Indonesia information technology report q3 2014

BMI Industry ViewBMI View: the Indonesian IT market is forecast to be a regional outperformer over the medium term with IT market growth benefitting from strong economic growth, a low PC

Q3 2014 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1750-5070

Published by:Business Monitor International

Report Q3 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2014

Business Monitor International

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT 9

Wireline SWOT 11

Political 13

Economic 15

Business Environment 17

Industry Forecast 18

Table: IT Industry - Historical Data And Forecasts (loccur mn) (Indonesia 2011-2018) 18

Wireline 24

Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Indonesia 2011-2018) 24

Macroeconomic Forecasts 26

Economic Analysis 26

Table: Indonesia - Economic Activity 29

Industry Risk Reward Ratings 30

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014 32

Market Overview 33

Hardware 33

Software 40

IT Services 46

Industry Trends And Developments 49

Regulatory Development 53

Table: Key Ministers And Departments 53

Competitive Landscape 56

International Companies 56

Table: Lenovo Indonesia 56

Table: Intel Indonesia Corporation 57

Table: Microsoft Indonesia PT 58

Table: IBM Indonesia 59

Table: Foxconn Technology 60

Local Companies 61

Table: Performance PT Multipolar Technology Tbk (MLPT) 61

Table: Walden Global Services (WGS) 62

Table: Aprisma Indonesia 62

Table: ALTiUS ERP 63

Company Profile 64

Sigma 64

Regional Overview 67

Demographic Forecast 71

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 72

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 73

Table: Indonesia's Key Population Ratios, 1990-2020 74

Table: Indonesia's Rural And Urban Population, 1990-2020 74

Methodology 75

Industry Forecast Methodology 75

Sources 76

Risk/Reward Ratings Methodology 77

Table: It Risk/Reward Ratings Indicators 78

Table: Weighting Of Components 79

BMI Industry View

BMI View: the Indonesian IT market is forecast to be a regional outperformer over the medium term with

IT market growth benefitting from strong economic growth, a low PC penetration rate and an emerging middle class Retail hardware, enterprise software and cloud computing are expected to be key drivers of medium-term growth The retail market will be the major driver of growth, with PC penetration estimated

at below 10% in 2012, meaning there is significant growth potential from first-time buyers and upgrades/ personal devices However, there is short-to-medium term downside in Indonesia as vendors face

depreciation of the rupiah, which has raised the cost of dollar denominated hardware and software imports,

or required vendors to absorb the costs In the immediate future, IT spending is forecast to increase to IDR71.7trn in 2014, up 12.3% from 2013, with the IT market accounting for 0.7% of GDP.

Headline Expenditure Projections

Computer Hardware Sales: IDR50.5trn in 2014 to IDR77.7trn in 2018, at a compound annual growth rate

(CAGR) of 11.3% in local currency terms Availability of low-cost tablets will maintain positive growthand we expect stronger medium-term growth as the economic environment becomes more supportive

Software sales: IDR8.9trn in 2014 to IDR16.0trn in 2018, at a CAGR of 15.9% in local currency terms.

Enterprise software deployments will drive spending, with modernisation in the manufacturing, mining andtourism verticals offering the greatest opportunities to vendors

IT Services Sales: IDR12.3trn in 2014 to IDR20.8trn in 2018, at a CAGR of 14.0% in local currency terms.

Cloud service adoption remains low in 2014, which could be worth more than IDR15.5trn by 2018

Key Trends & Developments

Cloud computing adoption remains limited in Indonesia, with Fujitsu Indonesia Country Head of

Infrastructure Services and Solution (ISS) Dewi Mulia Karnadi, citing network infrastructure quality andcyber security as bottlenecks to wider deployment in December 2013 In 2013 it was reported that Indonesiawas responsible for 38% of the world's malicious internet traffic, surpassing China as the leading root ofonline attacks This has grown from only 0.7% of recorded attacks 12 months previously, according to the

US-based Akamai Technologies The reasons behind the growth are under debate, but the implications of a

dramatic increase in online attacks have worried officials Cyber security is notoriously weak in Indonesiawith network-heavy industries, such as oil and gas, most susceptible to data phishing attempts There is

however scope for rapid growth in cloud deployments as the network quality and cyber security climatestrengthens.

