Indonesia information technology report q2 2015

Headline Expenditure Projections Computer Hardware Sales: IDR97.0trn in 2015 to IDR132.9trn in 2019, at a compound annual growth rate CAGR of 7.4% in local currency terms.. BMI extended

Q2 2015 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Report Q2 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2015

Business Monitor International

© 2015 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

BMI Industry View 7

SWOT 9

IT 9

Wireline SWOT 11

Political 12

Economic 14

Operational Risk 16

Industry Forecast 18

Table: IT Industry - Historical Data And Forecasts (Indonesia 2012-2019) 18

Macroeconomic Forecasts 25

Economic Analysis 25

Industry Risk Reward Ratings 29

Table: Asia Pacific Risk/Reward Index - Q2 2015 31

Market Overview 32

Hardware 32

Software 41

IT Services 49

Industry Trends And Developments 54

Regulatory Development 59

Table: Key Ministers And Departments 59

Competitive Landscape 63

International Companies 63

Table: Lenovo Indonesia 63

Table: Intel Indonesia Corporation 64

Table: Microsoft Indonesia PT 65

Table: IBM Indonesia 66

Table: Foxconn Technology 67

Local Companies 68

Table: Performance PT Multipolar Technology Tbk (MLPT) 68

Table: Walden Global Services (WGS) 69

Table: Aprisma Indonesia 70

Table: ALTiUS ERP 70

Company Profile 71

Sigma 71

Regional Overview 75

Demographic Forecast 79

Table: Population Headline Indicators (Indonesia 1990-2025) 80

Table: Key Population Ratios (Indonesia 1990-2025) 80

Table: Urban/Rural Population And Life Expectancy (Indonesia 1990-2025) 81

Table: Population By Age Group (Indonesia 1990-2025) 81

Table: Population By Age Group % (Indonesia 1990-2025) 82

Methodology 84

Industry Forecast Methodology 84

Sources 85

Risk/Reward Index Methodology 86

Table: It Risk/Reward Index Indicators 87

Table: Weighting Of Components 88

BMI Industry View

BMI View: The depreciation of the rupiah against the US dollar was a small drag on IT market growth, but

caused no significant disruption, a state of affairs we expect to be maintained into 2015 We again expect the drag of rupiah depreciation to be outweighed by the upside from strong economic growth, a low PC penetration rate, enterprise and public service modernisation and an emerging middle class As such we identify retail hardware, enterprise software and cloud computing as medium-term growth opportunities However, there is short-to-medium term downside if the Indonesian growth story is derailed by regional or global economic headwinds In the short-term, IT spending is forecast to increase to IDR170.2trn in 2015,

up 11.1% from 2014, with the IT market estimated to account for almost 1.5% of GDP.

Headline Expenditure Projections

Computer Hardware Sales: IDR97.0trn in 2015 to IDR132.9trn in 2019, at a compound annual growth

rate (CAGR) of 7.4% in local currency terms Even after strong growth in recent years, we expect

momentum to be maintained by a deepening of the market as incomes rise and device prices continue todecline as Android tablet vendors and Microsoft notebook vendors compete aggressively on price

Software sales: IDR28.2trn in 2015 to almost IDR53.0trn in 2019, at a CAGR of 17.0% in local currency

terms Piracy is a major drag on software market growth, but new legislation could help reduce the dragfrom 2015

IT Services Sales: IDR45.0trn in 2015 to IDR85.3trn in 2019, at a CAGR of 17.2% in local currency terms.

Improvements in network infrastructure and increased awareness among local enterprises will ensure stronggrowth in cloud service adoption, which we expect to be a key demand driver for IT services 2015-2019

Key Trends & Developments

Piracy has been a drag on the development of the Indonesia software market for many years The

anti-piracy lobby group estimated Indonesia had the highest incidence of anti-piracy in BMI's APAC coverage at

84% in 2013 - a figure that was unchanged from 2007 In light of slow progress and the scale of the squeeze

on software spending, we welcome the passage of new legislation through Indonesia's House of

Representatives in September 2014, with the bill set to come into law in 2015 The new law is aiming toincrease efficiency and effectiveness of Indonesia's copyright system, particularly its enforcement

mechanisms The new law has been received well by copyright owners, with the removal of ambiguity

evident in previous legislation welcomed However, we argue that anti-piracy legislation is just the first-step

in combating the problem, with investment in enforcement and education required to act as a deterrent andshift public opinion in the area of IP protection

