Indonesia information technology report q4 2009

Executive Summary The Indonesian IT market should grow at a compound annual growth rate CAGR of around 13% over 2009-2013 despite a deceleration in 2009, with demand in key segments affe

Including 5-year industry forecasts

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Indonesia Information Technology

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© 2009 Business Monitor International

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Technology Report Q4 2009

Including 5-year industry forecasts by BMI

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: October 2009

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT Sector SWOT 8

Indonesia Telecoms Industry SWOT 9

Indonesia Political SWOT 10

Indonesia Economic SWOT 11

Indonesia Business Environment SWOT 12

Industry Business Environment Overview 13

Regional It Business Environment Ratings 15

Asia Regional IT Markets Overview 16

IT Penetration 16

Market Growth And Drivers 18

Sectors And Verticals 20

Market Overview 22

Government Authority 22

Key Ministers 22

Background 22

Bandung High-Tech Valley SWOT 23

Hardware 24

Computer Spending By Sector, 2007e 25

Software 25

Services 26

Special Focus – Banks 27

SMEs 28

Industry Developments 28

Open Source Software 28

Industry Forecast 31

Indonesian IT Industry - Historical Data & Forecasts (US$mn unless otherwise stated) 33

Country Context 33

Consumer Expenditure, 2000-2012 (US$) 33

Rural & Urban Breakdown, 2005-2030 34

Internet 35

Internet 35

Table: Telecoms Sector – Internet – Historical Data & Forecasts 35

Competitive Landscape 37

Hardware 37

Software 39

IT Services 39

Internet Competitive Landscape 40

Company Profiles 41

Oracle 42

Sigma Cipta Caraka (SCC) 43

HP 45

Country Snapshot: Indonesia Demographic Data 46

Section 1: Population 46

Table: Demographic Indicators, 2005-2030 46

Table: Rural/Urban Breakdown, 2005-2030 47

Section 2: Education And Healthcare 47

Table: Education, 2000-2005 47

Table: Vital Statistics, 2005-2030 47

Section 3: Labour Market And Spending Power 48

Table: Employment Indicators, 2001-2006 48

Table: Consumer Expenditure, 2000-2010 (US$) 48

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 49

BMI Methodology 50

How We Generate Our Industry Forecasts 50

IT Industry 50

IT Ratings – Methodology 51

Table: IT Business Environment Indicators 52

Weighting 53

Table: Weighting Of Components 53

Sources 53

Executive Summary

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of around 13% over 2009-2013 despite a deceleration in 2009, with demand in key segments affected by the global economic crisis In H109, some manufacturing organisations deferred IT procurements, but there was continued spending in the financial sector, which had previously accounted for as much as 30% of total spending Demand is expected to pick up in 2010, and return to double-digit territory by 2011

Government spending is expected to increase this year, and some fundamental drivers, including low computer penetration and growing affordability, should ensure that the market remains in positive growth territory Indeed, Indonesia is projected to be one of the best regional IT market growth prospects over

BMI's five-year forecast period 2009 has undoubtedly brought more caution, however, with pressure for

cutbacks as companies focus more on the bottom line and immediate needs

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

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

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

Industry Developments

In H109 a ministerial decree directed that local government offices across Indonesia must adopt open source software (OSS) by 2011 The mayor of Surabaya revealed in July 2009 that his city had launched a pilot project for OSS applications According to the mayor, all Surabaya municipal offices were now using the software, and civil servants had been given relevant training The local government hoped that the municipality could save between 20% and 25% of its budget

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

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

The government is also rolling out new e-learning initiatives, which could see education's share of the local IT spending rise from its estimated level of around 4% The current ratio of PCs to students in public schools is around 1:3,200, and the government wants to increase this to 1:20 As there are 53mn

Competitive Landscape

Multinational vendors dominate the Indonesian brand PC market leaders, with Acer currently boasting the edge in both notebook and desktop segments In addition to HP and Acer, the rest of the top five comprises of Dell, Lenovo and Zyrex While locally assembled 'white boxes' still claim up to 60% of the

local PC market, a number of local PC and notebooks brands also enjoy increasing success, including

