Indonesia information technology report q3 2015

Looking over the medium term, we identify retail hardware, enterprise software and cloud computing as growth opportunities.. Source: BMIBMI made a minor upward adjustment to the Indonesi

Q3 2015 www.bmiresearch.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q3 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: April 2015

© 2015 Business Monitor International Ltd

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

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of the publisher

DISCLAIMER

Q3 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: April 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

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

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

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

of the publisher

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 12

Economic 14

Operational Risk 16

Industry Forecast 18

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

Macroeconomic Forecasts 25

Economic Analysis 25

Industry Risk Reward Ratings 30

Industry Risk Reward Index 30

Table: Asia Pacific Consumer Electronics Risk/Reward Index - Q315 32

Market Overview 33

Hardware 33

Software 42

Cloud Computing 46

IT Services 51

Industry Trends And Developments 55

Regulatory Development 60

Table: Key Ministers And Departments 60

Competitive Landscape 64

International Companies 64

Table: Lenovo Indonesia 64

Table: Intel Indonesia Corporation 65

Table: Microsoft Indonesia PT 66

Table: IBM Indonesia 67

Table: Foxconn Technology 68

Local Companies 69

Table: Performance PT Multipolar Technology Tbk (MLPT) 69

Table: Walden Global Services (WGS) 70

Table: Aprisma Indonesia 71

Table: ALTiUS ERP 71

Company Profile 72

Sigma 72

Regional Overview 76

Asia Pacific 76

Demographic Forecast 79

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

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

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

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

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

Methodology 84

Industry Forecast Methodology 84

Sources 85

Risk/Reward Index Methodology 86

Table: It Risk/Reward Index Indicators 87

Table: Weighting Of Components 88

BMI Industry View

BMI View: In 2015, we expect the drag of rupiah depreciation to be outweighed by the upside from strong

economic growth, a low PC penetration rate, enterprise and public service modernisation and an emerging middle class Balancing these trends, we forecast IT spending to increase to IDR176.3trn in 2015, up 15.1% from 2014, with the IT market estimated to account for 1.5% of GDP Looking over the medium term, we identify retail hardware, enterprise software and cloud computing as growth opportunities However, there

is short-to-medium term downside if the Indonesian growth story is derailed by regional or global economic headwinds.

Headline Expenditure Projections

■ Computer Hardware Sales: IDR100.5trn in 2015 to IDR142.0trn in 2019, at a compound annual growth

rate (CAGR) of 9.5% in local currency terms Even after strong growth in recent years a high hardwarespending growth rate should be maintained in Indonesia with plenty of spare capacity due to new entrants

to the market 2015-2019 as household incomes rise

■ Software Sales: IDR29.18trn in 2015 to IDR56.64trn in 2019, at a CAGR of 18.5% in local currency

terms Piracy is a major drag on software market growth, but new legislation could help reduce the dragfrom 2015, pushing the software growth rate higher as enterprise modernisation initiatives gather pace

■ IT Services Sales: IDR46.63trn in 2015 to IDR91.12trn in 2019, at a CAGR of 18.7% in local currency

terms Improvements in network infrastructure and increased awareness among local enterprises willensure strong growth in cloud service adoption, which we expect to be a key demand driver for ITservices 2015-2019

Key Trends And Developments

In the Q3 update, BMI has added an analysis of household income trends in Indonesia to the IT market

forecast, as well as analysis of the wider APAC medium-term story in the regional overview Householdincome trends provide additional context to our economic outlook, with particular relevance for retailhardware vendors positioning for medium-term growth In 2015, Indonesia remains a highly price sensitivemarket, a view derived from local retailer and vendor reports, and illustrated through the predominance of

USD1,000-10,000 households at around two-thirds of the total in Indonesia in 2015 We consider

sub-USD5,000 households to be external to the IT market due to insufficient purchasing power, but as ourforecast shows, we expect this group to reduce in size by around 50% by 2019, which will deepen the ITmarket, albeit predominantly at the low value end of the market