A major new push by the public and private sector in Indonesia to increase the coverage and capacity ofwireless and wireline infrastructure is expected to provide a boost to both hardware demand, as end-usershave new use cases, and to software and services as greater volumes of data, and the potential applications,are generated Under the 2014-19 Indonesia Broadband Plan, up to IDR278trn (USD23.2bn) is to beinvested in extending wireline broadband services to 30% of the urban population and 6% of the ruralpopulation, while mobile broadband services are to be rolled out to 52% of rural consumers Approximately10% of the ambitious project will be financed by the state, meaning that the onus will fall squarely on

Indonesia's wireline and mobile operators The most significant actor is incumbent operator PT Telkom Indonesia, who plans to triple its investment in broadband in 2015 as part of its support for the new

initiative It will spend IDR45trn (USD3.7bn) installing public Wi-Fi hotspots and backhaul transmissionfacilities and augmenting its fibre-optic backbones and satellite footprints in its bid to boost take-up ofconverged services

IT

SWOT Analysis

Strengths ■ Large potential market with population of almost 250mn at the end of 2013, and

forecast to reach almost 267mn in 2019

■ 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

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

Weaknesses ■ Underdeveloped telecommunications infrastructure, due to years of government

control and slow progress in deregulation

■ History of recent political instability

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

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

Opportunities ■ Investment in telecoms and datacentre infrastructure should lay the foundations for

rapid growth of cloud computing services, with SMEs considering a particularlyattractive target group

■ New copyright law in 2015 should help reduce incidence of software piracy

■ Computer ownership is low, but rising incomes and wider internet access will enableperiod of rapid 'catch-up growth'

■ Strong demand for tablets and low-cost laptops from a youthful population andbooming economic performance

SWOT Analysis - Continued

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

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

internet access, or drive ICT sector development

■ Regional economic instability could derail economic growth

■ Cyber security risks, both from criminals and state actors, could undermineconfidence in networked infrastructure ie cloud computing and IoT

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 Smartfren

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

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

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

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

■ Growing preference in the consumer segment for mobile broadband solutions

SWOT Analysis

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

2009 parliamentary and presidential elections passed peacefully, signalling theconsolidation of the democratic process Despite a lengthy challenge by PrabowoSubianto, 2014's elections also passed peacefully, resulting in the election of Joko'Jokowi' Widodo

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

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

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

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

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

executive power dating back to the early 2000s We expect this trend to continue tobolster political stability over the coming years

■ 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

Threats ■ Regional militant group Jemaah Islamiah poses a lingering threat to security in

Indonesia Jemaah Islamiah is blamed for a series of attacks, including the Bali

SWOT Analysis - Continued

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

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

of political instability

SWOT Analysis

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

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

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

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

rate still relatively high at 5.9% as of Q314 Many are forced to work in the informalsector Of particular concern is the youth unemployment rate, which is five times theoverall rate

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

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

business environment, particularly through reform of its unreliable legal system

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

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 The resumption of the Cepu field,which occurred in late 2009, may help to alleviate Indonesia's dependence on foreignoil given its small boost to production output, but we expect this bounce to be short-lived

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

Operational Risk

SWOT Analysis

Strengths ■ Investors in Indonesia's major cities benefit from a large labour pool

■ There are some diversification options for supply chains with road and railwaynetworks on the main island of Java It is also the location of several airports and thecountry's most important seaports

■ The domestic financial market is well developed, providing opportunities for portfolioinvestment, access to credit and links to international finance centres

■ Indonesia has a lower rate of violent crime than some neighbouring countries

Weaknesses ■ Low enrolment and attainment levels at secondary and tertiary education levels,

particularly in rural areas

■ The transport network is severely underdeveloped on most islands of the Indonesianarchipelago, including the large and resource-rich territories of Sumatra, Kalimantanand Papua

■ Burdensome trade bureaucracy adds significant delays to the processes of exportingand importing

■ Police force corruption is a major issue, meaning many crimes go unreported orinadequately investigated

Opportunities ■ The country's universities have a growing international reputation and are attracting

partnerships with foreign universities

■ Internet usage is becoming more widespread, with businesses already able to takeadvantage of easier communication with clients and customers

