetration rate and an emerging middle

class Despite a downwards revision to BMI's forecasts during Q413, following a slowdown in PC sales in

Q113 and uncertainties about Indonesia's economic outlook, we believe the market holds promise going into 2014 and beyond The rupiah has depreciated in 2013, having a constraining effect on household

spending, but BMI believes such effects will not be long lasting In the immediate future, IT spending is

forecast to increase to IDR63.0trn in 2013, up from IDR54.6bn in 2012, with the economy predicted to grow around 6% in 2013 The retail market will be a major driver of growth, with PC penetration estimated

at below 10% in 2012, meaning there is significant growth potential from first-time buyers and upgrades/ personal devices

Headline Expenditure Projections

Computer Hardware Sales: IDR44.7trn in 2013 to IDR63.7trn in 2017, at a compound annual growth rate

(CAGR) of 10.2% in local currency terms Sales were down in Q113, but rising incomes and the growingaffordability of devices, combined with credit availability, will increase sales in the consumer segment

Software sales: IDR7.6trn in 2013 to IDR12.7trn in 2017, at a CAGR of 14.9% in local currency terms.

Windows 8 sales will boost spending in 2013, as the government launches a new roadshow to bring downillegal software use

IT Services Sales: IDR10.7trn in 2013 to IDR16.7trn in 2017, at a CAGR of 12.9% in local currency terms.

Our forecast has been downwardly revised, but a key growth area is cloud services, which could be worthmore than IDR11.8trn by 2017

Key Trends & Developments

In October 2013, it was reported that Indonesia is responsible for 38% of the world's malicious internettraffic, surpassing China as the leading root of online attacks This has grown from only 0.7% of recorded

attacks 12 months previously, according to the US-based Akamai Technologies The reasons behind the

growth are under debate, but the implications of a dramatic increase in online attacks have worried officials.Cyber security is notoriously weak in Indonesia The second-highest cause of the 1.2mn daily attacks

recorded by the government is attempts at data theft Network-heavy industries, such as oil and gas, aremost susceptible to data phishing attempts.

Although the consumer story in Indonesia means that the retail hardware market is set to remain the

dominant theme in the Indonesian IT market, the cheaper rupiah - the currency was one of the weakestregional performers in 2013 - has had a constraining effect on household spending However, there are alsoopportunities for vendors to generate sales to the public and enterprise sectors

An active approach by the government to encourage IT development, led by the National ICT Council,should stimulate spending through a series of infrastructure and education initiatives Government ITspending was up in Q113, with a boost from projects previously delayed from Q412 Meanwhile, according

to government data, IT penetration in enterprises is low, particularly in the SME segment, representing ahuge potential market Modernisation is driving spending on applications such as CRM, ERP and financialmanagement in key sectors such as financial services, telecoms, utilities, government, retail and

manufacturing

IT

SWOT Analysis

Strengths ■ Large potential market

■ The market may be entering a faster growth stage It is forecast to grow quicker thanmost other Association of South East Asian Nations (ASEAN) markets over theforecast period, due to its underdeveloped nature

Weaknesses ■ Computer penetration is among the lowest in South East Asia, estimated at only 9%

in 2012

■ Underdeveloped telecommunications infrastructure, due to years of governmentcontrol and slow progress in deregulation

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

■ History of recent political instability

■ High piracy rate continues to be a drag on the software market, with one of thehighest piracy rates in the region

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

the government is showing signs of taking intellectual property more seriously

■ Strong demand for tablets and low-cost laptops from a youthful population andbooming economic performance

■ Per capita IT spending to increase rapidly as the middle class increases in size

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

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

SWOT Analysis - Continued

■ IT services, with local telcos investing heavily in data centres and networks

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

internet access, or drive ICT sector development

■ The global economic slowdown may hit key demand segments

■ A weaker rupiah could have a dampening effect on household and businessspending It is the worst performing Asian currency of the year as of October 2013

Indonesia's telecoms market presents good growth opportunities due to its large and youthful population andextremely low broadband penetration rate While the mobile industry generates low ARPUs in light ofconsumers' preference for prepaid subscriptions, and strong competition among operators and from

alternatives such as fixed-wireless technologies, operators are stepping up efforts to grow the nascent 3Gmarket However, although mobile data/VAS revenues are increasing, this is being offset by declining voicerevenue

Wireline SWOT

Strengths ■ Fixed-wireless offers a balance between fixed line and mobile at affordable prices and

has experienced strong demand, helping to boost overall fixed-line subscriber figures

in an otherwise slowing market

■ Increased competition in the fixed-wireless market following the award of nationwidelicences to Bakrie Telecom and Smartfren

Weaknesses ■ Lack of competition in the fixed-line market with Telkom dominating with an

80%-plus market share

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

■ Limited available capital via loans could hinder further progress of the broadbandmarket

■ Poor fixed-line infrastructure means limited internet accessibility in rural areas

Opportunities ■ Plenty of opportunities for broadband growth, with a higher number of operators

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

■ Submarine cable projects are on the rise, connecting Indonesia to regional peers such

as Hong Kong and then onwards to Singapore and Vietnam

■ Solid economic outlook led by domestic demand should aid growth of the telecomsindustry

Wireline SWOT - Continued

Threats ■ Uneven development between urban and regional areas could be further

exaggerated, with current broadband contracts centring on the larger islands of Javaand Sumatra

