Indonesia information technology report q4 2011

Growing investment in datacentres and other ICT infrastructure will support more demand for outsourcing and cloud computing, with sector players such as Telekom Indonesia launching new s

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REPORT Q4 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

Indonesia IT SWOT 8

Indonesia Telecoms SWOT 9

Indonesia Political SWOT 10

Indonesia Economic SWOT 11

Indonesia Business Environment SWOT 12

IT Business Environment Ratings 13

Regional It Business Environment Ratings 13

Asia Markets Overview 17

IT Penetration 17

IT Growth and Drivers 19

Sectors And Verticals 20

Indonesia Market Overview 24

Government Authority 24

Table: Key Ministers And Departments 24

Background 25

Hardware 26

Software 28

Services 29

Special Focus: Banks 30

Industry Developments 32

Industry Forecast 35

Table: Indonesian IT Industry, 2006-2015 (US$mn Unless Otherwise Stated) 37

Country Context 38

Table: Consumer Expenditure, 2000-2010 (US$) 38

Table: Rural & Urban Breakdown, 2005-2030 38

Industry Forecast Internet 39

Table: Telecoms Sector – Internet – Historical Data And Forecasts, 2008-2015 39

Macroeconomic Forecast 41

Indonesia – Economic Activity 43

Competitive Landscape 44

Hardware 44

Software 46

IT Services 48

Internet Competitive Landscape 49

Company Profiles 50

IBM Indonesia 50

Oracle 51

Sigma 52

HP 53

Country Snapshot: Indonesia Demographic Data 54

Table: Demographic Indicators, 2005-2030 54

Section 2: Education And Healthcare 55

Table: Education, 2000-2005 55

Table: Vital Statistics, 2005-2030 55

Section 3: Labour Market And Spending Power 56

Table: Employment Indicators, 2001-2006 56

Table: Average Annual Manufacturing Wages, 2000-2012 (IDR) 56

BMI Methodology 57

How We Generate Our Industry Forecasts 57

Transport Industry 57

Sources 58

Indonesia is forecast to be one of the best regional IT market growth prospects over BMI's five-year

forecast period IT spending is forecast to increase to US$5.3bn in 2011, up from US$4.7bn in 2010 Some fundamental drivers, including rising computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory Growing investment in datacentres and other ICT infrastructure will support more demand for outsourcing and cloud computing, with sector

players such as Telekom Indonesia launching new services in 2011

By 2015, IT spending is projected to reach a value of US$10.1bn With information and communication technology (ICT) penetration of around just 20% and development restricted to richer areas such as Java, the market has much growth potential However, the country's uneven development and digital divide are major barriers to faster growth in this potentially huge IT market

Industry Developments

In 2010, Indonesia's information society development received a boost when the government said that it would start to introduce e-passports Indonesia will thus follow in the footsteps of other South East Asian countries such as Singapore, Malaysia and Thailand The immigration department plans to distribute 10,000 e-passports in the first phase, with these being mainly available in immigration offices in Jakarta, Semarang and Surabaya

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

Indonesian schools system, this would require at least 2.5mn computers

Competitive Landscape

In August 2011, Chinese vendor Lenovo, the bestselling computer vendor in the Asian region, launched a

campaign targeting young Indonesian consumers Earlier in 2011, the vendor announced plans to achieve

a double-digit Indonesia PC market share in its current fiscal year According to company data, the company currently has a share of around 7.6% The consumer campaign builds on moves last year to create a stronger logistics and service infrastructure in Indonesia

Cloud computing will be a key focus for vendors in 2011 In 2011, Microsoft announced that it planned to invest around US$2.5bn in Indonesia to develop cloud-computing systems The company is partnering

with Telekom Indonesia, and a number of other partners and has reported interest in its cloud

services from several government agencies and large companies In 2010, Telkom partnered with