■ Tariff and non-tariff trade barriers to trade with the country's neighbours are lowereddue to Indonesia's membership of the Association of South East Asian Nations(ASEAN) Free Trade Agreement

SWOT Analysis - Continued

■ Membership of ASEAN will continue to foster greater cooperation between SouthEast Asian countries, improving the response to terrorism and reducing the risk ofinterstate conflict

Threats ■ There is a high risk of workers strikes disrupting business activity

■ Strong population growth will place further pressure on the struggling educationsystem

■ Port congestion will continue to keep lead times for importing goods elevated anddeter international shipping companies from using Indonesian terminals as directports of call

■ Porous borders, lack of police funding, and costly and slow legal processes meanthat intellectual property (IP) protection is likely to remain lax despite the broadcoverage of IP legislation

IDRmn 23,662,753 32,665,498 38,601,371 45,021,514 52,854,237 61,978,557 72,671,838 85,291,111

e/f - BMI estimate/forecast Source: BMI.

BMI extended the forecast for Indonesia's IT market to 2019 in the Q2 2015 update, but our bullish outlook

for the growth of the Indonesian IT market in 2015 and over the medium term is unchanged We base ourpositive medium term outlook on Indonesia's potential for rapid catch-up growth due to low penetrationrates for devices and solutions, combined with our in-house Country Risk team's assessment of economictrends, as well as declining product and solutions prices across the region These favourable trends haveattracted significant inward investment, which will add to growth momentum over the forecast period.Meanwhile we expect strong growth in enterprise demand over the medium term as modernisation

initiatives gather pace and cloud delivery opens software deployments to a wider market by putting

downward pressure on prices

Our view of Indonesia's potential to be a regional and global outperformer in terms of IT market growth isunchanged in Q2, with a CAGR of 12.1% forecast 2015-2019, and total sales expected to reach IDR271trn

2015 Outlook

BMI forecasts IT market growth of 11.1% in 2015 in Indonesia is unchanged, with total market value still

expected to reach IDR170.2trn As noted above, the strong economic outlook is fundamental to our ITmarket forecast as Indonesian consumers remain optimistic about job, finance and spending prospects Weforecast real GDP growth of 5.5% in 2015 and 5.0% real private final consumption growth, with bothfigures accelerating from 2014 Furthermore we forecast a slowdown in rupiah depreciation against thedollar in 2015 compared to 2012-2014, although it will remain a drag on growth

IT Market Growth(2012-2019)

Indonesia - IT market value, IDRmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f

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

e/f - BMI estimate/forecast Source: BMI.

The largest component of the Indonesian IT demand continues to be for computer hardware sales, butthey are forecast to underperform software and services growth rates in 2015 Nonetheless demand growthwill remain robust as a result of income growth and the relatively low penetration rate - ensuring demandcomes from both first-time buyers and the replacement/upgrade market Household PC penetration reached15.1% in Indonesia at the end of 2012 - less than half the APAC average of 31% and below the global

emerging market average of 27.6% This fact, when considered alongside Indonesia's large and growingpopulation and trajectory of rising incomes, illustrates the growth opportunity in the retail hardware market.

We forecast hardware spending growth will make an important contribution in absolute terms with growth

of 7.4% forecast in local currency terms for 2015

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

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

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

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

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

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

Income Per Capita Breakdown

(2012-2018)

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

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

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

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

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

Two significant government policies were announced in late 2014 with implications for IT market

development First, Indonesia's House of Representatives passed a draft of Indonesia's new Copyright Bill

in September 2014, which will come into law in 2015 The new law is aiming to increase efficiency andeffectiveness of Indonesia's copyright system, particularly its enforcement mechanisms The new law hasbeen received well by copyright owners, with the removal of ambiguity evident in previous legislationwelcomed and potentially a boost to software market spending growth Meanwhile, Under the 2014-19Indonesia Broadband Plan, up to IDR278trn (USD23.2bn) is to be invested in extending wireline broadbandservices to 30% of the urban population and 6% of the rural population, while mobile broadband servicesare to be rolled out to 52% of rural consumers

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, but as network infrastructure improves alongside increased supply of cloud products, BMI

forecasts bullish medium term growth at a CAGR of 33.4% 2015-2019

The enterprise market will also boost spending on IT products and services as modernisation initiatives areundertaken by firms looking to expand into neighbouring markets and/or defend domestic positions Privateenterprises, particularly SMEs, will provide a large part of PC sales, while ERP and other e-businessapplications are also finding increasing popularity in the SME market The SME sector of 42.2mn