The retail hardware market also has solid medium term prospects, but is set to underperform in the term due to the depreciation of the rupiah, putting upward pressure on the price of imported hardware and

short-software For instance, in September 2013 global PC market leader Lenovo announced plans to raise prices

of its PCs by about 20% in Indonesia This will lead to some deferred sales in the PC market, where

consumers remain highly price sensitive An additional trend could be additional momentum granted to

lower-cost tablets, particularly from local and regional OEMs producing devices running Google's Android

OS

IT

SWOT Analysis

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

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

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

Weaknesses ■ Computer penetration is among the lowest in South East Asia, estimated at only 9%

in 2012

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

■ History of recent political instability

■ High piracy rate continues to be a drag on the software market, with one of thehighest piracy rates in the region

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

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

the government is showing signs of taking intellectual property more seriously

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

■ Per capita IT spending to increase rapidly as the middle class increases in size

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

SWOT Analysis - Continued

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

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

internet access, or drive ICT sector development

■ The global economic slowdown may hit key demand segments

■ Rupiah weakness could have a dampening effect on household and businessspending

Wireline SWOT

SWOT

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

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

in an otherwise slowing market

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

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

SWOT - Continued

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

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

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

■ Growing preference in the consumer segment for mobile broadband solutions

SWOT Analysis

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

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

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

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

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

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

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

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

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

SWOT Analysis - Continued

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

Indonesia Jemaah Islamiah is blamed for a series of attacks, including the Balibombings of October 2002 and the Jakarta bombings of July 2009

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

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

of political instability

SWOT Analysis

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

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

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

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

rate still relatively high at 5.9% as of Q113 Many are forced to work in the informalsector Of particular concern is the youth unemployment rate, which is five times theoverall rate

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

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

business environment, particularly through reform of its unreliable legal system

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

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

The country has therefore become a net importer of crude oil in recent years, puttingdownward pressure on its current account position Furthermore, rising oil priceshave begun to pressure Indonesia's current account, where it typically runs a healthysurplus The resumption of the Cepu field, which occurred in late 2009, may help toalleviate Indonesia's dependence on foreign oil given its small boost to productionoutput, but we expect this bounce to be short-lived

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

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

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

Weaknesses ■ Corruption remains a major problem Indonesia ranked 118th out of 176 countries

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

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

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

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

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

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

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

Personal

computer

sales, IDRmn 28180384 33092642 37582763 41823051 46866186 52251692 58121504 64466419

Indonesia Softwaresales,

IDRmn 5372425 6529147 7666119 8896812 10362088 12025916 13913110 16038133 Indonesia Servicessales,

IDRmn 7890749 9399720 10828393 12340739 14126440 16125659 18363259 20849572

e/f - BMI estimate/forecast Source: BMI

BMI has a bullish outlook for the Indonesian IT market in 2014 and over the medium term The

depreciation of the rupiah will continue to be a drag on growth, but the impact will be offset by strongfundamentals including rising incomes, declining device prices and low penetration of products and

2014 Outlook

BMI considers the overall economic environment to

be conducive for IT market expansion in 2014

However currency weakness will weigh on sales

despite the announcement from several leading

vendors that they will absorb some of the potential

impact on prices BMI forecasts 5.4% real GDP

growth in 2014 and 4.7% real private final

consumption growth, which will see confidence

levels remain high and boost retail spending

However, with large numbers of products and

components imported to Indonesia the depreciation

of the rupiah will raise prices This will be a drag on

spending growth, magnified compared to developed

markets because of the price sensitive nature of the

market

The weaker rupiah is also a symptom of wider

concerns about Indonesia's exposure to global headwinds The sentiment towards emerging markets has

shifted fast in early 2014, and although BMI's core view is for robust growth in Indonesia, business IT

investment will be susceptible to shifting confidence, with Indonesian enterprises adopting a wait-and-seeapproach to hardware and systems upgrades in the face of concerns about Indonesia's exposure to economicheadwinds

A key are of growth in 2014 will be the hardware market, which is expected to account for 70.4% of totalspending There is a large growth opportunity in Indonesia with individual PC penetration around 10%.Meanwhile household PC penetration reached 15.1% in 2012, less than half the APAC average of 31% andbelow the global emerging market average of 27.6% This should be considered alongside Indonesia's hugepopulation and trajectory of rising incomes enabling the emerging middle class to acquire their first

household computing device

The development policy aiming to lift Indonesia into the ranks of the world's top 10 economies by 2025should also fuel ICT investment Direct spending by the government on infrastructure will boost the market

Industry Trends - IT Market

2011-2018

e/f - BMI estimate/forecast Source: BMI

in 2014 Government IT spending is expected to increase and continue to account for around 25% of the ITmarket, while the government is also encouraging state companies to use more IT.

