Indonesia information technology report q3 2009

Executive Summary The Indonesian IT market should grow at a compound annual growth rate CAGR of around 13% over 2009-2013 despite an expected slowdown in 2009 as key segments are affecte

Including 5-year industry forecasts

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Indonesia Information Technology

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© 2009 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 or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

Technology Report Q3 2009

Including 5-year industry forecasts by BMI

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: July 2009

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT Sector SWOT 8

Indonesia Telecoms Business Environment Industry SWOT 9

Indonesia Political SWOT 10

Indonesia Economic SWOT 11

Asia Regional IT Markets Overview 12

IT Penetration 12

Market Growth &Drivers 14

Sectors & Verticals 16

IT Business Environment Ratings 18

Asia IT Business Environment Ratings 20

Market Overview 21

Government Authorities 21

Key Ministers 21

Background 21

Bandung High-Tech Valley SWOT 22

Hardware 23

Computer Spending By Sector, 2007e 24

Software 24

Services 25

Industry Developments 27

Industry Forecast Scenario 30

Indonesian IT Industry - Historical Data & Forecasts (US$mn unless otherwise stated) 32

Country Context 32

Consumer Expenditure, 2000-2012 (US$) 32

Rural & Urban Breakdown, 2005-2030 33

Internet 33

Telecoms Sector - Internet - Historical Data & Forecasts 33

Macroeconomic Forecast 35

Indonesia – Economic Activity 37

Competitive Landscape 38

Hardware 38

Software 40

IT Services 40

Internet Competitive Landscape 41

Asia - Broadband Penetration Overview, 2007 42

Company Profiles 43

HP 47

Country Snapshot: Indonesia Demographic Data 48

Section 1: Population 48

Table: Demographic Indicators, 2005-2030 48

Table: Rural/Urban Breakdown, 2005-2030 49

Section 2: Education And Healthcare 49

Table: Education, 2000-2005 49

Table: Vital Statistics, 2005-2030 49

Section 3: Labour Market And Spending Power 50

Table: Employment Indicators, 2001-2006 50

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

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

BMI Forecast Modelling 52

How We Generate Our Industry Forecasts 52

IT Industry 52

IT Ratings – Methodology 53

Table: IT Business Environment Indicators 54

Weighting 55

Table: Weighting Of Components 55

Sources 55

Executive Summary

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of around 13% over 2009-2013 despite an expected slowdown in 2009 as key segments are affected by the global economic crisis In H109, some manufacturing organisations were cutting IT budgets, but there was continued spending in the financial sector, which had previously accounted for as much as 30% of total spending

2009 will still undoubtedly be a more difficult year, with pressure for cutbacks, as companies focus more

on the bottom line, and immediate needs However, BMI expects the market to avoid negative growth

despite downside risks In Q109, computer sales were indicated to be only slightly lower than the period last year, with hopes of an upturn in H209 Government IT spending was expected to increase as the government encourages IT spending by state enterprises

By 2013, Indonesia's hardware-dominated IT market is projected to reach a value of US$5.7bn,

displaying faster growth than many Association of South East Asian Nations (ASEAN) neighbours With information and communication technologies (ICT) penetration of only around 20% and development restricted to richer areas such as Java, the market has much latent growth potential However, the

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

Industry Developments

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

company Pertamina and state electricity company Perusahaan Listrik Negara (PLN)

A framework for Indonesian e-government development was set out by presidential instruction No 3/2003 A number of projects are ongoing, and these can be expected to increase Indonesia's Department

of Communications and Informatics (Depkominfo) is rolling out a new platform to increase the efficiency

of a number of department services The new system will be deployed to help expedite processing of permit applications, as well as increasing transparency of department operations

The government is also rolling out new e-learning initiatives which could see education's share of the local IT spending rise from its estimated level of around 4% The current ratio of PCs to students in

Competitive Landscape

Toshiba revealed recently that it planned to rely on low-end notebooks as its mainstay products in the