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

productivity through automating inventory, accounting and other functions

Segments

BMI has a bullish outlook for the development of enterprise spending on IT products and solutions

2015-2019 in Indonesia Due to relatively low levels of PC penetration among Indonesian enterprises,especially among the large base of SMEs, we expect demand for desktops to be maintained for the duration

of our forecast period However the consumer market is also expected to remain dynamic and offer

considerable growth opportunities for hardware vendors Demand for traditional notebooks has been eroded

by the popularity of new form factors in recent years by combination form low-cost tablets, but BMI

expects hybrids/convertibles could gain traction as prices decline over the medium term, with first-timebuyers likely to see multi-functionality as a major positive over tablets not running full versions of

operating systems

Indonesia GVA By Sector (%)

2015f

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

Turning to enterprise software and services enterprise demand, BMI identifies the large manufacturing,

mining and tourism sectors as potentially fruitful verticals for vendors of enterprise products and solutions.These are expected to be the largest three contributors to IT market spend in 2015, and there are

modernisation drives underway in all three verticals Meanwhile, despite cutbacks due to the financial crisis,the financial services segment will continue to be overweight in enterprise IT spending due to the demands

of the industry Spending on regulatory compliance and security solutions are expected to register the fastestgrowth The market also remains relatively under-penetrated, with IT implementations largely limited totransactional support Islamic banking also presents strong growth opportunities over the next few years

Additionally, we expect inward investment in manufacturing facilities as wages rise in China to createdemand for enterprise software deployments in Indonesia to connect with global supply chains, as well ascreate efficiencies

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

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

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

operators are emerging as key players in the smart services segment in Indonesia, with Telkomsel

partnering with Jasper Technologies in late 2014 for a nationwide Internet of Things (IoT) platform, while Ooredoo, the parent company of local telecoms operator Indosat, stated in January 2015 that it is targeting

the IoT 'Smart City' opportunity in Jakarta

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

Local players will capture a share of this growth through to 2019, but the SME market has also attracted theattention of global leaders, for instance, in October 2014 IBM promoted it SoftLayer IaaS product inIndonesia to SMEs, offering server, processor, RAM, and storage in the cloud for USD100 per month.Meanwhile, global software giant Microsoft launched the latest Office 365 SMB software package aimed atbusinesses with less than 250 employees This combination of local and global supply should make theSME market a hard fought battleground among vendors over the medium term

Macroeconomic Forecasts

Economic Analysis

BMI View: While we believe that Indonesia's real GDP growth is likely to accelerate to 5.5% in 2015 from

an estimated 5.1% in 2014 on the back of improving terms of trade and fiscal efficiency, we note that broad structural reforms will be necessary in order to return to the 6.0%+ growth rates that the government is targeting.

The Indonesian economy clocked its slowest rate of expansion since 2009 in Q314, expanding at a rate of5.0% year-on-year (y-o-y) versus consensus expectations of 5.2% In expenditure terms, the major drag onthe economy came from the investment category, where gross domestic capital formation growth fell to

3.5% y-o-y from a rate of 4.0% in Q214 As we noted previously (see '2015 Growth Outlook Tempered As

Momentum Continues To Slow', November 17 2014), Bank Indonesia (BI)'s ongoing tight monetary policy

campaign, which began in June 2013 in concert with the government's fuel price hikes, has taken the steamout of Indonesia's investment boom That said, it is important to note that the central bank was arguablybehind the curve in tightening its monetary policy stance to begin with, which led to the economy's

overheating leading up to its hikes in 2013

This overheating assumed the form of rapid credit creation which then fueled both fast investment rates aswell as sprightly consumption growth Along with a deterioration in the country's terms of trade as a result

of external factors, this led to a rapid decline in Indonesia's current account deficit, and a subsequent loss ofconfidence in the rupiah That said, we believe that the central bank's more hawkish policy under currentgovernor Agus Martowardojo has now had time to feed through the economy, as evidenced by slowing rates

of growth in both the investment space as well as credit creation As a result, BI has largely regained itspolicy-making credibility by preventing the build-up of any catastrophic asset bubbles in the domesticeconomy

Hawkishness Likely To Fade In H215

Nevertheless, with the central bank's policy rate likely to stay put at least through H115, economic growth isunlikely to pick up dramatically in the near-term The government's reduction (and later partial scrapping)

of fuel subsidies has sent headline inflation soaring, reducing room for the central bank to ease policy

despite the economic slowdown However, as we have written recently (see 'BI To Remain Hawkish

Throughout H115 Despite Slow Growth', January 8 2015), a spate of disinflationary factors (including

slowing money supply and credit growth, along with collapsing oil prices and a smaller fiscal deficit) will

likely allow the central bank to begin to shift its policy towards a more growth supportive on towards theend of the year.