Microsoft to launch cloud computing services, including platform-as-a-service (PaaS), service (IaaS) and software-as-a-service (SaaS)

infrastructure-as-a-Hardware

BMI forecasts 2011 Indonesian computer hardware spending of US$3.8bn, up from US$3.2bn in 2010

The market is forecast to rise at a CAGR of 17% to a value of US$7.1bn by 2015 In 2010,

consumer demand was reinforced by a revival in business IT hardware spending, which could account for about two-thirds of sales opportunities during the forecast period, with sales value doubling by 2015

Hardware accounts for more than 70% of Indonesian IT spending The main drivers are growing

affordability and more credit availability in a country where only about 20% of the population have access to a PC, compared with more than 40% in some other South East Asian countries such as Malaysia

or Thailand

Software

Indonesia's software sales are forecast by BMI to reach US$589mn in 2011, up from an estimated

US$535mn in 2010 During BMI's five-year forecast period to 2015, the software sector CAGR is

forecast at 22% In 2011, migrations to Microsoft's new Windows 7 operating system should remain a driver, although much will depend on consumer and business confidence One market inhibitor is the continuing software piracy problem, which, according to the government's own figures, loses Indonesian software companies more than US$100mn per year

Over the forecast period, enterprise resource planning (ERP) software should continue to be of most interest to small- and medium-sized enterprises (SMEs) as only around 20% of Indonesian SMEs are estimated to make use of IT In addition to cost savings, businesses will look to boost efficiency

and increase the flexibility of responses to customer needs

IT Services

Indonesia's IT services market is forecast to be worth US$866mn in 2011, recording double-digit growth

from US$769mn in 2010, based on BMI estimates IT services account for 17% of Indonesia's

hardware-centric IT market sales Hardware deployment services remain the largest Indonesian IT services category with a 20% market share

Improvements in Indonesia's telecoms and ICT infrastructure are expected to drive long-term growth in the Indonesian IT services market Commercial datacentres are being built, linked to growing rollout by public sector and commercial organisations of e-government or e-commerce services However, most opportunities are in fundamental service areas such as system integration, support systems, training, professional services, outsourcing and internet services

E-Readiness

Low telephone line density, high charges and low PC penetration are all significant obstacles to higher internet penetration However, the situation is not all bad, with signs of faster growth in user numbers and recent surveys showing that, among a very small elite, there is fast adoption (by regional standards) of broadband and a willingness to pay for video conferencing, security and other additional features The government is encouraging fixed wireless deployments, including WiMAX, to bring the internet to more remote areas

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 a lack of public

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

SWOT Analysis

Indonesia IT SWOT

Strengths ƒ Large potential market

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

Weaknesses ƒ Computer penetration is among the lowest in South East Asia, estimated at only 1.5%

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

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

ƒ History of recent political instability

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

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

the government is showing signs of taking intellectual property more seriously

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

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

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

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

internet access, or drive ICT sector development

ƒ The global economic slowdown may hit key demand segments

Indonesia Telecoms SWOT

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

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

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

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

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

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

Opportunities ƒ The mobile market expected to surge over the coming years, reaching nearly 431mn

people over the forecast period

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

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

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

mobile users as non-registrants are deactivated

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

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

Indonesia Political SWOT

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

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

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

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

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

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

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

the 2009 parliamentary elections Coupled with a strong mandate following his 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

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

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

2002 and the Jakarta bombings of July 2009

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

Additionally, Indonesia's population is extremely young, with over 50% of Indonesians under the age of 30 Younger populations have historically been a predictor of political instability

Indonesia Economic SWOT

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

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

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

Weaknesses ƒ Indonesia's economy is not growing fast enough to reduce unemployment, the rate of

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

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

of the country makes it difficult to weave national infrastructure together Despite an ambitious infrastructure revitalisation plan, the country currently compares

unfavourably with its Association of South East Asian Nations (ASEAN) peers

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

environment, particularly through reform of its unreliable legal system

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

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

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

dependence on foreign oil

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

Indonesia Business Environment SWOT

Strengths ƒ Indonesia is South East Asia's largest economy with a nominal GDP of US$500bn and

