Indonesia information technology report q2 2013

• According to government data, there are 30-35mn Indonesian companies that still do not use IT-basedsolutions, representing a huge potential market.. The cloud computing market is curre

Q2 2013 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q2 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2013

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BMI Industry View 7

SWOT 9

Wireline SWOT 11

Political 13

Economic 15

Business Environment 17

Industry Forecast 18

Table: Indonesia IT Industry - Historical Data And Forecasts (IDRmn) 20

Broadband 21

Table: Internet - Historical Data And Forecasts, 2010-2017 21

Macroeconomic Forecasts 23

Economic Analysis 23

Trade Deterioration Slowing… 23

…But Risks Seen In Portfolio Account 24

Risks To Outlook 26

Industry Risk Reward Ratings 27

Industry Risk/Reward Ratings 27

Table: Asia Pacific IT Risk/Reward Ratings - Q2 2013 30

Market Overview 31

Hardware 31

Software 35

IT Services 37

Industry Trends And Developments 40

Regulatory Development 44

Table: Key Ministers And Departments 44

Company Profile 46

Oracle Corp 46

Table: Oracle: Selected Acquisitions 47

Hewlett-Packard 51

IBM 57

Sigma 63

Regional Overview 66

IT Growth and Drivers 68

Sectors And Verticals 70

Demographic Forecast 74

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 75

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

Table: Indonesia's Key Population Ratios, 1990-2020 77

Table: Indonesia's Rural And Urban Population, 1990-2020 77

Methodology 78

Methodology 78

IT Industry 78

IT Ratings - Methodology 79

Table: IT Business Environment Indicators 80

Weighting 81

Table: Weighting Of Components 81

Sources 81

BMI Industry View

BMI View: Indonesian IT spending is expected to reach IDR64.6trn in 2013, up 16%, although BMI has

downwardly revised its forecast due to our expectation of a deteriorating investment climate BMI still

expects the Indonesian market to be one of the region's fastest-growing IT markets over our five-year forecast period In 2013, continued strength in government spending should offset an expected deceleration

in household demand PC penetration remains at below 10%, giving this huge market unrivalled long-term growth potential Rising computer penetration and growing affordability should ensure the market remains firmly in positive growth territory.

Headline Expenditure Projections

Computer hardware sales: IDR45.9trn in 2013 to IDR63.2trn in 2017, an average of 10% Forecast

revised after a slowdown in H112, but growing affordability and credit availability are driving sales in theconsumer segment

Software sales: IDR7.8trn in 2013 to IDR12.6trn in 2017, average growth of 14% Forecast upwardly

revised due to analyst modification although progress will depend on the success in bringing down illegalsoftware use

IT services sales: IDR11trn in 2013 to IDR16.6trn in 2017, up 12% over the period Forecast unchanged,

with a key growth area being cloud services, which could be worth more than US$100mn by 2017

Risk/Reward Ratings: Indonesia's score was 41.9 out of 100.0 Indonesia remained in ninth position in our

latest RRR table

Key Trends & Developments

■ 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 The Indonesiangovernment's Master Plan for Acceleration and Expansion for Indonesia Economic Development(MPEEI) states that connectivity between the islands of the country is a priority area Major governmentinfrastructure and ICT initiatives, particularly the Palapa Ring Project, have been rolled out to create theinfrastructure to support IT market growth

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

• According to government data, there are 30-35mn Indonesian companies that still do not use IT-basedsolutions, 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

SWOT Analysis

Strengths ■ Large potential market

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

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

1.5%

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

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

■ History of recent political instability

■ Legal concerns, such as intellectual property rights, are a deterrent to foreign directinvestment

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

the government is showing signs of taking intellectual property more seriously

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

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

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

SWOT Analysis - Continued

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

internet access, or drive ICT sector development

■ The global economic slowdown may hit key demand segments

Wireline SWOT

Wireline SWOT

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

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

in an otherwise slowing market

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

■ Provision of additional 3G bandwidth to be used towards improved mobile broadbandservices through raised network capacity

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

Wireline SWOT - Continued

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

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

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

SWOT Analysis

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

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

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

Weaknesses ■ Indonesia's domestic political scene is characterised by a proliferation of minority

parties, and formal and informal coalitions are necessary to govern and legislate.Moreover, the efficiency of state institutions is encumbered by bureaucracy andcorruption Prospects for reform are beset with numerous challenges, such as thelong-running practice of politicians promising government positions to campaignsupporters

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

Opportunities ■ President Susilo Bambang Yudhoyono's Democratic Party had a strong showing in

the 2009 parliamentary elections Coupled with a strong mandate following his election in the same year, the implementation of policies in the legislature shouldbecome less problematic

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

SWOT Analysis - Continued

Threats ■ Regional militant group Jemaah Islamiah (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

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

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

of political instability

SWOT Analysis

Strengths ■ Indonesia's strategic location between the Indian and Pacific Oceans and its

adjacency to major east-west trade routes make it an important economy in theregion Indonesia is also resource-rich and is the world's largest producer of palm oil