At the same time, the government is set to boost its participation in the infrastructure investment space.With the recent collapse in oil prices dovetailing with significant subsidy cuts, we expect the government torack up savings of approximately USD18.2bn in 2015 versus its original budget Much of these savings(approximately two-thirds) will be directed towards infrastructure projects, which will act as a considerabletailwind to the broader investment outlook in the country A portion of the remainder will be re-distributed

as subsidies to the poor, which will spur private consumption growth more in the near-term than the

outgoing fuel subsidies, given that those subsidies were more directly targeted at middle-to-upper classindividuals

Still Short Of The TargetIndonesia - Real GDP, % chg y-o-y & Government Target

*Real GDP: Historical Data Until 2014, BMI forecast thereafter

Source: BMI, BI

Spate Of Structural Reforms Still Needed

As such, we retain our expectations for Indonesian real GDP growth to accelerate to 5.5% in 2015, versus

an estimated 5.1% rate in 2014 Still, although Jokowi has already proven to be an aggressive and effectivepolicy-maker, it remains to be seen whether or not he will be able to push through the broad structuralreforms required for the Indonesian economy to accede to a higher plane of growth over the medium term.Chiefly, the government has yet to address struggles in the mining sector, and remains the world's mostdifficult environment in which to conduct mining activities according to research conducted by Canadian

think-tank The Fraser Institute.

Yet To Return To SurplusIndonesia - Trade Balance, USDmn

Source: BMI, Bloomberg

Much of these difficulties are related to the high levels of bureaucracy faced by firms looking to do business

in the space, as well as differing standards which are largely dependent upon local government officials.Additionally, the government has yet to come to an agreement with foreign firms on its wide-ranging exportban of unprocessed mineral ores While it was expected that firms would be permitted to re-start exports

under a new tax regime for at least an interim period ahead of more investment deadlines over the comingyears, such an agreement has so far failed to come to fruition In December, the Constitutional Court upheldthe ban, suggesting that a solution may be further off than previously thought While the ban has likely beenthe catalyst for some investment in the form of additional smelters being built, it has significantly

undermined exports, along with perceptions towards Indonesia's business environment We believe thatsuch issues (including a broad simplification of bureaucratic procedures) must be addressed for Indonesia toreturn to consistent 6.0%+ real GDP growth over the coming years

Industry Risk Reward Ratings

The extension of our forecasts and inputs to 2019 has led to a change in the outlook for many markets inAsia Pacific Previous regional leader South Korea fell three places, returning Singapore to the top spot Theindex remains largely unchanged in the latest update, with forecasts to 2019 having little impact on themarkets offering the greatest or fewest rewards High-spend markets that are home to large internationalcompanies tend to fare best, relying on established connectivity to support ongoing growth

Many of the emerging economies in our ratings suffer from weaker telecommunications infrastructure,which underpin the growth of IT services in particular Consumers and companies may own hardwarewithout the requirement of internet access, but it is data usage that supports much of the ongoing growth ofthe IT market

It is therefore no coincidence that Sri Lanka remains at the bottom of our ratings, below Vietnam Whileboth have vibrant mobile markets, it is the broadband sectors in both that lag Mobile broadband servicesoffer some opportunities but the markets' growth will be towards the end of our forecast period Both arestarting from a low base of PC penetration, and weak consumer spending capability compared with regionalpeers also limit prospects These markets still require hardware growth to take off in order to encourage thegrowth in IT services and software that denote more developed IT sectors

India, the Philippines and Thailand hold similar scores; their positions in the index were unchanged thisquarter India and the Philippines in particular have generated strong revenues from business processoutsourcing (BPO) Although the spending on these services largely takes place in other markets, thedevelopment of BPO sites requires spending on hardware and software in the local market to support thedevelopment of these platforms India's IT market has boomed, but largely as it has sold services overseas