Spending in some key IT verticals, such as financial services and banking, will be central to growth inenterprise IT spending However, there is also great potential in currently underpenetrated sectors, such asmanufacturing Adoption of cloud computing services by enterprises will also increase, and we identify theSME market as a large medium term opportunity Large enterprises continue to invest in datacentre and

cloud computing presence For instance, in March 2014 US-based social network company Facebook

announced plans to expand its international footprint by opening a data centre in Indonesia

Market Drivers

The IT hardware market will be boosted over the medium term by strong income growth in Indonesia andremain as the single largest segment of the IT market We estimate the hardware market accounted for70.4% of sales in 2014, which will decrease to 67.8% by 2018 Weak income growth among the poorest20% of the population will be of little consequence to the IT market, with incomes forecast to reach justIDR11.2mn (USD1,040) in 2018 - meaning they will remain outside the device market

However, strong income growth for the middle 60% and richest 20% of the population - with forecastCAGR of 10.7% and 12.4% respectively 2014-2018 - will broaden the addressable market Income growthamong the richest 20% bodes well for more advanced sales, while the income growth for the middle 60% ofthe population should deepen the market as consumers benefit from increased disposable income andacquire first household/personal devices In the short term though it is tablets that are the dominant trend,

for instance, Taiwanese vendor Asus estimated that tablets account for 50% of its Indonesian sales in

2013 Low-cost tablets running Android, particularly from OEMs in China, are expected to prove

particularly popular with Indonesian consumers in 2014

BMI forecasts hardware sales will reach a value of IDR77.7trn in 2018, with Indonesia achieving faster

growth than many other ASEAN members Low PC penetration and efforts to promote regions beyondJakarta will benefit hardware sales in the retail market However, Indonesia's uneven development anddigital divide remain major barriers to faster growth within this potentially huge IT market

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

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

productivity through automating inventory, accounting and other functions

Around 30-35mn Indonesian companies are estimated to lack any IT-based solutions IT services for thissegment will be dominated by basic services such as system integration, support systems, training,

professional services, outsourcing and internet services There is also an opportunity for cloud computingvendors in the SME market, but this market will only open up as telecoms operators invest in improvingwireless and wireline broadband infrastructure

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

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

The enterprise hardware market will remain robust

for the duration of our forecast, and continue to

produce strong demand for desktops However it is

in the consumer market where there will be faster

growth and more dynamism Demand for traditional

notebooks is being eroded by the popularity of new

form factors, particularly tablets, but BMI expects

hybrids/convertibles could gain traction as prices

decline, with first-time buyers likely to see

multi-functionality as a major positive

In terms of enterprise demand BMI identifies the

large manufacturing, mining and tourism sectors as

potentially fruitful verticals for vendors of enterprise

products and solutions These are expected to be the

largest three segments of the Indonesian economy in

2014, and there are modernisation drives underway in all three verticals We expect inward investment inmanufacturing facilities as wages rise in China to create demand for enterprise software deployments toconnect with global supply chains, as well as create efficiencies

Meanwhile, despite cutbacks due to the financial crisis, the financial services segment will continue to besignificant, with spending on regulatory compliance and security, for example, less susceptible to cutbacks.The market also remains relatively under-penetrated, with IT implementations largely limited to

transactional support Islamic banking also presents strong growth opportunities over the next few years

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

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

cloud services in Indonesia, driving the development of the market by offering new services and increasinglevels of education among customers about potential uses

Income Per Capita Breakdown

(2011-2018)

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

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 25,000,000

50,000,000 75,000,000

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

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

Inhabitants 1.6 1.8 2.1 2.5 3.0 3.5 4.0 4.5

f = BMI forecast Source: BMI

Based on market data from Telekomunikasi

Indonesia (Telkom), Bakrie Telecom and Indosat,

BMI estimates that there were just over 37mn

fixed-line connections in Indonesia at the end of December

2013 This was down from 37.983mn at the end of

2012 We have factored in the downtrend, which we

attribute to a growing rate of fixed to mobile

substitution, into our forecast and so there is no

major change to our five-year outlook, through to

2018, in this quarter's update to our telecoms market

report

Available data also shows that fixed-wireless

technologies account for the majority of connections

Telkom reported that its fixed-wireless subscriber

base reached 18mn in 2013, while its fixed-line

subscriber base was around 9.0mn, albeit trending

downwards For its part, Bakrie Telecom's fixed-wireless subscriber base reached 12.04mn

Fixed wireless connections have been driving growth in the fixed-line market in recent years, but it is clearthat its momentum is fluttering The growing affordability and convenience of mobile services will continue

Industry Trends - Wireline Sector

(2011-2018)