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

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

rate still relatively high at 6.2% as of August 2012 Many are forced to work in theinformal sector Of particular concern is the youth unemployment rate, which is fivetimes the overall rate

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

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

business environment, particularly through reform of its unreliable legal system

■ Indonesia stands to benefit from the rise of Islamic financing, having adopted newlegislation in early 2008 designed to tap into this rapidly expanding sphere With anoverall market share of only 3%, growth prospects for Islamic banking in the world'slargest Muslim country are enormous

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

The country has therefore become a net importer of crude oil in recent years, puttingdownward pressure on its current account position Furthermore, rising oil priceshave begun to pressure Indonesia's current account, where it typically runs a healthysurplus The resumption of the Cepu field in late 2009 may help to alleviate

Indonesia's dependence on foreign oil

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

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

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

Weaknesses ■ Corruption remains a major problem Indonesia ranked 118th out of 174 countries

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

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

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

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

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

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

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

Industry Forecast

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of 10.8% over

2013-2017, 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 IDR64.6trn in 2013, up from IDR55.6bn in

2012 Some fundamental drivers, including rising computer penetration and growing affordability, shouldensure that the market remains firmly in positive growth territory

Market Trends

BMI has downgraded its Indonesian growth forecasts amid signs of weakening investment However, we

still expect Indonesia to be one of the region's fastest-growing IT markets in 2013, consolidating a strongperformance in most market segments during 2012 PC penetration remains at below 10%, giving this hugemarket unrivalled long-term growth potential

Indonesia's IT market has reported rapid growth for several years However, ICT penetration remainsheavily concentrated in the capital Jakarta and its surrounding area, which offers a significant opportunity inother areas of the country PC sales are forecast to achieve double-digit growth in 2012, driven mainly byportable computers Vendor focus will shift to thinner and lighter laptops with more features and longerbattery life, and to other form factors such as tablets Strong wage growth looks set to continue in 2012 andwill also boost consumer purchasing power

The government's masterplan to lift Indonesia into the ranks of the world's top 10 economies by 2025,should fuel ICT investments Resident capital investment should enable the market to outperform theregion Spending in some key IT verticals, such as financial services and banking, should continue to besignificant in 2012 However, there is potential in currently underpenetrated sectors such as manufacturing.Business IT investment should also remain buoyant in line with the general economy as inflation moderatesand Bank Indonesia turns dovish Government infrastructure investments should also provide a boost to thebusiness sector

Consumer demand will remain the main driver; PC demand in H112 was affected by sluggish demand in thecommercial and education sectors Government IT spending is expected to increase however and continue

to account for around 25% of the IT market, with reports that the government was encouraging state

Market Drivers

By 2017, Indonesia's hardware-dominated IT market is projected to reach a value of IDR63.2bn, withIndonesia 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 potentiallyhuge IT market

Private enterprises, particularly SMEs, will dominate PC sales, with ERP and other e-business applicationsalso finding increasing popularity in the SME market The SME sector of 42.2mn companies will drivedemand for basic hardware and applications as enterprises look to enhance productivity through automatinginventory, accounting and other functions Around 30-35mn Indonesian companies are estimated to lackany IT-based solutions IT services for this segment will be dominated by basic services such as systemintegration, support systems, training, professional services, outsourcing and internet services

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

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

Segments

Although the consumer segment is relatively small as a proportion of the market, demand should be fuelled

by lower prices and new entertainment and wireless connectivity features The government's plans toestablish fixed wireless networks in major cities and encourage WiMAX build-out in rural areas will also bedrivers There are also an increasing number of Wi-Fi 'hotspots'

The consumer market is largely reliant on government initiatives to increase penetration It will remaindominated by the lower-price tiers, which will account for about 80% of sales The popularity of lower costnetbook computers, which flooded the market a few years back, will help sustain volume sales Computersales will also receive a boost from programmes to increase computer penetration in education, as thegovernment seeks to meet its growth targets for this sector

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

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

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

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

Summary

The value of the hardware market is predicted to grow from IDR45.9trn in 2013 to IDR63.2trn in 2017,with PC sales (including accessories) rising from IDR38trn to IDR52.5bn Software spending is forecast torise from IDR7.7trn to IDR12.6trn, and IT services spending is expected to increase from IDR11trn toIDR16.6trn

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

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

IT Market 40,532,778 46,570,952 55,574,624 64,638,860 70,615,805 78,133,545 86,941,910 92,389,925

