Indonesia information technology report q2 2012

Government IT spending is expected to increase and could have accounted for as much as 25% of the IT market in 2011, with reports that the government was encouraging state companies to u

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TECHNOLOGY REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy Deadline: February 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Indonesia IT SWOT 7

Indonesia Telecoms SWOT 8

Indonesia Political SWOT 9

Indonesia Economic SWOT 10

Indonesia Business Environment SWOT 11

Risk/Reward Ratings 12

Table: Asia IT Risk/Reward Ratings Q212 17

IT Markets Overview 18

Indonesia Market Overview 25

Government Authority 25

Table: Key Ministers And Departments 25

Hardware 26

Software 28

Services 30

Special Focus: Banks 31

Industry Developments 32

Industry Forecast 36

Table: Indonesia's IT Sector - Historical Data & Forecasts (US$mn Unless Otherwise Stated) 38

Industry Forecast Internet 39

Table: Telecoms Sector - Internet - Historical Data And Forecasts,2009-2016 39

Macroeconomic Forecast 41

Table: Indonesia – Economic Activity 43

Competitive Landscape 44

Hardware 44

Software 46

IT Services 47

Internet Competitive Landscape 48

Company Profiles 50

IBM 50

Hewlett-Packard 55

Sigma (telkomsigma) 61

Oracle Corp 63

Country Snapshot: Indonesia Demographic Data 67

Section 1: Population 67

Table: Demographic Indicators, 2005-2030 67

Table: Rural/Urban Breakdown, 2005-2030 68

Section 2: Education And Healthcare 68

Table: Education, 2000-2005 68

Table: Vital Statistics, 2005-2030 68

Section 3: Labour Market And Spending Power 69

Table: Employment Indicators, 2001-2006 69

Table: Consumer Expenditure, 2000-2010 (US$) 69

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 70

BMI Methodology 71

How We Generate Our Industry Forecasts 71

Transport Industry 71

Sources 72

Executive Summary

BMI View: Indonesian IT spending is expected to reach US$5.9bn in 2012, up 11.1%, with IT investment remaining buoyant in line with the general economy as inflation moderates BMI expects the Indonesian

market to be one of the region's fastest-growing IT markets over our five-year forecast period PC

penetration remains at around 6%, giving this huge market unrivalled long-term growth potential Rising computer penetration and growing affordability should ensure that the market remains firmly in positive growth territory

Headline Expenditure Projections

Computer hardware sales: US$3.8bn in 2011 to US$4.3bn in 2012, +11.0% in US dollar terms

Forecast in US dollar terms downwardly revised due to macroeconomic factors and analyst

modification

Software sales: US$594mn in 2011 to US$690mn in 2012, +16% in US dollar terms Forecast in US dollar terms downwardly revised due to analyst modification and progress will depend on the success

in bringing down illegal software use

IT services sales: US$873mn in 2011 to US$993mn in 2012, +14.0% in US dollar terms Forecast in US dollar terms upwardly revised due to macroeconomic factors but vendors will be attracted by the

growing cloud services opportunity, which could be worth around US$100mn by 2016

Risk/Reward Ratings: Indonesia's score was 39.1 out of 100.0 Indonesia ranked third from bottom of

the Asia region in our latest RRR table, behind ASEAN peers the Philippines, India and Thailand, and ahead Vietnam Sri Lanka

Key Trends & Developments

ƒ With ICT penetration of only 20% and development restricted to richer areas such as Java, the market has much growth potential However, Indonesia's uneven development and digital divide are major barriers to faster growth within this potentially huge IT market

ƒ Spending in some key IT verticals, such as financial services and banking should continue to be significant in 2012 as Bank Indonesia turns dovish Government infrastructure investments should also provide a boost to the business sector Government IT spending is expected to increase and could have accounted for as much as 25% of the IT market in 2011, with reports that the government was encouraging state companies to use more IT services.

ƒ An active approach by the government to encourage IT development, led by the National ICT Council, should stimulate spending through a series of infrastructure and education initiatives Around 30-35mn Indonesian companies are estimated to lack any IT-based solutions and enterprise resource planning (ERP) and other e-business applications will find increasing popularity in the small and medium-sized enterprise (SME) market.

SWOT Analysis

Indonesia IT SWOT

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

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

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

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

ƒ History of recent political instability

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

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

government is showing signs of taking intellectual property more seriously

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

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

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

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

access, or drive ICT sector development

Indonesia Telecoms SWOT

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

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

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

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

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

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

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

people over the forecast period

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

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

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

mobile users as non-registrants are deactivated

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

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

Indonesia Political SWOT

Strengths ƒ Indonesia managed a successful transition to democracy in 2004 In addition, the 2009

parliamentary and presidential elections passed peacefully, signalling the consolidation

of the democratic process Since 2009, the government has shown further signs of improvement in both efficacy and engagement

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 As the military's role in politics continues to wane, Indonesia's political stability should likewise improve

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 Prospects for reform are beset with numerous challenges, such as the long-running practice of politicians promising government positions to campaign supporters

ƒ The archipelago was impacted 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 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 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

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

of political instability

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

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

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

rate still relatively high at 6.8% as of February 2011 Many are forced to work in the informal sector Of particular concern is the youth unemployment rate, which is five times the overall rate

