Indonesia information technology report q3 2012

In 2012, resilient private consumption and capital investment should support demand for IT products and services and PC penetration remains at around 6%, giving this huge market unrivall

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TECHNOLOGY REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Indonesia IT Sector SWOT 7

Indonesia Telecoms Industry SWOT 8

Indonesia Political SWOT 9

Indonesia Economic SWOT 10

Indonesia Business Environment SWOT 11

Asia Pacific IT Risk/Reward Ratings 12

Table: Asia Pacific IT Risk/Reward Ratings 17

IT Markets Overview 18

IT Penetration 18

IT Growth and Drivers 20

Sectors And Verticals 22

Market Overview 26

Table: Key Ministers And Departments 26

Table: Bandung High-Tech Valley SWOT 27

Hardware 27

Software 30

Services 31

Special Focus: Banks 33

Industry Developments 34

Industry Forecast 37

Market Drivers 37

Table: Indonesia IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 39

Industry Forecast Internet 40

Table: Telecoms Sector – Internet – Historical Data And Forecasts 40

Competitive Landscape 42

Hardware 42

Software 44

IT Services 45

Internet Competitive Landscape 47

Macroeconomic Forecast 48

Table: Indonesia – Economic Activity 50

Company Profiles 51

IBM 51

Hewlett-Packard 56

Oracle Corp 62

Sigma (telkomsigma) 66

Indonesia Demographic Outlook 68

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 69

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 70

Table: Indonesia's Key Population Ratios, 1990-2020 71

Table: Indonesia's Rural And Urban Population, 1990-2020 71

BMI Methodology 72

How We Generate Our Industry Forecasts 72

Transport Industry 72

Sources 73

Executive Summary

BMI View: Indonesian IT spending is expected to reach US$6.0bn in 2012, up 12%, slightly higher than

previously forecast, despite a weakening economic backdrop BMI still expects the Indonesian market to

be one of the region's fastest-growing IT markets over our five-year forecast period In 2012, resilient private consumption and capital investment should support demand for IT products and services and PC penetration remains at around 6%, giving this huge market unrivalled long-term growth potential Rising computer penetration and growing affordability should ensure that the market remains firmly in positive growth territory

Headline Expenditure Projections

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

Forecast in US dollar terms upwardly revised due to analyst Adjustment, with growing affordability

and credit availability driving sales in the consumer segment

Software sales: US$599mn in 2011 to US$695mn in 2012, +16% in US dollar terms Forecast in US dollar terms unchanged and progress will depend on the success in bringing down illegal software use

IT services sales: US$880mn in 2011 to US$1.0bn in 2012, +14.0% in US dollar terms Forecast in US dollar terms unchanged, with a key growth area being cloud services, which could be worth around

US$100mn by 2016

Risk/Reward Ratings: Indonesia's score was 42.8 out of 100.0 Indonesia ranked fifth from bottom of

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

Key Trends & Developments

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

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

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

SWOT Analysis

Indonesia IT Sector SWOT

Strengths ƒ Large potential market

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

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

1.5%

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

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

ƒ History of recent political instability

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

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

and the government is showing signs of taking intellectual property more seriously

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

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

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

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

internet access, or drive ICT sector development

ƒ The global economic slowdown may hit key demand segments

Indonesia Telecoms Industry SWOT

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

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

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

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

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

ƒ Operators struggling with raised costs after the government forced companies

to charge a fee based on cost rather than share part of their revenues

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

431mn people over the forecast period

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

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

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

and mobile users as non-registrants are deactivated

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

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

Indonesia Political SWOT

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

the 2009 parliamentary and presidential elections passed peacefully, signalling the consolidation of the democratic process Since 2009, the government has shown further signs of improvement in both efficacy and engagement