Zyrex and Ion

Acer is thought to have a market share of more than 40% for notebooks In 2009 the Taiwanese vendor continued to expand its presence across both notebook and desktop segments with more product releases Meanwhile, HP has pledged to reclaim top spot in the Indonesian market from Acer at some point in H110 and has been aggressive in launching new notebook and netbook series

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

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

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

growth area Tata Consultancy Services (TCS) said that it had targeted the government as a future

growth driver in the Indonesian market Currently, TCS's 15 local clients are principally from sectors such as banking and financial services, telecoms and media

Hardware

BMI forecasts 2009 Indonesia computer hardware spending of around US$2.5bn, up from US$2.4bn last

year Growth decelerated in 2009 and is forecast to be in low single digits this year before ticking up again in 2010 Double-digit growth is expected to resume in 2011, with the market rising to a value of nearly US$4.0bn by 2013

Early results for 2009 were encouraging, due largely to notebook sales, which surged thanks to the popularity of netbooks; notebook sales grew faster than desktops in H109 In the current environment, the most promising growth driver is perhaps the consumer segment, which accounts for around 25% of computer demand The main drivers are growing affordability and more credit availability

Software

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

despite the current economic slowdown There were signs in H109 that many firms planned to increase software spending One market inhibitor is the continuing software piracy problem, which, by the local government's own figures, loses Indonesian software companies alone more than US$100mn a year

Over the forecast period, enterprise resource planning (ERP) software continues to be of most interest to the small and medium-sized enterprises (SMEs) market as currently only around 20% of Indonesian SMEs are estimated to make use of IT

IT Services

Indonesia's IT services market is projected to be worth US$589mn in 2009, recording year-on-year y) growth of 4% from US$564mn in 2008 Currently, IT services account for only 17% of the country's hardware-centric IT market sales Hardware deployment services remain the largest Indonesian IT

(y-o-services category, with approximately a 20% share

In 2009, the banking sector continued to provide opportunities for IT vendors, despite the fallout from the global financial crisis Banks continued with transformation strategies driven by factors such as new technologies & services and regulatory compliance However, most opportunities are currently

in fundamental service areas such as system integration, support systems, training, professional services, outsourcing and internet services

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

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

SWOT Analysis

Indonesia IT Sector SWOT

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

1.5%

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

ƒ Lack of government support Still no unified ICT ministry

ƒ History of political instability of late

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

the government is showing signs of taking intellectual property more seriously

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

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

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

internet access, and drive ICT sector development

ƒ Global economic slowdown may hit key demand segments

Indonesia Telecoms Industry SWOT

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

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

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

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

mobile users as non-registrants are deactivated

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

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

Indonesia Political SWOT

2009 parliamentary and presidential elections passed by peacefully, signalling the consolidation of the democratic process

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

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

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

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

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

Indonesia JI is blamed for a series of attacks, including the Bali bombings of October

2002 and other such incidents, including the Jakarta bombings of July 2009

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

Indonesia Economic SWOT

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

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

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

ƒ Indonesia's physical infrastructure is considered substandard The archipelagic nature

of the country makes it difficult to weave national infrastructure together

environment, particularly through reform of its unreliable legal system

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

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

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

Indonesia Business Environment SWOT

and is the world's fourth-most populous country with almost 240mn people It thus offers investors a vast home market in which to do business

ƒ Indonesia is also a founding member of the Association of South East Asian Nations (ASEAN) As a member of ASEAN's Free Trade Area (AFTA), Indonesia is committed

to lowering tariff and non-tariff barriers to trade

surveyed in Transparency International's 2008 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption

ƒ Indonesia's excessive bureaucracy makes it a difficult place to do business Among Asian economies, Indonesia has the longest period to start a business Labour laws are also considered excessive

environment, particularly by strengthening the legal system and fighting corruption If sustained, this would boost investor interest in Indonesia