■ The cost of PCs and tariffs could place internet and broadband services out of thereach for the majority of Indonesians

■ Growing preference in the consumer segment for mobile broadband solutions

SWOT Analysis

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

2009 parliamentary and presidential elections passed peacefully, signalling theconsolidation of the democratic process Following 2009, the government showedfurther signs of improvement in both efficacy and engagement, but progress hasstagnated since 2012

■ The military's role in politics has gradually been reduced The prospects of a militarycoup - which seemed a real possibility in the late 1990s and early 2000s - havediminished substantially As the military's role in politics continues to wane,Indonesia's political stability should likewise improve

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 andcorruption Prospects for reform are beset with numerous challenges, such as thelong-running practice of politicians promising government positions to campaignsupporters

■ The country was impacted by separatist rebellion and ethnic violence in the late1990s and early 2000s, which took great efforts to bring to heel In the event of a neweconomic crisis, calls for regional secession could re-emerge

Opportunities ■ 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 shouldbecome less problematic

re-■ Indonesia's status as the world's most populous Muslim country leaves it wellpositioned to speak out on global Islamic issues and act as a bridge between theMiddle East and the Asia Pacific region

SWOT Analysis - Continued

Threats ■ Regional militant group Jemaah Islamiah poses a lingering threat to security in

Indonesia Jemaah Islamiah is blamed for a series of attacks, including the Balibombings of October 2002 and the Jakarta bombings of July 2009

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

Additionally, Indonesia's population is extremely young, with more than 50% ofIndonesians younger than 30 Younger populations have historically been a predictor

of political instability

SWOT Analysis

Strengths ■ 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 theregion Indonesia is also resource-rich and is the world's largest producer of palm oil

■ Indonesia has a low cost and large supply of available labour resources Its labourforce, the fourth-largest in the world, is also one of the world's youngest

Weaknesses ■ Indonesia's economy is not growing fast enough to reduce unemployment, with the

rate still relatively high at 5.96.2% as of August 2012Q113 Many are forced to work inthe informal sector Of particular concern is the youth unemployment rate, which isfive times the overall rate

■ Indonesia's physical infrastructure is considered sub-standard The archipelagicnature of the country makes it difficult to weave national infrastructure together.Despite an ambitious infrastructure revitalisation plan, the country currently comparesunfavourably with its Association of Southeast Asian Nations peers

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 newlegislation in early 2008 designed to tap into this rapidly expanding sphere With anoverall market share of only 3%, growth prospects for Islamic banking in the world'slargest Muslim country are enormous

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

The country has therefore become a net importer of crude oil in recent years, puttingdownward pressure on its current account position Furthermore, rising oil priceshave begun to pressure Indonesia's current account, where it typically runs a healthysurplus The resumption of the Cepu field, which occurred in late in late 2009, mayhelp to alleviate Indonesia's dependence on foreign oil given its small boost toproduction output, but we expect this bounce to be short-lived

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

Strengths ■ Indonesia is South East Asia's largest economy with a nominal GDP of US$880bn and

is the world's fourth most populous country with more than 240mn people It thusoffers investors a vast home market in which to do business

■ As a member of the Association of South East Asian Nations' Free Trade Area,Indonesia is committed to lowering tariff and non-tariff barriers to trade

Weaknesses ■ Corruption remains a major problem Indonesia ranked 118th out of 176 countries

surveyed in Transparency International's 2012 Corruption Perceptions Index, where alow ranking denotes a higher degree of corruption

■ Indonesia's excessive bureaucracy makes it a difficult place to do business AmongAsian economies, Indonesia has the longest period to start a business Labour lawsare also considered excessive

Opportunities ■ President Susilo Bambang Yudhoyono's administration has gradually been reforming

the business environment, particularly by strengthening the legal system and fightingcorruption If sustained, this would boost investor interest in Indonesia However,reform has been slow, and divisions within the government could curb progressahead of 2014 elections

■ Indonesia has been amending its debt and banking regulations, with the aim ofattracting Islamic financial activities Over the past five years, Islamic banking growthhas averaged more than 65%

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

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

Industry Forecast

Table: Indonesia IT Industry - Historical Data And Forecasts (IDRmn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

IT market value 40,532,778 46,570,952 54,646,356 62,958,066 70,097,511 77,560,073 86,303,788 93,087,266 o/w Hardware 28,676,941 33,694,084 39,181,437 44,731,706 49,348,648 54,098,151 59,635,918 63,718,234

- PC 23,228,322 27,359,596 32,128,778 37,037,853 40,860,680 44,901,466 49,497,812 52,886,134

- Servers 2,580,925 3,032,468 3,526,329 4,025,854 4,441,378 4,868,834 5,367,233 5,734,641 o/w Software 4,863,933 5,215,947 6,338,977 7,554,968 8,692,091 9,927,689 11,392,100 12,659,868 o/w Services 6,991,904 7,660,922 9,125,941 10,671,392 12,056,772 13,534,233 15,275,771 16,709,164

IT market, % of GDP 0.63 0.63 0.66 0.68 0.68 0.68 0.67 0.65

e/f = BMI estimate/forecast Source: BMI

BMI forecasts the Indonesian IT market to be a regional and global outperformer over the duration of our

forecast period to 2017 We forecast a compound annual growth rate (CAGR) of 11.2% over 2013-2017,with Indonesia's IT market reaching a total value of IDR93.09trn by 2017