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

ƒ Indonesia is also a founding member of ASEAN As a member of ASEAN's Free Trade Area, Indonesia is committed to lowering tariff and non-tariff barriers to trade

Weaknesses ƒ Corruption remains a major problem Indonesia ranked 110th out of 180 countries

surveyed in Transparency International's 2010 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption

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

Opportunities ƒ The Yudhoyono administration has gradually been reforming the business

environment, particularly by strengthening the legal system and fighting corruption If sustained, this would boost investor interest in Indonesia Although reform has been slow, the government has shown itself to be increasingly willing to address important issues

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

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

demonstrate that, even after investments 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, JI remains active There is also a low-level threat from separatist rebels or from inter-communal tensions

IT Business Environment Ratings

Regional It Business Environment Ratings

Limits Of Potential Returns

Risks To Realisation Of

Returns

IT Market

Country Structur

e Limits

Market Risks

Country

IT BE Rating

Regiona

l Ranking

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 Source: BMI

BMI's Asia IT Business Environment Ratings (BER) compare the potential of a selection of the region's

markets over our forecast period through to 2015 Our Q411 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

There are no changes in country rankings in our updated Asia Q411 BER ratings Australia therefore retains its top regional rating this quarter One area of opportunity in 2011 is growing demand for cloud computing services A wide range of leading Australian private and public sector organisations have

launched cloud initiatives, including many of the country's leading banks Meanwhile, the government has unveiled a six-year cloud computing strategy

IT verticals such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in future The government's commitment to continue to implement the National Broadband Network project will drive the development of Australia's digital economy and feed demand for PCs

The smaller, but mature IT markets of Singapore and Hong Kong take second and third positions

respectively in our ratings table, due primarily to their high Country Structure scores Hong Kong and Singapore are expected to emerge as cloud computing hubs due to growing interest in cloud computing across the region

We forecast solid IT market growth in these markets in 2011 However, this will depend on continued business and consumer confidence in the economic recovery, which could feel an impact if China

experiences a slowdown Key sectors of the Hong Kong economy such as financial services are investing

in modernisation as Hong Kong strives to maintain its regional hub status in the face of competition from rivals such as Shanghai Hong Kong also continues to offer IT investors opportunities associated with its growing links to the vast Chinese market

Meanwhile, Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor

investment in service capabilities Moreover, ambitious projects such as the national healthcare register and the schools standard operating environment will bolster the IT market Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan

Singaporean spending on IT services will be boosted by the continuing boom in IT-enabled services such

as call centres and back-office financial services Other promising sectors for IT services include

healthcare, as the government launches a series of initiatives to develop health technology

On the downside, the continued restructuring of both economies, towards a more service-oriented model, may limit long-term growth prospects However, this also brings opportunities in sectors such as financial services and banking Businesses will probably remain cautious and value focused over the short term

BMI forecasts that South Koreans will increasingly choose to spend money on IT products due to a

substantial increase in disposable incomes Consumers appear willing to upgrade their PCs, and there is also a trend for households to own more than one computer

Meanwhile, South Korea's government is encouraging the utilisation of cloud computing by small

businesses New cloud computing offerings and increased competition in this segment are expected to fuel growing demand to utilise this technology IT outsourcing is also expected to show a strong demand trajectory

Malaysia remains in fifth position in our Q411 regional ratings Demand is expected to stay resilient, even

as economic growth moderates Government spending may become more constrained, because of

commitments to tackle the budget deficit, but there will be growth areas IT spending growth will be driven by the government's drive for greater broadband penetration It has set an optimistic target of 75%

by 2015

The rollout of a Malaysian high-speed broadband network will boost IT spending outside the Klang Valley Other projected growth and PC market drivers include a rise in the PC penetration level from about 35%, tax exemptions for notebooks and growth in disposable incomes