ƒ Indonesia's physical infrastructure is considered sub-standard The archipelagic nature

of the country makes it difficult to weave national infrastructure together Despite an ambitious infrastructure revitalisation plan, the country currently compares

unfavourably with its Association of Southeast Asian Nations peers

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 With an overall market share of only 3%, growth prospects for Islamic banking in the world's largest Muslim country are enormous

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

The country has therefore become a net importer of crude oil in recent years, putting downward pressure on its current account position Furthermore, rising oil prices have begun to pressure Indonesia's current account, where it typically runs a healthy surplus The resumption of the Cepu field in late 2009 may help to alleviate Indonesia's dependence on foreign oil

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 and is the world's fourth most

populous country with more than 240mn people It thus offers investors a vast home market in which to do business

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

Weaknesses ƒ Corruption remains a major problem Indonesia ranked 100th out of 182 countries

surveyed in Transparency International's 2011 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 President Susilo Bambang Yudhoyono's 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 Although reform has been slow, the government has shown itself to be increasingly willing to address important issues

ƒ Indonesia has been amending its debt and banking regulations, with the aim of attracting Islamic financial activities Over the past five years, Islamic banking growth has averaged more than 65%

demonstrate that even after investments are 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, militant group Jemaah Islamiah remains active There is also a low-level threat from separatist rebels or from inter-communal tensions

Risk/Reward Ratings

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

markets over our forecast period through to 2016 Our Q212 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

There were several changes to the

country rankings as we fine-tuned our

methodology to better reflect the market

conditions In this quarter's update,

highly urbanised Singapore overtook

Australia by outperforming the latter in

three out of the four components

Although Singapore's IT market is

smaller than that of Australia, Singapore

has other redeeming factors For one,

Singapore is strategically placed at the

heart of South East Asia amid emerging

markets such as Indonesia and Thailand

Its strong infrastructure, political

stability and pro-business environment

attract foreign investors and spur

Singaporean spending on IT services will be boosted by the continuing boom in IT-enabled services such

as call centres and back-office financial services Other promising sectors for IT services include

healthcare, as the government launches a series of initiatives to develop health technology

Although Australia fell to second position, it still has a respectable IT Rating of 70.9, which was

significantly higher than the regional average of 50.2 Due to the sheer mass of the country, it is inevitable that certain regions suffer from a deficiency in IT services However, the government has been looking to

Developed Countries Have Their Heads

Above The Rest

Asia Pacific IT Risk/Reward Ratings Q212

Source: BMI

resolve the issue with its ambitious National Broadband Network (NBN), which aims to deliver

nationwide high-speed broadband connectivity with a combination of fibre, fixed-wireless and satellite technologies Furthermore, a number of leading Australian private and public sector organisations have launched cloud initiatives, including many of the country's leading banks, while the government has also unveiled a six-year cloud computing strategy

IT verticals such as the government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in the future Meanwhile, the NBN should drive the development of Australia's digital economy and feed demand for personal computers and mobile devices

There were no changes to Hong Kong's IT Rating score or position on the table Hong Kong has one of the lowest fibre broadband tariff rates in the world, and this provides the backbone for next generation IT services such as cloud computing and data centres While we expect robust IT market growth in Hong Kong due to the increasing investment opportunities arising from its growing links with the vast Chinese market, we also highlight that the outlook for 2012 is looking more uncertain as we envisage a hard landing in China

Similar to its developed peers in the region, South Korea is also encouraging the utilisation of cloud computing by small businesses New cloud computing offerings and increased competition in this

segment are expected to fuel growing demand to use this technology IT outsourcing is also expected to show a strong demand trajectory The government has also identified the potential and importance of software development, highlighted by the ascendency of mobile operating system (OS) Android, and has announced a plan to develop an open-source OS with domestic ICT firms Regardless of whether the project would succeed, it shows the forward-looking stance of the South Korean government and its commitment to drive IT developments in the sector

While the South Korean consumers have exhibited strong appetite for IT products, we expect private consumption to be subdued in the near term South Korea's household debt quandary leaves the economy

in a precarious position While lower interest rates have reduced the risks of an implosion in the

household debt market, high debt levels still place a substantial constraint on consumption spending A deteriorating economy is likely to place considerable weight on consumers' debt repayment ability as incomes are likely to get slashed while the jobless rate ticks up A combination of seasonal factors, as well as a worsening economy should keep downward pressure on consumer spending going into 2012

Malaysia remains in fifth position in our

Q212 regional ratings Recent

developments such as a slowdown in

production activity and falling

commodity prices, which will

exacerbate the slowdown in mining

production, continue to support our

view that Malaysia's economic growth

will witness a significant slowdown in

2012 Consequently, government

spending may become more constrained

because of commitments to tackle the

budget deficit, but there will be growth

areas IT spending growth will be driven

by the government's drive for greater

household broadband penetration of

75% by 2015

The rollout of a Malaysian high-speed fibre broadband network will boost IT spending outside the Klang Valley Other projected growth and PC market drivers include a rise in the PC penetration level from about 35%, tax exemptions for notebooks and growth in disposable incomes

There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme, which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities

