Indonesia information technology report q1 2015

We expect IT market growth will be supported by strong economic growth, a low PC penetration rate, enterprise and public service modernisation and an emerging middle class.. Retail hardw

Q1 2015 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q1 2015

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2014

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BMI Industry View 7

SWOT 9

IT 9

Wireline SWOT 11

Political 13

Economic 15

Industry Forecast 17

Table: IT Industry - Historical Data And Forecasts (Indonesia 2011-2018) 17

Macroeconomic Forecasts 24

Economic Analysis 24

Trade Account Improving 25

Risks To 2015 Growth Forecast On The Rise 26

Table: Economic Activity (Indonesia 2009-2018) 27

Industry Risk Reward Ratings 28

Asia Pacific Risk/Reward Index 28

Table: Asia Pacific IT Risk/Reward Index - Q1 2015 31

Market Overview 32

Hardware 32

Software 41

IT Services 48

Industry Trends And Developments 52

Regulatory Development 57

Table: Key Ministers And Departments 57

Competitive Landscape 60

International Companies 60

Table: Lenovo Indonesia 60

Table: Intel Indonesia Corporation 61

Table: Microsoft Indonesia PT 62

Table: IBM Indonesia 63

Table: Foxconn Technology 64

Local Companies 65

Table: Performance PT Multipolar Technology Tbk (MLPT) 65

Table: Walden Global Services (WGS) 66

Table: Aprisma Indonesia 66

Table: ALTiUS ERP 67

Company Profile 68

Sigma 68

Regional Overview 71

Demographic Forecast 75

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 76

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 77

Table: Indonesia's Key Population Ratios, 1990-2020 78

Table: Indonesia's Rural And Urban Population, 1990-2020 78

Methodology 79

Industry Forecast Methodology 79

Sources 80

Risk/Reward Index Methodology 81

Table: It Risk/Reward Index Indicators 82

Table: Weighting Of Components 83

BMI Industry View

BMI View: After minor disruption to market growth in 2014 as a result of the depreciation of the rupiah

against the US dollar, we expect the market to remain on a positive growth trajectory over the medium term We expect IT market growth will be supported by strong economic growth, a low PC penetration rate, enterprise and public service modernisation and an emerging middle class Retail hardware, enterprise software and cloud computing are identified as medium-term growth opportunities However, there is short- to-medium term downside if the Indonesian growth story is derailed by regional or global economic headwinds In the short-term, IT spending is forecast to increase to IDR170.2trn in 2015, up 11.1% from

2014, with the IT market accounting for around 1.5% of GDP.

Headline Expenditure Projections

Computer Hardware Sales: IDR97.0rn in 2015 to IDR122.1trn in 2018, at a compound annual growth rate

(CAGR) of 8% in local currency terms Growth boosted by deepening of the market as Android tabletvendors and Microsoft notebook vendors compete aggressively on price, as they look to tap the low

penetration opportunity in Indonesia

Software sales: IDR28.2trn in 2015 to almost IDR45trn in 2018, at a CAGR of 17.0% in local currency

terms Piracy is a major drag on software market growth, but despite this there is a robust medium termoutlook, particularly in terms of enterprise software sales to SMEs

IT Services Sales: IDR45.0trn in 2015 to IDR72.3trn in 2018, at a CAGR of 17.2% in local currency terms.

Cloud service adoption remains low, but as telecoms infrastructure improves and end-user education levelsincrease cloud services are expected to gain traction

Key Trends & Developments

investment in datacentres in Indonesia in recent years, for instance, by the end of 2015 PT Telkom group,

Indonesia's incumbent telecoms operator, expects to be operating the fourth-largest data centre business inthe world Meanwhile, IBM plans to offer cloud server, processor, RAM, and storage (IaaS) services usingits SoftLayer datacentres for as little as USD100 per month

The tablet boom continued in Indonesia in 2014, with volumes up markedly, making tablets the largest

device, with around 1.1mn more tablets sold than notebooks BMI expects growth in the notebook segment

will rebound, but nonetheless consider Microsoft's more aggressive tablet push positively as a hedge againstthe shift to mobile In October 2014 it was announced that local smart devices manufacturer Speedup hadpartnered with Microsoft and Intel and planned to release an 8-inch Windows tablet in December 2014 orJanuary 2015 aimed at the consumer and commercial segments It also plans to release a 10-inch version ofthe tablet aimed at the education segment The partnership means the devices will come with an attractivepackage of software and services including Microsoft Office 365, 1TB of One Drive cloud storage and 60

minutes of free Skype calls per month for a year There are yet to be details on pricing revealed, but BMI

expects the device will be price competitive against mid-range Android rivals as Microsoft's primary goal is

to gain traction in emerging markets, rather than short-term profitability

■ Local presence of major global vendors in terms of sales and production, providinglinkages for local start-ups and entrepreneurs.