Indonesia market this year The company defines low-end as notebooks sold for less than IDR8mn

Toshiba's Indonesian notebook distributor, PT Techking Enterprises, said that Toshiba planned for

low-end notebooks to account for 70% of sales this year, an exact reverse of the situation last year

Software market leader Microsoft Indonesia reported a 30% year-on-year (y-o-y) rise in revenues in

FY08, well above the company's global average of 18% Microsoft has recently been involved in IT for

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

Major IT services vendors have reported a growing demand in the telecoms, manufacturing and banking

sectors Oracle has an agreement with local IT solutions provider PT Sigma Cipta Caraka (Sigma) to

provide outsourcing services Meanwhile, e-government is also being eyed by IT services vendors as a

potential growth area Tata Consultancy Services (TCS) said that it was targeting government as a

future growth driver in the Indonesia market Currently, TCS's fifteen local clients are principally from sectors such as banking and financial services, telecoms and media

Hardware

Computer hardware sales, including notebooks and peripherals, will be worth around US$2.5bn in 2009,

according to BMI projections, up from US$2.4bn in 2008 Growth slowed in Q408 following robust

growth in the first three quarters of last year, and is seen as easing further this year before ticking up again in 2010 Early results from 2009 are moderately encouraging, with sales in January at a similar level to the period of 2008, according to industry figures However, vendors remained cautious, with some still expecting a y-o-y market contraction

Software

For 2009, software sales are projected by BMI at US$402mn, up from an estimated US$377mn in 2008,

despite the current economic slowdown There were signs in H109 that many firms were planning to increase software spending One market inhibitor is the continuing software piracy problem, which, by the local government's own figures, loses Indonesian software companies alone more than US$100mn a year Over the forecast period, enterprise resource planning (ERP) software continues to be of most interest to the small and medium-sized enterprises (SME) market as currently only around 20% of

Indonesian SMEs are estimated to make use of IT

IT Services

Indonesia's IT Services market is expected to be worth US$589mn in 2009, recording y-o-y growth of 4%

from US$564mn in 2008, according to BMI estimates Currently, IT services account for only 17% of the

country's hardware-centric IT market sales Hardware deployment services remain the largest Indonesian

IT services category, with approximately a 20% share Currently, opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services

E-Readiness

Only about 6.6% of Indonesians have internet access, translating into around 14.5 million users Low telephone line density, high charges and low PC penetration are all significant obstacles However, the picture is not all bad as there are signs of faster growth in user numbers, and recent surveys have shown that among a very small elite, there is fast adoption, by regional standards, of broadband and a willingness

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

around 1.4 million broadband users in 2007, representing a 0.6% penetration rate The government is encouraging fixed wireless deployments, including WiMAX, to bring internet to more remote areas

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

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

SWOT Analysis

Indonesia IT Sector SWOT

ƒ Market may be entering faster growth stage; it is forecast to grow faster than most ASEAN markets over the review period (up to end-2013) due to its underdeveloped nature

Weaknesses ƒ Computer penetration among the lowest in South East Asia, estimated at only around

1.5%

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

ƒ Lack of government support Still no unified ICT ministry

ƒ History of political instability of late

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

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

the government is showing signs of taking intellectual property more seriously

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

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

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

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

internet access, and drive ICT sector development

ƒ Global economic slowdown may hit key demand segments

Indonesia Telecoms Business Environment Industry SWOT

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

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

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

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

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

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

Opportunities ƒ Mobile market expected to surge over the coming years, reaching nearly 431 million

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

mobile users as non-registrants are deactivated

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

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

Indonesia Political SWOT

Strengths ƒ Indonesia managed a successful transition to democracy in 2004 If the 2009

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

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

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

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

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

Opportunities ƒ Susilo Bambang Yudhoyono's Democratic Party had a strong showing in the 2009

parliamentary elections Should Yudhoyono retain the presidency in the upcoming presidential elections, it will pave the way for a potentially less problematic legislative implementation of policies