Another enabler for the development of Indonesia's IT market alongside rising incomes are the investmentsbeing made in supporting infrastructure Under the 2014-19 Indonesia Broadband Plan, up to IDR278trn

(USD23.2bn) is to be invested in extending wireline broadband services to 30% of the urban population and6% of the rural population, while mobile broadband services are to be rolled out to 52% of rural

consumers Approximately 10% of the ambitious project will be financed by the state, meaning that theonus will fall squarely on Indonesia's wireline and mobile operators The most significant actor is

incumbent operator PT Telkom Indonesia, which plans to triple its investment in broadband in 2015 as

part of its support for the new initiative It will spend IDR45trn (USD3.7bn) installing public Wi-Fi hotspotsand backhaul transmission facilities and augmenting its fibre-optic backbones and satellite footprints in itsbid to boost take-up of converged services

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

Weaknesses ■ Underdeveloped telecommunications infrastructure, due to years of government

control and slow progress in deregulation

■ History of recent political instability

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

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

Opportunities ■ Booming mobile and e-commerce market, creating demand for devices and

enterprise retail solutions

■ Investment in telecoms and datacentre infrastructure should lay the foundations forrapid growth of cloud computing services, with small- and medium-sized enterprisesconsidering a particularly attractive target group

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

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

SWOT Analysis - Continued

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

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

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

internet access, or drive ICT sector development

■ Regional economic instability could derail economic growth

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

■ Data sovereignty and content control initiatives from the government could bring itinto conflict with ICT vendors

Wireline SWOT

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

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

in an otherwise slowing market

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

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

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

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

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

■ Growing preference in the consumer segment for mobile broadband solutions

SWOT Analysis

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

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

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

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

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

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

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

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

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

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

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

SWOT Analysis - Continued

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

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

of political instability

SWOT Analysis

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

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

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

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

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

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

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

business environment, particularly through reform of its unreliable legal system

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

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

The country has therefore become a net importer of crude oil in recent years, puttingdownward pressure on its current account position The resumption of the Cepu field,which occurred in late 2009, may help to alleviate Indonesia's dependence on foreignoil given its small boost to production output, but we expect this bounce to be short-lived

SWOT Analysis - Continued

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

Operational Risk

SWOT Analysis

Strengths ■ There has been significant progress made in recent years towards achieving universal

primary education due to major government investment

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

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

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

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

particularly in rural areas

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

■ Opportunities for foreign direct investment are limited by a variety of restrictions onforeign ownership of businesses in Indonesia

■ Criminal gangs retain some degree of influence and cause disruption to legitimatebusiness activity

Opportunities ■ An expanding pool of technical workers can be found in Indonesia's larger cities

■ A more positive outlook for Indonesia's economy over the medium term is indicative

of the opportunities for investment in the country

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

SWOT Analysis - Continued

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

Threats ■ Strong population growth will place further pressure on the struggling education

■ The significant presence of Western interests means that terrorist attacks are likely tocontinue to affect foreign workers and businesses

e/f = BMI estimate/forecast Source: BMI

BMI made a minor upward adjustment to the Indonesian IT market growth forecast, building on our already

bullish outlook for 2015 and medium-term trends We forecast a compound annual growth rate (CAGR) of13.6% 2015-2019, with total IT market sales expected to reach almost IDR290.0trn (USD22.3bn) in 2019

Our positive medium-term outlook is based on Indonesia's potential for rapid catch-up growth throughbenefits derived from developments at the global level; ie, declining device prices and cloud services,enabling it to outperform the growth rates achieved by now developed markets in earlier stages of

development In addition to technological trends, our bullish outlook also draws on our in-house CountryRisk team's assessment of economic trends These favourable trends have attracted significant inwardinvestment, which will add to growth momentum over the forecast period