Weaknesses ■ Underdeveloped telecommunications infrastructure, due to years of government

control and slow progress in deregulation

■ History of recent political instability

■ High piracy rate continues to be a drag on the software market, with the highestpiracy rate in the region and slow progress in reducing incidence of unlicensedsoftware

■ Indonesia overtook China as the largest source of cyber attack traffic in 2013, withcyber threats becoming an increasingly important issue for domestic users as well

Opportunities ■ Investment in telecoms and datacentre infrastructure 2011-2014 has laid the

foundations for rapid growth of cloud computing services, with SMEs considering a

SWOT Analysis - Continued

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

■ IT services, with local telcos investing heavily in data centres, networks, machine communication and cloud computing services

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

internet access, or drive ICT sector development

■ Regional economic instability could derail economic growth

Wireline SWOT

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 ■ Limited 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

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 ■ Indonesia has built a more stable democracy following peaceful handovers of

executive power dating back to the early 2000s We expect this trend to continue to

SWOT Analysis - Continued

■ 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 5.9% as of Q113 Many are forced to work in the informalsector Of particular concern is the youth unemployment rate, which is five times theoverall 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

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

sales,

IDRmn 52,483,944 64,838,028 83,198,136 90,376,226 97,021,789 104,664,383 112,961,414 122,068,661 Personal

computer

sales,

IDRmn 40,780,024 50,281,890 64,403,677 69,571,619 74,270,180 79,670,528 85,500,494 91,868,874 Software

sales,

IDRmn 12,275,481 15,740,422 20,526,753 24,202,447 28,170,362 32,921,706 38,470,821 44,997,859 Services

sales,

IDRmn 18,747,248 23,662,753 32,665,498 38,601,371 45,021,514 52,712,789 61,702,508 72,283,795

f = forecast Source: BMI

BMI has a bullish outlook for the growth of the Indonesian IT market in 2015 and over the medium term to

2018 We base our positive medium term outlook on our in-house Country Risk team's assessment ofeconomic trends, as well as declining product and solutions prices across the region These favourabletrends have attracted significant inward investment, which will add to growth momentum

2015 Outlook

BMI forecasts growth of 11.1% in 2015, with total market value expects to reach IDR170.2trn Indonesian

consumers remain optimistic about job, finance and spending prospects, which translates into spending

growth in the retail market This sentiment reflects BMI's view that the overall economic environment will

be conducive for IT market expansion in 2014 We forecast real GDP growth of 6% in 2015 and 5.5% realprivate final consumption growth, with both figures up from 2014 as the rupiah is forecast to stabilise in

2015 after depreciating against the dollar 2012-2014 Our core view is for robust growth in Indonesia, but

we highlight downside risk from global headwinds, with business sentiment and IT investment susceptible

to shifting confidence at the global and regional level

IT Market Growth2011-2018

Indonesia - IT market value, IDRmn

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

0 100,000,000 200,000,000 300,000,000

f = forecast Source = BMI

The largest segment of the Indonesian IT market are computer hardware sales, which are forecast to

underperform software and services growth rates in 2015, but will make an important contribution inabsolute terms with growth of 7.4% forecast in local currency terms Price pressures exist in the market,

with price erosion most pressing in the Android tablet ecosystem, but this is offset by the volume growthpotential Household PC penetration reached 15.1% in Indonesia at the end of 2012 - less than half theAPAC average of 31% and below the global emerging market average of 27.6% This fact, when consideredalongside Indonesia's large and growing population and trajectory of rising incomes, illustrates the growthopportunity in the retail hardware market

BMI expects government policy will remain supportive of IT market growth in 2015 Indonesian

development policy is aiming to lift Indonesia into the ranks of the world's top 10 economies by 2025 - aboon to ICT investment Direct spending by the government on infrastructure will boost the market in 2015.Government IT spending is expected to increase and continue to account for around 25% of the IT market,while the government is also encouraging state companies to use more IT