Thailand has benefited from investment in data centres by several international companies and local usershave turned to cloud computing quickly Although the segment remains comparatively small, it will drivemuch of the overall market growth, as it starts from such a low base Thailand pulled ahead of its lowerranked peers with a brightening economic outlook and greater political stability combining to improve thecountry's IT growth prospects Thailand has closed the gap on the Philippines and India, which rank justabove

India saw no change to its score with the country remaining one of the key global business process

outsourcing (BPO) destinations However, IT spending among local companies remains low and the

country's limited reach of PCs means hardware does not exist in many regions to support the growth of ITservices The trend is similar in the Philippines, which has built a strong BPO presence also, but lacksIndia's scale The internal market for IT services is weak in both countries although companies present inthe markets have increased spending on technology.

As seen in the emerging market economies of our Asia Pacific Risk Reward Indices there is growingdemand for cloud computing among SMEs in order to cut costs and introduce technology in a cost effectivemanner Indonesia in particular has encouraged the growth in data centres to serve international companiesand drive more investment into IT services In all cases, a lack of hardware in smaller companies limits thereach of these products As desktops and notebooks are made increasingly affordable, enterprises will spendmore on IT service products

In the centre of the table Malaysia is separated from Indonesia by almost six points, marking a considerabledifference in outlook Only China joins Malaysia in the top half of the table with China's sheer scale the keydetermining factor in its high position China shares the characteristics of its emerging market peers - low

PC penetration, limited spending on IT services - but the large government sector and growing interest indeveloping businesses in the country encourage greater spending

The large gap between the top four markets and China, the highest ranked emerging market, reflects thematurity of IT development in Singapore, Hong Kong, South Korea and Australia These countries havehigh PC penetration rates with growth over 2011-2014 focused on tablets sales as additional devices ratherthan alternatives to notebooks IT services and software comprise the bulk of enterprise spending, pushingthe markets' growth rates Services such as enterprise resource planning and customer relationship

management are gaining ground as companies seek to automate processes and learn from data generatedinternally

The relative position of the markets is based principally on the size of the economies, and the ease ofreaching businesses City states Singapore and Hong Kong have a number of advantages in this, allowingthem to place highest in our Index

Table: Asia Pacific Risk/Reward Index - Q2 2015

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

Singapore 58.3 100.0 70.0 74.4 72.8 1 2 Hong Kong 60.0 100.0 45.0 77.7 71.2 2 3 South

Korea 65.0 85.0 75.0 65.4 71.2 3 1Australia 63.3 95.0 57.5 66.9 71.0 4 4 China 75.0 35.0 45.0 55.1 58.0 5 6 Malaysia 60.0 55.0 37.5 67.7 57.5 6 5 Indonesia 63.3 35.0 42.5 51.4 51.8 7 7 India 66.7 15.0 45.0 50.9 48.6 8 8 Philippines 53.3 35.0 42.5 50.9 47.1 9 9 Thailand 56.7 20.0 35.0 62.9 46.2 10 10 Vietnam 51.7 15.0 35.0 53.7 41.1 11 11 Sri Lanka 48.3 15.0 37.5 50.9 39.3 12 12

Average 60.1 50.4 47.3 60.6 56.3

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

Market Overview

Hardware

BMI extended the forecasts for the Indonesian IT market to 2019 in the Q2 2015, but there is no significant

change to our bullish outlook to IT market development, with the potential drag from rupiah depreciationalready factored in We maintain our hardware market forecast for growth of 7.4% in local currency terms

in 2015 to a total value of IDR97.0trn Growth is expected to slow slightly from 2014, when the withdrawal

of official Microsoft support for the XP operating system (OS) provided a boost to enterprise/public sector

upgrades However, as a result of our outlook for a slower rate of rupiah depreciation against the dollar in

2015, the market is forecast to fare better in US dollar terms in 2015

Our assessment of the solid medium-term potential for Indonesia's IT hardware market is unchanged

BMI forecasts that hardware spending will increase over the medium term at a compound annual growth

rate (CAGR) of 8.0% to 2019 in local currency terms Even with this fast pace of growth, the share ofhardware in the overall IT market will decline by eight percentage points (pp) during our five-year forecastperiod to 49% in 2019 as services and software growth is expected to outperform as the market becomesmore developed