Main telephone lines in service, '000 Broadband internet subscribers, '000

2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

20,000 40,000 60,000

f = BMI forecast Source: BMI

to erode the overall fixed-line industry In light of recent data from the telecoms operators, we have revisedour estimate to reflect accelerating contraction through to 2018 By the end of our five-year forecast period,

we envisage Indonesia's fixed-line base shrinking to 31.965mn

We have upgraded our forecast this quarter following the addition of estimates dedicated broadband

connections over wireless networks Although the operators are yet to publish mobile broadband

connections data, we estimate that 10-15% of 3G connections are based dedicated data subscriptions Thisestimate is consistent with data from other markets with similar characteristics in the region As a result, wenow believe that the total number of broadband connections in Indonesia reached 5.2mn by the end ofDecember 2013, a penetration rate of 2.1%

BMI expects Indonesia's fixed broadband industry to exhibit a steady growth trajectory with increasing

service adoption mainly in urban cities among businesses and more affluent consumers that require speed connectivity One key downside risk to the growth of broadband subscriptions is the uptake ofsmartphones by consumers, Many of which are likely to use their connections on the device, rather than aseparate dedicated broadband connection, for internet access Our revised forecast expects the total number

higher-of broadband connections in Indonesia to reach 11.9mn by 2018, representing a penetration rate higher-of 4.5%

Macroeconomic Forecasts

Economic Analysis

BMI View: Current Jakarta governor Joko Widodo's (Jokowi) runaway favourite tag for the presidential

elections leads us to believe that it may not be too premature to deliberate Indonesia's economic trajectory under a Jokowi-led administration While we have yet to see his policy platform, Jokowi's ability to

streamline bureaucratic inefficiencies, improve public finances, strike a balance between pro-business and pro-welfare policies, as well as willingness to take politically unpopular but necessary measures to right economic imbalances could provide some upside potential for the infrastructure, mining and oil and gas sectors.

As it presently stands, Governor of Jakarta Joko Widodo (Jokowi) of the Indonesia Democratic Party Struggle (PDI-P) appears to be the runaway favourite for the presidential elections, which will be held onJuly 9 Jokowi has consistently ranked at the top of polls since talk of him becoming president surfaced andthe ratings of both himself and the PDI-P have surged since his candidacy for the presidency was announced

-by the PDI-P in March While the legislative elections are only just about to begin and the presidentialelections are two months away, Jokowi's runaway-favourite tag leads us to believe that it may not be toopremature to deliberate Indonesia's economic trajectory under a Jokowi-led administration Below, wehighlight three sectors that could witness upside potential if and when Jokowi assumes the presidency

The Jokowi Effect

Indonesia - Jakarta Stock Exchange Index

Source: Bloomberg

Infrastructure: As our infrastructure team has outlined (see 'Bearish Outlook For Construction Takes Root

', January 22), the near-term outlook for the sector remains relatively subdued Against a backdrop of

elevated borrowing costs, policy uncertainty, a poor business environment and a misallocation of thegovernment's finances towards expensive fuel subsidies, our infrastructure team is expecting constructiongrowth (in real terms) to slow marginally from 6.7% in 2013 to 6.3% in 2014 Despite this, however, wehighlight that a Jokowi-led administration could provide some upside surprise over the longer term

To us, this surprise stems more from Jokowi's proven ability to streamline inefficient bureaucratic processesand improve the government's tax collection (as he did in Jakarta), than the widely perceived expectationthat he will personally push for the much-needed infrastructure upgrades To be sure, it appears that theprivate sector may have played a larger role than Jokowi in restarting a number of key infrastructureprojects within Jakarta The potential upside in Indonesia's infrastructure sector therefore lies in a possibilitythat Jokowi may revamp the country's tax system, increase the government's revenue collection stream,improve public finances and consequently carve out the ability to allocate more financial resources towardsinfrastructure upgrades and development

Mining: Regarding the mining sector, amid a confluence of factors - depleting grades of copper, a limit on coal production, progressively higher taxes on coal exports and a slowdown in China, among others - BMI

holds a less sanguine view of the industry over the longer term At present, the main risk facing the miningsector stems from whether the new administration maintains its nationalistic leanings post-elections Thatsaid, we presently believe that these inclinations are likely to merely be political maneuvering and are

consequently unlikely to extend beyond the elections (see 'Elections Crib Sheet: Jokowi Ascendant', March

27) Moreover, we also believe that a Jokowi-led administration may help to restore confidence within the

mining sector, which has been shaken by the introduction of a mining ban by the current administration.Jokowi has thus far exhibited the ability to balance investors' interests and citizen's welfare interests Inassuming that he extends this to the mining sector and does not compel foreign mining companies to partake

in projects that are widely seen to be politically popular but economically infeasible, Jokowi could providethe sector with a much-needed boost

