Indonesia information technology report q2 2009

Executive Summary Market Overview The Indonesian IT market should grow at a CAGR of around 9% between 2008 and 2013, despite signs in 2008 of an IT spending slowdown as demand in key se

Including 5-year industry forecasts

Indonesia Information Technology

Business Monitor International

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

Technology Report Q2 2009

Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: April 2009

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT Sector SWOT 8

Indonesia Telecoms Sector SWOT 9

Indonesia Political SWOT 10

Indonesia Economic SWOT 11

Indonesia Business Environment SWOT 12

Asia Regional IT Markets Overview 13

IT Penetration 13

Market Growth And Drivers 15

Sectors And Verticals 17

IT Business Environment Ratings 19

Table: Regional IT Business Environment Ratings 21

Market Overview 22

Government Authority 22

History And Market Structure 22

Bandung Hi-Tech Valley SWOT 23

Hardware 24

Table: Computer Spending By Sector, 2007 Estimate 25

Software 25

Services 26

Industry Developments 28

Industry Forecast Scenario 30

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

Internet 32

Table: Telecoms Sector – Internet – Historical Data & Forecasts 32

Macroeconomic Forecast 34

Table: Indonesia – Economic Activity 36

Country Context 37

Table: Consumer Expenditure, 2000-2012 (US$) 37

Table: Rural/Urban Breakdown, 2005-2030 37

Competitive Landscape 38

Hardware 38

Software 39

IT Services 40

Internet Competitive Landscape 41

Table: Regional Broadband Penetration Overview, 2007 41

Company Monitor 42

IBM Indonesia 42

Oracle 43

Sigma Cipta Caraka (SCC) 44

HP 46

Country Snapshot: Indonesia Demographic Data 47

Section 1: Population 47

Table: Demographic Indicators, 2005-2030 47

Section 2: Education And Healthcare 48

Table: Education, 2000-2005 48

Table: Vital Statistics, 2005-2030 48

Section 3: Labour Market And Spending Power 49

Table: Employment Indicators, 2001-2006 49

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 49

BMI Forecast Modelling 50

How We Generate Our Industry Forecasts 50

IT Industry 50

IT Ratings – Methodology 51

Table: IT Business Environment Indicators 52

Weighting 53

Table: Weighting Of Components 53

Sources 53

Executive Summary

Market Overview

The Indonesian IT market should grow at a CAGR of around 9% between 2008 and 2013, despite signs in

2008 of an IT spending slowdown as demand in key segments was affected by the global economic crisis Some organisations were cutting IT budgets, particularly in the financial sector which had previously accounted for as much as 30% of total spending

Relatively low levels of government IT spending compared with many other states may also mean that the IT market lacks a stabiliser which could help immunise it from the slowdown However, by 2013, the hardware-dominated IT market should reach a value of US$5.1bn, with Indonesia displaying faster growth than many ASEAN neighbours

Some fundamental drivers including low computer penetration, and growing affordability, and these should ensure that the market remains in positive growth territory Private consumption, which makes up more than 60% of GDP, continued to grow strongly in HY208, with an easing of inflationary pressures The SME sector of 42.2mn companies will drive demand for basic hardware and applications

Industry Developments

Indonesia’s Department of Communications and Informatics (Depkominfo) is rolling out a new platform

to increase the efficiency of a number of department services The new system will be deployed to help expedite processing of permit applications, as well as increasing transparency of procurement and other department operations

Among other current projects, Indonesia’s state enterprises ministry is to launch an e-procurement system that will standardise procurement in 25 state-owned companies The companies include some of the

largest in Indonesia, such as oil and gas company PT Pentamina and electricity firm PT PLN

The government is also rolling out new e-learning initiatives, which could see education’s share of the local IT spending rise from its estimated level of around 4% The current ratio of PCs to students in public schools is around 1:3200 and the government wants to increase this to 1:20 As there are 53mn students in Indonesia’s schools system, this would require at least 2.5mn computers

Competitive Landscape

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

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

network Metrodata

In 2008, following Asus’ initial success with its Eee PC, the netbook segment witnessed a series of

releases from the main international vendors HP released a series of consumer netbooks called HP Mini, while Dell Indonesia launched some of its own Mini Netbook series, including the Inspiron Mini, which featured a relatively larger keyboard Acer launched its popular Aspire 1 3G netbook on the local market

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

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

Education initiatives, announcing a co-operation with telecoms company PT Telkom and local software company PT Pesona Edukasi on an educational software development programme