2015 Outlook

BMI forecasts IT market growth of 15.1% in 2015 in local currency terms, with total market value expected

to reach a value of IDR176.3trn The strong economic outlook is fundamental to our IT market forecast asIndonesian consumers remain optimistic about job, finance and spending prospects We forecast real GDPgrowth of 5.3% in 2015 and 4.8% real private final consumption growth Furthermore, we forecast aslowdown in rupiah depreciation against the dollar in 2015 compared to 2012-2014, although it will remain

a drag on growth by eroding the purchasing power of Indonesian households and enterprises in globalproduct markets

e/f = BMI estimate/forecast Source: BMI

The largest component of the Indonesian IT demand continues to be for computer hardware sales, butthey are forecast to underperform software and services growth rates in 2015 Nonetheless demand growthwill remain robust as a result of income growth and the relatively low penetration rate - ensuring demandcomes from both first-time buyers and the replacement/upgrade market Household PC penetration reached

15.1% in Indonesia at the end of 2012 - less than half the APAC average of 31% and below the globalemerging market average of 27.6% This fact, when considered alongside Indonesia's large and growingpopulation and trajectory of rising incomes, illustrates the growth opportunity in the retail hardware market.

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

of 7.4% forecast in local currency terms for 2015

BMI considers Indonesian government IT policy to be supportive of IT market growth in 2015, although

there is downside Indonesian development policy is aiming to lift Indonesia into the ranks of the world'stop 10 economies by 2025 - a boon to ICT investment Direct spending by the government on infrastructurewill boost the market in 2015 Government IT spending is expected to increase and continue to account foraround 25% of the IT market, while the government is also encouraging state companies to use more IT.However, the Indonesian government's attempts to control radical content online and push for greater datasovereignty could bring it into conflict with the interests of ICT vendors; however, this is not our corescenario

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

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

square metres (sq m) of capacity by the end of 2015 New tier-2 and tier-3 facilities were scheduled forcompletion by YE14 and, with the completion of Indonesia's first tier-4 facility also scheduled for YE14,Telkom already has an estimated 70,000sq m of capacity at its disposal at the start of 2015 We expectcapacity increases to result in lower infrastructure-as-a-service costs, catalysing adoption

Market Drivers

BMI's Country Risk forecast for Indonesia is a key component of our bullish medium-term IT market

growth outlook Real GDP growth is forecast to average 6.5% annually 2015-2019, with real private finalconsumption growth forecast to be slightly slower at a 6.3% annual average Our income stratificationforecast provides additional insight, with particular relevance for retail hardware vendors Weak incomegrowth among the poorest 20% of the population will be of little consequence to the IT market, withincomes forecast to reach just IDR10.9mn (USD991) in 2019 - meaning they will remain outside the devicemarket However, strong income growth for the middle 60% and richest 20% of the population - withforecast CAGR of 10.5% and 12.2% respectively 2015-2019 - will broaden the addressable market

We have added an analysis of household income trends in Indonesia to provide additional context to the

predominance of USD1,000-10,000 households at around two-thirds of the total BMI considers

sub-USD5,000 households to be external to the IT market due to insufficient purchasing power, but as ourforecast shows, we expect this group to reduce in size by around 50% by 2019, which will deepen the ITmarket, albeit predominantly at the low value end of the market

BMI believes strong income growth for the richest 20% of Indonesian bodes well for premium devices sales, which should benefit premium oriented vendors including Apple, while the income growth for the

middle 60% of the population should deepen the market as consumers benefit from increased disposableincome and acquire first household/personal devices We believe this second grouping is captured in ourhousehold income forecast through the large scale migration of households from the USD1,000-5,000 andUSD5,000-10,000 bands to the USD5,000-10,000 and USD10,000-25,000 bands respectively

Indonesia Household Income Distribution (%) LHS And Change ('000) RHS

2015 & 2015-2019f

f = BMI forecast Source: National sources, BMI

A more active approach by the government to encourage IT development, including the establishment of theNational ICT Council, should stimulate spending through a series of infrastructure and education initiatives.The Indonesian government's Master Plan for Acceleration and Expansion for Indonesia Economic

Development (MPEEI) states that connectivity between the islands of the country is a priority area Major

government infrastructure and ICT initiatives, particularly the Palapa Ring Project, have been rolled out tocreate the infrastructure to support IT market growth.