Oil & Gas: The oil and gas industry is perhaps one of the industries whose growth has been most

constricted by the current administration's nationalistic policies The country may carry considerable oil andgas potential However, political uncertainty remains pervasive within the upstream and downstreamsegments, due to the different policy directions undertaken by the central and local governments, and this

has been one of the main deterrents to foreign investment By way of example, French supermajor Total

announced in late-2013 that it may hold back expansion efforts on its assets along the South MahakamStrait unless the government could provide it with the assurance that the firm could hold on to its existingproduction sharing contract (PSC) when the existing contract reaches its term in 2017 This came shortly

before the government chose not to extend Chevron's PSC to operate the Siak oil block in Riau and instead hand operations of the block over to state-owned oil company Pertamina.

At present, questions about Jokowi's policy direction have drawn a blank That being said, some semblance

of direction could be gleaned from Jokowi's overt stance towards progressively lifting fuel subsidies Byopting to allow the consumer to bear the brunt of higher fuel prices as opposed to revisiting existing

contracts with producers as a means of sharing the burden, this could be a signal that Jokowi is aware of theimportance of foreign investment towards Indonesia's long term economic growth prospects Given thenature of Indonesian politics where the personality is more important than party politics, Jokowi stands agood chance of being able to canvass strong enough public support in order to push through such unpopularbut necessary reforms

Table: Indonesia - Economic Activity

Nominal GDP,

IDRbn 2 7,427,086 8,260,335 9,291,710 10,472,619 11,652,255 13,004,381 14,545,227 16,282,016 Nominal GDP,

USDbn 2 846.5 879.9 889.2 929.2 1,059.3 1,187.6 1,322.3 1,507.6 Real GDP

growth, %y-o-y

1,2 6.5 6.2 5.8 5.4 6.0 6.3 6.5 6.6 GDP per capita,

USD 2 3,472 3,564 3,559 3,676 4,143 4,593 5,060 5,709 Population, mn 3 243.8 246.9 249.9 252.8 255.7 258.6 261.3 264.1 Industrial

production,

%y-o-y, ave 2 4.2 5.0 5.3 5.8 6.0 6.5 6.5 7.0 Unemployment,

% of labour

force, eop 2 6.6 6.1 6.0 6.0 6.0 6.0 6.0 6.0

Notes: e BMI estimates f BMI forecasts 1 Base Year = 2000 Sources: 2 BMI/IMF; 3 World Bank/UN/BMI.

Industry Risk Reward Ratings

The IT sector in Asia Pacific is one of the most dynamic globally owing to a combination of key growthfactors, including high levels of productivity across different industry verticals, large populations in manycountries in the region and rapid development of high-speed broadband networks The region is home to

leading global vendors, including Lenovo, Samsung, Huawei, Infosys, and Wipro, with strong

development of the entire ICT value chain

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

markets over our forecast period, ending 2018, based on macroeconomic and country risk factors thatimpact the IT market, as well as key market trends and industry-specific risks The combined real GDP ofthe 12 countries in our table is forecast to reach USD10.5 trillion in 2014

The average aggregate score for our ratings increased marginally this quarter from 55.3 to 55.9, mainly due

to improvements in the Industry Rewards and Industry Risks scores of some countries These were

sufficient to offset a slight decline in the average regional Country Rewards score The average regionalCountry Risk score is unchanged in this quarter's update In terms of ranking, there was only one change onour table; Indonesia moved up two places to eight, pushing down the Philippines and Thailand to ninth and

10th respectively

Industry Rewards

The main factors in BMI's industry rewards rating are value of the addressable IT market, our five year

growth outlook, government initiatives and IT spending as well as market depth, which assesses the

proportion of hardware sales to other IT products and services sales South Korea, China and India are theonly countries with a score of more than 70 in this category, although for different factors South Korea isone of the most matured markets in the region, with hardware sales accounting for less than 25% of total ITsales China's IT market is by far the biggest in the region, with the value projected to reach USD150bn in

2014 For its part, India's IT market is forecast to record double-digit growth over our forecast period, albeit

it from a low base

Australia is the only other country with an Industry Rewards score above the regional average, despitehaving the lowest five-year average growth rate at just 0.1% in US dollar terms The remaining countriesscore between 50 and 59, except Sri Lanka, the lowest ranked country on our table, which scores 46.7 The

country score in this category is held back by the small market size, forecast to reach USD530mn in 2014,and lack of depth in its IT market, with hardware sales accounting for more than 65% of total IT sales.