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

to wane, Indonesia's political stability should likewise improve

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

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

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

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

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

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

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

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

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

ƒ The fact that Indonesia subsidises basic goods means that when the government raises prices, there is a risk of public unrest, or at least a political backlash Additionally, Indonesia's population is extremely young, with more than 50% of Indonesians younger than 30 Younger populations have historically been a predictor of political instability

Indonesia Economic SWOT

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

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

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

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

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

ƒ Indonesia's physical infrastructure is considered sub-standard The archipelagic nature of the country makes it difficult to weave national infrastructure together Despite an ambitious infrastructure revitalisation plan, the country currently compares unfavourably with its Association of Southeast Asian Nations peers

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

business environment, particularly through reform of its unreliable legal system

ƒ Indonesia stands to benefit from the rise of Islamic financing, having adopted new legislation in early 2008 designed to tap into this rapidly expanding sphere With an overall market share of only 3%, growth prospects for Islamic banking

in the world's largest Muslim country are enormous

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

mid-1990s The country has therefore become a net importer of crude oil in recent years, putting downward pressure on its current account position Furthermore, rising oil prices have begun to pressure Indonesia's current account, where it typically runs a healthy surplus The resumption of the Cepu field in late 2009 may help to alleviate Indonesia's dependence on foreign oil

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

Indonesia Business Environment SWOT

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

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

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

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

countries surveyed in Transparency International's 2011 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption

ƒ Indonesia's excessive bureaucracy makes it a difficult place to do business

Among Asian economies, Indonesia has the longest period to start a business Labour laws are also considered excessive

Opportunities ƒ President Susilo Bambang Yudhoyono's administration has gradually been

reforming the business environment, particularly by strengthening the legal system and fighting corruption If sustained, this would boost investor interest in Indonesia Although reform has been slow, the government has shown itself to

be increasingly willing to address important issues

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

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

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

ƒ Security threats are a concern for investors Despite several of its top leaders having been arrested in recent years, militant group Jemaah Islamiah remains active There is also a low-level threat from separatist rebels or from inter-communal tensions

Asia Pacific IT Risk/Reward Ratings

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

markets over our forecast period through to 2016 Our Q312 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

While there were changes to the countries' individual scores, the rankings were largely unaffected The only change came in the form of Indonesia overtaking India and Thailand to become the eighth-ranked

country among the 12 covered in the Asia Pacific region by BMI

Singapore retained its leader position with an IT Ratings score of 74.1 Although Singapore's IT market is significantly smaller than many of its regional peers, the country has other redeeming factors For

example, Singapore is highly urbanised with a pool of skilled labour The country is also strategically placed at the heart of South East Asia amid emerging markets such as Indonesia and Thailand Its strong infrastructure, which includes access to major submarine cable networks and high-speed broadband connectivity, political stability and pro-business environment attract foreign investors and spur

technological developments

Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor investment in service capabilities In February 2011, the Infocomm Development Authority of Singapore and the Information Technology Standards Committee (ITSC) formed a Cloud Computing Standards Coordinating Task Force

to 'address the industry demands for cloud computing standards and co-ordinate the cloud computing standardisation efforts across the different Technical Committees in ITSC'

Australia closed the gap with Singapore by achieving an IT Ratings score of 73.2, up from 70.9 in the previous quarter The upgrade was largely due to an improvement in its IT Market score, although an increase in its Country Risk score aided as well Due to the country's sheer size, it is inevitable that certain regions suffer from a deficiency in IT network and services However, the government has been looking to resolve the issue with its ambitious National Broadband Network (NBN), which aims to deliver nationwide high-speed broadband connectivity with a combination of fibre, fixed-wireless and satellite technologies The introduction of high-speed broadband connectivity should fuel demand for sophisticated services such as cloud computing, which is already being embraced by the public sector and enterprises, machine-to-machine (M2M) connectivity and telepresence as well as devices as the industry moves towards ubiquitous connectivity and internet-connected homes