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

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

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

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

in absolute terms in early 2015, but as network infrastructure improves alongside increased supply of cloud

products, BMI forecasts bullish medium term growth at a CAGR of 35.2% 2015-2019 We expect the

strategies of Indonesian telecoms operators, and global vendors such as Microsoft and IBM, will drivemedium term cloud service adoption both among large enterprises and Indonesia's huge base of small- andmedium-sized enterprises (SMEs)

Segments

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

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

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

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

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

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

operating systems

Indonesia GVA By Sector (%)

2015f

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

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

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

modernisation drives underway in all three verticals Additionally, we expect inward investment in

manufacturing facilities as wages rise in China to create demand for enterprise software deployments inIndonesia to connect with global supply chains, as well as create efficiencies

Meanwhile, despite cutbacks due to the financial crisis, the financial services segment will continue to beoverweight in enterprise IT spending due to the demands of the industry Spending on regulatory

compliance and security solutions are expected to register the fastest growth The market also remainsrelatively under-penetrated, with IT implementations largely limited to transactional support Islamicbanking also presents strong growth opportunities over the next few years

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

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

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

Fujitsu, and a collaboration between TelkomSigma and REDtone Data Centre, are both targeting the

informatisation of Indonesia's healthcare system as major medium-term opportunities

Telecom operators are emerging as key players in the smart services segment in Indonesia, with Telkomsel partnering with Jasper Technologies in late 2014 for a nationwide Internet of Things (IoT) platform, while Ooredoo, the parent company of local telecoms operator Indosat, stated in January 2015 that it is targeting the IoT 'Smart City' opportunity in Jakarta Subsequently, in April 2015 Indosat added to its IoT

capabilities by partnering with Swedish telecoms equipment vendor Ericsson to deploy a cloud-based

machine-to-machine (M2M) platform in Indonesia, via the Ericsson Device Connection Platform

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

Local players will capture a share of this growth through to 2019, but the SME market has also attracted theattention of global leaders, for instance, in October 2014 IBM promoted it SoftLayer infrastructure-as-a-service (IaaS) product in Indonesia to SMEs, offering server, processor, RAM, and storage in the cloud for

USD100 per month Meanwhile, global software giant Microsoft launched the latest Office 365 SMB

software package aimed at businesses with less than 250 employees This combination of local and globalsupply should make the SME market a hard-fought battleground among vendors over the medium term

Macroeconomic Forecasts

Economic Analysis

BMI View: While we believe that Indonesia's economy will likely pick up momentum over the course of

2015 following a 5.0% real GDP expansion in 2014, high borrowing costs and a challenging export outlook will cap upside potential As such, we have downgraded our 2015 real GDP growth forecast slightly to 5.3%, versus 5.5% previously.

While growth in the Indonesian economy will likely continue to stabilise over the coming quarters

following a deceleration over the past three years, we are seeing signs that a rapid acceleration may be moreelusive Although headline real GDP growth recovered to a 5.0% pace in Q414 (from 4.9% in Q314, itsslowest clip since 2009), a number of factors are likely to weigh on hopes for a rapid recovery towards thegovernment's 5.7% growth target in 2015 As such, we have lowered our real GDP growth forecast for 2015slightly to 5.3%, from 5.5% previously

Too Soon For A Consumer Pick-Up

While Indonesia boasts massive consumer potential owing to rising incomes and low indebtedness levels,high interest rates coupled with a consistently depreciating rupiah have placed a lid on private consumptiongrowth over recent quarters Private consumption growth clocked in at just 5.0% in Q414, its worst

performance since Q112, and households are likely to remain under pressure in the immediate future.Although the disinflationary feed-through effects of lower oil prices will be a tailwind for the category, therecent shake-up in the government's fuel subsidy schemes will act as a counterbalance against this

throughout 2015 The latter effect has been felt most acutely in the autos sector, where domestic salesplummeted in January and February by 9.1% and 20.6% y-o-y, respectively The poor performance of theautos sector in the first two months of the year, along with the challenging interest rate and fuel price

outlook in the country, informed a recent downgrade by BMI's autos team, which is now forecasting a 6.6%

contraction in total auto sales in 2015 versus a previous forecast of -4.3% (see 'Acute Headwinds To Push Back Autos Recovery To 2016', March 23).