BMI downwardly revised its forecast in Q413, following a slowdown in PC sales in the first quarter of the

year and a degradation of Indonesia's economic outlook That said, some fundamental drivers, includingrising computer penetration and growing affordability, should ensure that the market remains firmly inpositive growth territory

Market Trends

Our forecast for the Indonesian IT market was

downgraded in Q413, in response to negative

currency trends and a weaker global outlook

negatively impacting on the Indonesian economy

PC sales were down around 2% year-on-year (y-o-y)

in Q113 The cheaper rupiah - the currency was one

of the weakest regional performers - has had a

constraining effect on household spending Business

IT investment also fell short of vendor hopes, as

Indonesian enterprises adopted a wait-and-see

approach to hardware and systems upgrades in the

face of concerns about Indonesia's exposure to

economic headwinds

Even after the downgrade, we are still forecasting

strong growth of 15.2% in 2013, albeit a slowdown

from the 17.3% growth in local currency terms seen

in 2012 Government IT spending took up much of the slack caused by the dip in private IT investment inQ113, with a boost from public sector procurements delayed from Q412 Moreover, Indonesian businessesremain the most optimistic in Asia, and consumer confidence is also high by regional standards Indonesiawill still be one of the region's fastest-growing IT markets in 2013, consolidating a strong performance inmost market segments during 2012

There are strong fundamentals in the Indonesian market Real GDP growth is forecast to reach 6.1% in

2013, with private consumption expected to increase by 5.5% in real terms Meanwhile, PC penetration isbelow 10%, giving this huge market unrivalled long-term growth potential, as incomes rise to levels wherelarge parts of the emerging middle class can afford their first household computing device

Although PC penetration is relatively low across Indonesia, there are differences within the country ICTpenetration remains heavily concentrated in the capital Jakarta and its surrounding area Regions beyondJakarta offer greater first-time PC buying potential, but, with a strong middle class emerging around thecapital, there is a large mobile computing device opportunity In Q113, the fastest PC market growthoccurred in regions outside of Java and Bali, while some other regions reported negative growth

Industry Trends - IT Market

2010-2017

e/f = BMI estimate/forecast Source: BMI

The government's masterplan to lift Indonesia into the ranks of the world's top 10 economies by 2025should fuel ICT investment Spending in some key IT verticals, such as financial services and banking, will

be central to growth in enterprise IT spending However, there is also great potential in currently

underpenetrated sectors, such as manufacturing Business IT investment should remain buoyant, in line withthe general economy Adoption of cloud computing services by enterprises will also increase, with the value

of the market potentially increasing to IDR10.1trn by the end of BMI's five-year forecast period.

Meanwhile, government infrastructure investments should also provide a boost to the business

sector Government IT spending is expected to increase and continue to account for around 25% of the ITmarket, while the government is also encouraging state companies to use more IT

The enterprise market will also boost spending on IT products and services Private enterprises, particularlySMEs, will provide a large part of PC sales, while ERP and other e-business applications are also findingincreasing popularity in the SME market The SME sector of 42.2mn companies will drive demand forbasic hardware and applications, as enterprises look to enhance productivity through automating inventory,accounting and other functions Around 30-35mn Indonesian companies are estimated to lack any IT-basedsolutions IT services for this segment will be dominated by basic services such as system integration,support systems, training, professional services, outsourcing and internet services There is also an

opportunity for cloud computing vendors in the SME market, but this market will only open up as telecomsoperators invest in improving wireless and wireline broadband infrastructure

A more active approach by the government to encourage IT development, including the establishment of theNational ICT Council, headed by President Yudhoyono, should stimulate spending through a series ofinfrastructure and education initiatives The Indonesian government's Master Plan for Acceleration andExpansion for Indonesia Economic Development (MPEEI) states that connectivity between the islands ofthe country is a priority area Major government infrastructure and ICT initiatives, particularly the PalapaRing Project, have been rolled out to create the infrastructure to support IT market growth Cheap computer

programmes are likely to be favoured, as increasing internet penetration and computers in schools

programmes are believed to represent potential demand for up to 25mn units

Segments

Although the consumer segment is relatively small as a proportion of the total market, it is estimated thatretail accounts for 70% of the hardware market by units shipped However, demand for traditional

notebooks is being eroded by the popularity of new form factors, particularly tablets Taiwanese vendor

Asus has projected that tablets will account for 50% of its Indonesian PC sales in 2013.

In the medium term, demand growth will be fuelled by lower prices and new entertainment and wirelessconnectivity features Low-cost tablets running Android, particularly from OEMs in China, are expected toprove particularly popular with Indonesian consumers The government's plans to establish fixed wirelessnetworks in major cities and encourage WiMAX build-out in rural areas will also be drivers There are also

an increasing number of Wi-Fi 'hotspots' Telecoms operators are increasingly pushing tablets as devices tobundle with wireless data subscriptions as a means of winning market share and increasing network usage

While the emerging middle class in Indonesia is promoting consumption, a large portion of sales are reliant

on government initiatives to increase penetration It will remain dominated by the lower-price tiers, whichwill account for about 80% of sales The popularity of lower-cost netbook computers, which flooded themarket a few years back, has helped to sustain volume sales, but demand for the devices has dropped offsharply - largely replaced by tablets, but also by low-cost and slimline notebooks Computer sales will alsoreceive a boost from programmes to increase computer penetration in education, as the government seeks tomeet its growth targets for this sector