IT Market As %

GDP 0.63 0.63 0.67 0.71 0.69 0.68 0.68 0.65 Hardware 28,676,941 33,694,084 39,847,005 45,925,910 49,713,527 54,498,148 60,076,860 63,240,904 o/w PCs 23,228,322 27,359,596 32,674,544 38,026,654 41,162,800 45,233,463 49,863,794 52,489,950 o/w Servers 2,580,925 3,032,468 3,586,230 4,133,332 4,474,217 4,904,833 5,406,917 5,691,681 Software 4,863,933 5,215,947 6,446,656 7,756,663 8,756,360 10,001,094 11,476,332 12,565,030 Services 6,991,904 7,660,922 9,280,962 10,956,287 12,145,918 13,634,304 15,388,718 16,583,992

e/f = BMI estimate/forecast Source: BMI

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

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

No of internet users ('000) 26,211 43,589 61,024 73,229 82,749 90,196 94,706 99,441

No of internet users/100 inhabitants 10.9 18.0 24.9 29.6 33.2 35.8 37.3 38.8

No of broadband internet subscribers

('000) 2,280 2,736 3,037 3,280 3,444 3,617 3,797 3,987

No of broadband internet subscribers/100

inhabitants 1.0 1.1 1.2 1.3 1.4 1.4 1.5 1.6

e/f = BMI estimate/forecast Source: BMI, ITU, operators

Latest data retrieved from the International

Telecommunication Union (ITU) showed a drastic

change in the number of internet users and fixed

broadband subscribers in Indonesia compared to

those previously reported The ITU said there were

about 43.6mn individuals using the internet in the

country at the end of 2011, representing a

penetration rate of 18% This was up from 26.2mn in

2010, equivalent to 11% penetration Previously, we

note that the ITU said there were about 61.0mn

internet users in 2011 No reasons were given for the

change in data

We have adjusted our forecasts accordingly in light

of the revised figures We now expect 99.4mn

internet users in Indonesia by end-2017, up from

73.2mn in end-2013

Current forecasts for Indonesia's broadband market are based on data from the ITU, which showed thatthere were only 2.7mn fixed broadband subscribers in Indonesia at the end of 2011, up from 2.3mn in 2010.Similarly, there were changes to ITU's historical data Previously, it reported 1.9mn fixed broadband users

in the country in 2010 We have also based our forecasts on more recent subscriber data from fixed-line

operators Telekomunikasi Indonesia (Telkom) and Indosat.

Industry Trends - Broadband

Sector

2010-2017

e/f = BMI estimate/forecast Source: BMI, ITU, operators

While the low broadband customer base suggests significant growth potential, we note that development offixed broadband infrastructure in Indonesia is hampered by the country's fragmented geography, especially

in rural regions Consequently, operators are instead turning to mobile broadband technologies to increasecoverage, and consumers are also opting for mobile broadband services in light of more affordable

subscriptions and devices

WiMAX has been deployed on a limited basis, but operators now seem wary of investing in a technologythat will be superseded by alternatives, primarily LTE The government has effectively put back its plannedlicensing of LTE by two to three years in an effort to coerce the WiMAX operators into committing to

network rollouts, but BMI thinks this will have little effect, even with the sweetener of being allowed to

offer mobile WiMAX Nevertheless, WiMAX seemed the most appropriate solution to delivering speed broadband services across Indonesia's 17,508 islands

high-We expect Indonesia's fixed broadband industry to exhibit a steady growth trajectory with increasingservice adoption mainly in urban cities among businesses and more affluent consumers that require higher-speed connectivity The masses' generally low purchasing power and lack of need for high-speed broadbandspeeds mean that 3G-based mobile broadband services would be suffice in the near-to-medium term, whichwill be to the detriment of Indonesia's fixed broadband market We forecast 4.0mn fixed broadband

subscribers in Indonesia by end-2017, representing a penetration rate of 1.6%, up from 3.3mn in end-2013

Macroeconomic Forecasts

Economic Analysis

BMI View: We continue to hold a neutral bias on the rupiah over the short-term, as our expectations for

the currency to hit stability have played out well Although Indonesia's external position has deteriorated markedly over the course of 2012, it too appears to have found some stability, and we believe that pressures from the country's weakening trade position have eased somewhat As such, we expect the unit to end 2012

at our target of IDR9,600/US$

Indonesia's current account deficit came in at US$5.3bn in Q312, a notable retreat from its Q212 recordhigh of US$7.7bn Nevertheless, the performance was the second worst on record for the account, andcontinues to paint a picture of Indonesia's distressed external position relative to 2011, when the countrywas posting consistent surpluses As we have written before, the rapid deterioration in Indonesia's currentaccount has largely been the result of its declining terms of trade in view of commodity prices Morespecifically, 2012 has witnessed a marked drop in the price of coal (-24.3%) and palm oil (25.8%),

Indonesia's two largest commodity exports, even as oil (Indonesia is a net oil importer) prices stayedresilient As a result, Indonesia's exports through Q312 had fallen by 6.6% from the same period in 2011 innominal terms despite the fact that they had grown by 2.0% in real terms

Trade Deterioration Slowing…

However, following what has been perhaps the worst trade performance in the region in 2012, we expectIndonesia's external balance to stabilize somewhat in 2013 on the back of a moderate recovery in exportgrowth, as reflected by our forecast for the current account deficit to fall slightly from 2.1% of GDP in 2012

to 2.0% in 2013 As such, we expect depreciatory pressure on the rupiah arising from the country's negativetrade position to ease somewhat relative to H112, during which time the currency sold off by 4.8%