There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Cloud computing will also

be a growth area and the government has named cloud computing as one of its top 10 strategic technology priorities

In China, despite an expected moderation in investment and retail spending over the next year, an

expansion in consumer credit will help drive IT market growth The rural electronics subsidy programme will continue to boost demand from the vast, underpenetrated rural areas The lower tier city and towns are expected to be the fastest growing segment of the PC market but pressure on hardware prices is also a risk in the current environment

Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among other expected drivers In the Chinese IT services segment, growing interest in cloud computing will be stimulated by the establishment of government pilot programmes in five cities However, there are still market risks associated with IP rights protection in China, as well as piracy and a lack of business transparency

Vietnamese IT demand, although with a rather smaller market than its leading neighbour to the north, is expected to have several long-term drivers Vietnam's improving ICT infrastructure will facilitate the development of the nation's IT market in a country with just 15% PC penetration PC subsidy

programmes will support the PC market this year as the government continues to roll out the One

Teacher-One Computer programme

Vietnamese government digital divide programmes to boost internet and digital utility in rural areas will help addressable market growth and open PC ownership to a growing number of rural inhabitants

Vietnam's gradual integration into global trade networks such as ASEAN and the WTO has helped reduce tariff barriers and prices, and has increased opportunities

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow The

Philippines has a lower PC penetration than many other Asian countries and the IT market offers

corresponding high growth potential over the forecast period

However, the Philippines faces challenges such as labour shortages and rising wages In the enterprise segment, surveys suggest that many businesses including small and medium-sized enterprises (SMEs) plan to increase IT spending again in 2011

India also recorded impressive double-digit year-on-year (y-o-y) computer sales growth in 2010 The potential is clear, with less than 2% of the population owning a computer, which is about 20% of the level

in China It was estimated that 5% of India's 7.5mn SMEs could implement a technology solution in

2010 Significant opportunities will be created by demand from Indian businesses and government agencies to help utilise cloud computing

In 2011, having postponed IT projects during the economic slowdown, many Indian private and public sector organisations are now investing again in upgrading their IT infrastructure Realisation of India's growth potential depends on fundamental drivers such as increasing India's low computer penetration, rising incomes, falling computer prices and the government's ambitions to connect the country's vast rural areas to the rest of the world

The last three markets in our regional ratings have low scores due primarily to business environment factors, despite considerable growth potential In Thailand, the fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period A number of factors should also support momentum, including the government's PC for Education programme and 3G

mobile and WiMAX broadband service rollouts BMI's view is that the fundamentals of growing

affordability and low PC penetration will keep the market on a positive growth trajectory

Similarly, with ICT penetration of only about 20% and development restricted to richer areas such as

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

of the fastest growing in the region over the five-year forecast period Spending in some key IT verticals, such as financial services and banking should continue to be significant in 2010 Government IT spending

is also expected to increase and could have accounted for as much as 25% of the IT market in 2010 The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Sri Lanka's IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Asia Markets Overview

IT Penetration

Across Asia, government ICT initiatives and

growing affordability will help to drive

increases in PC penetration during BMI's

five-year forecast period While some cities and

regions stand out, there is an unbalanced

pattern of regional development, with PC

penetration in countries such as Singapore

above 50%, while in other countries, such as

Indonesia, it is below 5%

The two Asian leaders, 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 25% in 2010 – although it was far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by 2015

In India, less than 5% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased PC ownership PC penetration in Vietnam

was estimated by BMI at around 15% in 2010 Notebooks are owned by an estimated 7% of the

Vietnamese population, which points to

significant growth potential for the local PC

market

Lower prices will help to drive higher PC

penetration in developing markets The average

price of a PC in the Indian market has nearly

halved over the past few years, and rising

incomes and greater credit availability will

continue to bring computers within the reach of

lower-income demographics Even in more

mature markets, there is room for development,

however, with official data suggesting that as

many as 25% of Hong Kong households do not

have a computer at home

Around the region, affordable computer programmes continue to find favour with governments In China,

a subsidised household electronics products initiative aimed at rural residents has helped to boost PC sales

in areas where penetration was low In Australia in 2010, national and state governments continued to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