Increased corporate demand for IT products and services will reflect a growing awareness of the value oftechnology in various sectors Despite cutbacks due to the financial crisis, the financial services segmentwill continue to be significant, with spending on regulatory compliance and security, for example, lesssusceptible to cutbacks The market also remains relatively under-penetrated, with IT implementationslargely limited to transactional support Islamic banking also presents strong growth opportunities over thenext few years

Another potential demand driver will be organisations looking for help to utilise efficiencies from cloudcomputing, such as SaaS and infrastructure-as-a-service The cloud computing market is currently small in

absolute terms, at less than IDR2bn, but in H111 IT giants such as PT Telkom and Microsoft launched

cloud services in Indonesia and demand should grow as more vendors enter the market

Table: Internet - Historical Data And Forecasts, 2010-2017

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 26,211 29,758 37,597 45,116 50,981 55,569 58,348 61,265

No of internet users/100 inhabitants 10.9 12.3 15.4 18.3 20.4 22.1 23.0 23.9

No of broadband internet subscribers ('000) 2,280 2,736 2,983 3,222 3,383 3,552 3,729 3,841

No of broadband internet subscribers/100

f = BMI forecast Source: BMI ITU, Kominfo, operators

New data from the ITU show that there were approximately 37.6mn internet users in Indonesia at the end of

2012, up from 29.8mn a year earlier These figures are lower than those previously reported, although itremains unclear why the data have been revised downwards Kominfo, the agency charged with publishingstatistical analyses of the postal and communications markets, has not disclosed any useful information

since 2010 Therefore, BMI is using the new ITU figures and adjusting its five-year forecasts to account for

the newly revealed market growth dynamic

The ITU data also show that there were 2.983mn fixed broadband subscribers in the country at the end of

2012, up from 2.736mn a year earlier This is broadly in line with our previous estimate for 2012, so there isonly a small change to our forecast for fixed broadband adoption

We are yet to include mobile broadband connections in the forecast owing to a lack of clarity from

operators regarding the number of dedicated mobile broadband connections (those that are primarily voice in nature) However, the top three operators indicate that there is a high level of usage of non-voiceservices, although we note considerable quarterly variations in growth

non-BMI expects Indonesia's fixed broadband industry to exhibit a steady growth trajectory with increasing

service adoption mainly in urban cities among businesses and more affluent consumers that require speed connectivity The masses' generally low purchasing power and lack of need for high-speed broadbandservices mean that 3G-based mobile broadband services will continue to struggle to achieve traction in themedium term We forecast 3.841mn fixed broadband subscribers by 2017, representing a penetration rate ofjust 1.5%, up from 1.2% in 2012

higher-Industry Trends - Broadband Sector

2010-2017

forecast = BMI Source: BMI, ITU, Kominfo, operators

Macroeconomic Forecasts

Economic Analysis

BMI View: Indonesian assets have been hit hard by the confluence of a global flight to the US dollar as

well as a record current account deficit and high domestic inflation Although both the government and central bank have made efforts to stem high levels of volatility, we note that the measures introduced thus far are unlikely to be sufficient, and that tighter monetary policy may still be needed to avert a crisis of confidence As a result of the hit that rising borrowing costs and inflation will take on investment and private consumption, we have downgraded our 2014 real GDP growth forecast materially to 5.4% from 6.0% previously.

Indonesian asset markets have been roiled recently following the release of worse-than-expected Q213current account data, which reflected a record US$9.8bn deficit against a previous central bank estimate ofUS$9bn The deficit, which was equivalent to 4.4% of GDP (harkening back to blow-out deficits in themid-1990s), proved to be the catalyst for a substantial sell-off in Indonesian assets Equities and the rupiahwere particularly hard-hit, shedding 9.9% and 5.0%, respectively, over the past week

BI, Government Measures Still Insufficient

In an attempt to calm markets, Bank Indonesia (BI) has been actively intervening by purchasing both

government bonds and the rupiah However, as we wrote recently (see 'BI Remains Under Pressure As Reserves Plummet', August 15th 2013), BI's intervention has failed to stem the tide of selling that has been

working against Indonesian assets throughout 2013, and with the central bank's reserves having alreadyfallen by 17.8% since the beginning of the year (total foreign currency reserves now stand at a relativelyinadequate 10.5% of GDP), we note that BI will be hard pressed to continue its pace of support for therupiah should the currency continue to sell off

of a lull in investment activity, as well as soaring inflation, which hit 8.6% year-on-year (y-o-y) in July.

BI To Remain Vigilant

Although we continue to expect the country's high inflation levels to retreat in 2014 (largely due to itspolicy-driven nature following fuel price hikes in June), both the government and the central bank will beforced to continue to address price growth before they can shift their attention to supporting economicactivity Despite the fact that BI has already hiked its benchmark interest rate by 125 basis points (bps) sinceJune (including 50 basis points of hikes at an emergency meeting held on August 29), real rates are stillsolidly negative, and with imported cost pressures set to build following the rupiah's sell-off, further hikesare not out of the question While we are currently projecting for BI to hold its benchmark rate at 7.00%until the end of the year, we note that price action on the rupiah continues to signal significant sellingpressure Should this continue, the central bank may find it necessary to pursue further rate hikes On the

part of the government, the Yudhoyono administration has announced a stimulus package that seeks toavoid inflationary direct transfers in favour of pro-investment policies.