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

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

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

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

Indonesia Economic SWOT

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

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

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

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

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

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

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

business environment, particularly through reform of its unreliable legal system

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

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

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

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

Asia Regional IT Markets Overview

IT Penetration

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

Across Asia, government ICT initiatives and growing affordability will drive increases in PC penetration

during BMI's forecast period up to end-2013 While some cities and regions stand out, there is an

unbalanced pattern of regional development, with PC penetration in countries like Singapore being above 50%; in others, such as Indonesia, it is less than 2%

The two Asian giants, China and India, embody the region's growth potential, as in both countries

computer ownership remains the preserve of a minority In China, PC penetration was only around 16%

in 2007 although it was far higher in cities like Shanghai and Beijing, and projected to pass 25% overall

by 2013 In India, less than 2% of people own a computer However, 45% of the population is under 25, which provides a promising demographic context for increased PC ownership The government's ultimate target of 1bn internet-connected computers in India is equivalent to the total estimated number of PCs in the world today

Around the region, affordable computer programmes are finding favour with governments In early 2009, China announced a new subsidised PC programme aimed at rural residents In the Philippines, where penetration is currently around 5%, the government launched its PC4All programme in 2007 In

Indonesia, penetration of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the

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

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

2012 The fastest growth is projected for India in which penetration is projected to increase from 17.7% to 44% by 2013 while Indonesia suffers from high tariffs

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

penetration by 2013 This is due partly to the Infocomm Development Authority (IDA)'s ambitious Intelligent Nation initiative Meanwhile, some 46% of Malaysians had internet access in 2008 Across the region, government programmes are an important driver of information and communication technologies (ICT) penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China, and every township in the west

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

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

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

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

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

covering more than 200 public venues

Market Growth &Drivers

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

Most Asian IT markets are expected to remain in positive growth territory in 2009, despite an expected impact on IT spending from the global economic slowdown Across the region, demand from both

business and consumer segments weakened in H208 after often robust sales in H108 Difficult economic headwinds will persist in 2009 but strong fundamental demand drivers meant that there will be continued opportunities Key factors include cheaper PCs and reform in sectors such as telecommunications and finance, as well as government initiatives

In China, the falling stock market and high inflation affected consumer sentiment in 2008, while declining

external demand influenced business investment plans However, BMI expects IT market growth to be

maintained by an expansion into western China, rural areas and lower tier cities, as well as growing

demand from small to medium-sized enterprises (SMEs) IT spending will also receive a boost from

government spending and IT projects associated with the Shanghai World Expo in 2010

In India, IT spending growth slowed significantly in 2008 and is expected to ease further in H109, before starting to recover in H209 Fundamental market drivers include the government's ambitions to connect the vast rural areas to the outside world, coupled with falling computer prices In early 2009, India's

government announced a series of measures in early 2009 to stimulate the market Meanwhile, India's business process outsourcing (BPO) industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

As mentioned above, the Philippines is one of

the countries currently benefiting from low

price PC programmes, such as PC4ALL, which

provide opportunities for vendors to penetrate

the low-income segments Other regional

computer sale drivers over the forecast period

include education, lower prices, IP telephony,

cheaper processors and notebook entertainment

and wireless networking features Meanwhile

in Indonesia, relatively low levels of

government IT spending may mean that the IT

market lacks a stabiliser which could help

immunise it from the slowdown Once again,

however, the basic demographics of low

computer penetration and growing affordability should keep the market in positive territory

In more developed markets such as Hong Kong and Singapore there were indications of declining

consumer and business sentiment in H208, but IT spending remained in positive territory for the year as a whole The Singaporean government continued to be a major factor in 2008 with the US$1.3bn Standard Operating Environment tender award In Hong Kong, rising unemployment and exposure to the financial crisis will contribute to slow growth in 2009, but this will be partly counteracted by higher government IT spending and cross-border trade and co-operation