Not So Cheap

Indonesia - Real Effective Exchange Rate Index

Source: BMI, Barclays

…But Risks Seen In Portfolio Account

Nevertheless, we do see some scope for further downside for the unit as we head into 2013 Despite the factthat the rupiah has been the worst performing currency in the region in 2012, it is not yet cheap in realeffective terms, as indicated on the above chart Moreover, we have seen the correlation between the rupiahand Indonesia's credit default swap (CDS) break down, with the CDS flirting with 2007 lows even as therupiah has continued to sell-off Rather than suggesting that the rupiah is cheap, we believe that this isindicative of the fact that Indonesian credit protection is inexpensive in consideration of Indonesia's

continued exposure to the parlous state of the global economy, and that this dynamic indicates furtherdownside risk for the rupiah should the CDS spike higher

CDS Relatively Attractive

Indonesia - Real Effective Exchange Rate Index & Indonesia 5-Year Credit Default Swap

Source: BMI, Barclays

Indeed, it is the perilous external climate that we believe will be the key driver for the rupiah over the nextyear, and for this reason we also see risks for the currency with regards to the country's portfolio account Insharp contrast to its trade woes, foreign investment in Indonesian equity and debt markets has been

undeniably strong so far in 2012 Over the first three quarters of 2012, total foreign inflows into Indonesiandebt (both public and private) hit US$9.3bn, versus US$5.6bn over the same period in 2011 Indonesia'sequity market saw a similar improvement, raking in US$1.7bn worth of foreign investors' funds versus anoutflow of US$1.1bn in the first three quarters of 2011

Fickle Inflows Pose Rising Risks

Indonesia - Stock Of Portfolio Investment Since 2004, US$mn

Source: BMI, BI

These inflows have contributed considerably to what we believe are rich valuations within Indonesia'ssovereign debt and equity markets, and a reversal in these flows is therefore increasingly likely Given thatforeign ownership in these markets (approximately 60% of Indonesian equities and 30% of Indonesianbonds are owned by foreigners) is among the highest in the region, this means increased risks for the rupiahoriginating from the portfolio account (and the related hot money outflows) Taking these risks into account,and in consideration of the fact that we believe they outweigh the potential upside from a trade rebound, wehave revised our average rupiah forecast for 2013 downwards from IDR9,400/US$ to IDR9,700/US$,reflecting an end of period target of IDR9,800/US$

Risks To Outlook

Risks of large-scale portfolio outflows will be especially high should the global economy underperform our

Industry Risk Reward Ratings

Industry Risk/Reward Ratings

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

markets over our forecast period through to 2017 Our Q213 ratings reflect our consideration of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects

There was just one change to the countries' rankings in this quarter's update as Australia swapped positionwith Hong Kong This is due to a downgrade in Hong Kong's Country Risk score from 85.7 the previousquarter to 79.0 While the other countries covered remained in their respective positions, there were slightlychanges to the IT Rating scores as we have updated our macroeconomic data and forecasts

Singapore continued to outperform its regional peers due to a stable business environment and a proactiveregulator In addition to the Infocomm Development Authority (IDA)'s 10-year masterplan (IntelligentNation 2015), which seeks to coordinate developments within the public and private sectors, the regulatorhas undertaken initiatives such as the FutureSchoolds@Singapore programme (a collaboration between theIDA and the Ministry of Education to enhance the diversity of education offerings for the integration of IT)and implementing an interoperable near field communication (NFC) infrastructure, which paved the way forNFC-based mobile payment services

Australia moved to second position even though there were no changes to its Rewards and Risks scores.The country's National Broadband Network (NBN) project is well underway, although it still faces thethreat of being scaled back if the opposition Coalition party assumes power in the next federal election.However, a complete revamp of the project is unlikely given the hefty cost involved Australia is alsoeyeing to reduce its reliance on its mining industry by turning the country into a regional technology hubthat could compete with peers such as Japan, Singapore and South Korea Forming the foundation for theshift will be the NBN

Hong Kong is a well-established financial hub, and IT solutions present an opportunity for companies toreduce operating costs and improve operational efficiency when carrying out transactions, particularlycross-border trade In addition to affordable fibre broadband services, Hong Kong's relationship with China

provides companies access to a high-growth market For example, US-based VelaTel Global

Communications purchased a Hong Kong mobile virtual network operator in December 2012 to

complement its telecoms and IT businesses in China

South Korea saw its IT Rating score increase to 65.2 from 64.6 as the increase in its Country Rewards scoreoffset a decline in its Industry Rewards score There is growing interest from the public and private sectors

in cloud computing models such as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS).Additionally, South Korea is the region's leader in terms of LTE adoption, which reflects the country'stechnology savvy nature