Into Negative Territory

Indonesia -BI Benchmark Interest Rate, % & Headline CPI*, % chg y-o-y & Government 10-Year

Bond, % yield

Source: BMI, BI

*August 2013 CPI=BI Estimate

The package, introduced on August 23, has three main thrusts The first, aimed at shoring up the rupiah andcutting the current account deficit, includes such measures as tax cuts for labour intensive, export-orientedindustries, as well as a relaxation of quotas for mineral exports The second, which is meant to addressexport weakness, will provide further tax incentives for labour intensive industries, while also applying newtaxes on imports of such goods as luxury vehicles The third raft of policies, which should be the mosteffective, will apply a raft of tax holidays and other incentives towards the investment in and export of keycommodities such as palm oil, nickel, copper, and bauxite

Stimulus Unlikely To Prevent Growth Slowdown

While the introduction of such a package indicates proactive policy-making on the part of the government,

we nevertheless note that the intended measures will do little to shore up economic activity in the near term,and markets appear to agree with us given the Jakarta Composite Index (JCI)'s reaction to the news

Additionally, the introduction of tax holidays and other incentives in the commodities space may not beenough to entice investors, who will still face longer-term (and anti-business environment) initiatives inIndonesia aimed at curbing the export of unprocessed commodities That said, the assistance for labourintensive industries will be well-received, as this year's minimum wage hikes (in some areas as high as50%) have already forced a spate of affected firms to implement large-scale lay-offs

H114, we believe that BI will be likely to shift towards a more growth supportive bias, with potentialinterest rate cuts coming into play.

Table: Indonesia - Economic Activity

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Nominal GDP,

IDRbn 2 5,722,866 6,415,530 7,427,086 8,260,335 9,209,168 10,189,690 11,396,836 4,845,580 5,722,866 Nominal GDP,

US$bn 2 549.9 705.9 846.3 881 877.1 878.4 999.7 1,135.10 1,292.10 Real GDP

mn 3 237.5 240.7 243.8 246.9e 249.9 252.8 255.7 258.6 261.3 Industrial

Notes: e BMI estimates f BMI forecasts 1 Base Year = 2000 Sources: 2 BMI/IMF; 3 World Bank/UN/BMI.

Industry Risk Reward Ratings

BMI's Asia Pacific IT Risk/Reward Ratings (RRR) compares the potential of a selection of the region's

markets over our forecast period through to 2017 Our Q114 ratings reflect our consideration of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects

There were three changes in the aggregate scores of countries in our ratings table as we have updated ourmacroeconomic and industry data, although this resulted in only one change in our rankings compared tothe previous quarter South Korea displaced Singapore at the top of our table to take first position thisquarter following an upgrade to its country rewards score China's industry rewards rating was downgradedthis quarter but this was not sufficient to move the country from the fifth position on our table Sri Lanka'sscore in that category was upgraded this quarter but the country remained rooted to the bottom of our table.There were no changes to the aggregate scores of the other nine countries on our table Despite the changes

to South Korea, Sri Lanka and China's scores, the average regional score was unchanged at 54.9

South Korea registered an aggregate score of 72.2, compared to 71.0 in the previous quarter, owing to a 5ptincrease to its country rewards score Economic activity in the country picked up in H113, with real GDPgrowth of 1.1% quarter-on-quarter (q-o-q) during Q213 from a revised 0.8% q-o-q in Q113 Private andgovernment consumption were the main drivers of growth, expanding 1.0% and 2.4%, up from a -0.4% and1.2% in the previous quarter This performance had a positive effect on our country rewards rating, whichincorporates key macro indicators such as GDP per capita and unemployment in assessing the attractiveness

of the IT market

There was no change to Singapore's aggregate score, although it dropped to second position on our table onthe back of the upgrade to South Korea's score Singapore is one of only two countries with the maximumscore of 100 in the country rewards category The country's heavy reliance on technological innovations toattract businesses and drive economic growth due to limited land capital and a lack of natural resourcesmakes it an attractive market for a wide range of IT solutions, including advanced corporate solutions andconsumer mobility solutions Singapore scores slightly below average in the industry rewards categoriesowing to the relatively small size of its market

Hong Kong is the other country with a maximum score of 100 in the country rewards category, althoughthis could only earn it the third position on our table owing to weak industry rewards and industry riskscores Hong Kong, like Singapore, is held back by a small market size in the industry rewards category

while a strong Chinese influence on the country is a drag on its industry risk rating However, Hong Kongremains a prime financial hub, with strong demand for IT solutions that help companies to reduce operatingcosts and improve operational efficiency when carrying out transactions, particularly cross-border trade.

