Indonesia information technology report q2 2010

Some fundamental drivers, including low computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory.. ƒ Market may be enteri

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TECHNOLOGY REPORT Q2 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: April 2010

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

Business Environment Ratings 13

Asia IT Business Environment Ratings 13

Table: Regional IT Business Environment Ratings 15

Market Overview 16

Asia Regional IT Markets Overview 16

Market Growth And Drivers 17

Market Overview 21

Key Ministers 21

Table: Computer Spending By Sector, 2007e 24

Industry Developments 28

Industry Forecast Scenario 31

Table: Indonesian IT Industry - Historical Data & Forecasts (US$mn Unless Otherwise Stated) 33

Internet 34

Table: Telecoms Sector – Internet – Historical Data & Forecasts 34

Macroeconomic Forecast 36

Table: Indonesia – Economic Activity 38

Competitive Landscape 39

Company Profiles 44

IBM Indonesia 44

Oracle 45

Sigma Cipta Caraka (SCC) 46

HP 47

Country Snapshot: Indonesia Demographic Data 48

Section 1: Population 48

Table: Demographic Indicators, 2005-2030 48

Table: Rural/Urban Breakdown, 2005-2030 49

Section 2: Education And Healthcare 49

Table: Education, 2000-2005 49

Table: Vital Statistics, 2005-2030 49

Section 3: Labour Market And Spending Power 50

Table: Employment Indicators, 2001-2006 50

Table: Consumer Expenditure, 2000-2010 (US$) 50

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 51

How We Generate Our Industry Forecasts 52

IT Industry 52

IT Ratings – Methodology 53

Table: IT Business Environment Indicators 54

Weighting 55

Table: Weighting Of Components 55

Sources 55

Executive Summary

Indonesia is projected to represent one of the best Asian IT market growth prospects over BMI’s

five-year forecast period IT spending is forecast to increase to US$4.0bn in 2010, up from US$3.5bn last year Some fundamental drivers, including low computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of around 15% over 2010-2014, following a slowdown in 2009 when demand was affected by the global economic crisis Some manufacturing organisations deferred IT procurements, but there was continued spending in the financial sector, which had previously accounted for as much as 30% of total spending

By 2014, Indonesia’s hardware-dominated IT market is projected to reach a value of US$6.9bn With information and communication technology (ICT) penetration of only around 20% and development restricted to richer areas such as Java, the market has much latent growth potential However, the

country’s uneven development and resultant digital divide are a major barrier to faster growth within this potentially huge IT market

Industry Developments

In 2009, a ministerial decree directed that local government offices across Indonesia must adopt source software (OSS) by 2011 The mayor of Surabaya revealed in July 2009 that his city had launched a pilot project for OSS applications According to the mayor, all Surabaya municipal offices were now using the software and civil servants had been given relevant training The local government hoped that the municipality could save 20-25% of its budget

open-E-government is expected to emerge as an area of growing opportunity for IT vendors over the next couple of years Currently, several ministries at both federal and province level are planning to implement projects In 2008, a number of projects were launched, including an e-procurement system by the State Ministry for State Enterprise, which covered 25 state-owned enterprises, including oil and gas company

Pertamina and electricity company Perusahaan Listrik Negara

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

IT spending rise from its estimated level of around 4% The current ratio of PCs to students in public schools is around 1:3,200 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

segments of the Indonesian PC market with more product releases However, HP has pledged to strike

back and has set a target of reclaiming top spot in the Indonesian market from Acer at some point in H110 HP, estimating the market share gap between itself and Acer at around 10%, said it was optimistic that it could be leading Indonesia’s PC market early in 2010 as its products achieved greater penetration

In 2010, the focus of leading PC vendors such as HP, Acer and Lenovo is expected to be increasingly on

lighter and slimmer notebooks that offer consumers more features than netbooks In November 2009, Acer launched its Ferrari One model, which has an 11.6-inch screen and a dual processor, while HP’s new HP Envy line has a 13.1-inch screen as well as a dual processor Both are lighter than a mainstream notebook but have more processing power than most netbooks

IT service vendors have reported a growing demand in the telecoms, manufacturing and banking sectors Oracle has an agreement with local IT solutions provider PT Sigma Cipta Caraka to provide outsourcing services Meanwhile, e-government is also being eyed by IT service vendors as a potential growth area Tata Consultancy Services (TCS) said that it had targeted the government as a future growth driver in the Indonesian market Currently, TCS’s 15 local clients are principally from sectors such as banking and financial services, telecoms and media