Computer Sales

Computer sales (including notebooks and peripherals) will be worth around US$2.5bn in calendar year

2009, according to BMI estimates, up from US$2.4bn in 2008 Growth slowed a bit in 2008 and is seen

as easing further in 2009 before ticking up again in 2010 Early results from 2009 were moderately encouraging, with sales in January at a similar level to the same period of the previous year, according to industry figures Spending on IT hardware is likely to slow from some organisations, particularly in the financial sector, or amid trading companies with exposure to export markets affected by the global

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

Software

For 2009, software sales are projected by BMI at US$406mn, up from an estimated US$377mn in 2008,

despite the continuing piracy problem, which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year In 2008 Indonesia was ranked as the country with the twelve highest level of software piracy in the world, at around 84% Application software accounts for more than 40% of the total software market currently Within the applications segment, the single largest segment is back-office applications, accounting for around two-thirds of sales Inventory is an entry-point application for many businesses

IT Services

Indonesia’s IT services market is expected to be worth US$595mn in 2009, recording year-on-year

(y-o-mainly in fundamental services such as system integration, support systems, training, professional

services, outsourcing and internet services

E-Readiness

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

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

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

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

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

SWOT Analysis

Indonesia IT Sector SWOT

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

around 1.5%

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

ƒ Lack of government support Still no unified ICT ministry

ƒ History of recent political instability

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

government is showing signs of taking intellectual property more seriously

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

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

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

internet access, and drive ICT sector development

ƒ Global economic slowdown may hit key demand segments, including banks

Indonesia Telecoms Sector SWOT

ƒ Presence of key strategic investors including SingTel, ST Telemedia of Singapore, Telekom Malaysia and Maxis of Malaysia, Hong Kong’s Hutchison and the United Arab Emirates (UAE)’s Etisalat

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

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

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

mobile users as non-registrants are deactivated

ƒ Dominance of prepaid market leading to falling ARPU rates

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

Indonesia Political SWOT

parliamentary and presidential elections pass peacefully, this would signal the consolidation of the democratic process

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

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

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

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

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

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

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

Indonesia Economic SWOT

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

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

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

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

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

business environment, particularly through reform of its unreliable legal system

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

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

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

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

Indonesia Business Environment SWOT

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

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

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

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

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

environment, particularly by strengthening the legal system and fighting corruption

If sustained, this would boost investor interest in Indonesia

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

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

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

Asia Regional IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives and

growing affordability will drive increases in

PC penetration during BMI’s forecast period

to 2013 While some cities and regions stand

out, there is an unbalanced pattern of regional

development, with PC penetration in

countries like Singapore being above 50%,

while in other countries, for example

Indonesia, it is less than 2%

The two Asian giants, China and India,

embody the region’s growth potential, as in

both countries computer ownership remains

the preserve of a minority In China, PC

penetration was only around 16% in 2007 although it was far higher in cities like Shanghai and Beijing, and projected to pass 25% overall by 2013 In India, less than 2% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased

PC ownership The government’s ultimate

target of 1bn internet-connected computers in

India is equivalent to the total estimated

number of PCs in the world today

Around the region, affordable computer

programmes are finding favour with

governments In early 2009 China announced

a new subsidised PC programme aimed at

rural residents In the Philippines, where

penetration is currently around 5%, the

government launched its PC4All programme

in 2007 In Indonesia, penetration of around

2% could double by 2013 if government

initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio of PCs to students in public schools rise to 1:20

Internet Penetration

(per 100 population)

0 10 20 30 40 50 60 70

A similarly broad range is found with respect to internet penetration India and Indonesia are now above 17% penetration, despite a lack of fixed-line infrastructure in those countries Both have deployed fixed wireless technologies as one alternative solution, and overall penetration should pass 30% in both by

2012 The fastest growth is projected for India, in which penetration is projected to increase from 17.7%

to 44% by 2013, while Indonesia suffers from high tariffs

Singapore should also see strong momentum and is projected to record more than 86%broadband

penetration by 2013 This is due partly to the Infocomm Development Authority (IDA)’s ambitious

‘Intelligent Nation’ initiative Meanwhile, some 46% of Malaysians had internet access in 2008 Across the region, government programmes are an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China, and every township in the west

Dial-up technology is still the dominant access method However, even in developing markets the number

of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course

to reach 20% by 2013 In India, where the government designated 2007 as ‘the Year of Broadband’, penetration should increase tenfold to reach 5.4% by 2013 from around 0.5% currently This is far below government targets, however Malaysia and Singapore will also see strong growth in the number of broadband subscribers