proportion of their populations live in rural areas and lack access to reliable broadband services

Industry Risks

We upgraded the Industry Risk scores of four countries - Australia, Malaysia, Indonesia and Sri Lanka - thisquarter to reflect notable improvements in the enactment or implementation of laws to protect intellectualproperty (IP) rights Despite these efforts, the region remains a hotbed for product counterfeiting andsoftware piracy as evidenced by the low regional average score in this category South Korea and Singaporeoutperform their regional peers in this category with scores of 75 and 70 respectively At the other end ofour table, Thailand and Vietnam recorded the lowest score of 35

Country Risk

The country risk category assesses the impact of key macroeconomic factors on the IT market Some of thefactors we consider in our analysis include short-term external and financial risks, trade bureaucracy andlegal framework We also incorporate Transparency International's corruption index in our ratings Thescores in the country risk category have the narrowest range and highest average score among the four

categories in our table Hong Kong has the highest score of 77.7, followed by Singapore on 74.4 HongKong's score is boosted by its strong legal framework, transparent and efficient trade policies and a strongcorruption score.

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014

Country Industry rewards rewards Country Industry risks Country risks IT rating Rank Previous rank

South Korea 75.0 80.0 75.0 65.4 74.5 1 1 Singapore 58.3 100.0 70.0 74.4 72.8 2 2 Hong Kong 58.3 100.0 45.0 77.7 70.4 3 3 Australia 60.0 95.0 57.5 66.9 69.5 4 4 China 75.0 35.0 45.0 55.1 58.0 5 5 Malaysia 56.7 55.0 37.5 67.7 55.9 6 6 India 71.7 15.0 45.0 50.9 50.8 7 7 Indonesia 53.3 35.0 42.5 51.4 47.2 8 10 Philippines 53.3 30.0 42.5 50.9 45.9 9 8 Thailand 55.0 20.0 35.0 62.9 45.5 10 9 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 46.7 15.0 37.5 50.9 38.6 12 12

Average 59.7 49.6 47.3 60.7 55.9 -

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

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

Market Overview

Hardware

BMI forecasts the hardware market in Indonesia will reach a value of IDR50.5trn in 2014, an increase of

11.3% from 2013 Increased demand from both the retail and enterprises is expected to drive growth in

2014, with demand for tablets and hybrids expected to be particularly strong

The Indonesian hardware market has great medium-term potential; however the depreciation of the rupiah

will put upward pressure on the price of imported products and be a drag on growth in the short to medium

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

growth rate (CAGR) of 11.3% 2014-2018 in local currency terms Even with this fast pace of growth, theshare of hardware in the overall IT market will decline by two percentage points (pps) during our five-yearforecast period to 67.8% in 2018

The depreciation of the rupiah has been a drag on PC

market growth in recent years, and BMI expects this

trend will continue into 2014 Despite these

challenges the underlying trend of rising incomes

and low PC penetration will ensure continued

growth Retailers reported that sales of desktops and

notebooks in the first three months of 2013 were

down on the same period of the previous year, but

the boom in tablet sales offset squeezed decline in

traditional form factor volumes Meanwhile,

government spending remained robust but, amid

continued economic uncertainty, there were

indications that businesses were delaying upgrades

In 2014 the depreciation of the rupiah will continue

to be a drag on market growth, an important feature

in a price sensitive market The impact on prices is

already being felt, for instance in September 2013 Lenovo announced plans to raise prices of its PCs by

about 20% in Indonesia Chief operating officer at Lenovo Indonesia, Sandy Lumy said the company willadjust its prices upward by 10% to 20% in accordance with the latest exchange rate Lumy said the pricesacross all market segments would increase as the import costs for the products were in US dollars Lenovo's

25,000,000 50,000,000

e/f - BMI estimate/forecast Source: BMI

move came after the Indonesian rupiah weakened by 16% against the US dollar in 9M13, and with furtherdepreciation forecast for 2014.