Hardware

BMI forecasts 2010 Indonesian computer hardware spending of around US$2.8bn, up from US$2.5bn

last year Growth decelerated in 2009 but is forecast to return to double digits this year, with the market rising to a value of nearly US$4.7bn by 2014 Spending in 2009 surpassed initial expectations, due largely to notebook sales, which surged with the popularity of netbooks; notebook sales grew faster than desktops in H109

Hardware accounts for more than 70% of Indonesian IT spending The real PC volume sales driver in

2009 was small form factor netbooks, which achieved triple-digit shipments growth and sold upwards of 400,000 units The low prices and additional mobility were the main factors behind their success

Netbooks are popular as basic connectivity devices, and with internet penetration still below 10%, there is plenty of room for further growth

Software

Indonesia’s software sales are projected by BMI at US$475mn in 2010, up from an estimated US$410mn

in 2009 In 2010, sales of Microsoft’s new Windows 7 operating system has the potential to have an

impact, although much will depend on consumer and business confidence There should also be a boost from systems upgrades delayed from 2009 One market inhibitor is the continuing software piracy

problem which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year

Over the forecast period, enterprise resource planning (ERP) software continues to be of most interest to small and medium-sized enterprises (SMEs) as currently only around 20% of Indonesian SMEs are estimated to make use of IT

IT Services

Indonesia’s IT services market is expected to be worth US$683mn in 2010, recording double-digit growth

from US$601mn in 2009, based on BMI estimates Currently, IT services account for only 17% of

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

Indonesian IT services category, with approximately a 20% share

In 2009, the banking sector continued to provide opportunities for IT vendors, despite the fallout from the global financial crisis Banks continued with transformation strategies driven by factors such as new technologies and services as well as regulatory compliance However, most opportunities are currently

in fundamental service areas such as system integration, support systems, training, professional services, outsourcing and internet services

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

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

SWOT Analysis

Indonesia IT Sector SWOT

Strengths ƒ Large potential market

ƒ Market may be entering faster growth stage; it is forecast to grow faster than most

Association of Southeast Asian Nations (ASEAN) markets over the review period (up to end-2014) due to its underdeveloped nature

Weaknesses ƒ Computer penetration among the lowest in South East Asia, estimated at only 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 political instability of late

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

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

government is showing signs of taking intellectual property more seriously

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

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

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

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

access, or drive ICT sector development

ƒ Global economic slowdown may hit key demand segments

Indonesia Telecoms Sector SWOT

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

ƒ Presence of key strategic investors including SingTel, ST Telemedia of Singapore,

Telekom Malaysia and Maxis of Malaysia, Hong Kong’s Hutchison and the UAE’s Etisalat

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

ƒ Limited mobile spectrum due to overcrowding in the sector, following 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 cost rather than share part of their revenues

Opportunities ƒ Mobile market expected to surge over the coming years, reaching nearly 431mn people in

Threats ƒ Government registration scheme could lead to short-term fall in fixed wireless and mobile

users as non-registrants are deactivated

ƒ Dominance of prepaid market leading to falling average revenue per user rates

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

Indonesia Political SWOT

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

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

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

Weaknesses ƒ Indonesia’s domestic political scene is characterised by a proliferation of

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

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

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

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

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

Threats ƒ Regional militant group Jemaah Islamiah (JI) poses a lingering threat to

security in Indonesia JI is blamed for a series of attacks, including the Bali bombings of October 2002 and other such incidents, including the Jakarta bombings of July 2009

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

Indonesia Economic SWOT

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

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

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

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

Although unemployment has been decreasing, the unemployment rate is still relatively high, at 8.1% in February 2009 Many are forced to work in the informal sector

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

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

business environment, particularly through reform of its unreliable legal system

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

Threats ƒ Production at Indonesia’s ageing oil fields has been in decline since the

mid-1990s Thus, the country has become a net importer of crude oil in recent years, adding downward pressure on its current account position

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

Indonesia Business Environment SWOT

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

US$500bn, and is the world’s fourth-most populous country with almost 240mn people It thus offers investors a vast home market in which to do business

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

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

countries 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 to start a business Labour laws are also considered excessive