Malaysia's remained in fifth position with an IT Rating score of 52.3, up from 51.2 the previous quarter.The upward revision was because of an improvement in the country's Industry Rewards component LikeSingapore, Malaysia has its Economic Transformation Programme (ETP), which has earmarked areas such

as cloud computing as one of its top 10 strategic technology priorities The government aims to propel thecountry into a regional services and outsourcing hub, and has provided initiatives to attract the participation

of the private sector Developments under the ETP include a 60,000 sq ft purpose-built data centre facility

in Petaling Jaya and the Malaysian Public Transport System (a web and smartphone application thatprovides real-time public transportation tracking)

China's IT Rating score remained unchanged over the quarter at 48.6 The country has the third-highestIndustry Rewards score in the region behind Australia and Singapore, which is a reflection of the potential

of the Chinese market in light of its sheer size In October 2012, India's Tata Consultancy Services (TCS)

announced its intention to increase its workforce in China from 3,000 as part of its Asia expansion strategy

The decision mirrors a move made by local rival Infosys in 2011 to add 4,000 employees in Shanghai and

build a new US$130mn office in the city TCS's decision to beef up its China presence fits nicely in linewith our long-term view that India will benefit from a reorientation of China's economy away from

infrastructure investment and towards consumer services

The Philippines' IT Rating score saw a slight upward revision from 43.7 the previous quarter to 43.8 in light

of a small improvement in the country's Country Risk score The Philippine IT market will continue to bedriven by the local IT and business process outsourcing (BPO) sectors The BPO industry, which accountsfor around 30% of IT spending, continues to grow, and it is in the midst of expanding operations outsideMetro Manila However, we are also noting a shift towards high-value services In October 2012, the

Philippine Long Distance Telephone Company announced that it may sell a majority stake in BPO unit to

fund investment in its nascent data centre business, accelerate deployment of advanced internet gatewaysand roll out fibre transmission solutions

slow to integrate ICT solutions in their operations Additionally, major Indian IT providers are facing theproblem of rising wages of around 10-20% in recent years due to growing shortages of talents at home.Although the country is looking to implement widespread industry reforms to kick start the economy, theprocess is far from smooth, which has resulted in an investment slowdown in light of uncertainties.

Indonesia saw an upgrade in its Industry Rewards score, which led to a 0.2 percentage point increase in thecountry's IT Rating score to 41.2 One of the most populous country in the world, Indonesia is experiencingstrong IT developments in richer areas such as Java, where IT infrastructure is more established Growingurbanisation means that medium-tier cities are also becoming investment hotspots, which will lead todemand for IT services Both consumer- and business-facing solutions have strong growth opportunities,especially with the government keen to spur developments For example, the Indonesian government is

currently in negotiation with Foxconn Technology Group to set up a manufacturing facility.

Thailand's IT Rating score improved from 39.9 to 40.5 this quarter due to an upward revision in its IndustryRewards score The country has seen a number of positive developments in late 2012, most notably thesuccessfully conclusion of the much-delayed 3G auction Additionally, Thailand's call-centre industry is

experiencing growth with Indian customer interaction management firm Servion Global Solutions

announced a plan to set up an office in early 2013 According to the company, Thailand is the largestmarket in ASEAN for contact centres The launch of the ASEAN Economic Community in 2015 willfurther make the country more attractive to foreign investors

Like Thailand, Vietnam's IT Rating score increased due to an improvement in its Industry Rewards score.Vietnam also noted an upward revision in its Country Risk score from 47.2 to 49.9 Vietnam is trying tocatch up with regional peers, with the government pledging to invest US$8.5bn in the ICT sector in the next

10 years The government is also looking to attract US$5bn worth of foreign investments in the IT sector by

2015, according to Avaya Vietnam, along with Thailand, Indonesia and the Philippines, is also expected to

benefit from a new ICT training programme for small and medium enterprises, which is implemented by the

ASEAN Foundation and funded by a US$300,000 grant from Microsoft.

Sri Lanka remained in 12th position in our RRR with an IT Rating score of 27.7 In line with our consensus outlook on the Sri Lankan economy, the recently-released GDP figures for Q312 showed realGDP growth having slowed considerably to 4.8% year-on-year, down from the 6.4% expansion recorded inthe preceding quarter We do not see economic growth turning up until H213 at the very earliest, hence ourprojection for full-year real GDP growth to remain flat at 5.4% in 2013 While we expect Sri Lanka'seconomic outlook to remain gloomy for the foreseeable future, the IT industry remains a key focus for the

below-government due to its importance in enabling trade and empowering consumers For example, Sri Lanka'sInformation and Communications Technology Agency soft launched the Lanka Government Cloud facility

in August 2012, which has the goal of creating an enabling environment for better products and services byleveraging on ICT