Governments around the region are interested in WiMAX as a potential alternative broadband access method, with India and Malaysia among the countries where network deployments are planned

Meanwhile, the growth of Wi-Fi coverage will be one driver of notebook sales in places like Hong Kong, where the government has committed another HKD200mn to the deployment of a Wi-Fi network

covering more than 200 public venues

Market Growth And Drivers

Most Asian IT markets are expected to remain in positive growth territory in 2009, despite an expected impact on IT spending from the global

economic slowdown Across the region,

demand from both business and consumer

segments weakened in H208, after often

robust sales in the first half of the year The

difficult economic headwinds will persist in

2009, but strong fundamental demand drivers

meant that there will be continued

opportunities Key factors include cheaper

PCs and reform in sectors such as

telecommunications and finance, as well as

government initiatives

In China, the falling stock market and high

inflation affected consumer sentiment in

2008, while declining external demand

influenced business investment plans

However, BMI expects IT market growth to

be maintained by an expansion into western

China, rural areas and lower tier cities, as

well as growing demand from small to

medium-sized enterprises (SME) IT spending

will also receive a boost from government

spending and IT projects associated with the

Shanghai World Expo in 2010

In India, IT spending growth slowed

significantly in 2008 and is expected to ease

further in H109, before starting to recover in H209 Fundamental market drivers include the government’s ambitions to connect the vast rural areas to the outside world, coupled with falling computer prices In early 2009, India’s government announced a series of measures in early 2009 to stimulate the market Meanwhile, India’s business process outsourcing (BPO) industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

IT Market Sizes (US$mn)

(2008e)

0 20,000 40,000 60,000 80,000 China

Hong Kong India Indonesia Malaysia Philippines Singapore

e = estimate Source: BMI

IT Market Sizes As % Of National GDPs

(2008e-2013f)

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

e/f = estimate/forecast Source: BMI

As mentioned above, the Philippines is one of the countries currently benefiting from low price PC programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional

computer sale drivers over the forecast period

include education, lower prices, IP telephony,

cheaper processors, and notebook

entertainment and wireless networking

features Meanwhile, in Indonesia, relatively

low levels of government IT spending may

mean that the IT market lacks a stabiliser

which could help immunise it from the

slowdown Once again, however, the basic

demographics of low computer penetration,

and growing affordability, should keep the

market in positive territory

In more developed markets, such as Hong Kong and Singapore, there were indications of declining consumer and business sentiment in H208, but IT spending remained in positive territory for the year as a whole The Singaporean government continued to be a major factor in 2008, with the US$1.3bn Standard Operating Environment tender award In Hong Kong, rising unemployment, and exposure to the financial crisis, will contribute to slower growth in 2009, but this will be partly counteracted by higher government

IT spending, and cross-border trade and co-operation

The largest IT market in the region is, unsurprisingly, China, estimated at US$73.1bn in 2008, trailed distantly by India (US$13.8bn) and Singapore (US$4.8bn) Singapore’s IT market (including

communications) is the largest as a proportion of national GDP (2.7%) followed by China, Hong Kong and Malaysia, all at 1.9%

The fastest growing IT market over the forecast period looks set to be India with 2008-2013 compound growth of 79%, taking first place due largely to low PC penetration China is second, with the IT market growing by an estimated 74% over the forecast period

IT Markets Compound Growth

( 2008e-2013f (%) )

0 20 40 60 80 100 China

Hong Kong India Indonesia Malaysia Philippines Singapore

e/f = estimate/forecast Source: BMI

Sectors And Verticals

Regional IT markets will remain hardware-centric, with hardware accounting for between 45% and 68%

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

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

prices and more features

2009 is likely to be a challenging year for hardware sales In many markets, demand proved quite robust

in H108, exceeding forecasts, but there were signs of a slowdown towards the end of the year Demand

from under-penetrated rural areas, affordable computer programmes and growing broadband penetration

should generally prevent stagnation

In both emerging and more mature markets, the growing popularity of broadband will help to support

computer sales China Telecom is among regional telecoms companies to have rolled PC bundling offers

as part of its broadband packages Meanwhile, a wave of 3G launches across the region should also

provide a stimulus to sales of notebooks, with Vodafone Hong Kong among service providers offering

3G/ HSPA USB modems bundled with their 3G services

In much of emerging Asia, demand from smaller towns and rural areas will provide the main source of

growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth

segments over the forecast period, with SME demand for servers and networking equipment a significant