Datacentre investment is expected to remain on its strong growth trajectory in 2015, which will open up the

market for cloud computing to a much wider user base in Indonesia For instance, telecoms incumbent, PT Telkom Group, expects to be operating the fourth-largest data centre business in the world with 100,000

square metres of capacity by the end of 2015 New tier-2 and tier-3 facilities were scheduled for completion

by YE14 and, with the completion of Indonesia's first tier-4 facility also scheduled for YE14, Telkomalready has an estimated 70,000sq m of capacity at its disposal at the start of 2015 We expect capacityincreases to result in lower Infrastructure-as-a-Service costs, catalysing adoption

Finally, enterprise demand will be relatively broad based as firms across a range of verticals undertakemodernisation initiatives aimed at international expansion and defending market share domestically.However spending growth in some overweight IT verticals such as financial services and banking willremain critical to overall enterprise IT spending performance There is also great potential in currentlyunderpenetrated sectors, such as manufacturing

BMI believes income growth among the richest 20% bodes well for premium devices sales, which should benefit vendors such as Apple, while the income growth for the middle 60% of the population should

deepen the market as consumers benefit from increased disposable income and acquire first household/personal devices

Income Per Capita Breakdown

(2011-2018)

Poorest 20%, net income per capita, IDR Richest 20%, net income per capita, IDR Middle 60% of population, net income per capita, IDR

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0

25,000,000 50,000,000 75,000,000 100,000,000

e/f - estimate/forecast Source: BMI, National Statistics

There are also important device trends within the hardware market In the short term it is tablets that are thedominant trend, with low-cost tablets running Android, particularly from OEMs in China, expected to bepopular with Indonesian consumers However, there has also been a resurgence in the desktop and notebookmarket with sales boosted by the withdrawal of official support for the XP OS, prompting enterprise andpublic sector upgrades in 2014 However, of greater significance going forwards is the decision to cut OSlicensing costs for low-cost Windows devices, making them more cost competitive versus Android tablets

The enterprise market will also boost spending on IT products and services as modernisation initiatives areundertaken by firms looking to expand into neighbouring markets and/or defend domestic positions Privateenterprises, particularly SMEs, will provide a large part of PC sales, while ERP and other e-business

applications are also finding increasing popularity in the SME market The SME sector of 42.2mn

companies will drive demand for basic hardware and applications, as enterprises look to enhance

productivity through automating inventory, accounting and other functions

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, driving the development of the market by offering new services and increasinglevels of education among customers about potential uses

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

Segments

The enterprise hardware market will remain robust for the duration of our forecast, and continue to producestrong demand for desktops However the consumer market is also expected to remain dynamic and offerconsiderable growth opportunities Demand for traditional notebooks has been eroded by the popularity of

new form factors, particularly tablets, but BMI expects hybrids/convertibles could gain traction as prices

decline over the medium term, with first-time buyers likely to see multi-functionality as a major positiveover tablets not running full versions of operating systems

Indonesia GVA By Sector (%)

2015f

f = forecast Source: BMI, National Statistics, World Bank, UN

In terms of enterprise demand, BMI identifies the large manufacturing, mining and tourism sectors as

potentially fruitful verticals for vendors of enterprise products and solutions These are expected to be thelargest three segments of the Indonesian economy in 2014, and there are modernisation drives underway inall three verticals We expect inward investment in manufacturing facilities as wages rise in China to createdemand for enterprise software deployments to connect with global supply chains, as well as create

efficiencies

BMI believes the healthcare IT opportunity, and other public services, will be a major contributor to growth

over the medium term As an emerging market with a relative lack of legacy public service delivery

infrastructure - and challenging geography combined with the demands of urbanisation - we expect ITservices vendors with innovative solutions could win major contracts in the years to 2018

Meanwhile, despite cutbacks due to the financial crisis, the financial services segment will continue to beoverweight in enterprise IT spending due to the demands of the industry Spending on regulatory

compliance and security solutions are expected to register the fastest growth The market also remains

relatively under-penetrated, with IT implementations largely limited to transactional support Islamicbanking also presents strong growth opportunities over the next few years.