Table: Asia Pacific IT Risk/Reward Ratings - Q2 2013

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Ran k Previous Rank

Singapore 57.0 100.0 70.0 85.1 74.1 1 1 Australia 60.0 95.0 80.0 72.9 73.3 2 3 Hong Kong 55.0 100.0 70.0 79.0 72.2 3 2 South Korea 50.7 80.0 75.0 75.4 65.2 4 4 Malaysia 45.3 55.0 35.0 77.7 52.3 5 5 China 55.6 30.0 35.0 65.1 48.6 6 6 Philippines 39.3 45.0 42.5 54.2 43.8 7 7 India 52.5 15.0 45.0 50.9 42.1 8 8 Indonesia 38.8 40.0 35.0 53.1 41.2 9 9 Thailand 41.3 20.0 35.0 70.3 40.5 10 10 Vietnam 38.1 15.0 35.0 49.9 34.2 11 11 Sri Lanka 28.8 10.0 35.0 44.2 27.7 12 12

Average 46.9 50.4 49.4 64.8 51.3

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

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

Market Overview

Hardware

BMI forecasts that the computer hardware spending in Indonesia will reach a value of IDR46tn in 2013 and

will increase to IDR63tn in 2017, growing at a CAGR of 8.3% The share of hardware in the overall ITmarket will decline by more than 2.5% in that duration

BMI forecasts a spectacular 2013 for IT hardware vendors in the country, with the market growing by an

impressive 15.3% that year The growth is particularly impressive, as it comes on the back of 2012, whenthe market grew by an even more impressive 18.3% The Indonesian economy seems to be enjoying thefruits of political stability under a government that is liberal, yet sensitive to the demands of the market Theequation between the US dollar and the Indonesian Rupiah is likely to play a role as it did in 2012 Aweaker dollar translates into cheaper imports, boosting sales in the local currency, although the same effectwill not be visible when looked at in terms of US dollar sales

All in all, the Indonesian market will continue to exude promise for the immediate to distant future TheIndonesian promise hinges on the following factors:

•The sheer size of its economy places Indonesia at the top of South East Asian peers It is the only country

in the region to feature in the G20 For a major duration since the late 1970s, Indonesia has seen healthyeconomic growth barring the meltdown in 1997 to a large extent Indonesia, at its present growth rates, iswell on the way towards featuring in the top ten global economies by the year 2025

•Given the history of sustained growth, it is surprising that Indonesia is characterised by low PC

penetration Intel pegs the PC penetration of the country to be as low as 7% in 2013, considerably lower

than regional peers such as Malaysia and Thailand as well as even Philippines and Vietnam Given thepromising per capita income of the country and the history of sustained growth, the lack of PC penetration

is a compelling business opportunity The modest PC penetration remains centred on metros such as Jakarta,according to estimates, providing a much clearer picture of the market opportunity

•Indonesia presents an attractive demographic distribution with more than half the population under 30years of age, as of 2013 The distribution places the segment most receptive to IT in a clear majority, whichbodes well for IT hardware vendors

Indonesia remains the largest market for notebooks and tablets in the south East Asian region Gfk reportsthat the combined shipment units for notebooks and tablets in the country grew by an impressive 37%during 2012 These numbers are a resounding endorsement to the enhancing economic profile of thecountry Notebooks are also the more popular PC format among the retail consumer users, while the

corporate and business users display more affinity to the desktop, according to Lenovo Lenovo also

contends that notebooks are the main drawers for first time PC users, including students Given the

demographic profile of Indonesia, it is obvious that the most promising customer segment is

overwhelmingly in favour of notebooks Lenovo, in fact, pegs the proportional share of notebooks amongthe retail user's PC purchases at a formidable 85% On a larger note, IDC reports that notebooks accountedfor a little above two-thirds of the overall PC shipments in the country in 2012 Recognising the appeal ofnotebooks in the largely aspirational segment comprising of the youth, Lenovo offered its IdeaPad products

at a very competitive price of US$250 in January 2013

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

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

Tablets

Tablets are on track towards achieving mainstream status in Indonesia IDC reports a 42% hike in thenumber of tablet shipments in the country in the year 2012 In that sense, tablets in Indonesia are traversingtheir larger global market development trajectory wherein they are poised to overtake notebook shipments

in the next few years, as estimated by NPD DisplaySearch among others While Apple and Samsung have

played their role in enhancing consumer awareness of tablets, IDC contends it is the local vendors that are

market leaders in the country Key local vendors in the market include Advan, MITO and Smartfen among others Another Indonesian manufacturer, Nexian, launched its Android based tablet S Nexian8

Mini in March 2013 at a price of US$155 Local players are the obvious price leaders, something that their

global counterparts are trying to match Acer, for example, launched its Iconia B1-A71 tablet in January

2013, at a price of US$150, which is a fraction of the price of iPad It is interesting to learn that the averageprice of a tablet sold in Indonesia was US$485 in 2012, which was a considerable drop from US$651, asrecorded in 2011, according to Gfk Indonesia Acer, on its part, is looking to replicate its performance on

50% in the country's tablets Samsung launched its Galaxy Note 10.1 in the Indonesian market in September