ƒ Indonesia has been amending its debt and banking regulations in 2008, with the aim

of attracting Islamic financial activities

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

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

Industry Business Environment Overview

BMI's Asia IT Business Environment Ratings compare the potential of a selection of the region's markets

over our forecast period, through to 2013 The ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government spending projects

In H109, some important new markets are included in our Asia ratings: Australia, South Korea, Sri Lanka and Thailand In what is a diverse region, the addition of these four markets reinforces a correlation between GDP per capita and business environment ranking The established markets of Australia and South Korea take two of the top four positions in our table, while Thailand and Sri Lanka join their South East Asian peer Indonesia in the lower section of the table

In H109, the global economic slowdown had a marked impact across Asian IT markets, with spending growth declining sharply in some states like Malaysia, but holding up relatively well in others like

Australia Australia's top ranking is in part due to ambitious government information and communication technology (ICT) programmes, such as the government National Broadband Network project, which is expected to stimulate IT spending across all sectors of the economy Government tenders will also drive considerable spending in years to come in areas such as education, e-government, transport and

government's ambitious 'Intelligent Nation 2015' plan and the standard operating environment

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

headwinds as export demand weakens and rising unemployment and low asset prices dampen consumer

confidence The turmoil in financial markets may affect the important banking vertical in both markets, with heavy job cuts announced

In China, factors such as China's vast potential rural market, government spending and demand from key verticals such as telecoms should help to prevent stagnation Sectors driving double-digit IT spending growth currently include telecoms, government, energy, social security, education and transport

However, there are still risks associated with IP rights protection and piracy and a lack of business

environment transparency Pressure on hardware prices is also a risk in the current environment

Malaysian IT spending is expected to dip into negative territory despite government measures such as a stimulus package and a small and medium-sized enterprise (SME) modernisation fund In the medium term, growth will be driven by low PC penetration, rising incomes and a high-tech-focused national development plan The subsidised roll-out of a high-speed broadband network will address a relative lack

of ICT infrastructure outside the Klang Valley

In the Philippines, the economic uncertainty and fall in remittances present a threat to enterprise and consumer IT spending, but the IT market will be driven by further growth in IT and business process outsourcing The market has a lower PC penetration than many other Asian countries and offers

correspondingly high growth potential over the forecast period However, there are challenges such as labour shortages and rising wages

India IT PC market growth slowed significantly in H109, but a recovery is expected to begin in the second half of the year The potential of the market is plain, with less than 2% of the population owning a computer, about one-fifth the level in China Realisation of this long-term growth potential depends on fundamental drivers such as raising India's low computer penetration, rising incomes, falling computer prices and the government's ambitions to connect the vast rural areas to the outside world

Three South East Asian markets occupy the final three positions in our table, with low rankings due primarily to business environment factors, despite considerable growth potential In Thailand, tighter credit conditions will lead to deferred IT spending in the short term by consumers and businesses, but the fundamentals of growing affordability and low PC penetration, supported by government ICT initiatives, will keep the market in positive territory during the forecast period

Similarly, with ICT penetration of only around 20% and development restricted to richer areas such as Java, the Indonesian IT market has much latent growth potential Relatively low levels of government IT spending compared with many other states may mean that the Indonesian IT market lacks a stabiliser, although public sector IT spending is expected to increase this year

Sri Lanka's IT market has felt the effects over the years of the country's and political economic instability, from disruption of distribution channels and a flourishing grey market to under-development of the country's telecoms infrastructure However, with the prospect, in mid-2009, of an end to Sri Lanka's long-running civil war, the market will feature on IT vendors' radar as among the best potential growth

prospects in South Asia

Regional It Business Environment Ratings

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

Country Risk which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings The ratings structure is aligned across the 14 Industries for which BMI

provides Business Environment Ratings methodology and is designed to enable clients to consider each rating

individually or as a composite, which the choice depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report

Asia Regional IT Markets Overview

IT Penetration

Internet Penetration Broadband Internet Penetration

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

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

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

pattern of regional development, with PC penetration in countries like Singapore being above 50%, while

in other countries, such as Indonesia, it is less than 2%

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

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

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

by 2013 In India, less than 2% of people own a computer However, some 45% of the population is under