0 10 20 30 40 50 60 70 80 90 100

e = estimate Source: BMI f = forecast Source: BMI

Due in part to high levels of piracy, software’s share of IT spending is relatively low, ranging from 11%

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

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

Despite the economic downturn, there are still expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some

sectors and to encourage vendors to promote software-on-demand solutions There is a growing trend for

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

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

BMI The economic situation, and credit tightening, is likely to have an impact on projects in some

verticals, but continued demand in sectors like telecoms and banking will help to prevent stagnation Government spending will account for a larger share of spending in many markets In China, government stimulus packages should drive IT-related investments, while Singapore government ICT tenders were worth an estimated US$1bn in 2008, and the Hong Kong government’s Digital 21 initiative will continue

to generate a number of projects

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

fundamental services including system integration, support systems, training, professional services, outsourcing and internet services Main spenders across the region include banks and financial institutions and governments Even in emerging markets like India, IT vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

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

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

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

IT Business Environment Ratings

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

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

In 2008 the global economic slowdown had a marked but varied impact across Asian IT markets, with spending growth declining sharply in some states like Malaysia and Indonesia, but holding up relatively well in others like Hong Kong The more mature IT markets of Singapore and Hong Kong take the top two spots in our Q109 rankings table, due primarily to their high country structure scores Both of the two regional giants, China and India, saw dips in consumer IT spending in H208, but both have strong market drivers, which should ensure continued growth

Malaysian IT spending felt perhaps the biggest impact from the global economic headwinds In 2009 IT spending in the country will benefit from the government stimulus package unveiled in March 2009, as well as broadband roll-outs and a new small and medium-sized enterprise (SME) modernisation fund In the Philippines, the economic uncertainty and fall in remittances presents a threat to enterprise and

consumer IT spending, but the IT market will be driven by further growth in IT and business process outsourcing (BPO) Bringing up the field, Indonesia stands to be one of the Asian countries more affected

by the slowdown, with signs in 2008 of a number of organisations cutting IT budgets, particularly in the large financial vertical

Singapore and Hong Kong are relatively small IT markets, but each has a strong fundamental driver, which provides some relative immunity against current economic trends Hong Kong continues to offer investors in the IT field opportunities associated with its growing links to the vast China market

Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious

‘Intelligent Nation 2015’ plan and the standard operating environment Country risks are judged as low in both markets, reflecting generally good regulatory and market environments

On the downside, the continued restructuring of both economies to a more service-oriented economic model may limit long-term growth prospects, although this also brings opportunities in sectors such as financial services and banking These markets remain vulnerable to the current global economic

headwinds as export demand weakens and rising unemployment and low asset prices dampen consumer confidence The turmoil in financial markets may affect the important banking vertical in both markets, with heavy job cuts announced

In China, there were also signs in 2008 of the global economic slowdown having an impact on the

domestic IT market, and growth is expected to ease further in 2009 before making a recovery in 2010 Factors such as China’s vast potential rural market, government spending and demand from key verticals such as telecoms will help to guarantee a continued return Sectors driving double-digit IT spending growth currently include telecoms, government, energy, social security, education and transport

However, there are still risks associated with IP rights protection and piracy and a lack of business

environment transparency Pressure on hardware prices is also a risk in the current environment

Both Malaysia and the Philippines have suffered some impact from the economic crisis, which

governments of both states are determined to mitigate through a number of initiatives In Malaysia, greater affordability should support growing consumer PC demand, and the subsidised roll-out of a high-speed broadband network will address a relative lack of information and communication technology (ICT) infrastructure outside the Klang Valley The Philippines is set to be a high growth market, and the current global economic climate will present further BPO opportunities, which governments at various levels hope to exploit However, there are challenges such as labour shortages and rising wages

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

is plain, with less than 2% of the population owning a computer, about one-fifth the level in China Similarly, with ICT penetration of only around 20% and development restricted to richer areas such as Java, the Indonesian IT market has much latent growth potential Relatively low levels of government IT spending compared with many other states may also mean that the Indonesia IT market lacks a stabiliser that could help immunise it from the slowdown

Table: Regional IT Business Environment Ratings

Country

Market Risks

Country

IT BE Rating

Regional Ranking

Singapore 62 90 72 70 90 82 74.7 1 Hong Kong 47 90 62 70 88 81 67.6 2 China 68 25 53 30 69 53 53.2 3 Malaysia 50 50 50 35 71 57 52.0 4 Philippines 46 40 44 43 57 51 45.9 5 India 52 10 37 45 49 47 40.3 6