Market Trends

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

penetration rate in Indonesia as large numbers of first-time buyers enter the market, which should ensuregrowth in terms of both volumes and value 2015-2019 There are a range of factors that combine to

underpin our outlook for the Indonesian hardware market and still make it one of our picks for

outperforming growth both regionally and globally:

■ The sheer size of its economy places Indonesia among the top markets in Asia Pacific, even though PCpenetration remained low in 2012 It is the only country in South East Asia to feature in the G20

Indonesia, at its present growth rates, is well on the way towards featuring in the top ten globaleconomies by the year 2025

■ The low PC penetration rate means there is a large pool of first-time buyers that can be tapped as incomes

rise over the medium term Intel pegs the individual PC penetration of the country to be as low as 7%,

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

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

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on cities such as Jakarta In 2013, regions outside Java and Bali were reported to showthe fastest quarterly growth, while some other regions showed a decline.

■ Indonesia presents an attractive demographic distribution, with over half of the population under 30 years

of age, as of 2013 This distribution places the segment most receptive to IT in a clear majority, whichbodes well for IT hardware vendors over the medium term

Local Manufacturers

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

Hardware Market(2012-2019)

Personal computer sales, IDRmn Servers sales, IDRmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

25,000,000 50,000,000 75,000,000 100,000,000 125,000,000

e/f - BMI estimate/forecast Source: BMI.

Enterprise Demand

SMEs form an important, yet comparatively unexplored component of the Indonesian hardware market TheMinistry of SMEs and Co-operatives asserted in 2011 that SMEs account for 99% of the registered firms inthe country and provide employment to 97% of its workforce Their share in exports and value-addedproducts is not commensurate with their overall dominance otherwise Investment in IT can offset thisimbalance to a considerable extent

Meanwhile, buoyed by the long-term positive prospects in the region, financial institutions have beenemploying continual upgrades Some of the Indonesian banks that underwent core banking upgrades in the

recent past include Bank Syariah Mandiri, Panin Bank and Bank Andara among others.

Government Push

The government will play a major role in boosting the prospects of IT hardware, both as a facilitator andend-user In 2013, government spending was a bright spot for the PC market and helped to compensate forconstrained spending by the private sector Government investments in PC hardware were boosted by anumber of procurements delayed from Q412

The Indonesian government provided a major boost to the hardware market by eliminating duties onpersonal computers in 2010 Some of the major initiatives undertaken by the government as an end-userinclude the following:

■ National Broadband Plan 2015-2019, aiming to extend wireline broadband services to 30% of the urbanpopulation and 6% of the rural population, while mobile broadband services are to be rolled out to 52%

of rural consumers

■ The Palapa Ring Program, also known as the Nusantara Superhighway Project, driven by the Ministry ofCommunication and Information Technology, will create a backbone of optical fibre on a nationwidescale spanning more than 55,000 km and including terrestrial, as well as undersea cables

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

Household PC Penetration (%)

2010-2012

Source: National Regulator, ITU

Notebooks

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

slowdown from growth in recent years as tablet demand cannibalised notebook sales However, but weexpect stronger growth over the medium term as first-time buyer households are attracted to the greaterfunctionality offered by notebooks compared to tablets We forecast notebook volumes will grow at aCAGR of 12.1% 2015-2019, with total volumes expected to reach 6.5mn in 2018

Microsoft's decision in 2014 to cut OS licensing costs on low-cost devices has enabled partner vendors to

be far more cost competitive against Android tablet vendors, which boosted BMI's outlook for notebook

sales growth over the medium term As such they can now offer a mix of mobility and functionality, which

we have long argued to be an attractive mix of features for first-time buyer households where an existingdesktop/notebook cannot act as a hub for a tablet

The notebook market is driven by retail sales, with only around one-third of units in sold in the enterprisemarket, with the desktop a stalwart in enterprise sales This difference between retail and corporate and

business users is supported by statements from Chinese equipment vendor Lenovo Lenovo contends thatnotebooks are the main draws for first-time PC users, including students Given the demographic profile ofIndonesia, it is obvious that the most promising customer segment is overwhelmingly in favour of mobile

PCs Lenovo, in fact, pegs the proportional share of notebooks among the retail user's PC purchases at a

formidable 85%

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

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

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

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

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

Meanwhile, in January 2015 Lenovo stated it was targeting second position in the Indonesian notebookmarket with a market share of 25%, while maintaining its overall leadership of PC sales