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

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

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

IT Markets Compound Growth

(2008e-2013f (%))

e/f = estimate/forecast Source: BMI

Sectors & Verticals

Market Structure (% Of Total IT Market)

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

Regional IT markets will remain hardware-centric, with hardware accounting for 45-68% of the total spending in all markets However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

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

in H108, exceeding forecasts, but there were signs of a slowdown towards the end of the year Demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally prevent stagnation

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

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

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

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

3G/HSPA (high-speed packet access) USB modems bundled with their 3G services

In much of emerging Asia, demand from smaller towns and rural areas will provide the main source of growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

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

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

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

Despite the economic downturn, there are still expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some sectors and to encourage vendors to promote software-on-demand solutions There is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs, including labour costs In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as CRM and business intelligence, where faster growth is possible

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

economic situation, and credit tightening, is likely to have an impact on projects in some verticals, but continued demand in sectors like telecoms and banking will help to prevent stagnation Government spending will account for a larger share of spending in many markets In China, government stimulus packages should drive IT-related investments, while Singapore government ICT tenders were worth an estimated US$1bn in 2008 The Hong Kong government's Digital 21 initiative will continue to generate a number of projects

Regionally, hardware deployment services remain the largest IT services category with other fundamental services including system integration, support systems, training, professional services, outsourcing and internet services Main spenders across the region include banks and financial institutions and

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

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

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

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

IT Business Environment Ratings

Stock Market Data

BMI's new IT Business Environment Ratings for Asia compare the potential of a selection of the region's markets over our forecast period, through to end-2013 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights

protection and the implementation of government spending projects

In H109, the global economic slowdown had a marked but varied impact across Asian IT markets, with spending growth declining sharply in states like Malaysia and Indonesia but holding up relatively well in others like Hong Kong The more mature IT markets of Singapore and Hong Kong take the top two spots

in our Q309 rankings, due primarily to their high Country Structure scores Both of the two regional giants, China and India, saw weaknesses in IT spending in H109, but both have strong market drivers which should ensure continued growth

Malaysian IT spending has suffered perhaps the biggest impact from the global economic headwinds In

2009, IT spending in the country is expected to dip into negative territory despite a government stimulus package unveiled in March and a small and medium-sized enterprise (SME) modernisation fund In the medium term, growth will be driven by low PC penetration, rising incomes and a high-tech-focused national development plan In the Philippines, economic uncertainty and a fall in remittances present a threat to enterprise and consumer IT spending, but the IT market will be driven by further growth in IT and business process outsourcing (BPO) Bringing up the field, Indonesia stands to be one of the Asian countries more affected by the slowdown However, state IT spending was expected to increase this year, and a recovery is possible in H209

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

Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan and the standard operating environment Country risks are judged as low in both markets, reflecting generally good regulatory and market environments

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

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

In China, there were signs in early 2009 of improved growth in several market sectors, with computer sales, particularly of notebooks, and more positive consumer demand Factors such as China's vast

potential rural market, government spending and demand from key verticals such as telecoms should help

to prevent stagnation Sectors driving double-digit IT spending growth currently include telecoms,

government, energy, social security, education and transport However, there are still risks associated with IP rights protection and piracy and a lack of business environment transparency Pressure on

hardware prices is also a risk in the current environment

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

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

India's IT PC market growth reportedly recovered somewhat in Q109 to record sequential quarterly growth, but sales were still down year-on-year However, the potential of the market is plain, with less than 2% of the population owning a computer, about one-fifth the level in China Similarly, with ICT penetration of only around 20% and development restricted to richer areas such as Java, the Indonesian IT market has much latent growth potential Relatively low levels of government IT spending compared with many other states may also mean that the Indonesia IT market lacks a stabiliser, although public sector IT spending is expected to increase this year