Hong Kong saw its IT Ratings score rise to 72.6 from 69.4 in the previous quarter Like Australia, the improvement was fuelled by an upgrade in its IT Market score, although the positive effect was partially

offset by a decline in the territory's Country Risk score Hong Kong has one of the lowest fibre broadband tariff rates in the world, and this provides the backbone for next generation IT services such as cloud computing and data centres Hong Kong is also well connected to the international submarine cable network, and the territory is one of the 11 landing sites for the new 10,400km Asia Pacific Gateway (APG) system The network, which is scheduled to become operational by June 2014, is designed for an initial transmission speed of 40Gbps per wavelength, using Digital Coherent detection and Optical Add-

Drop Multiplexing technologies, according to Japan's NEC The APG system will be able to

accommodate 100Gbps for increasing efficiency and capacity in the future

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

segment are expected to fuel growing demand to use this technology Other areas of growth include M2M and telecare, which are led by technological advancements in the underlying networks At the end of January 2012, there were 44mn 3G subscribers and 2.8mn 4G (comprising WiBro and LTE) users By comparison, there were only 6.7mn 2G subscribers

However, besides being vulnerable to the global headwind, South Korea's economy has its own

problems Firstly, South Korea's household debt situation remains an overriding concern While a

collapse in the housing debt market looks to be an unlikely scenario, considerable risk remains from households' debt servicing capacities as the economy heads south Secondly, its external debt situation puts the economy in a very precarious position Given that a significant portion of external debt is held by foreign bank branches and is short-term in nature, a sudden bout of risk aversion could see substantial foreign capital outflows

Malaysia remained in fifth position in our Q312 regional ratings There are increasingly attractive

opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme, which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities The rollout of the High Speed Broadband network will also boost IT spending outside the Klang Valley and help the country achieve a household broadband penetration rate

of 75% by 2015 Other projected growth and PC market drivers include a rise in the PC penetration level from about 35%, tax exemptions for notebooks and growth in disposable incomes

Our Chinese hard landing view is playing out well with evidence such as the People's Bank of China's

decision to cut its reserve requirement ratio in February 2012 and a sharp drop in the HSBC flash

purchasing managers' index for China to 48.1 in March 2012 from 49.6 in the previous month providing support

A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers We expect growing interest in cloud computing will be stimulated by the establishment of government pilot programmes Besides market risks such as poor intellectual property rights protection, piracy and a lack of business transparency, the overall pace of development has been comparatively slow However, companies have started to seek the help of foreign counterparts to

accelerate the process For example, China Mobile collaborated with South Korea's SK Telecom to develop technologies such as M2M while China Telecom formed a strategic partnership with Internet Initiative Japan to provide cloud computing services in China

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow, and it is in the midst of expanding operations outside Metro Manila In order to facilitate the expansion, network operators are extending fibre optic network throughout the country to provide high capacity

connectivity The Philippines is also looking at cloud computing as the next growth driver, with the private sector leading the charge Domestic firms have partnered with foreign IT companies in order to provide the necessary infrastructure and technology to expand their products portfolio, which should attract businesses including small and medium-sized enterprises (SMEs) as they look to cut costs amid an uncertain global economy

Indonesia is ranked eighth with an IT Ratings score of 42.8, up from 39.1 in the previous quarter The significant improvement was driven by an upgrade in its IT Market, Country Structure and Country Risk scores With ICT penetration of only about 20% and development restricted to richer areas such as Java,

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

fastest growing in the region over the five-year forecast period, and this has been reflected in the country's movement up the Risk/Reward Ratings table Spending in some key IT verticals such as financial services and banking should continue to be significant in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Indonesia is also susceptible to the global headwind, and weak demand from China will pressure

Indonesia's trade surplus However, we expect resilient private consumption and capital investment to enable the archipelago to continue to outperform the region Wage growth in Indonesia has been strong as the economy's growth has begun to translate into higher employment Reports indicate that minimum wages have been raised by as much as 20% in some cities, and double-digit wage growth is widely expected Consumer strength has translated into increasing demand for goods previously inaccessible to the majority of Indonesians, such as automobiles and consumer electronics