25, which provides a promising demographic context for increased PC ownership The government's

ultimate target of 1bn internet-connected computers in India is equivalent to the total estimated number of PCs in the world today

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

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

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

A similarly broad range is found with respect to internet penetration India and Indonesia are now above 17% penetration, despite a lack of fixed-line infrastructure in those countries Both have deployed fixed

wireless technologies as one alternative solution and overall penetration should pass 30% in both by

2012 The fastest growth is projected for India, in which penetration is projected to increase from 17.7%

to 44% by 2013, while Indonesia suffers from high tariffs

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

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

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

number of broadband subscribers continues to gain ground steadily In China, broadband penetration is on course to reach 20% by 2013 In India, where the government designated 2007 as 'the Year of

Broadband', penetration should increase tenfold to reach 5.4% by 2013 from around 0.5% currently This

is far below government targets, however Malaysia and Singapore will also see strong growth in the number of broadband subscribers

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

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

covering more than 200 public venues

Market Growth And Drivers

IT Market Sizes (US$mn) IT Market Sizes As % Of National GDP

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

business and consumer segments weakened in H208, after robust sales in the first half of the year The difficult economic headwinds will persist in 2009, but strong fundamental demand drivers meant that there will be continued opportunities Key factors include cheaper PCs and reform in sectors such as

telecommunications and finance, as well as government initiatives

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

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

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

demand from SMEs IT spending will also receive a boost from government spending and IT projects associated with the Shanghai World Expo in 2010

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

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

As mentioned above, the Philippines is one of

the countries currently benefiting from

low-priced PC programmes (PC4ALL), which

provide opportunities for vendors to penetrate

the low-income segments Other regional

computer sale drivers over the forecast period

include education, lower prices, IP telephony,

cheaper processors as well as notebook

entertainment and wireless networking features

Meanwhile, in Indonesia, relatively low levels

of government IT spending may mean that the

IT market lacks a stabiliser that could help

immunise it from the slowdown Once again,

however, the basic demographics of low

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

In more developed markets, such as Hong Kong and Singapore, there were indications of declining consumer and business sentiment in H208, but IT spending remained in positive territory for the year as a whole The Singaporean government continued to be a major factor in 2008, with the US$1.3bn Standard Operating Environment tender award In Hong Kong, rising unemployment and exposure to the financial crisis will contribute to slower growth in 2009, but this will be partly counteracted by higher government

IT spending as well as cross-border trade and co-operation

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

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

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

IT Markets Compound Growth

(2008e-2013f, %)

e/f = estimate/forecast Source: BMI

Sectors And Verticals

Regional IT markets will remain hardware-centric, with hardware accounting for 45-68% of total

spending in all markets However, spending on software and services will grow faster Notebook sales are

growing much faster than the PC market as a whole with growth driven by falling prices and more

features

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

robust in H108 and exceeded forecasts, but there were signs of a slowdown towards the end of the year

Demand from under-penetrated rural areas, affordable computer programmes and growing broadband

penetration should generally prevent stagnation

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

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

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

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

3G/HSPA USB modems bundled with their 3G services

In much of emerging Asia, demand from smaller towns and rural areas will provide the main source of

growth, along with replacement of desktops with notebooks SMEs will be one of the strong growth

segments over the forecast period, with SME demand for servers and networking equipment a significant

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

11-25% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but despite

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

Despite the economic downturn, there are still expected to be opportunities for software vendors in most markets The economic situation is likely to lead to further consideration of open source solutions in some sectors and to encourage vendors to promote software-on-demand solutions There is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs

(including labour costs) In general, ERP and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationshiop management (CRM) and business intelligence, where faster growth is possible

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

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

generate a number of projects

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

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

as well as governments Even in emerging markets like India, IT vendors are having to pay more attention

to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

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

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

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

Market Overview

Government Authority

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

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

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

cross-Other relevant government bodies and ministers include:

Key Ministers

Information and Communication Sofyan A Djalil

Key Departments

Badan Koordinasi Penanaman Modal

Badan Pengkajian dan Penerapan

Tehnologi (BPPT)

State Ministry for Research and Technology/Agency for the Assessment and Application of Technology

Departemen Perindustrian dan

Background

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

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

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

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

Bandung High-Tech Valley SWOT

ƒ More than 500,000 high-tech workers

ƒ Some tax incentives

ƒ Weak telecommunications infrastructure

ƒ No international airport

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

from within Indonesia, e.g Bali Camp

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

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

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

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

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

be seen whether this may change with the new government Legal issues such as intellectual property rights have also been a barrier to foreign investment Furthermore, the software piracy rate remains among the highest in the world

Hardware

BMI forecasts 2009 Indonesia computer hardware spending of around US$2.5bn, up from US$2.4bn last

year Growth decelerated in 2009 and is forecast to be in low single digits this year before ticking up again in 2010 Double-digit growth is expected to resume in 2011, with the market rising to a value of nearly US$4.0bn by 2013 Early results for 2009 were encouraging, due largely to notebook sales, which surged due largely to the popularity of netbooks; notebook sales grew faster than desktops in H109

Spending on IT hardware is likely to remain cautious, as local firms cut budgets due to falling domestic and external demand The global financial crisis has hit spending by the financial services

vertical Meanwhile, trading companies with exposure to export markets affected by the global economic slowdown deferred some hardware replacements in H109 However, the low levels of computer

penetration in manufacturing segments mean that there is still plenty of momentum for growth The Indonesia Computer Business Association (Apkomindo) forecast volume sales of around 2.2mn units in

2009 having downwardly revised its earlier projections

Hardware accounts for more than 70% of Indonesian IT spending In the current environment, the most promising growth driver is perhaps the consumer segment, which accounts for around 25% of computer demand In H109 consumer demand was resilient, growing 5.5% in Q109 The main drivers are growing affordability and more credit availability Prices of both notebooks and desktops are falling with desktop prices now as low as US$400, while notebook prices start from around US$700

Notebooks are now growing faster than the PC market as a whole with around 1mn unit sales projected this year Demand for these is being driven by lower prices, small unit size, lightweight functionality and entertainment and wireless networking features Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in data centres

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

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

Computer Spending By Sector, 2007e

US$mn

e = estimate Source: BMI

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

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

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

Software

Indonesia's software sales are projected by BMI at US$402mn in 2009, up from an estimated US$377mn

in 2008 despite the current economic slowdown There were signs in H109 that many firms planned to increase software spending despite the slowdown Current economic uncertainties may lead some

organisations to look to defer systems updates, but others will see IT as a strategic tool for increasing

competitiveness in difficult times During BMI's five-year forecast period, the software sector CAGR is

forecast at 17%

Application software accounts for more than 40% of the total software market and is the largest portion, followed by systems infrastructure Within the applications segment, the single largest segment is back-office applications, accounting for around two-thirds of sales The next few years should witness shift away from packaged proprietary software towards other models, such as SaaS (software as a service) and open source Improved broadband infrastructure will assist the popularisation of the rented software

Over the forecast period, ERP software continues to be of most interest to the SME market as enterprises look to enhance productivity through the automation of essential functions Currently only around 20% of Indonesian SMEs are estimated to make use of IT Inventory is an application entry-point application for many businesses, but among existing users the market is evolving from an emphasis on basic ERP

applications focused on operational efficiency, to more strategic modules such as CRM, business

analytics and risk compliance

One market inhibitor is Indonesia's continuing software piracy problem, which, by the local government's own figures, loses Indonesian software companies alone more than US$100mn a year In 2008, the rate rose again by 1% to 85%, according to the Business Software Association Indonesia was ranked as the country with the 12th-highest level of software piracy in the world last year

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

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

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

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

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

Services

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

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

Indonesia's hardware-centric IT market sales

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

is expected to be around 15% The economic situation, and credit tightening, is likely to have an effect on demand in some key IT spending verticals