Opportunities ƒ The Yudhoyono administration has gradually been reforming the business

environment, particularly by strengthening the legal system and fighting corruption If sustained, this would boost investor interest in Indonesia

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

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

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

ƒ Security threats are a concern for investors Despite several of its top leaders having been arrested in recent years, 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 intercommunal tensions

Business Environment Ratings

Asia IT Business Environment Ratings

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

markets over our forecast period, through to 2014 Our Q210 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 state spending projects

In 2009 the global economic slowdown had a marked impact across Asian IT markets, with spending growth declining sharply in states like Malaysia, but holding up relatively well in others like Australia Australia’s top ranking is in part due to government ICT programmes, such as the government National Broadband Network project The ambitious broadband plans will drive development of Australia’s digital economy and feed demand for PCs Government tenders will also generate opportunities in years to come

in areas such as education, e-government, transport and healthcare

The two smaller, but mature, IT markets of Singapore and Hong Kong take second and third spots in out rankings table respectively, due primarily to their high country structure scores Hong Kong continues to offer investors in the IT field opportunities associated with its growing links to the vast Chinese market Singapore benefits from high broadband penetration and initiatives such as the government’s ambitious

‘Intelligent Nation 2015’ plan and the standard operating environment

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 Businesses will probably remain cautious and value focused in the near term By Q110, surveys showed significantly better business sentiment, and vendors reported a boost from projects delayed from 2009

South Korea, in fourth place in our table, was hit by the global economic downturn, but BMI forecasts

that Korean per capita IT spend will rise from US$750 in 2010 to US$921 in 2014 Consumers seem willing to upgrade their PCs, and there is also a trend for households to own more than one PC There will

be a number of key growth areas such as industry-specific software applications, and IT outsourcing, which is expected to show a strong demand trajectory

In China, factors such as the vast potential rural market, government spending and demand from key verticals such as telecoms should drive growth Key sectors 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

Malaysian IT spending growth will be driven by a rise in the current PC penetration level of around 35%, rising incomes and a high-tech-focused national development plan 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 There are also increasingly attractive opportunities in the

IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub

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

In 2009, the Indian authorities announced a series of measures to stimulate the domestic IT market as well

as assist domestic IT companies The potential is plain, with less than 2% of the population owning a computer, about one-fifth the level in China Realisation of this long-term growth potential depends on fundamental drivers such as raising India’s low computer penetration, rising incomes, falling computer prices and the government’s ambitions to connect the vast rural areas to the outside world

Three South East Asian markets occupy the final three positions in our table, with low rankings due primarily to business environment factors, despite considerable growth potential In Thailand, once an upturn starts, IT spending could spurt forward again as customers make good on pent-up demand The fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including a Government

PC for Education programme, and 3G mobile and WiMAX broadband service roll-outs

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 BMI expects the Indonesian market to

bounce back strongly from the deceleration last year and become one of the best regional IT market

growth prospects over BMI’s five-year forecast period The SME sector will drive demand for basic

hardware and applications as enterprises look to enhance productivity

Sri Lanka’s IT market has felt the effects over the years of the country’s and political economic

instability, from disruption of distribution channels, and a flourishing grey market, to underdeveloped telecoms infrastructure However, the market will feature on IT vendor’s radar as among the best

potential growth prospects in South Asia Computerisation has only just got started in the government

service, and major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Regional IT Business Environment Ratings

Risks To Realisation Of

Returns

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking

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

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

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

Market Overview

Asia Regional IT Markets Overview

IT Penetration

Across Asia, government information and communication technology (ICT) initiatives and growing

affordability will drive increases in PC penetration during BMI’s forecast period 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, such as 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 within the forecast period if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target

of raising the current 1:3,200 ratio of PCs to students in public schools to 1:20

A similarly broad range is found with respect to internet penetration 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

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 31% by 2014 In India, where the government designated 2007 as ‘the Year of

Broadband’, penetration should increase tenfold to reach 5.5% 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 robust

sales in the first half of the year The

difficult economic headwinds persisted in

2009, but strong fundamental demand

drivers meant that there were 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 SMEs 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 to stimulate the market Meanwhile, India’s business process