One of BMI's key macro themes for Asia Pacific in 2012 is a growth slowdown across the board with

recession risks highest in countries such as Australia, Hong Kong and Singapore due to factors such as a slowdown in the US and Europe as well as a Chinese hard landing

2012 may be the year in which China's economy goes from - as the title of our China Special Report in October 2011 put it - 'Miracle To Meltdown' We have warned for years about the imbalances inherent in the Chinese economic growth model, which are characterised by a major overemphasis on investment at the expense of consumption, underpinned by unsustainable credit expansion Now, several indicators point to a Chinese hard landing While the definition of hard landing is up for debate, we generally consider it to include the following characteristics: a contraction in manufacturing output as reported by the purchasing manager index (PMI) surveys; a contraction in services sector PMI; a sustained fall in

Country Structure A Letdown

Asia Pacific IT Risk/Reward Ratings Q212

Source: Q212

imports; double-digit house price declines; elevated banking sector stress; and growing expectations of currency weakness

A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers We expect growing interest in cloud computing will be stimulated by the establishment of government pilot programmes However, there are still market risks associated with IP rights protection in China as well as piracy and a lack of business transparency

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow The

Philippines has a low PC penetration, like many other developing Asian countries, and the IT market offers corresponding high growth potential over the forecast period The Philippines is also looking at cloud computing as the next growth driver, with the private sector leading the charge Domestic firms have partnered with foreign IT companies in order to provide the necessary infrastructure and technology

to expand their products portfolio, which should attract businesses including small and medium-sized enterprises (SMEs) as they look to cut costs amid an uncertain global economy

India's IT industry possesses significant growth potential as only a small portion of the country's massive population has access to a personal computer Significant opportunities will also be created by demand from Indian businesses and government agencies to help use more advanced IT solutions to improve efficiency and reduce costs Consequently, India had a relatively high IT Market score of 49.0 However, the country was significantly let down by its weak Country Structure score

India is in the midst of a significant cyclical slowdown Industrial production growth stalled to a month low of 3.3% year-on-year in July 2011, led by a downturn in both capital goods and consumer durables activity The latter is of particular concern from a GDP accounting perspective given that

21-households make up the lion's share of GDP (at an estimated 62% in FY2010/11), and in line with our view, the Indian consumer has started to tighten spending on 'big ticket' purchases Although many Indian private and public sector organisations have started to consider upgrading their IT infrastructure, further deterioration in the global economy could once again force them to scale back on investments

The global consumer electronics industry has been severely disrupted by the flooding in Thailand, as output of key components for hard disk drives by Thai plants has been dramatically cut Companies that were directly affected by the disaster have announced that they are looking to relocate some of their operations to alternative countries in order to diversify risk and minimise disruptions, which is a blow to the Thai IT sector

However, we retain an overall bullish stance due to the Thai government's flood rehabilitation and IT proliferation plans We expect the launch of more compatible products to leverage on the long-awaited

launch of 3G services Intel predicts that ultrabooks could account for as much as 40% of the notebooks

sold in Thailand in 2012, although BMI has a more conservative forecast as we foresee tablet computers

as a serious threat Meanwhile, the Thai government has earmarked the ICT industry as an important growth driver Besides a plan for 3G operators to provide broadband and Wi-Fi services freely available

in schools nationwide as part of a universal social obligation initiative, the government also has a One Tablet Per Child project, which intends to bridge the digital and education divide

With ICT penetration of only about 20% and development restricted to richer areas such as Java, the

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

fastest growing in the region over the five-year forecast period Spending in some key IT verticals, such

as financial services and banking should continue to be significant in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Sri Lanka's IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

However, initiatives such as network expansion projects by telecoms providers to increase internet penetration rates in Sri Lanka and free training tools for SMEs from the International Finance Corporation (a member of the World Bank Group) to boost adoption of IT services cloud help the country to close the gap with its regional peers

Table: Asia IT Risk/Reward Ratings Q212

Limits Of Potential Returns

Risks To Realisation Of Potential Returns

Country IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT Rating

Regiona

l Rank Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1 Australia 55.5 95.0 69.3 80.0 71.2 74.7 70.9 2 Hong Kong 48.3 95.0 64.7 70.0 87.4 80.4 69.4 3 South Korea 53.3 75.0 60.9 75.0 71.4 72.8 64.5 4 Malaysia 41.3 55.0 46.1 35.0 76.7 60.0 50.3 5 China 53.1 30.0 45.0 35.0 68.4 55.1 48.0 6 Philippines 39.3 45.0 41.3 42.5 52.2 48.3 43.4 7 India 49.0 15.0 37.1 45.0 55.6 51.3 41.4 8 Thailand 37.5 20.0 31.4 35.0 72.6 57.6 39.2 9

Vietnam 38.1 15.0 30.0 35.0 44.2 40.5 33.2 11 Sri Lanka 30.0 10.0 23.0 35.0 44.2 40.5 28.3 12

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth

potential of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the

realisation of anticipated returns Source: BMI

IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will help to

drive increases in PC penetration during

BMI's five-year forecast period While

some cities and regions stand out, there

is an unbalanced pattern of regional

development, with PC penetration in

countries such as Singapore above 50%,

while in other countries, such as

Indonesia, it is below 5%

The two Asian leaders, 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 25% in 2010 - although it was far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60%

by 2015 In India, less than 5% of people own a computer However, some 45% of the population is under