Asia IT Business Environment Ratings

Limits of Potential Returns Risks to Realisation of Returns

IT Market StructureCountry Limits Market Risks Country Risk Risks RatingIT BE Regional Ranking

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

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

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

regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), the latter of which

is based on BMI's proprietary Country Risk ratings The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report Source: BMI

Market Overview

Government Authorities

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

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

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

cross-Other relevant government bodies and ministers include:

Key Ministers

Key Departments

Badan Koordinasi Penanaman Modal

Badan Pengkajian dan Penerapan

Tehnologi (BPPT)

State Ministry for Research and Technology/Agency for the Assessment

and Application of TechnologyDepartemen Perindustrian dan

Background

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

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

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

Bandung High-Tech Valley SWOT

ƒ More than 500,000 high-tech workers

ƒ Some tax incentives

ƒ Weak telecommunications infrastructure

ƒ No international airport

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

even from within Indonesia, e.g Bali Camp

The financial crisis of 1997, which saw a 70% fall in the value of the rupiah against the US dollar,

alongside other far-reaching economic and political consequences, had a large impact on the IT market Several multinationals withdrew credit from local distributors and there was some cancellation of planned investments

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

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

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

be seen whether this may change with the new government Legal issues such as intellectual property

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

Hardware

Computer hardware sales, including notebooks and peripherals, will be worth around US$2.5bn in 2009,

according to BMI projections, up from US$2.4bn in 2008 Growth slowed in Q408 following robust

growth in the first three quarters of last year, and is seen as easing further in 2009 before ticking up again

in 2010 Early results for this year so far are moderately encouraging, with sales in January at a similar level to the period of the previous year, according to industry figures However, vendors remained

cautious, with some still expecting a year-on-year (y-o-y) market contraction

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

exposure to export markets affected by the global economic slowdown However, the low levels of computer penetration in manufacturing segments mean that there is still plenty of momentum for growth The Indonesia Computer Business Association (Apkomindo) now expects volume sales of around 2.2mn units in 2009 having downwardly revised its forecasts for the year

In the current environment, the most promising growth driver is perhaps the consumer segment, which accounts for around 25% of computer demand The main drivers are growing affordability and more credit availability Prices of both notebooks and desktops are falling with desktop prices now as low as US$400, while notebook prices start from around US$700 Notebooks are now growing faster than the

PC market as a whole with around 1mn unit sales projected this year Demand for these is being driven by lower prices, small unit size, lightweight functionality and entertainment and wireless networking

features Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in data centres

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

become a growing focus of attention for some vendors, including Lenovo and Dell Around a third of the market is accounted for by non-branded, locally assembled PCs Hewlett Packard (HP) is the brand leader with around 15%, followed by Acer with around 10% Acer is the leader in the notebook segment

Computer Spending By Sector, 2007e

US$mn

e = estimate Source: BMI

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

While the consumer market is growing, the business sector looks set to continue to account for around two-thirds of sales opportunities during the forecast period Meanwhile, government spending has been relatively small compared with regional neighbours such as Singapore and India, but could increase as a share of spending this year Education provides a small but steadily growing source of demand,

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

Software

For 2009, software sales are projected by BMI at US$402mn, up from an estimated US$377mn in 2008

despite the current economic slowdown There were signs in H109 that many firms were planning to increase software spending The current economic crisis may lead some organisations cut IT budgets or look to defer systems updates, but others will see IT as a strategic tool for increasing competitiveness in difficult times

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

Taken these factors into consideration, over 2009-2013, the software sector compound annual growth rate (CAGR) is forecast at 17% Application software accounts for more than 40% of the total software

market and is the largest portion, followed by systems infrastructure Within the applications segment, the single largest segment is back-office applications, accounting for around two-thirds of sales The next few years should witness shift away from packaged proprietary software towards other models, such as Saas (Software-as-a-Service) and Open Source Improved broadband infrastructure will assist the

popularisation of the rented software model

Over the forecast period, enterprise resource planning (ERP) software continues to be of most interest to the SME market as enterprises look to enhance productivity through the automation of essential functions Currently only around 20% of Indonesian SMEs are estimated to make use of IT Inventory is an

application entry-point application for many businesses, but among existing users the market is evolving from an emphasis on basic ERP applications focused on operational efficiency, to more strategic modules such as customer relationship management (CRM), business analytics and risk compliance