Rupiah Hitting The Pocketbook

Indonesia - Exchange Rate, IDR/USD

Source: BMI, Bloomberg

While the weak rupiah will have a mixed impact on Indonesia's trade picture, it is significantly morenegative for the private consumption outlook over the near-term The rupiah has lost 16.0% of its value overthe past year, and this will undermine purchasing power considerably as more expensive imports will hitconsumers' pocketbooks At the same time, Bank Indonesia (BI) will be constrained from easing its

monetary policy too aggressively as it remains wary of the country's current account deficit (equivalent to3.0% of GDP in 2014) Although the central bank surprisingly cut its benchmark interest rate by 25 basispoints (bps) in February, the quantum of the cut is unlikely to have a significant supportive effect on theeconomy in the near-term At the same time, even though we expect BI to proceed with two additional ratecuts equivalent to a total of 50bps over the remainder of the year, it is unlikely that these will effect asignificantly better position for the Indonesian consumer until late in the year or even H116 As a result ofthese factors, we have downgraded our private consumption growth forecast to 4.8% in 2015, from 5.0%previously

Trade Outlook: A Mixed Bag

The weaker rupiah has not yet translated into a boost in real export growth in Indonesia, as reflected by thecategory's -5.0% y-o-y performance in Q414 However, exports in real terms should witness a modest pick-

up over the coming quarters, as the weak rupiah will continue to make Indonesian products slightly morecompetitive At the same time, weak base effects in the category will also add a tailwind That said, we donot see much potential for a significant pick-up in exports, as poor commodity demand (owing largely to theongoing slowdown in China) will weigh on shipments of mining products such as coal and copper As such,

we expect exports to expand at a real rate of 3.1% in 2015, versus a disappointing 0.8% pace in 2014

Meanwhile, the private consumption outlook will act as a drag on import growth The rupiah's significantmove over the past two years is likely to have both curtailed overall consumption in Indonesia, as well asreoriented consumption more towards domestically produced goods Real import growth over the course of

2014 posted at just 2.2%, reflecting the second straight year of minimal increase in the category (importsgrew by 1.2% in 2013) For 2015, we see limited potential for a more aggressive pick-up in imports, andinstead expect growth to stagnate at 2.3%

Rebound To Be Modest At First

Indonesia - GDP At Constant Prices By Expenditure Category, % chg y-o-y

Source: BMI, Bloomberg, BI

*f=BMI forecast

Investment Poised For A Comeback

Following two straight years of sub-5.0% real annual growth in fixed-capital formation, we believe thatinvestment in Indonesia is poised to recover While hard-hitting reforms have been hard to come by thus farfor President Joko 'Jokowi' Widodo, his fuel subsidy victory has freed up significant funds (as much asUSD10bn) for public infrastructure development in 2015 alone Jokowi's other key success thus far was hisconsolidation of business licensing procedures under the Indonesia Investment Coordinating Board

(BKPM), which contrasts with the previous process which required investors to go through various

industrial ministries The reform of business licensing procedures aims to cut what had previously been amonths' or (in some cases) years' long investment approval process down to just weeks These efforts look

to already be paying off, as Jokowi was able to secure USD74.4bn worth of investment commitments overthe course of a recent trip to Japan and China These commitments include a USD1.6bn planned investment

from Toyota Motor Corp, part of a reported effort to boost the Japanese giant's annual vehicle exports