India's IT industry possesses significant growth potential as only a small portion of the country's massive population has access to a personal computer Significant opportunities will also be created by demand from Indian businesses and government agencies to help use more advanced IT solutions to improve efficiency and reduce costs Consequently, India had a relatively high IT Market score of 52.5 However, the country was significantly let down by its weak Country Structure score

Although India has made strides to address its electricity deficit (the country's power supply deficit improved from a 11.1% power deficit in Q1 FY2008/09 to a 6.6% deficit in power supply during the first quarter of FY2011/12), that deficit remains sizeable and India needs to boost investment to cope with demand, which has been growing at a significant pace, fuelled by rapid population growth and continued high levels of economic growth This is set to continue and presents a major obstacle to the country's business environment and economic development

However, it is insufficient for India to only address power generation as the annual power loss through the country's power grid system is estimated at more than 30% As of 2006, about three-quarters of India's villages received an electricity supply, but only 43% of rural households had been provided with a

permanent supply According to the Planning Commission of India, 600mn people are not connected to the power grid That said, India's transmission grids sector is showing significant growth potential for private investors The sector is undergoing a process of liberalisation, requiring state-run companies such

as state-owned Power Grid Corporation of India to compete with private sector companies for

electricity transmission projects

The short-term outlook on Thailand's IT sector is largely mixed Local media have reported that retail IT sales are expected to decline by 15% year-on-year in Q112, attributable to higher living costs

Furthermore, the effects of the flooding are still felt with higher end-product prices in light of supply chain disruptions to hard disk drives However, the industry envisages a recovery in H212 due to the launch of new products such as ultrabooks, which are expected to become more affordable, government-

led projects and increasing 3G network coverage BMI shares the sentiment as the government has been

trying to fulfil its election promise of bridging the digital divide in the country

The Smart Thailand project, which was first unveiled in September 2011, aims to boost the country's competitiveness through greater ICT development The initiative rightly looks at integrating ICT

particularly into the government sector and expanding and upgrading the underlying network

infrastructure, which would improve the overall business environment

Smart Thailand has a two-pronged approach The Smart Network project, which will cost THB80bn, aims

to expand broadband coverage to 95% of the population by 2020, up from 80% in 2015 and the current 33% The Smart Government project aims to transition all 800 government services across the education,

service quality and the communication between agencies If both measures are successfully implemented, Thailand should become more attractive to companies and foreign investors

Vietnam remains in 11th position with an IT Ratings score of 33.5 While the sizeable population,

growing affluence and increasing middle class present long-term potential for IT demand, like India, Vietnam's poor Country Structure score has negatively affected the country's attractiveness The

government has digital divide programmes to boost internet and digital utility in rural areas, which theoretically should help to fuel market growth and open PC ownership to a growing number of rural inhabitants Moreover, Vietnam's gradual integration into global trade networks such as ASEAN and the WTO has helped reduce tariff barriers and prices, and has increased opportunities However, overall progress has been slow, partially due to a lack of clear vision and state-owned companies' dominance in the ICT market

There were no changes to Sri Lanka's IT Rating score of 28.3, although we highlight that the country holds long-term potential in light of the restoration of peace and improvements in the security situation, which will help to release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the

underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only just started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

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

Table: Asia Pacific IT Risk/Reward Ratings

Limits Of Potential Returns

Risks To Realisation Of Potential Returns

Country IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT Rating

Regional Rank

proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides

Risk/Reward methodology and is designed to enable clients to consider each rating individually or as a composite, 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

IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will help to

drive increases in PC penetration during

BMI's five-year forecast period While

some cities and regions stand out, there is

an unbalanced pattern of regional

development, with PC penetration in

countries such as Singapore above 50%,

while in other countries, such as

Indonesia, it is below 5%

The two Asian 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 is only around 30% in 2012 – although it is far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by