25, which provides a promising demographic context for increased PC ownership PC penetration in

Vietnam was estimated by BMI at around 15% in 2010 Notebooks are owned by an estimated 7% of the

Vietnamese population, which points to significant growth potential for the local PC market

Lower prices will help to drive higher PC

penetration in developing markets The

average price of a PC in the Indian

market has nearly halved over the past

few years, and rising incomes and greater

credit availability will continue to bring

computers within the reach of

lower-income demographics Even in more

mature markets, there is room for

development, however, with official data

suggesting that as many as 25% of Hong

Kong households do not have a computer

Around the region, affordable computer programmes continue to find favour with governments In China,

a subsidised household electronics products initiative aimed at rural residents has helped to boost PC sales

in areas where penetration was low In Australia in 2010, national and state governments continued to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

In Indonesia, PC penetration of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio of PCs to students in public schools to 1:20 Meanwhile, in 2010, the Vietnamese government launched a programme entitled One Teacher-One Computer, which offered discounts on PCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in Singapore, South Korea, Hong Kong and Australia, with estimated 2011

penetration rates of 78.5%, 76.4% and 75.5% and 67.4% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 160.2% in 2011 Meanwhile, the Philippines has the one of lowest levels of internet usage, with just 7.1% narrowband and 6.1% broadband penetration estimated in 2011

The fastest growth is expected in Indonesia, where internet penetration is projected to leap from 36% in

2011 to 67.4% by 2015 India is now at above 28% internet penetration despite a lack of fixed-line infrastructure and this should reach 36% by 2015 Steady growth is also projected for Sri Lanka, where penetration is projected to increase from 14.1% to 19.4% by 2015 Some 60.4% of Malaysians had internet access in 2010

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by growing numbers of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 33.1% by 2015 In India,

penetration should increase sixfold to reach 9.4% by 2015 from around 1.5% currently, although this remains below government targets Singapore will also see continued strong growth in broadband

penetration, which is projected to reach 186% by 2015

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 In Australia, the government's commitment to develop the National Broadband Network should further the development of Australia's digital economy

Meanwhile, the growth of Wi-Fi coverage will be one driver of notebook sales in places such as Hong Kong, where the government has committed another HKD200mn to the deployment of a Wi-Fi network covering more than 200 public venues

IT Growth and Drivers

Across the region in 2011, IT spending

should benefit from improved economic

circumstances and tenders, previously

deferred as a result of the economic

situation, although much will depend on

business confidence Strong fundamental

demand drivers of IT spending mean that

there will be continued opportunities

Key factors common to most markets

include cheaper PCs and reform in

sectors such as telecommunications and

finance, as well as government

initiatives

In some of the region's largest markets, such as China, lower-tier cities and towns will be among the

fastest growing segment of the IT market BMI expects China's IT market growth to be driven by an

expansion into western China and rural areas well as growing demand from small- and medium-sized enterprises (SMEs) The Chinese IT market will also receive a boost in 2011 from a 50% increase in import tariffs on some electronics products, such as laptops

Demand this year will be bolstered by

market expansion in the relatively

underpenetrated rural areas SIS

forecasts that market growth in

upcountry areas will be 30% in 2011,

double that forecast for the country as a

whole A similar situation pertains to

India where in 2011 there are expected to

be strong growth opportunities in smaller

cities

The long-term potential of India's IT

market is plain: less than 3% of people in

2011e IT Market Sizes

India own a computer (about one-fifth of the level in China), meaning particular potential in the end product range India's IT market appears to be positioned for strong growth thanks to an improving economy and consumer sentiment, and government support for modernisation in lagging sectors

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

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional

computer sale drivers over the forecast

period include education, lower prices,

IP telephony, cheaper processors as well

as notebook entertainment and wireless

networking features Meanwhile, in

Indonesia, the basic demographics of

rising computer penetration and growing

affordability should drive growth SMEs

represent a growth opportunity, as

currently only around 20% of Indonesian

SMEs are estimated to make use of IT Compliance with government and international regulations will be

a driver in financial, manufacturing and other sectors

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

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

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

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

The largest IT market in the region is, unsurprisingly, China, estimated at US$105.4bn in 2011, trailed distantly by Australia (US$20.8bn), India (US$19.7bn) and South Korea (US$17.8bn.) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.2%), followed by Hong Kong (2.1%) Thailand's IT market was affected last year by a number of exogenous events

including floods in the north east of the country, and political unrest However, in 2011 the country looks

Lanka is third with the IT market growing by an estimated 89% over BMI's five-year forecast period,

while China's total growth is estimated at a still healthy 70%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% of total spending in all markets in 2010 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

In mature markets such as Australia and Singapore, PC sales are dominated by replacement sales In Australia, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households More than 90% of Australian households now have a PC, but consumers have appeared willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

Tablet sales will lead to a new PC market growth area, with triple-digit growth projected in many

markets In China it is estimated that tablets could account for around 6-7% of computer sales in 2011 However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations In Australia, netbooks sales growth slowed from the first quarter of 2010, and this has continued into 2011

In less-developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth Another driver will be 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