In light of the improving environment for foreign investment, as well as our expectations for significantlyhigher government infrastructure spending this year, we see real fixed capital investment growth improving

to 6.0% in 2015 That said, as will be the case with the outlook for private consumption, we believe thatborrowing conditions will only materially improve towards the latter half of 2015 and into 2016 as BI takesits time easing monetary policy

Expenditure Breakdown

Private Consumption: With households remaining constrained by high borrowing costs and the weak

rupiah, we see little scope for improvement in private consumption in 2015 As such, we forecast for realprivate consumption growth to come in at 2.8%, slightly down from 2.9% in 2014

Government Consumption: While subsidy spending will be down in 2015, the government's expansionary

fiscal programme suggests a rebound in public consumption for this year As such, we forecast real

government consumption to expand by 5.0% in 2015, versus 2.0% in 2014

Investment: Real gross fixed capital formation growth fell to 4.1% in 2014, versus 4.7% in 2013, as

companies were constrained by a slowing economy, political uncertainty, and financial market volatility.However, we believe that all three of these hindrances will be reduced in 2015, and with governmentinfrastructure spending likely to surge (along with easing monetary policy conditions), we see scope for realfixed capital formation to advance by 6.0% in 2015

Net Exports: Net exports suffered from myriad headwinds in 2014, expanding by just 0.8% in real terms.

We believe that the account will see a modest improvement to 3.1% in 2015 as the weak rupiah spurs newshipments That said, this will also act as a drag on imports, which we forecast will grow by just 2.2% thisyear, versus 1.2% in 2014

Industry Risk Reward Ratings

Industry Risk Reward Index

BMI's Consumer Electronics Risk/Rewards Index has been updated for Q315, incorporating the latest

macroeconomic and industry data Although a number of countries saw minor revisions to their scores invarious categories, these have had no impact on their ranking relative to one another Singapore and HongKong lead the field, Vietnam and Sri Lanka continue to languish at the bottom The most significant change

to the Index this quarter is the addition of Japan to our analysis, extending our coverage to 13 markets.Unsurprisingly, as one of the largest producers of advanced technology, Japan scores very highly and entersthe Index in first position

As we have remarked in the past, high-spend markets that are home to large international companies tend tofare best, relying on established connectivity to support ongoing growth Emerging economies suffer fromweaker telecommunications infrastructure, which underpin the growth of IT services in particular

Consumers and companies may own hardware without the requirement of internet access, but it is datausage that supports much of the ongoing growth of the IT market

It is therefore no coincidence that Sri Lanka remains at the bottom of our indices, below Vietnam Whileboth have vibrant mobile markets, the broadband sectors lag behind in both countries Mobile broadbandservices offer some opportunities but the markets' growth will be towards the end of our forecast period.Both are starting from a low base of PC penetration, and weak consumer spending capability compared withregional peers also limit prospects These markets still require hardware growth to take off in order toencourage the growth in IT services and software that denote more developed IT sectors

India, the Philippines and Thailand hold similar scores India and the Philippines in particular have

generated strong revenues from business process outsourcing (BPO) Although the spending on theseservices largely takes place in other markets, the development of BPO sites requires spending on hardwareand software in the local market to support the development of these platforms India's IT market hasboomed, but largely as through selling services overseas

Thailand has benefited from investment in data centres by several international companies and local usershave turned to cloud computing quickly Although the segment remains comparatively small, it will drivemuch of the overall market growth, starting from a low base Thailand pulled ahead of its lower rankedpeers with a brightening economic outlook and greater political stability combining to improve the country's

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

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

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

In the centre of the table Malaysia is separated from Indonesia by more than four points, marking a

considerable difference in outlook Only China joins Malaysia in the top half of the table with China's sheerscale the key determining factor in its high position China shares the characteristics of its emerging marketpeers - low PC penetration, limited spending on IT services - but the large government sector and growinginterest in developing businesses in the country encourage greater spending By adding Japan to the

analysis, the regional averages have been raised and China only just attains the new industry average scorefor the region, of 57.3 points