IT Markets Compound Growth

2008e-2013f, %

e/f = estimate/forecast Source: BMI

outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

As mentioned above, the Philippines is one of the countries currently benefiting from low-priced PC programmes, which provide opportunities for vendors to penetrate the low-income segments Other regional computer sale drivers over the forecast period include education, lower prices, IP telephony, cheaper processors as well as notebook entertainment and wireless networking features Meanwhile, in Indonesia, relatively low levels of government IT spending may mean that the IT market lacks a stabiliser that 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 as well as cross-border trade and cooperation

The largest IT market in the region is, unsurprisingly, China, estimated at US$73.1bn in 2008, trailed distantly by India (US$13.5bn) 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

Sectors And Verticals

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

This year is likely to be a challenging year for hardware sales In many markets, demand proved quite robust in H108 and exceeded 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 out 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 growth opportunity

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

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

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

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 customer relationship management (CRM) and business intelligence, where faster growth is possible

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

economic situation and credit tightening are 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

as well as 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 are increasing Outsourcing could account for as much as 30% of China’s IT services spending by 2013, while in India there have been

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

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

Market Overview

Government Authority

In November 2006, Indonesia’s President Susilo Bambang Yudhoyono announced the establishment of a new guiding body to provide strategic direction for the country’s IT development The National

Information and Communications Technology Council Indonesia is chaired by the president himself and

is tasked with formulating IT policy The other main task for the committee is to coordinate a departmental e-government initiative at all levels, and the committee also has ministers representing 10 other ministries including finance, law, education, trade as well as research and technology The

cross-committee has been tasked with implementing a large and ambitious programme of ICT initiatives including completing the Palapa Ring Project, which is to cover 50% of cities There are also

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

Other relevant government bodies and ministers include:

Key Ministers

Small and Medium

(BKPM) State Ministry for Investment/Investment Co-ordinating Board

Badan Pengkajian dan

Penerapan Tehnologi

(BPPT)

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

of TechnologyDepartemen

Regions Under the 1999 Telecoms Law, all telecoms operators and service providers in Indonesia have

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 substantial imports and several foreign computer companies establishing production plants in Indonesia, despite a competitive market for locally assembled personal computers At the height of the 1990s boom, the government established Bandung High-Tech Valley, located a few hours outside Jakarta The valley is

an important centre for telecommunications and engineering, in addition to being home to several

universities

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 planned investments

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

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

by the lack of a dedicated IT ministry Programmes to widen computer ownership and internet access have been modest in scale and lacking in effect compared with elsewhere in the region, and it remains to

be seen whether this 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

BMI forecasts 2010 Indonesian computer hardware spending of around US$2.8bn, up from US$2.5bn

last year Growth decelerated in 2009 but is forecast to return to double digits this year, with the market rising to a value of nearly US$4.7bn by 2014 Spending in 2009 surpassed initial expectations, thanks to notebook sales, which surged due to the popularity of netbooks; notebook sales grew faster than desktops

in H109

Hardware accounts for more than 70% of Indonesian IT spending In 2009, the main driver was

the consumer segment, which accounts for around 25% of computer demand Consumer demand was resilient in H109, growing 5.5% in the first quarter 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

In 2010, consumer spending is expected to be reinforced by a revival in business IT hardware spending that could get stronger as the years go on There could be a boost, particularly in the second half of the

year, from computer hardware tenders delayed from 2009 The launch of Microsoft’s Windows 7

operating system also has the potential to help trigger a new cycle of hardware upgrades in

2010, although much will depend on business confidence

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

2009, but the advance is unlikely to match that of 2009

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

penetration in manufacturing segments mean that there is still plenty of momentum for growth The Indonesia Computer Business Association (Apkomindo) forecast volume sales of around 2.2mn units in

2009

Notebooks are now growing faster than the PC market as a whole, with around 1mn unit sales projected this year Demand for these is being driven by lower prices, small unit size, lightweight functionality as well as 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 market, it is growing fast and has

become a growing focus of attention for some vendors, including Lenovo and Dell Around a 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, 2007e

e = estimate Source: BMI

Locally assembled computers were about 60% of the total, even though imported components face tariffs ranging from 5-20%, which pre-assembled computers escape There have been calls for the components tariff to be abolished The low-end price tier will continue to dominate and will account for around 80%

of sales, reinforced by the growing popularity of netbooks

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 has been relatively small compared with regional neighbours such as Singapore and India, but could increase as a share of spending Education provides a small but steadily growing source of demand, accounting for 3-4% of sales, but this could also grow with the government targeting the purchase of 2.5mn computers