Scores out of 100, with 100 highest The IT BE Rating is the principal rating It is comprised of two sub-ratings 'Limits

of Potential Returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting, respectively In turn, the 'Limits' Rating is comprised of Food & Drink Market and Country Structure, which have a 70% and 30% weighting, respectively, and are based upon growth/size/maturity/govt policy of IT industry (Market) and the broader

economic/socio-demographic environment (Country) The 'Risks' rating is comprised of Market Risks and Country Risk which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry

regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings The ratings structure is aligned across the 14 Industries for which BMI

provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating

individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report Source: BMI

community and IT associations, as well as government

Other relevant government bodies and ministers include:

Key Ministers

Key Departments

Badan Pengkajian dan Penerapan Tehnologi (BPPT)

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

Departemen Perindustrian dan Perdagangan

History And Market Structure

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

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

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

Bandung Hi-Tech Valley SWOT

ƒ More than 500,000 high-tech workers

ƒ Some tax incentives

ƒ Weak telecommunications infrastructure

ƒ No international airport

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

even from within Indonesia (e.g Bali Camp)

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

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

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

Hardware

Computer sales (including notebooks and peripherals) will be worth around US$2.5bn in calendar year

2009, according to BMI estimates, up from US$2.4bn in 2008 Growth slowed a bit in 2008 and is seen

as easing further in 2009 before ticking up again in 2010 Early results from 2009 were moderately encouraging, with sales in January at a similar level to the same period of the previous year, according to industry figures

Hardware accounts for more than 70% of Indonesian IT spending Spending on IT hardware is likely to slow from some organisations, particularly in the financial sector, or amid trading companies with

exposure to export markets affected by the global economic slowdown However, the low levels of computer penetration in manufacturing segments mean that there is still plenty of momentum for growth

Local computer industry association Apkomindo expects volume sales of around 2.2mn units in 2009

In the current environment, the most promising growth driver is perhaps the consumer segment, which accounts for around 25% of computer demand The main drivers are growing affordability and more credit availability Prices of both notebooks and desktops are falling, with desktop prices now as low as US$400, while notebooks start from around US$700 Notebooks are now growing faster than the PC market as a whole, with around 1mn unit sales projected this year Demand for notebooks is being driven

by lower prices as well as smaller and lighter form factors and entertainment and wireless networking features Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in data centres

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

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

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

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

Table: Computer Spending By Sector, 2007 Estimate

While the consumer market is growing, the business sector looks set to continue to account for around two-thirds of sales opportunities during the forecast period Meanwhile, government spending remains relatively small compared with regional neighbours such as Singapore and India Education provides a small, but steadily growing, source of demand, accounting for 3-4% of sales, and this could grow with the government targeting the purchase of 2.5mn computers

Software

For 2009, software sales are projected by BMI at US$406mn, up from an estimated US$377mn in 2008,

despite the continuing piracy problem, which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year In 2008 Indonesia was ranked as the country with the twelve highest level of software piracy in the world, at around 84%

Given these developments, over the 2008-2013 period, software sector CAGR is forecast at 12%

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

Over the forecast period, ERP software continues to be of most interest to the SME market, as enterprises look to enhance productivity through the automation of essential functions Inventory is an entry-point application for many businesses, but the market is evolving from an emphasis on basic ERP applications

focused on operational efficiency, to more strategic modules such as CRM, business analytics and risk compliance The current economic crisis may lead some companies to cut IT budgets or look to defer systems updates, but other companies may see IT as a means of achieving greater efficiencies and

increasing competitiveness in difficult times

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

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

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

Data from the Indonesian Telematics Software Association (Aspiluki) suggested that 60% of software

in use in Indonesia – including in the government sector – is sourced from foreign producers

Services

Indonesia’s IT services market is expected to be worth US$595mn in 2009, recording y-o-y growth of

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

Indonesia’s hardware-centric IT market sales

Hardware deployment services remains the largest Indonesia IT services category, with approximately a 20% share Growth opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services Sector CAGR over the 2005-

2010 period is expected to be around 13% The economic situation, and credit tightening, is likely to have

an effect on demand in some key verticals which have been driving IT spending

The Indonesian IT market is dominated by two verticals, financial services and banking, and telecoms, which together account for around 50% of spending Banking as a whole is emerging as the single most important vertical, accounting for around 30% of IT spending, followed by telecoms and the government Government spending remains relatively small compared with regional neighbours such as Singapore and