Falling prices is another major driver, placing pressure on margins As of the third quarter of 2010, the average price of a PC in China was estimated to have fallen to around US$600, considerably below the price level in developed markets In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach

of lower income demographics

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, broadband plans will also help to popularise tablets

At the end of 2010, Australian telecoms operators such as Telstra were competing to offer affordable

tablets bundled with data services

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 However, netbooks and notebooks face competition from other form factors such as

smartphones from Palm, RIM, Apple and other vendors, and tablet notebooks, spearheaded by Apple's

iPad,

Due in part to high levels of piracy, software's share of IT spending is relatively low, ranging from 9-25%

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

In 2011, sales of Microsoft's Windows 7 operating system and new Intel core technology retain the

potential to help trigger hardware upgrades, although much will depend on business confidence

Hundreds of large enterprises and thousands of small enterprises in China have already started migrating

to Windows 7, and this process is expected to continue in 2011

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install back-office systems to meet efficiency requirements

In general, enterprise resource planning and other e-business products still dominate the enterprise

software market, but vendors are also looking to other areas such as customer relationship management and business intelligence, where faster growth is possible Although the market remains relatively small, more companies are looking at computing solutions such as software-as-a-service (SaaS) Cloud

computing business models such as SaaS offer smaller businesses a cost-effective way to deliver

applications such as payroll, tax-return processing and recruitment

The hosted application model may already account for between one-fifth and one-quarter of Chinese software revenues and SaaS has also enjoyed steady growth in the Hong Kong market over the past few years Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia Meanwhile, around one-third of Australian organisations already use some cloud computing

New platforms and services in the telecoms field is a driver for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile, expanding technology adoption in the logistics industry and public transport will be a source of IT

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

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

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

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

Government spending will account for a larger share of spending in many markets In China, government stimulus packages have helped to drive IT-related investments, while in Singapore government ICT projects such as SOE2 provide significant opportunities Meanwhile, the Hong Kong government's Digital 21 initiative will continue to generate spending

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

fundamental services including system integration, support systems, training, professional services, outsourcing and internet services Main spenders across the region include banks and financial

institutions, as well as governments Even in emerging markets such as India, IT vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

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

large contracts such as that awarded by Idea Cellular to IBM Singapore and Hong Kong have both seen

a trend towards larger outsourcing projects in the public and private sectors

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Indonesia Market Overview

Government Authority

The National ICT Council is chaired by the Indonesian president and is tasked with formulating IT policy The other main task for the council is to coordinate a cross-departmental e-government initiative at all levels It also includes ministers representing 10 other ministries, including finance, law, education, trade and research and technology The council has been tasked with implementing a large and ambitious programme of ICT initiatives, including completing the Palapa Ring Project, which is to cover 50% of Indonesian cities It has responsibilities related to e-procurement and applying IT to education The council has a working team with experts drawn from the business community and IT associations, as well

as from the government

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

Table: Key Ministers And Departments

Small and Medium Enterprises SoegihartoResearch and Technology Kusmayanto KadimanInformation and Communication Sofyan A Djalil

Key Departments

Badan Koordinasi Penanaman

Modal (BKPM) Ministry for Investment/Investment Coordinating BoardBadan Pengkajian dan

Penerapan Tehnologi (BPPT)

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

of TechnologyDepartemen Perindustrian dan

Perdagangan (DEPPERINDAG) Department of Industry and TradeDepartemen Perhubungan Department of Communications

Source: BMI

Background

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

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

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

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

The financial crisis in 1997, when there was a 70% fall in the value of the rupiah against the US dollar and other far-reaching economic and political consequences, had a large impact on the IT market Several multinationals withdrew credit from local distributors and some planned investments were cancelled The IT market is now recovering from the global economic crisis of 2008-2009

Despite inherent potential, the IT market's development is restrained by a number of factors, including poor telecommunications infrastructure, partly as a result of slow progress in deregulation and

liberalisation Deregulation has been slow in other sectors of the economy as well, with the local business environment highly bureaucratic even by regional standards Another problem has been the lack of government support for the market and domestic sectors, as shown by the lack of a dedicated IT ministry Programmes to increase computer ownership and internet access have been modest in scale and lacking in effect compared with elsewhere in the region, and it remains to be seen whether this will change under the latest Yudhoyono administration Legal issues such as IP rights have also been barriers to foreign

investment, while the level of software piracy remains among the highest in the world

Hardware

BMI forecasts 2012 Indonesian computer hardware spending of US$4.3bn, up from US$3.8bn in 2011

The market is forecast to rise at a CAGR of 17% to a value of US$8.0bn by 2016 PC shipments reported solid growth in 2011 building on a strong recovery in 2010 PC penetration remains below 10%, with Indonesian Computer Association Apkomindo estimating a rate of 6% in 2011, and this represents

considerable market potential

Over BMI's five-year forecast period, Indonesia is again expected to be one of the fastest-growing

regional PC markets, continuing the double-digit growth of recent years In 2011, retailers hoped that promotions linked to the Independence Day holiday in August would provide a boost to consumer sales

summer shopping season Migrations to Microsoft's Windows 7 operating system retain the potential to