Despite the short-term challenges, there are a range of factors that combine to underpin our outlook for theIndonesian hardware market and still make it one of our picks for outperforming growth both regionally andglobally The Indonesian promise hinges on the following factors:

■ The sheer size of its economy places Indonesia among the top markets in Asia Pacific, even though PCpenetration remained low in 2012 It is the only country in South East Asia to feature in the G20 Forlong periods since the late 1970s, Indonesia has seen healthy economic growth -barring the meltdown in

1997 to a large extent Indonesia, at its present growth rates, is well on the way towards featuring in thetop ten global economies by the year 2025

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

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

estimates are slightly higher, at around 9-10% for 2012 The latest regulatory data show household PCpenetration reached 15.1% in 2012, compared to the APAC average of 31% and the developing world

average of 27.6% Given BMI's forecast for real private final consumption growth to average 6.4%

annually 2014-2018, during which time GDP per capita will increase from USD3,479 in 2013 toUSD5,582 in 2018, the low PC penetration rate is a compelling business opportunity

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on cities such as Jakarta, according to estimates, providing a much clearer picture of themarket opportunity In 2013, regions outside Java and Bali were reported to show the fastest quarterlygrowth, while some other regions showed a decline

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

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

Local Manufacturers

Indonesia enjoys a strong base of local manufacturers and assemblers Apart from being price leaders, thesecompanies also cater to custom requirements These companies account for a sizeable fraction of overall PCsales

SMEs

SMEs form an important, yet comparatively unexplored component of the Indonesian hardware market TheMinistry of SMEs and Co-operatives asserts that SMEs account for 99% of the registered firms in thecountry and provide employment to 97% of its workforce Their share in exports and value-added products

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

Financial Institutions

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

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

Government Push

The government will play a major role in boosting the prospects of IT hardware, both as a facilitator andend-user In H113, government spending was a bright spot for the PC market and helped to compensate forconstrained spending by the private sector Government investments in PC hardware were boosted by anumber of procurements delayed from Q412

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

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

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

■ Computerisation of road toll collection Issuing of electronic identification cards to citizens, also known

as e-KTP, covered close to 60% of the target population by 2012

Notebooks have gained the greatest traction in the

retail market, compared to around one-third of units

in the business market In 2013 it was estimated that

a total of 3.5mn notebooks were sold, according to

IDC However, in the retail segment, the popularity

of traditional notebooks is being undermined by

enthusiasm for newer form factors, such as tablets,

particularly low cost devices running Google's

Android OS

This difference between retail and corporate and

business users is supported by statements from

Chinese equipment vendor Lenovo Lenovo also

contends that notebooks are the main draws for

first-time PC users, including students Given the

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

overwhelmingly in favour of mobile PCs Lenovo, in fact, pegs the proportional share of notebooks amongthe retail user's PC purchases at a formidable 85% Recognising the appeal of notebooks in the largelyaspirational youth segment, Lenovo offered its IdeaPad products at a very competitive price of USD250 inJanuary 2013

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

the country in 2012 were occupied by Acer and Asus respectively, according to IDC ASUS retained its

lead in the Indonesian consumer notebook segment in 2013, with sales up 10% from 2012 ASUS had a27.3% share of notebook sales in 2013 according to Gfk This includes a leading position in conventionalnotebooks (26.1%) and ultra-thin notebooks (36.8%)

Netbooks

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

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

Household PC Penetration (%)

2010-2012

Source: National Regulator, ITU

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

Tablets

Tablets experienced a sharp uptick in sales in 2012 and continued to grow rapidly in 2013 IDC estimates a42% increase in the number of tablet shipments in the country in 2012 In that sense, tablets in Indonesia arefollowing in the footsteps of their success globally Tablet uptake in Indonesia was initially slow, with an

Apple-centric market meaning the devices were out of reach for the majority of consumers However, more

affordable Android devices have seen volumes increase markedly

Statcounter data show that iOS (the operating system

on Apple's iPad) continues to account for a large

share of tablet browsing traffic in Indonesia,

reflecting the large installed base However, the

share of tablet traffic from iOS was down 0.2pps

year-on-year (y-o-y) to 42.5% in March 2014

Meanwhile Android gained momentum from 2012

as vendors capitalised on the price sensitive nature

of the Indonesian hardware market However its

share remained flat y-o-y to March 2014 at 57%

Samsung leads the market with 41.6% of tablet

browsing traffic, but its share was down 1.4pps

y-o-y as it lost out to lower cost vendors This data is in

line with Samsung claims that it achieved 50% tablet

market share in 2012 through its Galaxy Tab

products (as well as an 80% share of Android

smartphones), moving it ahead of Apple However

as is the case in the majority of emerging markets, price erosion in the Android ecosystem has seen

Samsung fall back slightly

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has said

that it expected tablets to contribute 50% towards its total Indonesia market sales in 2013 The vendor hopes

to capture 20% market share in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in an

Indonesia Tablet Browsing Traffic

By Vendor (%) And Y-o-Y Change

March-2014

Source: Statcounter

effort to target the emerging middle class Statcounter is supportive of ASUS making inroads, with a 0.7ppsincrease in its share of tablet browsing traffic in Indonesia to 0.7% in March 2014.