The SME opportunity is highly significant over the medium term, with government data showing 70% ofthe 56.5mn Indonesian SMEs use no IT solutions IT services for this segment will be dominated by basicservices such as system integration, support systems, training, professional services, and outsourcing Weexpect cloud vendors to be in a strong position to tap this demand, with cloud cost structures favourable forSMEs versus the economics of on-site deployment

Local players will capture a share of this growth through to 2018, but the SME market has also attracted theattention of global leaders, for instance, in October 2014 IBM promoted it SoftLayer IaaS product inIndonesia to SMEs, offering server, processor, RAM, and storage in the cloud for USD100 per month.Meanwhile, global software giant Microsoft launched the latest Office 365 SMB software package aimed atbusinesses with less than 250 employees This combination of local and global supply should make theSME market a hard fought battleground among vendors over the medium term

Macroeconomic Forecasts

Economic Analysis

BMI View: Indonesia's trade account continues to improve, and along with the increase in policy continuity

that should follow Joko Widodo's accession to the presidency, we believe that Indonesia's economic growth outlook will be brighter in 2015 That said, an obstructionist opposition in parliament, as well as a

decreasing likelihood of interest rate cuts in H115, underscore increasing downside risks to our sanguine real GDP growth forecast of 6.0% next year.

Following a period of slowing economic growth, we believe that the Indonesian economy is likely nearing abottom Real GDP growth slowed to 5.1% year-on-year (y-o-y) in Q214, its slowest clip since Q309 Theslowdown has been relatively broad-based, with private consumption growth (4.9% y-o-y versus 5.4% inQ114) and gross fixed capital formation (4.0% versus 4.6% previously) both retreating as higher borrowingcosts weigh on consumers as well as businesses At the same time, from an output perspective, the miningsector has fallen back into contraction (-0.1% y-o-y in Q214) as a confluence of factors has weighed againstit

One of the biggest drags on the industry, which remains a key contributor to Indonesia's overall economy(accounting for approximately 11.0% of GDP), has been the government's ban on the export of raw mineralores Not only has the ban hit economic growth by limiting exports, but it has also affected investment inthe sector as businesses consider alternatives to what has become an increasingly hostile business

environment for miners However, our mining team believes that the government is still on course to come

to terms with miners in order to restart the export of bauxite and nickel ores (which will likely be subject tohefty taxes) While this will not come close to solving all of the beleaguered mining sector's woes, it willnevertheless act as a boost to exports in the near-term

On The MendIndonesia - Exports & Imports, USDmn (LHS) & Balance

Source: BMI, Statistik Indonesia

Trade Account Improving

While Indonesia has yet to return to the consistent trade surplus that it registered in 2012, the country's tradeaccount has registered an improvement thus far in 2014 versus 2013 We believe that this is largely a result

of Bank Indonesia (BI)'s hawkish monetary policy cycle that began in mid-2013, and has since acted as adamper on import demand Through the first 8 months of 2014, Indonesia's trade deficit came in at justUSD1.4bn, a result that is considerably more manageable than the USD5.6bn deficit racked up during thesame period in 2013 While the end of the global commodities super-cycle means that Indonesia can nolonger rely on high commodities prices to run a consistently high trade surplus, we believe that the tradeaccount has been righted following its rapid deterioration last year

FDI Still On The RiseIndonesia - Foreign Direct Investment, USDmn

Source: BMI, BI

Along with the potential for greater policy continuity once incoming president Joko 'Jokowi' Widodoconsolidates his leadership, Indonesia's trade stabilisation should lead to increased investor confidence inIndonesia, which will bode well for foreign direct investment (FDI) To be sure, despite the economy'sslowdown (along with rising political uncertainty ahead of July's presidential elections), FDI in H114expanded by 24.8% versus the same period in 2013 This suggests that a shift away from the relativelyprotectionist policies that the government has sought over the past three years could boost FDI growthcloser to the rate of growth seen in the neighbouring Philippines, which has experienced more robusteconomic growth than Indonesia over the past two years amid an improving policy backdrop

Risks To 2015 Growth Forecast On The Rise

That said, risks to our relatively sanguine real GDP growth forecast of 6.0% for 2015 are on the rise Themost prescient risk is likely to stem from the country's political outlook, which has become increasinglyopaque as a result of aggressive politicking by Prabowo Subianto's Red and White coalition As we havestated previously, Jokowi's parliamentary coalition remains a minority, with approximately 37% of theoverall seats While Indonesia's legislature has not typically suffered from overt obstructionism in the past,

the contentious nature of this year's presidential elections suggests that Prabowo may utilise his coalition toblock legislation brought forward by Jokowi In such an event, his policy-making agenda (which we believe

is relatively business friendly compared to Prabowo's) could be significantly undermined