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

confidence Apkomindo targeted 40% growth in 2012 for its members, while BMI projects a revenues

increase of 23%

Hardware accounts for more than 70% of Indonesian IT spending In 2011, the fastest growth segment was the consumer segment, which accounts for about 25% of computer demand The main drivers are growing affordability and more credit availability Rising PC penetration points to exceptional growth potential Computer utilisation in education is also forecast to grow rapidly and provide a major segment

of demand

Prices for notebooks and desktops are falling, with desktop prices now as low as US$400, while

notebooks start from about US$700 These trends are expected to allow PC penetration to rise in a

country where only about 20% of the population have access to a PC, compared with above 40% in some other South East Asian countries such as Malaysia or Thailand Meanwhile, a growing PC-installed base has fuelled demand for servers and storage devices

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

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

the market is accounted for by non-branded, locally assembled PCs Notebooks are now growing faster than the PC market as a whole, with more than 30% growth estimated in 2010 as notebooks account for about 50% of total PC demand Desktop sales are growing relatively slowly but remain important for businesses and government

Netbooks are popular as basic connectivity devices, and, with internet penetration still below 10%, there

is plenty of room for further growth Sales are expected to increase in 2011, but the advance is unlikely to match the peak year 2009, especially with the emergence of tablet notebooks Growth of up to 40% was projected by some vendors in 2010, with the increase trailing off thereafter In 2009, netbooks achieved triple-digit shipments growth and sold more than 400,000 units Low prices and additional mobility were the main factors behind their success

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

connectivity solutions and often include a Wi-Fi option Other vendors are expected to follow Apple in releasing tablet devices that have a form factor between the size of a smartphone and a netbook Unlike in many other markets, where tablets were initially perceived primarily as a consumer device, in Indonesia early adopters were usually from the business segment However, the popularity of the devices has spread rapidly to other market segments with retailers reporting explosive growth in tablet demand in the

Indonesian market in H111 This uptake is expected to lead to the decline of the netbook category and could also constrain growth for notebooks and desktops

In 2011, telecoms operator PT Telkom reported rapid growth in demand for tablets Tablets are being

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

more expensive than smartphones, but, despite a previous mixed record with this form factor, are seen as

a growth area in 2012 Another area that vendors will watch is the e-reader market

In 2012, consumer spending is expected to be reinforced by an upwards trend in business IT hardware spending that could get stronger as the years go on While the consumer market is growing, the business sector looks set to continue to account for around two-thirds of sales opportunities during the forecast period Sales to this segment are projected to double by 2016 Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in datacentres

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

500 employees was expected to grow more than 21% in 2010 to 366,255 units, growing faster than the larger SME segment

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

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

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

manufacturing explore potential efficiencies and cost-savings from virtualisation

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

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

Locally assembled computers made up about 60% of the total, even though imported components face tariffs ranging 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 about 80% of sales, reinforced by the growing popularity of netbooks

Software

Indonesia's software sales are forecast by BMI to reach US$690mn in 2012, up from an estimated

US$594mn in 2011 During BMI's five-year forecast period to 2016, the software sector CAGR is

forecast at 22% In 2012, demand is expected to grow strongly in line with robust economic growth and a continual expansion of PC penetration Migrations to the Windows 7 operating system retain the potential

to make an impact, as Windows XP still constitutes a significant portion of the installed computer base

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

companies that still do not use IT-based solutions, representing a huge potential market Modernisation is driving spending on applications such as CRM, ERP and financial management in key sectors such as financial services, telecoms, utilities, government, retail and manufacturing Among clients investing in

new systems in 2011 was Acuatico Air Indonesia, which implemented a new Oracle solution for its

water distribution operations in Indonesia

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

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

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

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

stage

There should be a continued boost in 2012 from systems upgrades previously delayed as a result of the global economic crisis Compliance with government and international regulations is a long-term driver

in the financial sector, manufacturing and other sectors

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

popularisation of the rented software model Given the focus at many businesses of controlling costs, new

IT delivery models such as software-as-a-service (SaaS) and platform-as-a-service (PaaS) are expected to

grow in popularity Microsoft Indonesia has reported that cloud computing accounts for around 20% of

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

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

responses to customer needs Large businesses are most likely to put IT applications such as mail, phone systems and document management into a cloud Applications for tax and finance regulations are also potential candidates for cloud computing For a small business, the cost of running inventory software for

a public cloud can be as little as US$15 a month, including internet subscriptions However, enterprise applications that require a high level of customisation, or that are subject to regulatory or data-sensitivity constraints, are more likely to stay on-premise

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

government's own figures, loses Indonesian software companies more than US$100mn a year In 2010, the level of piracy rose again (by 1%) to 87%, according to the Business Software Alliance (BSA) Indonesia was ranked as the country with the 11th highest level of software piracy in the world in 2010 The BSA estimated that losses from software piracy in the Indonesia market reached a new high

of US$1.32bn in that year, more than previously forecast

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

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

Data from the Indonesian Telematics Software Association show that 60% of software in use in

Indonesia, including in the government sector, is sourced from foreign producers

Services

Indonesia's IT services market is forecast to be worth US$993mn in 2012, up from US$873mn in 2011,

based on BMI estimates IT services account for only 17% of Indonesia's hardware-centric IT market

sales The Indonesian IT services market is dominated by the financial services and banking sector, as well as telecoms Together, these two industry verticals account for around 50% of spending of IT

services Banking is emerging as the most important vertical, responsible for roughly 30% of IT spending, followed by telecoms and government