2016 In India, less than 5% of people own a computer However, some 45% of the population is under

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

Vietnam is estimated by BMI at around 20% in 2012 Notebooks are owned by an estimated 10% of the

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

Lower price will help to drive higher PC penetration in developing markets The average price of a PC in the Indian market has nearly halved over the past few years and rising incomes and greater credit

availability will continue to bring computers within the reach of lower-income demographics Even in more mature markets, there is room for development, however, with official data suggesting that as many

as 25% of Hong Kong households do not have a computer at home

Around the region, affordable computer programmes continue to find favour with governments In China, a subsidised household electronics products initiative aimed at rural residents has helped to boost

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

In Indonesia, PC penetration of around 3% could double by 2016 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising

Narrowband Penetration

Per 100 Population

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

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

government has launched a programme entitled One Teacher-One Computer, which offers discounts on PCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in South Korea, Hong Kong, Singapore, and Australia, with estimated 2012

penetration rates of 76.9%, 74.0% and 73.3% and 71.0% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 189.5% in 2012 Meanwhile, the Philippines has the lowest levels of internet usage, with just 8.3% narrowband and 7.4% broadband penetration estimated

in 2012

The fastest growth is expected in

Indonesia, where internet penetration is

projected to leap from 45.4% in 2012 to

68.9% in 2016, and the Philippines,

where penetration is forecast to reach

12.6% by 2016 India is still at only

11.8% internet penetration despite an

improvement in fixed-line infrastructure,

and penetration is forecast to reach only

16.2% by 2016 Steady growth is also

projected for Sri Lanka, where

penetration is projected to increase from

18.8% to 25.4% by 2016 Some 56.4% of

Malaysians have internet access in 2012

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by a growing number of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 20.9% by 2016 In India,

penetration should increase more than double to reach 2.8% by 2016 from around 1.2% currently,

although this remains below government targets Sri Lanka will also see continued solid growth in

broadband penetration, which is projected to reach 21.7% by 2016

Across the region, government programmes are an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China and every township in the west In Australia, the government's commitment to develop the National Broadband Network should further the development of Australia's digital economy

Broadband Penetration

Per 100 Population

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

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

IT Growth and Drivers

Across Asia in 2012, IT spending should

benefit from improved economic

circumstances and tenders previously

deferred as a result of the economic

situation, although a forecast slowdown

in China could act as a drag on some

markets Strong fundamental demand

drivers of IT spending meant that there

will be continued opportunities Key

factors common to most markets include

cheaper PCs and reform in sectors such

as telecommunications and finance, as

well as government initiatives

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

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

by an expansion into western China and rural areas as well as growing demand from small and sized enterprises (SMEs)

medium-Despite these drivers, BMI expects a moderation in Chinese consumer and business IT investment in

2012 owing to government economic cooling measures and uncertainty about the global economic situation However, an expansion in consumer credit and a modernisation drive in sectors such as

education, healthcare and manufacturing will sustain market growth

The long-term IT market potential of another Asian giant, India, is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning particular potential in the lower-end product range Having postponed IT projects during the economic slowdown, many Indian private and public sector organisations are now investing again in upgrading their IT infrastructure

2012 IT Market Sizes

US$mn, forecast

f = BMI forecast Source: BMI

India's IT market appears to be

positioned for strong growth thanks to an

improving economy and consumer

sentiment as well as government support

for modernisation in lagging sectors

Meanwhile, India's business process

outsourcing industry is growing at around

40% per annum and will continue to

generate opportunities for vendors of IT

products and services

In Thailand, demand will be bolstered by

market expansion in the relatively

underpenetrated rural areas SIS

estimates that market growth in

upcountry areas should be 30% in 2011, double that it has forecast for the country as a whole A similar situation pertains in India where in 2012 there are expected to be strong growth opportunities in smaller cities