At the same time, risks are rising regarding our expectations for Bank Indonesia (BI) to cut its benchmarkinterest rate in H115 Although Jokowi's efforts to hike fuel prices could be stymied by the aforementionedpolitical opposition, it is possible for him to issue a presidential decree in order to push the legislationthrough In the event that the fuel price hikes are significant (above 15%), headline inflation would likelyrise above BI's target range, thereby delaying the prospect of interest rate cuts as the central bank maintainsits focus on inflation management

Table: Economic Activity (Indonesia 2009-2018)

2009 2010 2011 2012e 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 538.8 709.5 838.4 876.6 869.3 860.2 957.1 1,110.3 1,264.2 1,441.0 Real GDP growth, % y-o-y 4.6 6.2 6.5 6.3 5.8 5.1 6.0 6.3 6.5 6.6 GDP per capita, USD 2,268 2,948 3,438 3,551 3,479 3,402 3,742 4,294 4,837 5,456 Population, mn 237.5 240.7 243.8 246.9 249.9 252.8 255.7 258.6 261.3 264.1 Industrial production, % y-o-y, ave 1.5 4.3 4.2 5.0 5.3 5.8 6.0 6.5 6.5 7.0 Unemployment, % of labour force, eop 7.9 7.1 6.6 6.1 6.3 6.0 6.0 6.0 6.0 6.0

National Sources/BMI

Industry Risk Reward Ratings

Asia Pacific Risk/Reward Index

BMI View: BMI's Asia Pacific IT Risk/Reward Index (RRI) compares the potential of a selection of the

region's markets over our medium-term forecast period to 2018 The Q115 index reflects our analysis of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government initiatives to develop IT markets and local industry.

There are several changes in the position of markets in our Q115 index, and a net improvement in theregional average score This was driven by stronger sales of PCs (including desktops, notebooks and tablets)

in several key markets, as well as large scale investments by international IT enterprise vendors looking totap into the region's growth story The average regional IT score increased 0.7 percentage points

(pps) quarter-on-quarter (q-o-q) to 56.3 out of 100 in Q115, slightly behind the European average of 57.0,but with greater upside potential as the region continues to develop

There was a change at the top of the table, as South Korea reclaimed top spot from Singapore South Korea

moved up with a 1.2pps q-o-q improvement in its overall score, as BMI's in-house Country Risk team

upgraded the country rewards score, reflecting the medium-term growth prospects for the economy as awhole South Korea continues to score highly in the industry rewards category, second only to China, with ascore of 70 out of 100, supported by high per capita spending and high penetration not only of desktops andnotebooks but also of tablets and increasingly hybrid notebooks There is scope for an uptick in enterprise

IT spending in the medium term as vendors focus on cloud computing and IT services opportunities.Adoption levels among South Korean firms remain low considering the country's advanced economy status,but we expect this to change as competition in a range of sectors in the wider region intensifies, drivinginvestments in cost saving products and solutions

Singapore dropped to second position in the rankings in Q115, although there was no change to its score of72.8 out of 100 Singapore has always scored highly in our index, as one of only two countries with themaximum score of 100 in the country rewards category However, it scores slightly below average in theindustry rewards categories due to the relatively small size of its population, and therefore IT market This

is offset by Singapore's position as a regional hub for cloud computing services and data centres, which iscontinuing to attract major inward investment by global and regional vendors

Hong Kong is in third position in the index, closing the gap with Singapore as a result of a 1.7pps

improvement in the industry rewards category BMI upgraded the outlook for medium-term IT spending

growth, a key input in the industry rewards category Like Singapore, Hong Kong receives the maximumscore of 100 in the country rewards category As an economically developed city-state, Hong Kong offersmany advantages to firms, and benefits from its status as a regional financial services and cloud computinghub However, there is downside risk to Hong Kong's continued status as an affluent regional city-state,with financial services volumes under threat from the rapid rise of Shanghai, as well as political risks, asshown by protests in H214, that some uncertainty regarding Hong Kong's future political development.