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

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

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

Netbooks

Netbooks have been a major source of growth in Indonesia, particularly the likes of devices from Axioo and

local PC makers that target first-time buyers The extended boom in netbooks is contrary to the trendglobally, where sales have fallen off as notebook prices have come down and tablets have captured themarket for ultra-mobile content consumers However, the market for netbooks tailed off in 2012, as

notebooks have become more affordable to local consumers and competition has intensified from low-costtablets By 2013 netbooks had declined to a peripheral device category in the Indonesian market in terms ofsales

2,500 5,000 7,500

e/f = BMI estimate/forecast Source: BMI

Tablets

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

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

we forecast a CAGR of 5.6% to 2019 We expect tablets to remain popular in Indonesia due to the low-cost

of devices relative to notebooks - critical to success in a low-income price sensitive market

However, we caution that the cuts to Windows OS licensing fees and vendor innovation in the hybridnotebook category could erode the attractiveness of tablets over the medium term Additionally, the intensedynamic of price competition means that profitability is limited in the tablet market in Indonesia unlessvendors carve out a significant share of sales to ensure the benefit of scale Finally, the growth dynamic ofthe tablet market, with a rapid diffusion of ownership in core user groups and subsequent lengthening ofreplacement rates, means the tablet market could be subject to a signficantly slower growth rate over themedium term

Tablet uptake in Indonesia was initially slow, with an Apple-centric market meaning the devices were out

of reach for the majority of consumers due to low-incomes and the premium price tags of iPads However,more affordable Android devices have seen volumes increase markedly since 2012, although Apple remains

a market leader

Statcounter data show that Apple was surpassed as the leading tablet vendor by browsing traffic share inIndonesia in January 2015 Samsung took the lead with a share of 39.8% of tablet browsing traffic, ahead ofApple's share of 38.9%, with tablet traffic share a proxy for installed base of devices There has howeverbeen significant volatility in reported tablet browsing traffic, with Samsung previously overtaken by Apple

in March 2014 in terms of tablet browsing traffic share in Indonesia, when Samsung also lost out to rival

players in the Android ecosystem BMI believes Apple benefitted from increased focus on the Indonesia

market, which despite being an emerging market, is home to a significant pool of premium oriented

consumers as a result of the size of its population

However as is the case in the majority of emerging markets, price erosion in the Android ecosystem hasseen Samsung fall back slightly, losing share to rivals undercutting its Galaxy range to establish marketshare, for instance, Acer, ASUS and Lenovo - as well as a host of low-cost local/regional vendors Based on

browsing traffic share (see accompanying chart) BMI believes both Apple and Samsung lost some market

share to smaller rivals in 2014

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has saidthat it expected tablets to contribute 50% towards its total Indonesia market sales in 2013 The vendor hopes

to capture 20% market share in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in aneffort to target the emerging middle class Statcounter is supportive of ASUS making inroads from a lowbase, with a 4.0pps increase in its share of tablet browsing traffic in Indonesia to 4.1% in January 2015

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

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

adversely affected by device trends, political instability and the economy, with its business down 10%(however they did not mention whether this was in value or volume terms) Browsing traffic data indicateLenovo is making inroads, with its share of tablet traffic up 1.1 y-o-y to 1.2% in January 2015.

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

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

low-to-mid range vendors include Advan, MITO and Smartfen among others Meanwhile, Indonesia manufacturer S Nexian launched six new devices in March 2013, including an 8-inch Android tablet The S

Nexian device will come with 8GB to 32GB of storage with a 1,024x768 resolution The device is available

for IDR1.5mn (USD155), approximately 50% of the cost of the Asus Google Nexus 7 and is available subsidised through a partnership with telecoms operator Indosat, giving the user access to the operators

5,000 Wi-Fi locations across the country

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

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

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

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

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

Tablet Top FiveIndonesia Tablet Browsing Traffic By Vendor (%) And y-o-y Change, January 2015

Source: StatCounter

Hybrids/Convertibles

In October 2012, with the launch of the new OS, Windows vendors were able to introduce touch devices with a number of tablets released The addition of more vendors and another touch OS will add to

-competition in the market - putting further pressure on prices

However, the more significant development is the medium-term impact on innovation and form factors.Windows has a traditional strength in productivity use cases and software, with the OS being central to theenterprise market and Microsoft's Office Suite ubiquitous

There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices

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

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), HP's