The large 11.3-point gap between the top five markets and China, the highest ranked emerging market,reflects the maturity of IT development in Japan, Singapore, Hong Kong, South Korea and Australia Thesecountries have high PC penetration rates with growth over 2011-2014 focused on tablets sales as additionaldevices rather than alternatives to notebooks IT services and software comprise the bulk of enterprisespending, pushing the markets' growth rates Services such as enterprise resource planning and customerrelationship management are gaining ground as companies seek to automate processes and learn from datagenerated internally

The relative position of the markets is based principally on the size of the economies, and the ease ofreaching businesses City states Singapore and Hong Kong have a number of advantages in this, allowingthem to place highest in our Index Japan, too, is highly urbanised, yielding a very high Country Rewardsscore and it is on a par with South Korea in terms of Industry Risks as both countries host numeroustechnology-dependent multinational businesses and pro-technology governments

Japan's Country Risks score is lower than those for Singapore and Hong Kong, and this is linked to its lessattractive economic growth outlook Our Country Risk team has a bearish 2015 real GDP growth forecast of0.8% (compared with consensus expectations of 1.0%); Japan is facing upside risks as the economy appears

to be slowly emerging from recession The ongoing decline in oil and gas prices should provide significantsupport for Japan's manufacturing industries, while incipient reforms as part of Prime Minister Shinzo Abe's'Third Arrow' initiative are boosting corporate profitability These positive developments could help Japanstave off the worst-case scenario of a fiscal and financial crisis, allowing the economy to 'muddle through'over the coming years That said, woeful demographics, huge levels of fiscal debt, and excessively easymonetary policy will prevent any sustainable acceleration in real GDP

Table: Asia Pacific Consumer Electronics Risk/Reward Index - Q315

Rewards Risks Country Industry

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

Market Overview

Hardware

BMI has raised its growth outlook for the Indonesia IT market in Q315, but we continue to highlight the

squeeze on growth from rupiah depreciation against the US dollar, which will erode Indonesian purchasingpower in global markets We forecast local currency growth of 11.2% for the Indonesian hardware market

in 2015 to a total value of almost IDR100.5trn

We maintain our bullish view for medium-term growth potential of Indonesia's IT hardware in the Q3

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

rate (CAGR) of 9.5% to 2019 in local currency terms Even with this fast pace of growth, the share ofhardware in the overall IT market will decline by eight percentage points (pp) during our five-year forecastperiod to 49% in 2019 as services and software growth is expected to outperform as the market becomesmore developed

Market Trends

BMI expects strong medium-term income growth will enable vendors to tap potential demand from the low

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

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

outperforming growth both regionally and globally:

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

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

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

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

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

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

average 6.3% annually 2015-2019, during which time GDP per capita will increase from USD3,514 in

2014 to USD5,396 in 2019, 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

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

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

Local Manufacturers

Indonesia enjoys a strong base of local manufacturers and assemblers, with potential for acceleration ininvestment in 2015 as the Association of Southeast Asian Nations (ASEAN)'s Economic

Community (AEC) develops (see Industry Trends And Developments for more details) Apart from being

price leaders, these companies also cater to custom requirements These companies account for a sizeablefraction of overall PC sales

Hardware Market

(2012-2019)

Personal computer sales, IDRmn Servers sales, IDRmn

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

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

e/f = BMI estimate/forecast Source: BMI

Enterprise Demand

Small- and medium-sized enterprises (SMEs) form an important, yet comparatively unexplored, component

of the Indonesian hardware market The SMEs and co-operatives ministry asserted in 2011 that SMEsaccount for 99% of the registered firms in the country 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 a considerable extent

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

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

Government Push

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

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

■ National Broadband Plan 2015-2019: Aims to extend wireline broadband services to 30% of the urban

population and 6% of the rural population, while mobile broadband services are to be rolled out to 52%

of rural consumers

■ The Palapa Ring Program: Also known as the Nusantara Superhighway Project and driven by the

communication and information technology ministry, the programme will create a backbone of opticalfibre on a nationwide scale spanning more than 55,000km and including terrestrial and undersea cables