The Philippines is one of the countries currently benefiting from low-priced PC programmes (PC4ALL), which provide opportunities for vendors to penetrate the low-income segments Other regional computer sale drivers over the forecast period include education, lower prices, IP telephony and cheaper processors

as well as notebook entertainment and wireless networking features Meanwhile, in Indonesia, the basic demographics of rising computer penetration and growing affordability should drive growth SMEs represent a growth opportunity, as currently only around 20% of Indonesian SMEs are estimated to make use of IT Compliance with government and international regulations will be a driver in financial,

manufacturing and other sectors

IT Market Size

As % Of National GDP

f = BMI forecast Source: BMI

In more developed markets, such as

Hong Kong and Singapore, robust retail

sales the led way in 2011, as evidenced

by the strong advance sales of Apple's

iPad2 In 2012 vendors hope that the iPad

3 and ultrabooks will provide new growth

areas Economic expansion and

improving business conditions are

underpinning stronger business sector

demand while a strong property market

and lower unemployment have boosted

confidence among consumers However,

a potential cooling of the Chinese

economy as a result of monetary

tightening would quickly spread to both

markets

The largest IT market in the region is, unsurprisingly, China, estimated at US$124.4bn in 2012, trailed distantly by Australia (US$22.0bn), India (US$20.7bn) and South Korea (US$18.5bn) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.4%), followed by Hong Kong (2.1%) Thailand's IT market has been affected by a number of exogenous events including floods, which in late 2011 disrupted its production of hard disk drives, but in 2012 it looks to be back on track

The fastest growing IT markets over the forecast period looks set to be India and Indonesia with

2012-2016 compound growth of 109% and 96% respectively, driven by increasing PC penetration Sri Lanka is

third with the IT market growing by an estimated 83% over BMI's five-year forecast period, while

China's total growth is estimated at a still healthy 55%, slower than Vietnam at 69%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 43-73% of total spending in all markets in 2012 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

In mature markets such as Australia and Singapore, PC sales are dominated by replacement sales In Australia, upgrades are estimated to account for at least 80% of business purchases and over 50% in the case of households Over 90% of Australian households now have a PC, but consumers have appeared

IT Market Compound Growth

2012-2016 (%)

Source: BMI

willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase

a second household PC Around 30% of households have more than one PC

Tablet sales will provide a PC market growth area, with triple-digit growth projected in many markets In China it is estimated that tablets accounted for around 6-7% of computer sales in 2011 The tariff on an imported iPad was previously set at around CNY1,000 and has now been reduced to CNY500 In 2012, tablets should be a growth area in India as well, with sales surpassing 1mn units, although much will depend on greater affordability The arrival on the market of cheaper, locally produced tablets, retailing for as low as US$30, will help expand the market

However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations Meanwhile, vendor expectations of a substantial boost from their promotion of high-tier ultrabooks may not be realised until prices come down closer to their US market level

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth In India, 2011 saw a wave of computer procurements by local governments Another driver in emerging Asian markets will be replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

Falling prices is another major driver, placing pressure on margins In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach of lower income demographics

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

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

offers as part of its broadband packages Meanwhile, broadband plans will also help to popularise tablets

Australia telecoms operators such as Telstra were competing to offer affordable tablets bundled with data

services

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

11-36% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but, despite

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

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) In 2012, growing numbers of SMEs are expected to invest in enterprise resource planning (ERP), while many of those that already have it will explore efficiencies through consolidation and virtualisation As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install back-office systems to meet requirements of efficiency The growing global ambitions of many Asian companies, as well as often booming domestic markets, will fuel investments in software

In general, ERP and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business

intelligence, where faster growth is possible Although the market remains relatively small, more

companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver applications such as payroll, tax-return processing and recruitment

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

New platforms and services in the telecoms field is a driver for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile,

2012f (LHS) & 2016f (RHS)

f = BMI forecast Source: BMI

expanding technology adoption in the logistics industry and public transport will be a source of IT