Lenovo Ideapad U300, Samsung Series 5 and Toshiba Portege Z series While premium pricing of

ultrabooks can be a showstopper in a price sensitive market at Indonesia, Intel is confident economies ofscale will make the price more palatable The release of Windows 8 in October 2012 could also provide aboost to adoption of ultrabooks as consumers and businesses upgrade to the new operating system

Netbooks

The advent of Windows 8 could spell curtains for the netbook market in the country, which, in contrast toglobal trends, continues to thrive Globally, netbooks are now increasingly seen as low performing andbulky devices However, Indonesian customers have appreciated its price-performance ratio in a kinder lightthan other markets The appeal of netbooks is evident from the fact that Acer launched its TravelMate B113netbook in the Indonesian market as late as February 2013, whereas globally the company is in the process

of withdrawing from this product altogether While the short-term prospects for netbooks in the countryhold a modicum of promise; there is a question mark over the future of the product as tablets and ultrabookscontinue to add features and see a considerable reduction in costs

Windows 8

Windows 8 has met with an enthusiastic response in the Indonesian market, with a wide array of productlaunches by vendors The shape of things to come was unveiled to an extent in the boot camp held byMicrosoft Indonesia in April 2012 for Windows 8 The camp saw the launch of as many as 44 applicationsdeveloped by Indonesians for Windows 8

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

Financial institutions

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

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

•The ongoing computerisation of government procurement, also known as e-GP had covered more than 25enterprises in 2012, according to the Global Business Guide Indonesia.

•Computerisation of road toll collection

•Issuing of electronic identification cards to citizens, also known as e-KTP covered close to 60% of thetarget population by 2012

Challenges

However, there are troubling developments looming on the horizon In November 2012, Indonesia's

Director General of Foreign Trade reported that the country was contemplating a curb on the import oflaptops and mobile phones in an effort to discourage illegal imports Such a move can be counterproductive

to the prospects of IT hardware in the country

Software

Making sense of the numbers

BMI forecasts that the computer software spending in Indonesia will reach a value of IDR8tn in 2013 and

increase to IDR13tn in 2017, growing at a CAGR of 12.8% The share of hardware in the overall IT marketwill increase by more than 1.5% in that duration There should be a continued boost in 2013 from systemsupgrades previously delayed as a result of the global economic crisis Compliance with government andinternational regulations is a long-term driver in the financial sector, manufacturing and other sectors

Generic software

Indonesia has a vibrant ERP market SAP has a solid presence in the region However, it is believed in

certain quarters that Indonesian business practices require high level of customisation in ERP, which is

delivered by home-grown companies such as Epicor Interestingly Ramco, the Indian cloud based ERP vendor announced a partner in Indonesia in the form of Multipolar Technology in September 2012 Ramco counts Panasonic and SDV Logistics as its customers in the country.

Windows 8

Windows 8 was well received by businesses According to Indonesia Finance Today, Microsoft counted

500 companies that used the enterprise edition of Windows 8, in January 2013 Windows 8 has an addeddimension of interest in the Indonesian market Indonesia hosts a considerable legacy of Windows OS,including Windows XP This situation makes the timing of Windows 8 launch ripe for long-pendingmigration in a considerable proportion of the Indonesian market Microsoft has a long-standing relationshipwith Indonesia According to the licensing agreement between the government and Microsoft in 2007, thegovernment reportedly agreed to purchase 35,496 licensed copies of the Windows operating system and117,480 copies of the Office package for a total price of US$41.9mn

Domain specific software

Apart from generic software; application and domain specific software continue to receive patronage This

is evidenced in the case of banks, which have implemented major core banking migration exercises Giventhe fragmented nature of Indonesian businesses and large preponderance of SMEs, it will not be surprising

if application software grabs a sizeable chunk of the software market Even larger companies such as those

in the banking domain will find application-specific software, such as core-banking turn out to be theirmajor expense centre

Open-source software

Indonesia boasts of a vibrant open-source community, which initially shot into the limelight by opposingthe deal between Microsoft and the Indonesian government towards the purchase of bulk licences of theformer by the latter in 2007 In September 2012, open-source communities at Padang, West Sumatera,Indonesia held a gathering whose attendees included fedora-id (Fedora Indonesia Regional Sumatera Barat,represented by inibudi), KPLI (Kelompok Pengguna Linux Indonesia) Padang, ARM (Android

RanahMinang), Android Padang, IBT-S (Indonesian Backtrack - Sumbar), ELCO UNP (Electronic LinuxCommunity Universitas Negeri Padang) and SLiMS Sumbar The purpose of the gathering was fostering asense of inity by creating a container community forum

Piracy

One market inhibitor is Indonesia's continuing software piracy problem, which was 86% in 2012, according

to FT It is evident that an improvement of a few percent points in compliance will translate into an

impressive market opportunity in Indonesia

Making sense of the numbers

BMI forecasts that the cloud computing spending in Indonesia will reach a value of IDR4tn in 2013 and

increase to IDR11tn in 2017, growing at a CAGR of 30% The share of computing in the overall IT marketwill increase by 6% in that duration