Australia's score is unchanged, and it remains in fourth place, 12.8pps clear of Malaysia in fifth The maindifferentiator is the high incomes enjoyed by Australians compared to emerging markets in Asia Pacific.This supports a lucrative retail hardware market with very high per capita spending The economy's

developed nature ensures strong demand for enterprise solutions, while high labour costs make it a fertile

market for the development of a new generation of labour saving technologies such as IBM's

Watson-as-a-Service, which has already been trialled by local financial institutions Investments in supporting

infrastructure, particularly the National Broadband Network (NBN), present medium-term upside potential

Malaysia has moved up one place to fifth, overtaking China, as the former's score increased by 0.8pps whilethe latter's fell by 0.7pps However, the drawback of Malaysia's far smaller market is only partly offset byhigher incomes and development levels, and a difference of just 0.2pps in overall scores in, we expectChina to move back up the table However, Malaysia also has strong growth prospects as incomes rise and

as a result of a supportive government policy environment For instance, MSC Malaysia has made cloud

computing development a strategic priority and working to develop a national cloud computing platform.State governments are also exploring cloud computing, which should fuel growth in on-premises

deployment of enterprise solutions

China has dropped one place, but continues to be the market with the strongest medium-term potential,owing to its huge population and relatively advanced IT market in the context of income levels We have abroadly positive outlook, with the latest round of economic reforms scheduled for implementation by 2020

reflect the boom in consumer and enterprise spending on IT products and solutions in recent years BMI has

a bullish outlook for IT sector development over the medium term as a result of the strong growth story,enterprise modernisation initiatives and the large-scale investment by global and regional vendors toestablish and expand their presence in the country Indonesia will become an increasingly important engine

of IT market growth in the medium term

Based on its huge population India should sit higher up the rankings, but it is a market of contradictions.Compared to fellow regional giant China, India has performed poorly in raising the incomes of the majority

of its population, and it continues to be afflicted by widespread poverty, meaning swathes of the populationremain outside the IT market However, there are also considerable strengths Bangalore is the world'sleading location of outsourcing services provision, with Mumbai in third position India is also home some

of the world's largest IT services players, such as Wipro, Tata Consultancy and

Infosys However, ineffectual governance and weak institutions obstruct faster development, and we do not

see a short-term improvement despite reform-focused rhetoric from the new government That said, shouldPrime Minister Narendra Modi's government succeed in generating economic reform and improvingstandards of governance, India could move to a higher growth trajectory

The Philippines' IT score improved by 0.7pps after we upgraded the spending growth outlook due to thecontinuation of large-scale investments in the business process outsourcing (BPO) industry We expect this

to generate demand for IT products and solutions, particularly as outsourcing firms move up the value chaintowards services such as software development

Thailand and Vietnam are in 10th and 11th place, respectively, with unchanged scores However, the twomarkets have significantly different risk profiles, with Thailand's outlook weighted to the downside due tothe political crisis and the military's increasingly aggressive stance towards IT and telecoms services.Vietnam has considerable upside potential as it emerges as a hub for regional manufacturing, a trend thatcould accelerate with the development of the ASEAN Economic Community The first major investment

came from chip manufacturer Intel, announced in 2006, but other investments have followed from

Samsung Electronics, which expects to produce as much of 40% of its global smartphones and tablets in Vietnam by 2015, as well as Nokia and LG The growth of manufacturing will have an impact on

employment and wages, and will provide an incentive for students to pursue ICT-related skills

development

Sri Lanka remains at the bottom of the table, but its score has improved by 0.7pps as IT spending growth

momentum continues to gather This is reflected in recent product launches For instance, SAP announced

the launch of its cloud portfolio in Sri Lanka in April 2014, following the launch of Amazon Web Services,

the leading global cloud hosting provider, in December 2013 A continuation of this trend could see SriLanka's score improve That said, the country scores poorly in all categories of the index, with incomes andinstitutions only just recovering from a lengthy civil conflict However, there are bright spots as confidencereturns and local and international firms invest

Table: Asia Pacific IT Risk/Reward Index - Q1 2015

Country Industry rewards Country rewards Industry risks Country risks IT score Rank Previous rank

South Korea 70.0 85.0 75.0 65.4 73.4 1 2 Singapore 58.3 100.0 70.0 74.4 72.8 2 1 Hong Kong 60.0 100.0 45.0 77.7 71.2 3 3 Australia 61.7 95.0 57.5 66.9 70.3 4 4 Malaysia 60.0 55.0 37.5 67.7 57.5 5 6 China 73.3 35.0 45.0 55.1 57.3 6 5 Indonesia 65.0 35.0 42.5 51.4 52.5 7 8 India 66.7 15.0 45.0 50.9 48.6 8 7 Philippines 55.0 30.0 42.5 50.9 46.6 9 9 Thailand 53.3 20.0 35.0 62.9 44.7 10 10 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 48.3 15.0 37.5 50.9 39.3 12 12