Software

Indonesia’s software sales are projected by BMI at US$475mn in 2010, up from an estimated US$410mn

in 2009 During BMI’s five-year forecast period, the software sector CAGR is forecast at 18% In 2010,

sales of Microsoft’s new Windows 7 operating system, released in October 2009, has the potential to have

an impact

In 2009, economic uncertainties led some organisations to look to defer systems updates, although but others saw IT as a strategic tool for increasing competitiveness in difficult times There should also be a boost in 2010 from systems upgrades delayed from last year Compliance with government and

international regulations is a long-term driver in financial, manufacturing and other sectors

Application software accounts for more than 40% of the total software market 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 The next few years should witness a shift

away from packaged proprietary software towards other models, such as software as a service (SaaS) and OSS Improved broadband infrastructure will assist the popularisation of the rented software model

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 Currently, only around 20%

of Indonesian SMEs are estimated to make use of IT Inventory is an application entry-point application for many businesses, but among existing users 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 Business intelligence is expected to be an emerging opportunity over BMI’s

five-year forecast period, although the market is still at the education stage

One market inhibitor is Indonesia’s continuing software piracy problem which, by the local government’s own figures, loses Indonesian software companies alone more than US$100mn a year In 2008, the rate rose again by 1% to 85%, according to Apkomindo Indonesia was ranked as the country with the 12th highest level of software piracy in the world last year

Under the current licensing agreement between the government and Microsoft, which has 90% of the operating system and office software market in the country, the government reportedly agreed to purchase 35,496 licensed copies of the Windows operating system and 117,480 copies of the Office package for a total price of around US$41.9mn

However, the deal has attracted growing criticism from the open-source lobby in Indonesia, which

claimed that the memorandum of understanding 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 OSS In July 2009, the mayor of Surabaya announced that his city had launched

an OSS pilot scheme, with all municipal offices now using the software

Data from the Indonesian Telematics Software Association suggest 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$683mn in 2010, recording double-digit growth

from US$601mn in 2009, based on BMI estimates Currently, IT services account for only 17% of

Indonesia’s hardware-centric IT market sales

Hardware deployment services remain the largest Indonesian IT services category with an approximate 20% share Growth opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services Sector CAGR over 2010-2014

is expected to be around 16% The economic situation and credit tightening are likely to have an effect on demand in some key IT spending verticals

The market is dominated by two verticals, financial services and banking as well as telecoms, which together account for around 50% of spending Banking is emerging as the single most important vertical, responsible for roughly 30% of IT spending, followed by telecoms and the government As of H109, spending in these important industry segments appeared to be holding up better than expected

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

increase further (see Industry Developments)

Special Focus - Banks

In 2009, the banking sector continued to provide opportunities for IT vendors, despite the fallout from the global financial crisis Banks were continuing with transformation strategies that were driven by factors such as new technologies and services as well as regulatory compliance Among recent

implementations, PT Bank Bumiputera Indonesia migrated to a new IT system with a US$5mn

investment The migration also involved ATM network expansion and integration with third-party

systems

Banking has emerged as one of the key IT market sectors and the Indonesian Federation of Private Domestic Banks (Perbanas) forecast that the sector would spend around US$1.47bn on IT in 2008 Meanwhile, the Indonesian Software Association estimated that the banking sector was on course to spend over US$1.05bn on ICT in 2008, accounting for as much as 30% of spending by some estimates

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

of spending If anything, their dominance is predicted to increase over the next few years, with Bank Panin, one of the 10, announcing that it had a budget of around US$30mn for IT In contrast, the

remaining small and medium-sized banks are likely to delay spending as they await the regulation of Bank Indonesia on Indonesian banking consolidation There are pressures on them to merge with the larger banks

The banking industry has become highly concerned with disaster recovery services As such, a service was deemed mandatory by Bank Indonesia To a lesser extent, there is also demand from telecoms operators

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

Indonesia was highlighted by the news that PT Bank IFI was converting to this shari’a-compliant

banking One local company that has developed an expertise in this area has been Sigma, which has

developed its shari’a core banking system to follow the principles of Islamic banking

SMEs

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

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

considering expansion This will be a driver for IT spending with firms looking to connect branch offices There is also more interest in basic security solutions