Indonesia presents near ideal conditions for cloud computing, which include a healthy mix of local andglobal players, an overwhelming presence of cost-conscious SMEs and the demographic dominance of theinternet savvy youth In its inaugural cloud index for Indonesia for the year 2012, VmWare noted the rate ofcloud computing adoption among businesses in Indonesia was as high as 41% 51% of the non-adoptersplanned to have cloud computing solution in place in the next 18 months The high level of positivity aboutcloud computing explains the high growth rate

companies followed this up by launching an enterprise-class public cloud infrastructure-as-a-service (IaaS)

in October 2012 The services will leverage Indosat's national connectivity backbone and its data centrefacilities and the cloud computing solution capabilities of the US based Dimension Data

•In May 2012, Telekomunikasi Indonesia, the government owned telecommunications operator, announcedinvestment of US$10mn in the development of cloud computing services

•In December 2012, CBM, an Indonesian CSP completed the deployment of cloud platform targeted at

business as well as retail customers Based on the AppLogic solution provided by CA, the platform hopes toleverage the 300 km of optical fibre network owned by CBM in Jakarta metro

•Earlier in 2011, Microsoft announced that it was planning to invest US$2.5bn in the development of cloudcomputing networks in Indonesia

IT Services

Making sense of the numbers

BMI forecasts that the IT services spending in Indonesia will reach a value of IDR8tn in 2013 and increase

to IDR13tn in 2017, growing at a CAGR of 12.8% The share of hardware in the overall IT market willincrease by more than 1.5% in that duration

Improvements in Indonesia's telecoms and ICT infrastructure are expected to drive long-term growth in theIndonesian IT services market This helps spread the fruits of development across the larger region

Towards that end, the Palapa Ring Project holds considerable promise Its brisk completion will helpsustain, if not enhance the growth of IT services throughout the region The Palapa national fibre ringproject is nearing completion, meaning all main islands within the Indonesian archipelago will be connectedwith fibre-optic backbone capacity This will be naturally followed by extending the links to neighbouringnations

Banks

Banking services will lead other verticals in the employment of IT services Apart from core banking asillustrated earlier, spending areas for these banks include payments processing, debt recovery and securityservices Disaster recovery follows almost as a corollary of core banking, and moreover it was deemedmandatory by Bank Indonesia Apart from the mainstream banks; Islamic banks as well as regional

development banks in the country also hold considerable expansion potential for IT services

Telcos

Indonesian telcos can also be looked at as a lucrative market for IT services, both as enablers and end-users

However, the recent legal tangle involving the 'bankruptcy' of the state-owned Telkomsel can prove to be a

dampener for investors in telcos for deploying IT services However, it is largely conceded that the

bankruptcy declaration by the court was not a result of operational performance or financial situation ofTelkomsel, which remain healthy; but due to a legal dispute between creditors and the company

Incidentally, the size of the amount to be repaid under dispute is much lower than Telkomsel's annualearnings

Data centres

management of electronic transactions and systems The regulation mandates Indonesian businesses andothers conducting electronic transactions in the country to set up data centre sites in the country As if on

cue, in October 2012, Equinix, the global data centre company and PT DCI, the Indonesian company declared its plans of building a 65,000 square feet data centre in Jakarta In March 2013, Supra Primatama Nusantara announced its plans of investing US$50mn in data centre building The company already offers

a gamut of connectivity and hosting services including data centres in the country

In March 2013, the Batam Free Trade Zone Management Agency (BP FTZ) presented a proposal to severalcompanies including BlackBerry for opening the latter's data centre in its newly opened IT centre in thesame region BP FTZ contends that Batam's geographical location insulates it from the threat of tsunami Atthe same time Batam is the hub of the optical fibre backbone in the country These factors make Batam anideal site for disaster recovery centres

Government

The Indonesian government is accused in several quarters of not being proactive enough in leveraging IT tothe extent demonstrated by its regional peers It is however, undeniable that the connectivity projects rolled-out by the government are the most influential drivers for IT services in the country

Industry Trends And 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 committedIDR50bn over the next three years to this project, which it is hoped will stimulate the digital creativeindustry by bringing together developers and tech entrepreneurs The target for the next three year is tocreate 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 few years.The market is potentially huge and several ministries at federal and province level are making plans toimplement projects A number of projects have been launched during the last few years, including an e-procurement system by the Ministry for State-Owned Enterprises The system standardised procurement

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 instructionwas 2015, but progress has been inconsistent

A number of projects are ongoing, however, and these can be expected to increase The Department ofCommunications and Informatics (Depkominfo) is rolling out a platform to increase the efficiency of anumber of department services The new system will be deployed to help expedite processing of permitapplications, as well as increasing transparency of procurement and other department operations

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

Despite progress in e-government deployments, a lack of inter-operability among institutions has been