Average 60.4 50.0 47.3 60.6 56.3 -

-Scores out of 100, with 100 the best -Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks' at 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

The Indonesian hardware market also has solid medium-term potential BMI forecasts that hardware

spending will increase over the medium term at a compound annual growth rate (CAGR) of 8.0% to 2018 inlocal currency terms Even with this fast pace of growth, the share of hardware in the overall IT market willdecline by seven percentage points (pp) during our five-year forecast period to 38.4% in 2018 as servicesand software growth outperforms as the market matures

Over the medium term BMI expects strong income growth will enable vendors to target the low PC

penetration rate in Indonesia as large numbers of first-time buyers enter the market, which should ensuregrowth in terms of both volumes and value to 2018 There are a range of factors that combine to underpinour outlook for the Indonesian hardware market and still make it one of our picks for outperforming growthboth regionally and globally

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

Indonesia, at its present growth rates, is well on the way towards featuring in the top ten globaleconomies 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 individual PC penetration of the country to be as low as 7%,

while other estimates are slightly higher, at around 9-10% for 2012 The latest regulatory data showhousehold PC penetration reached 15.1% in 2012, compared to the APAC average of 31% and the

developing world average of 27.6% Given BMI's forecast for real private final consumption growth to

average 6.4% annually 2014-2018, during which time GDP per capita will increase from USD3,489 in

2013 to USD5,566 in 2018, the low PC penetration rate is a compelling 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 2013, 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

Local Manufacturers

Indonesia enjoys a strong base of local manufacturers and assemblers, with potential for acceleration ininvestment in 2015 as the AEC develops (see Industry Trends & Developments for more details) Apartfrom being price leaders, these companies also cater to custom requirements These companies account for asizeable fraction of overall PC sales

Hardware Market(2011-2018)

Personal computer sales, IDRmn Servers sales, IDRmn

2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

25,000,000 50,000,000 75,000,000 100,000,000

f - forecast Source: BMI

Enterprise Demand

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

Meanwhile, buoyed by the long-term positive prospects in the region, financial institutions have beenemploying 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 2013, 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 ongoing computerisation of government procurement, also known as e-GP had covered more than 25enterprises in 2012, according to the Global Business Guide Indonesia

■ Computerisation of road toll collection Issuing of electronic identification cards to citizens, also known

as e-KTP, covered close to 60% of the target population by 2012

Household PC Penetration (%)

2010-2012

Source: National Regulator, ITU

Notebooks

BMI estimates a total of 3.65mn notebooks were sold in 2014, an increase of just 8% from 2013, a marked

slowdown from growth in recent years as tablet demand cannibalised notebook sales However, but weexpect stronger growth over the medium term as first-time buyer households are attracted to the greaterfunctionality offered by notebooks compared to tablets We forecast notebook volumes will grow at aCAGR of 11.9% to 2018, with total volumes expected to reach 5.9mn in 2018

business users is supported by statements from Chinese equipment vendor Lenovo Lenovo contends thatnotebooks are the main draws for first-time PC users, including students Given the demographic profile ofIndonesia, it is obvious that 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%

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

the country have been occupied by Acer and Asus respectively in recent years ASUS retained its lead in

the Indonesian consumer notebook segment in 2013, with sales up 10% from 2012 ASUS had a 27.3%

share of notebook sales in 2013, according to GfK This includes a leading position in conventional

notebooks (26.1%) and ultra-thin notebooks (36.8%) The latest data for Q214 show ASUS strengthened itsleadership position in the Indonesian notebook market with a share of 32.6%, according to GfK

The growth opportunity in the Indonesian notebook market means vendor interest has been maintained, withJapanese vendor Fujitsu announcing two new E-Series Lifebook notebooks in June 2014 The notebooks are

aimed primarily at the enterprise segment, where Fujitsu has a strong position as a hardware provider, but it

was still targeting growth of 20% across all product lines in Indonesia in 2014

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 By 2013 netbooks had declined to a peripheral device category in the Indonesian market in terms ofsales