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

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

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

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

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

Services

Indonesia's IT services market is expected to be worth US$589mn in 2009, recording y-o-y growth of 4%

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

Indonesia's hardware-centric IT market sales

Hardware deployment services remains the largest Indonesia IT services category with an approximate 20% share Growth opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services Sector CAGR over 2009-2013

is expected to be around 15% The economic situation, and credit tightening, is likely to have an effect on

The market is dominated by two verticals, financial services & banking and telecoms, which together account for around 50% of spending Banking is emerging as the single most important vertical,

accounting for around 30% of IT spending, followed by telecoms and the government As of H109, spending in these important industry segments appeared to be holding up better than expected

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

increase (see Industry Developments)

Special Focus - Banks

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

PT Bank Bumiputera Indonesia migrated to a new IT system with a US$5mn investment The

migration also involved ATM network expansion, and integration with third-party systems

Banking has emerged as one of the key IT market sectors, and the Indonesian Federation of Private Domestic Banks (Perbanas) forecast that the sector would spend around around US$1.47bn on IT in 2008 Meanwhile the Indonesian Software Association estimated last year that the banking sector was on course

to spend over US$1.05bn on ICT in 2008, accounting for as much as 30% of spending by some estimates

Bank IT spending is increasingly dominated by the group of 10 largest banks, such as PT Bank Mandiri, Bank Central Asia and Bank Negra Indonesia These collectively account for an estimated US$630mn of spending If anything, their dominance is predicted to increase over the next few years, with Bank Panin, one of the 10, recently announcing that it had a budget of US$30mn for IT last year In contrast, the remaining small and medium-sized banks are likely to delay spending as they await the regulation of Bank Indonesia on Indonesian banking consolidation There are pressures on them to merge with the larger banks

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

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

Indonesia was highlighted last year by the news that PT Bank IFI was converting to this sharia-compliant

banking One local company which has developed an expertise in this area has been Sigma, which has developed its Sharia Core Banking System to follow the principles of Islamic banking

SMEs

Enterprises account for 70-80% of all sales in the country, while SMEs make up more than 90% of businesses Total annual spending by SMEs on ICT has been estimated to be as high as US$7bn, although this includes telecommunications and internet costs However, IT spending has been growing at a double-digit rate over the past few years, and vendors expect it to accelerate in 2008

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

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

Industry Developments

E-Government

E-government is expected to emerge as an area of growing opportunity for IT vendors over the next couple of years The market is potentially huge, but still underdeveloped Currently, several ministries, at federal and province level, are making plans to implement projects In 2008, a number of projects were launched including an e-procurement system by the State Ministry for State Owned Enterprise The new system standardised procurement procedures across 25 state-owned enterprises, including state oil and gas company Pertamina and state electricity company Perusahaan Listrik Negara (PLN)

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 envisaged in that instruction was 2015, but progress has been inconsistent

A number of projects are ongoing, however, and these can be expected to increase Indonesia's

Department of Communications and Informatics (Depkominfo) is rolling out a new platform to increase the efficiency of a number of department services The new system will be deployed to help expedite processing of permit applications as well as increasing transparency of procurement and other department operations Depkominfo's planned e-services will include Broadcast Permit Management, Government Goods & Services Procurement Electronics System (SePP) and e-licensing services

Despite progress in e-government deployments, a lack of inter-operability among institutions has been identified as a weakness Djoko Agung Harijadi, e-government director at the Department of

Communications and Informatics, said recently that each government institution was busy developing its own platforms in isolation His comments echoed the appraisal by the latest UN e-government survey,