Australia remains in fourth position with an aggregate score of 68.0 The continued delay to the proposedNational Broadband Network, which will vastly improve broadband coverage and speeds throughout the

country, thereby providing a boost to the IT sector, poses a downside risk to our outlook BMI notes that the

project could see further disruption after the entire board of state-owned NBN Co reportedly offered toresign following the general elections in September 2013, which brought the Liberal-National coalition(LNC) to power The new Communications Minister Malcolm Turnbull is proposing an alternative NBNplan proposed to replace the previously proposed fibre-to-the-home (FTTH) technology with fibre-to-the-node (FTTN) The new government intends to rely on less of fibre and more on the existing copper

networks to save costs and time We believe that this is a short-term solution that could materially impactdevelopments in the IT industry

China also remains in fifth position despite a 1.5pt decrease to its aggregate score This further narrowed thegap with Malaysia to just 0.1pt Malaysia is in sixth position with a score of 57.2 We downgraded China'sindustry rewards score to 73.3 this quarter from 76.7 in our previous update to reflect the likely impact of aslow down on economic growth on demand for IT services However, the country's score in this categoryremains the highest in the region owing to its large population and rising income levels We retain the viewthat China will shift its economy away from infrastructure investment and towards consumer services,creating opportunities for the IT sector There is no change to Malaysia score this quarter, although

continued investments in cloud technology poses an upside risk to our outlook

There is a 10-15pts gap between Malaysia in sixth position and India, Indonesia, Thailand, Philippines andVietnam in that order from seventh to 11th Although these countries have considerably larger populationsthan some countries ahead of them on our table, they are held back by weak country rewards scores whichreflect lower GDP per capita and rate of urbanisation, as well as higher rates of unemployment Amongthese countries, Indonesia has the highest country rewards score of 35, compared to the regional average of49.6, while India and Vietnam recorded joint the lowest score of 15

That said, India's IT market houses some of the world's largest players - Wipro, Tata Consultancy and Infosys - and we note that companies in the country are becoming more receptive to engaging the services

of professional IT firms to reduce cost and focus on their core competency The Philippines is a established player in the business process outsourcing (BPO) industry but there are signs that the country is

well-trying to move towards high-value services Thailand's ICT industry is looking increasingly brighter withthe National Broadcasting and Telecommunications Commission able to implement changes, while

Vietnam has pledged to invest US$8.5bn in its ICT sector in the next 10 years The government is also

looking to attract US$5bn worth of foreign investments in the IT sector by 2015, according to Avaya In

April 2013, construction for the Danang Hi-Tech Park, which costs US$278mn and follow the same model

as the US' Silicon Valley and Taiwan's Hsinchui Science Park, was started The project is expected to houseabout 100 businesses, create 25,000 jobs and generate revenue of US$3bn

Sri Lanka remained in 12th position with an aggregate score of 35.0 compared to 35.2 in the previousquarter We upgraded the country's industry rewards score to reflect improvements in fixed and wirelessbroadband networks and investments cloud services However, the country continues to lag behind its peers

on all for categories of our ratings table On a positive note, recently-released GDP figures for Q213 showedheadline economic growth surging to 6.8% year-on-year (y-o-y), up from the 6.0% rate witnessed in the

first quarter, and beating consensus expectations for a 6.1% expansion (according to the Bloomberg

survey) Overall, Sri Lanka's economy grew by 6.3% y-o-y in H113, which is approximately in line withour full-year real GDP growth forecast of 6.4% This development bodes well for the IT sector, whichshould see sustained demand for corporate and consumer IT solutions throughout 2014

Table: Asia Pacific IT Risk/Reward Ratings - Q1 2014

Rewards Risks Country Industry rewards Country rewards Industry risks Country risks IT rating Rank Previous rank

Asia Pacific IT Risk/Reward Ratings - Q1 2014 - Continued

Rewards Risks

Average 58.1 49.6 45.2 60.7 54.9

Scores out of 100, with 100 highest The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks' Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/

economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

The hardware market in Indonesia is forecast to reach a value of IDR45trn in 2013, an increase of 14.2% from 2012 BMI has downwardly revised its 2013 forecast, following a dip in sales in Q113 However, BMI still forecasts that hardware spending will increase at a compound annual growth rate (CAGR) of

10.2% from 2013 to 2017 in local currency terms Even with this fast pace of growth, the share of hardware

in the overall IT market will decline by two percentage points (pps) during our five-year forecast period to2017

BMI maintains a positive growth outlook for the IT

hardware market in 2013, with wider economic

performance providing key impetus for growth

However, the effects of a depreciating currency and

a slowing economy appear to have had an impact on

PC sales in Q412 and Q113 Retailers reported that

sales in the first three months of 2013 were down on

the same period of the previous year, even though

they were up on Q412 Government spending

remained robust but, amid continued economic

uncertainty, there were indications that businesses

were delaying upgrades

The forecast for 2013 comes on the back of a strong

2012, during which the market grew by an

impressive 17.3% The Indonesian economy seems

to be enjoying the fruits of political stability under a

government that is liberal, yet sensitive, to the demands of the market A weaker dollar translated intocheaper imports, boosting sales in the local currency, although the same effect will not be visible whenlooked at in terms of US dollar sales However, in 2013, the exchange rate between the US dollar and theIndonesian rupiah appears unlikely to make the same contribution to driving PC sales As of end-October

2013, the rupiah was among the weakest performing regional currencies of the year, having fallen byaround 15% This reduced purchasing power has affected household spending and counts among the factorscontributing to a weakening of demand for PCs

Hardware Market (IDRmn)

2010-2017

e/f = BMI estimate/forecast Source: BMI

Despite the current slowdown, there are a range of factors that combine to underpin our outlook for theIndonesian hardware market and still make it one of our picks for outperforming growth both regionally andglobally The Indonesian promise hinges on the following factors:

■ The sheer size of its economy places Indonesia among the top markets in Asia Pacific, even though PCpenetration remained low in 2012 It is the only country in South East Asia to feature in the G20 Forlong periods since the late 1970s, Indonesia has seen healthy economic growth -barring the meltdown in

1997 to a large extent Indonesia, at its present growth rates, is well on the way towards featuring in thetop ten global economies by the year 2025

■ The low PC penetration rate means there is a large pool of first-time buyers that can be tapped as incomes

rise over the medium term Intel pegs the PC penetration of the country to be as low as 7%, while other

estimates are slightly higher, at around 9-10% for 2012 This is still considerably lower than regional

peers such as Malaysia and Thailand as well as even Philippines and Vietnam Given BMI's forecast for

real private final consumption growth to average 6.5% annually from 2013 to 2017, during which timeGDP per capita will increase from US$3,595 in 2012 to US$6,031 in 2017, the lack of PC penetration is acompelling business opportunity

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on cities such as Jakarta, according to estimates, providing a much clearer picture of themarket opportunity In Q113, regions outside Java and Bali were reported to show the fastest quarterlygrowth, while some other regions showed a decline

■ Indonesia presents an attractive demographic distribution, with over half of the population under 30 years

of age, as of 2013 This distribution places the segment most receptive to IT in a clear majority, whichbodes well for IT hardware vendors over the medium term

The notebook category has been an outperformer in the retail market and is the largest market in South East

Asia BMI estimates that the combined shipment units for notebooks and tablets in Indonesia grew by an impressive 31% during 2012, to 4.2mn units According to BMI estimates, 3.3mn notebooks were shipped

during the whole of 2012, with sales of a further close to 1mn tablets These numbers are a resoundingendorsement of the health of the market

Notebooks have gained the greatest traction in the retail market, where BMI estimates that they account for

upwards of 80% of sales, compared to around one-third of units in the business market However, in theretail segment, the popularity of traditional notebooks is being undermined by enthusiasm for newer formfactors, such as tablets This difference between retail and corporate and business users is supported by

statements from Chinese equipment vendor Lenovo Lenovo also contends that notebooks are the main

draws for first-time PC users, including students Given the demographic profile of Indonesia, it is obviousthat the most promising customer segment is overwhelmingly in favour of mobile PCs Lenovo, in fact,pegs the proportional share of notebooks among the retail user's PC purchases at a formidable 85%

Recognising the appeal of notebooks in the largely aspirational youth segment, Lenovo offered its IdeaPadproducts at a very competitive price of US$250 in January 2013

Lenovo has good reason to be aggressive in the Indonesian market, as the top two slots in notebook sales in

the country in 2012 were occupied by Acer and Asus respectively, according to IDC.

Tablets

Tablets experienced a sharp uptick in sales in 2012 and are set to grow rapidly in 2013 IDC estimates a42% increase in the number of tablet shipments in the country in 2012 In that sense, tablets in Indonesia arefollowing in the footsteps of their success globally Tablet uptake in Indonesia was initially slow, with an

Apple-centric market meaning the devices were out of reach for the majority of consumers However, more

affordable devices have seen volumes increase markedly

Statcounter data show that iOS (the operating system on Apple's iPad) and Android respectively accountedfor 2.1% and 3% of PC browsing traffic in March 2013 This is a small share of overall traffic, as would beexpected, but, with Android's share up by 2.4pps and iOS up 1.2pps, they are rising rapidly It is notablethat Android is ahead of iOS, a feature not seen in the vast majority of markets, even with low incomes

Samsung claims to have achieved 50% tablet market share in 2012 through its Galaxy Tab products (as

well as an 80% share of Android smartphones), moving it ahead of Apple

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has saidthat it expects tablets to contribute 50% towards its total Indonesia market sales in 2013 The vendor hopes

to capture 20% market share in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in aneffort to target the emerging middle class IDC states that Acer was not even among the top 10 tabletvendors in 2012, during which over 1.3mn tablets were shipped Acer's success in Indonesia will dependpartly on its ability to reach beyond the largest cities to establish a dealer network that will repair as well assell its devices As part of its drive to meet the target, from the last quarter of 2012, the company haslaunched an intensive marketing campaign for its tablets Asus has introduced a broad portfolio of tabletsmodels at various price points, with the newest Fonepad tablet following on from Memopad, VIotab andPadfone

Samsung is also well positioned to sell large numbers of tablets, with tablets expected to surpass notebookvolumes eventually However, we believe that low-priced alternatives from Chinese OEMs and localmanufacturers will be the ones to take the tablet truly mass market Key local vendors in the market include

Advan, MITO and Smartfen among others Meanwhile, Indonesia manufacturer S Nexian launched six

new devices in March 2013, including an 8-inch Android tablet The S Nexian device will come with 8GB

to 32GB of storage with a 1,024x768 resolution The device is available for IDR1.5mn (US$155),

approximately 50% of the cost of the Asus Google Nexus 7 and is available subsidised through a

partnership with telecoms operator Indosat, giving the user access to the operators 5,000 Wi-Fi locations

across the country S Nexian is targeting the sale of 250,000 tablets over the course of 2012

The decline in the average price of a tablet sold in Indonesia reflects the focus on the low end of the market.The average price was US$485 in 2012, which was a considerable drop from US$651, as recorded in 2011,according to Gfk Indonesia

Ultrabooks

Despite little traction being gained in 2012, Intel, the key driver behind the ultrabook concept, remains

bullish about it in Indonesia It plans to stick to its guns by employing the more advanced, and thus moreexpensive, Ivy Bridge processor There were suggestions from certain vendors about reverting to the cost-effective, but feature-limited Sandy Bridge processors; but Intel plans to stick to Ivy Bridge, for its betterendurance Some of the ultrabook models available in Indonesia as of Q412 include Acer Aspire S3, Asus

Zenbook, Dell XPS, HP Folio, Lenovo Ideapad U300, Samsung Series 5 and Toshiba Portege Z series.