Services sector CAGR over 2012-2016 is expected to be around 20% Improvements in Indonesia's telecoms and ICT infrastructure are expected to drive long-term growth in the Indonesian IT services

market In H111, PT Telkom reported double-digit growth in its revenue category that includes IT

services Commercial datacentres are being built around the country by Indonesian telecoms service

providers such as PT Telkom and PT Indosat The development of these facilities is linked to growing

rollout by public sector and commercial organisations of e-government or e-commerce services

Meanwhile, the Palapa national fibre ring project is nearing completion, meaning that all main islands within the Indonesian archipelago will be connected with fibre-optic backbone capacity The rollout of

additional submarine cables to locations such as Australia, Hong Kong and Singapore is also in progress

or at least under planning

One potential demand driver will be organisations looking for help to utilise efficiencies from cloud computing such as SaaS and Infrastructure-as-a-Service The cloud computing market is currently small

in absolute terms, at less than US$10mn, but BMI expects this could reach around US$80mn within the forecast period New cloud computing offerings from telecoms and IT companies are leading to increased

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

In 2011, IT giants such as PT Telkom, Microsoft and Tata subsidiary InstaCompute launched cloud

services in Indonesia, and more vendors are looking for channel partners to help them offer cloud

computing and rented software services Meanwhile, Microsoft reported in 2011 that several government agencies and at least 14 large companies had expressed interest in its cloud services Local cooperatives and SMEs are seen as the main market for such services in Indonesia Other areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments

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

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

increase further (see below)

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

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

Special Focus: Banks

Banking has emerged as one of the key IT market sectors, accounting for as much as 30% of total

Indonesian IT spending by some estimates The Indonesian Software Association has

estimated annual banking sector spending on ICT at more than US$1bn

Banks' IT spending is increasingly dominated by the 10 largest banks, such as PT Bank Mandiri, Bank Central Asia and Bank Negra Indonesia, which collectively account for an estimated US$630mn of spending Their dominance is predicted to increase over the next few years, with Bank Panin, one of the

10, announcing that it has a budget of about US$30mn for IT In contrast, the small- and medium-sized banks are likely to delay spending as they wait for the regulations on Indonesian banking consolidation There is pressure on the smaller banks to merge with larger ones

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 few years, Islamic banking has accounted for an increasing share of banks' IT spending as an increasing number of individuals and companies choose to do business with banking institutions that comply with shari'a principles Islamic banking is a huge potential growth area for IT vendors Despite rapid growth over recent years, shari'a banks still only account for 3.2% of total commercial bank loans The increasing opportunity presented by Islamic banking in Indonesia was highlighted by the news that

PT Bank IFI was converting to shari'a-compliant banking One local company that has developed an

expertise in this area is Sigma, which has developed its shari'a core banking system to follow the

principles of Islamic banking

SMEs

Businesses 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 as firms look to connect branch offices There is also more interest in basic security solutions

Industry Developments

Launch of Bandung Digital Valley

In January 2012, Indonesian telecoms giant PT Telkom announced the launch of a new IT hub facility called Bandung Digital Valley (BDV) The new site, located at Teoeko's Research & Development Centre

in Bandung, will focus on developing various kinds of applications and content PT Telkom has

committed IDR50bn over the next three years to this project, which it is hoped will stimulate the digital creative industry by bringing together developers and tech entrepreneurs.The target for the next three yeas

it to create 600 SaaS type cloud computing solutions and 5,000 application stores

E-Government

E-government is expected to be an area of growing opportunities for IT vendors over the next couple of

years The market is potentially huge and several ministries at federal and province level are making plans

to implement projects A number of projects have been launched during the last few years, including an procurement system by the Ministry for State-Owned Enterprises The system standardised procurement

e-procedures across 25 state-owned enterprises, including oil and gas company Pertamina and the

electricity company Perusahaan Listrik Negara

The framework for Indonesian e-government development was set out by presidential instruction No 3/2003, which called for development of a system covering services such as e-procurement, e-

announcements, recruitment, payments and access to information systems The deadline in the instruction was 2015 but progress has been inconsistent

A number of projects are ongoing, however, and these can be expected to increase The Department of Communications and Informatics (Depkominfo) is rolling out a 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

Depkominfo's planned e-services include Broadcast Permit Management, Government Goods & Services Procurement Electronics System and e-licensing services

Despite progress in e-government deployments, a lack of inter-operability among institutions has been identified as a weakness Depkominfo's e-government director, Djoko Agung Harijadi, said each

government institution has been developing its platforms in isolation His comments echoed the appraisal

by the UN e-government survey, which ranked Indonesia 106th for this indicator The government has said the main focus for the Directorate General of Telematics is the development of e-government

applications and key public infrastructure

The government has made some efforts to drive integration For example, it has promoted a policy of adopting OSS to save costs, distributing some software for free There have been a number of pan-

departmental initiatives The National Single Window is a project to provide a unified portal to facilitate import-export permits The project is led by the Ministry of Finance and supported by a number of other departments, including Depkominfo, the customs and excise office, and port authorities