2,000 4,000 6,000 8,000

f = forecast Source: BMI

Tablets

BMI estimates tablets were again the largest PC device category in 2014, having narrowly surpassed

notebook volumes in 2013 We estimate shipments of 4.7mn in 2014, an increase of 36.8% from 2013, and

we forecast a robust CAGR of 10.3% to 2018 We expect tablets to remain popular in Indonesia due to thelow-cost of devices relative to notebooks - critical to success in a low-income price sensitive market

However, we caution that the cuts to Windows OS licensing fees and vendor innovation in the hybrid

Statcounter data show that iOS (the operating system on Apple's iPad) continues to account for a large share

of tablet browsing traffic in Indonesia, reflecting the large installed base Further, the share of tablet traffic

from iOS was up 8.2pp year-on-year (y-o-y) to 43.4% in September 2014 BMI believes Apple benefitted

from increased focus on the Indonesia market, which despite being an emerging market, is home to asignificant pool of premium oriented consumers as a result of the size of its population

In Indonesia, Samsung appears to be losing ground in terms of tablet sales - in contrast to performance

across most of APAC It was overtaken by Apple in March 2014 in terms of tablet browsing traffic share inIndonesia, and Samsung also lost out to rival players in the Android ecosystem, with its share of trafficdown 9.0pp y-o-y to September 2014 This data is in line with Samsung claims that it achieved 50% tabletmarket share in 2012 through its Galaxy Tab products (as well as an 80% share of Android smartphones),moving it ahead of Apple However as is the case in the majority of emerging markets, price erosion in theAndroid ecosystem has seen Samsung fall back slightly, losing share to rivals undercutting its Galaxy range

to establish market share, for instance, Acer, ASUS and Lenovo - as well as a host of low-cost local/regional vendors

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has saidthat it expected 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 Statcounter is supportive of ASUS making inroads from a lowbase, with a 1.9pps increase in its share of tablet browsing traffic in Indonesia to 2% in September 2014

Meanwhile, the latest IDC states that Acer was not even among the top 10 tablet vendors in 2012, duringwhich over 1.3mn tablets were shipped Acer's success in Indonesia will depend partly on its ability to reachbeyond the largest cities to establish a dealer network that will repair as well as sell its devices As part ofits drive to meet the target, from the last quarter of 2012, the company has launched an intensive marketingcampaign for its tablets Asus has introduced a broad portfolio of tablets models at various price points, withthe newest Fonepad tablet following on from Memopad, VIotab and Padfone

When it announced the latest version the Yoga Tablet 8 and 10 in Indonesia in October 2014 global PCmarket leader Lenovo stated it was aiming for a 10% share of the Indonesia tablet market in 2015 - up from

a share of around 6% in 2014 At the event Lenovo officials stated its Indonesian business had been

adversely affected by device trends, political instability and the economy, with its business down 10%(however they did not mention whether this was in value or volume terms) Browsing traffic data indicate

Lenovo is making inroads, with its share of tablet traffic up 1.2 y-o-y to 1.2% in September 2014, with0.8pp of the gain made in the six months to September 2014.

BMI believes that low-priced alternatives from Chinese OEMs and local manufacturers are a major threat to

global brands in Indonesia and are playing a significant role in making tablets truly mass market Important

low-to-mid range vendors 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 (USD155), 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

Meanwhile, in October 2014 it was announced that local smart devices manufacturer Speedup had partneredwith Microsoft and Intel and planned to release an 8-inch Windows tablet in December 2014 or January

2015 aimed at the consumer and commercial segments It also plans to release a 10-inch version of thetablet aimed at the education segment The partnership means the devices will come with an attractivepackage of software and services including Microsoft Office 365, 1TB of One Drive cloud storage and 60

minutes of free Skype calls per month for a year There are yet to be details on pricing revealed, but BMI

expects the device will be price competitive against mid-range Android rivals as Microsoft's primary goal is

to gain traction in emerging markets, rather than short-term profitability

Tablet Top FiveIndonesia Tablet Browsing Traffic By Vendor (%) And y-o-y Change, September 2014

Source: StatCounter

Hybrids/Convertibles

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 to leverage this strength over rival iOS and Android devices

by designing tablets with strong productivity functionality alongside the passive media consumption

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), HP's Envy and Lenovo's Yoga and Helix More recently, a range of hybrids including the Dell Venue range and

Asus Transformer run full versions of Windows 8, increasing the functionality gap versus Apple andAndroid tablets