While premium pricing of ultrabooks can be a showstopper in a price-sensitive market such as Indonesia,Intel is confident that economies of scale will make the price more palatable The release of Windows 8 inOctober 2012 could also provide a boost to the adoption of ultrabooks, as consumers and businesses

upgrade to the new operating system BMI expects lower-cost ultrabooks to become widely available in

H213 and 2014, as vendors risk losing out on volumes to tablet manufacturers Lower-cost slimline

Ultrabooks (or near equivalents) have already been seen in Vietnam

Netbooks

Netbooks have been a major source of growth in Indonesia, particularly the likes of devices from Axioo and

local PC makers that target first-time buyers The extended boom in netbooks is contrary to the trendglobally, where sales have fallen off as notebook prices have come down and tablets have captured themarket for ultra-mobile content consumers However, the market for netbooks tailed off in 2012, as

notebooks have become more affordable to local consumers and competition has intensified from low-costtablets

The advent of Windows 8 could be the final blow for the netbook market in the country, but even then weexpect there to be demand for the devices through 2013 and 2014 Globally, netbooks are now increasinglyseen as low-performing and bulky devices However, Indonesian customers have appreciated its price-performance ratio in a kinder light than other markets The appeal of netbooks is evident from the fact thatAcer launched its TravelMate B113 netbook in the Indonesian market as late as February 2013, whereasglobally the company is in the process of withdrawing from this product altogether Over the medium term,

we expect netbooks to become essentially an obsolete device category in the face of competition fromultrabooks and tablets

Windows 8

Windows 8 has met with an enthusiastic response in the Indonesian market after being launched in October

2012, with a wide array of product launches by vendors The shape of things to come was unveiled to an

extent in the boot camp held by Microsoft Indonesia in April 2012 for Windows 8 The camp saw the

launch of as many as 44 applications developed by Indonesians for Windows 8

In October 2012, with the launch of the new OS, Windows vendors were able to introduce touch devices with a number of tablets released The addition of more vendors and another touch OS will add to

-competition in the market - putting further pressure on prices

However, the more significant development is the medium-term impact on innovation and form factors.Windows has a traditional strength in productivity use cases and software, with the OS being central to theenterprise market and Microsoft's Office Suite ubiquitous There is therefore an opportunity for vendors toleverage this strength over rival iOS and Android devices by designing tablets with strong productivityfunctionality alongside the passive media consumption features Early examples have been hybrid devicessuch as Microsoft's own Surface (RT & Pro), HP's Envy and Lenovo's Yoga and Helix Although designinnovation has some way to go, and prices of hybrids will need to decline, the multi-use device has scope tocapture a share of the tablet market by offering a stronger value proposition to consumers while not

compromising on user experience

Indonesia PC Browsing Traffic By OS (% chg y-o-y & pps)

March-2013

Source: Statcounter

Local Manufacturers

Indonesia enjoys a strong base of local manufacturers and assemblers Apart from being price leaders, thesecompanies also cater to custom requirements These companies account for a sizeable fraction of overall PCsales

SMEs

SMEs form an important, yet comparatively unexplored component of the Indonesian hardware market TheMinistry of SMEs and Co-operatives asserts that SMEs account for 99% of the registered firms in thecountry and provide employment to 97% of its workforce Their share in exports and value-added products

is not commensurate with their overall dominance otherwise Investment in IT can offset this imbalance to aconsiderable extent

Financial Institutions

The Indonesian economy is on the ascendancy in terms of its growth rate The large proportion of SMEsprovides a strong domestic bulwark against the vagaries of international trade Buoyed by the long-termpositive prospects in the region, financial institutions have been employing continual upgrades Some of the

Indonesian banks that underwent core banking upgrades in the recent past include Bank Syariah Mandiri, Panin Bank and Bank Andara among others.

Government Push

The government will play a major role in boosting the prospects of IT hardware, both as a facilitator andend-user In H113, government spending was a bright spot for the PC market and helped to compensate forconstrained spending by the private sector Government investments in PC hardware were boosted by anumber of procurements delayed from Q412

The Indonesian government provided a major boost to the hardware market by eliminating duties onpersonal computers in 2010 Some of the major initiatives undertaken by the government as an end-userinclude the following:

■ The Palapa Ring Program, also known as the Nusantara Superhighway Project, driven by the Ministry ofCommunication and Information Technology, will create a backbone of optical fibre on a nationwidescale spanning more than 55,000 km and including terrestrial, as well as undersea cables The GlobalBusiness Guide Indonesia reports the project had achieved completion levels of 80% in February 2012