Local Government

E-government has also made some progress at the local level in Indonesia in recent years According to the latest national government figures, about 85% of Indonesia's 400 provincial and regency governments have e-government programmes In many cases, however, this may be as basic as simply having a

website Government figures from 2007 showed that only around 20% of regional governments had been 'covered by IT', and that, while 81% had websites, not all of these were regularly updated There is a proposal to use new electronic methods to measure citizen's satisfaction levels with government service and this would provide another adoption driver

To further drive development, regional governments are encouraged to appoint a chief information officer (CIO) The director general of telematics applications at Depkominfo said a CIO post was needed in every government institution To ensure interoperability among government applications, the government will be trying to develop a standard architecture A number of standardisation projects have already taken place at national level, such as the introduction of a single ID card for healthcare, education and tax The government has also provided local authorities with software packs for health services, demographics and logistics

IT In Education

The government is rolling out new e-learning initiatives, attempting to use IT as a means to close the national education gap The ratio of PCs to students in public schools is 1:3,200 The government wants

to increase this to 1:20 As there are around 53mn students in Indonesia's schools system, from

kindergartens through to senior high schools, this would require at least 2.5mn extra computers The new, internet-based National Education Network, designed to facilitate the use of internet in schools, involves 1,000 network points in five clusters nationwide Despite some advances in e-education, constraints remain due to poor infrastructure and the lack of public awareness in a country where only 20mn people

own fixed-line telephones

E-Passports

Indonesia's information society development received a boost from the government's plan to start to introduce e-passports Indonesia is following in the footsteps of other South East Asian countries such as Singapore, Malaysia and Thailand that have started issuing e-passports The immigration department plans to distribute 10,000 e-passports in the first phase, with these being mainly available in immigration offices in Jakarta, Semarang and Surabaya The e-passports, which will have electronic chips, will cost around IRP600,000 (US$67)

PC Component Duties

In 2010, the government said it was ready to eliminate duties on PC components in a bid to assist the local PC industry Nearly all PC components, such as motherboards and graphic cards, used by the industry are imported, which means manufacturers have to pay import duties The Indonesian Computer Association (Apkomindo) has called on the government to provide further support to domestic PC

manufacturers, including a campaign to encourage the purchase of Indonesian products and the use of rupiah in IT procurements

Open-Source Software

A ministerial decree directed that local government offices across Indonesia must adopt OSS by 2011, although it seemed unlikely that this target could be met Meanwhile, local governments have rolled out similar initiatives, with Surabaya among municipal administrations to have introduced pilot schemes for OSS applications According to the local mayor, all Surabaya municipal offices used the software, and

civil servants were given the relevant training The local government hoped that the municipality could save 20-25% of its budget through the use of OSS applications, which included an application allowing local residents to access information about municipality activities online

IT Sector Development

The government is to review component duties to ensure that these do not become a barrier to continuing

IT sector growth The government regards the IT industry as a key economic growth sector capable of creating 67,000 new jobs The Department of Industry estimated that the IT sector would grow 11.2% in

2008, to a production value of around IDR49.7trn The government has also said that it will roll out new initiatives to create a more conducive climate for foreign direct investment by IT multinationals Among the initiatives being discussed is a reduction in sales tax for relevant categories of goods

The IT sector is regarded as important to the future economic development of the country In an attempt

to foster development of more local IT entrepreneurs, the Telecom Technology Institute in Bandung is building an IT development centre The US$2.2mn centre will act as an incubator for small firms in the

IT sector

Industry Forecast

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of 18% over

2012-2016, with Indonesia forecast to be one of the best regional IT market growth prospects over BMI's

five-year forecast period IT spending is forecast to increase to US$5.9bn in 2012, up from US$5.3bn in 2011 Some fundamental drivers, including rising computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory

Market Trends

BMI expects the Indonesian market to be one of the region's fastest-growing IT markets in 2012,

consolidating a strong performance in most market segments during 2010 and 2011 PC penetration remains at around 6%, giving this huge market unrivalled long-term growth potential Consumer demand will remain the main driver, with PC imports' value expected to rise by around 30% in 2011, after growth

of around 40% was reported in 2010

PC sales are forecast to achieve double-digit growth in 2012, driven mainly by portable computers In

2010, netbooks continued to sell well, but the rate of growth may slow Vendor focus will shift to thinner and lighter laptops with more features and longer battery life, and to other form factors such as tablets In

2010, falling unemployment and a strengthening rupiah will also boost consumer purchasing power

Spending in some key IT verticals, such as financial services and banking, should continue to be

significant in 2012 Business IT investment should also remain buoyant in line with the general economy

as inflation moderates and Bank Indonesia turns dovish Government infrastructure investments should also provide a boost to the business sector

Government IT spending is expected to increase and could have accounted for as much as 25% of the IT market in 2011, with reports that the government was encouraging state companies to use more IT Meanwhile, vendors will be attracted by the growing cloud services opportunity, which could be worth

around US$100mn by the end of BMI's five-year forecast period

Market Drivers

By 2016, Indonesia's hardware-dominated IT market is projected to reach a value of US$11.6bn, with Indonesia achieving faster growth than many other ASEAN members With ICT penetration of only 20% and development restricted to richer areas such as Java, the market has much growth potential However, Indonesia's uneven development and digital divide are major barriers to faster growth within this

potentially huge IT market