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

BMI believes that low-priced alternatives from Chinese OEMs and local manufacturers are the ones to take

the tablet truly mass market The most successful vendor appears to be woPad, which accounted for thethird highest share of tablet browsing traffic in March 2014, according to Statocunter data, but still farbehind Apple and Samsung

Other important low-to-mid range vendors include Advan, MITO and Smartfen among others.

Meanwhile, Indonesia manufacturer S Nexian launched six new devices in March 2013, including an 8-inch

Android tablet The S Nexian device will come with 8GB to 32GB of storage with a 1,024x768 resolution

The device is available for IDR1.5mn (USD155), approximately 50% of the cost of the Asus Google Nexus

7 and is available subsidised through a partnership with telecoms operator Indosat, giving the user access to

the operators 5,000 Wi-Fi locations across the country

The decline in the average price of a tablet sold in Indonesia reflects the focus on the low end of the market.The average price was USD485 in 2012, which was a considerable drop from USD651, as recorded in 2011,according to Gfk Indonesia

Ultrabooks

Despite little traction being gained in 2012, Intel, the key driver behind the ultrabook concept, remainsbullish about it in Indonesia It plans to stick to its guns by employing the more advanced, and thus moreexpensive, Ivy Bridge processor There were suggestions from certain vendors about reverting to the cost-effective, but feature-limited Sandy Bridge processors; but Intel plans to stick to Ivy Bridge, for its betterendurance Some of the ultrabook models available in Indonesia as of Q412 include Acer Aspire S3, Asus

Zenbook, Dell XPS, HP Folio, Lenovo Ideapad U300, Samsung Series 5 and Toshiba Portege Z series.

While premium pricing of ultrabooks can be a showstopper in a price-sensitive market such as Indonesia,

Intel is confident that economies of scale will make the price more palatable BMI expects lower-cost

ultrabooks to become widely available in 2014, as vendors risk losing out on volumes to tablet

manufacturers Lower-cost slimline Ultrabooks (or near equivalents) have already been seen in Vietnam

Hybrids/Convertibles

Windows 8 has met with an enthusiastic response in the Indonesian market after being launched in October

2012, with a wide array of product launches by vendors The shape of things to come was unveiled to an

extent in the boot camp held by Microsoft Indonesia in April 2012 for Windows 8 The camp saw the

launch of as many as 44 applications developed by Indonesians for Windows 8

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

-competition in the market - putting further pressure on prices

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

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

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

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

Envy and Lenovo's Yoga and Helix More recently, a range of hybrids including the Dell Venue range andAsus Transformer run full versions of Windows 8, increasing the functionality gap versus Apple andAndroid tablets

Although design innovation has some way to go, and prices of hybrids will need to decline, the multi-usedevice has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience However, Microsoft must first overcome a brandperception deficit it faces against Apple and Android

BMI forecasts a 15.9% CAGR for the computer software market in Indonesia 2014-2018, with total

spending reaching IDR16.0trn in 2018 The share of software in the overall IT market will increase by morethan 2.0pps during our forecast period as software spending growth outperforms the hardware segment asthe market matures

We forecast slightly slower growth in 2014 compared to 2013 as a result of rupiah depreciation, but despitethis drag we still expect software spending will be the outperforming segment of the IT market Thereshould be a continued boost from systems upgrades previously delayed as a result of the global economiccrisis Compliance with government and international regulations is a long-term driver in the financialsector, manufacturing and other sectors

Enterprise Software

Indonesia has a vibrant ERP market with the

presence of global leaders including SAP, which has

a solid presence in the region However, it is

believed in certain quarters that Indonesian business

practices require high levels of customisation in

ERP, which is delivered by home-grown companies

such as Epicor Interestingly Ramco, the Indian

cloud-based ERP vendor announced a partner in

Indonesia in the form of Multipolar Technology in

September 2012 Ramco counts Panasonic and SDV

Logistics as its customers in the country.

In 2013 Lexmark increased its focus on the

enterprise market in Indonesia to challenge the

leading players It has offered print services in

Indonesia since 2006, but after stopping the production go inkjet printers in 2012 Lexmark is now targetingenterprise solutions Acquiring 10 software companies since 2010, Lexmark has shifted its focus and seesgreat opportunity in Indonesia Its solutions include document lifecycle management software 'Perceptive',end-to-end banking workflow solution 'Lexmark Distributed Intelligent Capture' and intelligent engineprocess software 'Brainware' that clarifies and extracts data from documents

Software Market

(2011-2018)

Indonesia - Software sales, IDRmn

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0

5,000,000 10,000,000 15,000,000

e/f - BMI estimate/forecast Source: BMI