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

The IT services segment accounts for 17-41% of spending in the Asian markets covered by BMI The

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2012

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

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

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

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

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

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

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

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

Meanwhile, growing interest in cloud computing will be further stimulated by government programmes

In China, government cloud pilots are under way in at least five cities The Hong Kong government announced plans in 2011 for an escalation of its cloud strategy over the next few years In 2012 more leading Australian private and public sector organisations are expected to launched cloud initiatives and the government has adopted a six-year cloud computing strategy

Market Overview

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

as from the government

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

Table: Key Ministers And Departments

Industry Andung Nitimiharja

Key Departments

Badan Koordinasi Penanaman Modal (BKPM) Ministry for Investment/Investment Coordinating Board

Badan Pengkajian dan Penerapan Tehnologi (BPPT)

Ministry for Research and Technology/Agency for the

Assessment and Application of TechnologyDepartemen Perindustrian dan Perdagangan

Background

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

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

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

The local computer hardware market enjoyed a growth rate of 15-20% per year during the 1990s, with substantial imports and several foreign computer companies establishing production plants in Indonesia,

despite a competitive market for locally assembled personal computers At the height of the 1990s boom, the government established Bandung High-Tech Valley, a few hours travelling time from Jakarta The valley is an important centre for telecommunications and engineering, as well as being home to several universities

Table: Bandung High-Tech Valley SWOT

Strengths ƒ BHTV has many top universities, research centres and technology-related

corporations

ƒ More than 500,000 hi-tech workers

ƒ Some tax incentives

Weaknesses ƒ Inadequate government incentives

ƒ Weak telecommunications infrastructure

ƒ No international airport

Opportunities ƒ A rapidly growing number of small start-up companies

ƒ The government has talked of new packages to attract investors and cut red tape

Threats ƒ Competition from other 'Silicon Valleys' in the region, eg, Malaysia MSC, and

even elsewhere in Indonesia, eg, Bali Camp

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

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

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

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

Hardware

BMI forecasts 2012 Indonesian computer hardware spending of US$4.3bn, up from US$3.9bn in 2011

solid growth in 2011 building on a strong recovery in 2010 PC penetration remains below 10%, with Indonesian Computer Association Apkomindo estimating a rate of 6% in 2011, and this represents

considerable market potential.

Hardware accounts for more than 70% of Indonesian IT spending Over BMI's five-year forecast period,

Indonesia is again expected to be one of the fastest-growing regional PC markets, continuing the digit growth of recent years In 2011, retailers hoped that promotions linked to the Independence Day holiday in August would provide a boost to consumer sales summer shopping season Migrations to

double-Microsoft's Windows 7 operating system retain the potential to help trigger a new cycle of hardware

upgrades, although much will depend on business and consumer confidence Apkomindo targeted 40%

growth in 2012 for its members, while BMI projects a revenue increase of 23%

In 2011, the fastest growth segment was the consumer segment, which accounts for about 25% of

computer demand The main drivers are growing affordability and more credit availability Rising PC penetration points to exceptional growth potential Computer utilisation in education is also forecast to grow rapidly and provide a major segment of demand

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

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

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

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

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

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

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

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

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

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

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

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

designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy Tablets are expected to be significantly more expensive than smartphones, but, despite a previous mixed record with this form factor, are seen as

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

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

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

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

Business spending on IT hardware was hit by the tough global economic environment in 2009 as local firms cut budgets due to falling domestic and external demand Trading companies with exposure to export markets affected by the global economic slowdown deferred some hardware replacements Global economic uncertainty will continue to present a downside risk to corporate PC demand However, the low levels of computer penetration in manufacturing segments mean there are still plenty of opportunities for growth The biggest opportunity is from SMEs, which are estimated to have accounted for nearly 80% of business PC demand, with sales of more than 900,000 computers There will be increased demand, too, for storage products, as organisations in sectors such as government, financial services and banking, and manufacturing explore potential efficiencies and cost-savings from virtualisation