■ E-GP: The ongoing computerisation of government procurement had covered more than 25 enterprises 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

Household PC Penetration (%)

2010-2012

Source: National regulator, ITU

Notebooks

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

slowdown from growth in recent years as booming tablet demand cannibalised notebook sales However,

we expect stronger growth over the medium term as first-time buyer households are attracted to the greaterfunctionality offered by notebooks compared to tablets We forecast notebook volumes will grow at aCAGR of 12.1% 2015-2019, with total volumes expected to reach almost 6.50mn in 2019

Microsoft's decision in 2014 to cut operating system (OS) licensing costs on low-cost devices has enabled partner vendors to be far more cost-competitive against Android tablet vendors, which boosted BMI's

outlook for notebook sales growth over the medium term As such they can now offer a mix of mobility andfunctionality, which we have long argued to be an attractive mix of features for first-time buyer householdswhere an existing desktop/notebook cannot act as a hub for a tablet

The notebook market is driven by retail sales, with only around one-third of units in sold in the enterprise

business users is supported by statements from Chinese equipment vendor Lenovo Lenovo contends that

notebooks are the main draws for first-time PC users, including students Given the demographic profile ofIndonesia, it is obvious that the most promising customer segment is overwhelmingly in favour of mobilePCs Lenovo, in fact, pegs the proportional share of notebooks among the retail user's PC purchases at aformidable 85%

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

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

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

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

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

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

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

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

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

Netbooks

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

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

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

2,500 5,000 7,500

e/f = BMI estimate/forecast Source: BMI

Tablets

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

notebook volumes in 2013 We estimate shipments of 4.70mn in 2014, an increase of 36.8% from 2013, and

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

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

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

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

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

a market leader

Statcounter data show that Apple was surpassed as the leading tablet vendor by browsing traffic share inIndonesia in January 2015 Samsung took the lead with a share of 39.8% of tablet browsing traffic, ahead ofApple's share of 38.9%, with tablet traffic share a proxy for installed base of devices By April 2015, thegap had widened, with Samsung leading with a share of 41.3%, clear of Apple's share of 34.6% Despite its

declining share of the tablet market, BMI believes Apple has benefitted from increased focus on Indonesia,

which despite being a low income emerging mass market, is home to a significant pool of premium orientedconsumers as a result of the size of its population

The top two have a dominant position in the Indonesia tablet market, but as is the case in the majority ofemerging markets, price erosion in the Android ecosystem has seen Samsung fall back slightly, losing share

to rivals undercutting its Galaxy range to establish market share - for example, Acer, ASUS and Lenovo - as

well as a host of low-cost local/regional vendors Based on browsing traffic share (see chart below)

BMI believes both Apple and Samsung lost some market share to smaller rivals in 2014, but only ASUS is

presenting a significant challenge, and even then we do not consider it to be a viable candidate to take one

of the top two spots, at least in the short term

Taiwanese vendor ASUS stated that it expected tablets to contribute 50% towards its total Indonesia marketsales in 2013 ASUS introduced a broad portfolio of tablets models at various price points, with the newestFonepad tablet following on from Memopad, VIotab and Padfone The vendor hoped to capture 20% marketshare in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in an effort to target theemerging middle class Statcounter is supportive of ASUS making inroads from a low base, with a 5.3ppincrease in its share of tablet browsing traffic in Indonesia to 6.1% in April 2015

Meanwhile, IDC states that fellow Taiwanese notebook vendor Acer was not even among the top 10 tabletvendors in 2012, during which over 1.3mn tablets were shipped Acer's success in Indonesia will dependpartly on its ability to reach beyond the largest cities to establish a dealer network that will repair as well assell its devices As part of its drive to meet the target, from the last quarter of 2012, the company haslaunched an intensive marketing campaign for its tablets