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

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

Locally assembled computers made up about 60% of the total, even though imported components face tariffs ranging from 5-20%, which pre-assembled computers escape There have been calls for the

components tariff to be abolished The low-end price tier will continue to dominate and will account for about 80% of sales, reinforced by the growing popularity of netbooks

Software

Indonesia's software sales are forecast by BMI to reach US$695mn in 2012, up from an estimated

US$599mn in 2011 During BMI's five-year forecast period to 2016, the software sector CAGR is

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

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

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

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

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

water distribution operations in Indonesia

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

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

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

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

stage

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

in the financial sector, manufacturing and other sectors

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

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

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

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

its local revenue and it has been growing at about 50% a year

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

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

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

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

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

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

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

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

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

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

Services

Indonesia's IT services market is forecast to be worth US$1.0bn in 2012, up from US$880mn in 2011,

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

sales The Indonesian IT services market is dominated by the financial services and banking sector, as

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

Services sector CAGR over 2012-2016 is expected to be around 19% Improvements in Indonesia's telecoms and ICT infrastructure are expected to drive long-term growth in the Indonesian IT services

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

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

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

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

Meanwhile, the Palapa national fibre ring project is nearing completion, meaning that all main islands within the Indonesian archipelago will be connected with fibre-optic backbone capacity The rollout of additional submarine cables to locations such as Australia, Hong Kong and Singapore is also in progress

or at least under planning

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

in absolute terms, at less than US$10mn, but BMI expects this could reach around US$80mn within the

forecast period

New cloud computing offerings from telecoms and IT companies are leading to increased competition in

this segment, which should fuel further demand from end-users to utilise this technology In December

2011 Indonesia telecoms and data service provider Indosat launched end-to-end cloud computing services

to businesses and consumers in the country The services, which are mainly targeted at large enterprises and small- and medium-sized businesses, will leverage Indosat's national connectivity backbone and its data centre facilities.

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

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

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

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

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

increase further (see below)

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

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

Special Focus: Banks

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

Indonesian IT spending by some estimates The Indonesian Software Association has

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

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

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

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

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

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

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

principles of Islamic banking

SMEs

Businesses account for 70-80% of all sales in the country, while SMEs make up more than 90% of businesses Total annual spending by SMEs on ICT has been estimated to be as high as US$7bn, although

this includes telecommunications and internet costs However, IT spending has been growing at a digit rate over the past few years

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

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

Industry Developments

Launch of Bandung Digital Valley

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

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

committed IDR50bn over the next three years to this project, which it is hoped will stimulate the digital creative industry by bringing together developers and tech entrepreneurs The target for the next three year is to create 600 SaaS type cloud computing solutions and 5,000 application stores.

E-Government

E-government is expected to be an area of growing opportunities for IT vendors over the next few years The market is potentially huge and several ministries at federal and province level are making plans to implement projects A number of projects have been launched during the last few years, including an e-procurement system by the Ministry for State-Owned Enterprises The system standardised procurement

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

electricity company Perusahaan Listrik Negara

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

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

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

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

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

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

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

applications and key public infrastructure

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

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

Local Government

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

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

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

IT In Education

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

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

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

own fixed-line telephones

E-Passports

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

PC Component Duties

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

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

Open-Source Software

A ministerial decree directed that local government offices across Indonesia must adopt OSS by 2011, although it seemed unlikely that this target could be met Meanwhile, local governments have rolled out similar initiatives, with Surabaya among municipal administrations to have introduced pilot schemes for OSS applications According to the local mayor, all Surabaya municipal offices used the software, and civil servants were given the relevant training The local government hoped that the municipality could save 20-25% of its budget through the use of OSS applications, which included an application allowing local residents to access information about municipality activities online.

IT Sector Development

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

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

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

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

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

IT sector