In Indonesia, PC 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 Meanwhile, in 2010, the Vietnamese government launched a programme entitled One Teacher-One Computer, which offered discounts on PCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in Singapore, South Korea, Hong Kong and Australia, with estimated 2011

penetration rates of 78.5%, 76.4% and 75.5% and 67.4% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 160.2% in 2011 Meanwhile, the Philippines has the one of lowest levels of internet usage, with just 7.1% narrowband and 6.1% broadband penetration estimated in 2011

The fastest growth is expected in Indonesia, where internet penetration is projected to leap from 36% in

2011 to 67.4% by 2015 India is now at above 28% internet penetration despite a lack of fixed-line infrastructure and this should reach 36% by 2015 Steady growth is also projected for Sri Lanka, where penetration is projected to increase from 14.1% to 19.4% by 2015 Some 60.4% of Malaysians had internet access in 2010

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by growing numbers of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 33.1% by 2015 In India,

penetration should increase sixfold to reach 9.4% by 2015 from around 1.5% currently, although this remains below government targets Singapore will also see continued strong growth in broadband

penetration, which is projected to reach 186% by 2015

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

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

IT Growth and Drivers

Across the region in 2011, IT spending should

benefit from improved economic circumstances

and tenders, previously deferred as a result of

the economic situation, although much will

depend on business confidence Strong

fundamental demand drivers of IT spending

mean that there will be continued

opportunities Key factors common to most

markets include cheaper PCs and reform in

sectors such as telecommunications and

finance, as well as government initiatives

In some of the region's largest markets, such as

China, lower-tier cities and towns will be among the fastest growing segment of the IT market BMI

expects China's IT market growth to be driven by an expansion into western China and rural areas well as growing demand from small- and medium-sized enterprises (SMEs) The Chinese IT market will also receive a boost in 2011 from a 50% increase in import tariffs on some electronics products, such as laptops

In Thailand in 2011, demand will be bolstered

by market expansion in the relatively

underpenetrated rural areas SIS forecasts that

market growth in upcountry areas will be 30%

in 2011, double that forecast for the country as

a whole A similar situation pertains to India

where in 2011 there are expected to be strong

growth opportunities in smaller cities

The long-term potential of India's IT market is

plain: less than 3% of people in India own a

computer (about one-fifth of the level in

China), meaning particular potential in the

lower-end product range India's IT market appears to be positioned for strong growth thanks to an improving economy and consumer sentiment, and government support for modernisation in lagging sectors Meanwhile, India's business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

2011e IT Market Sizes

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, the basic demographics of rising

computer penetration and growing affordability

should drive growth SMEs represent a growth

opportunity, as currently only around 20% of

Indonesian SMEs are estimated to make use of IT Compliance with government and international

regulations will be a driver in financial, manufacturing and other sectors

In more developed markets, such as Hong Kong and Singapore, robust retail sales led the way in early

2010 as spending recorded positive growth following a contraction in 2009 In Hong Kong, consumer

spending is expected to remain strong in 2010, as evidenced by the positive early reception for Apple's

iPad IT market growth will be driven by government IT spending, as well as cross-border trade and cooperation

The largest IT market in the region is, unsurprisingly, China, estimated at US$105.4bn in 2011, trailed distantly by Australia (US$20.8bn), India (US$19.7bn) and South Korea (US$17.8bn.) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.2%), followed by Hong Kong (2.1%) Thailand's IT market was affected last year by a number of exogenous events

including floods in the north east of the country, and political unrest However, in 2011 the country looks

to be back on track

The fastest growing IT markets over the forecast period are projected to be India and Indonesia with 2011-2015 compound growth of 109% and 91% respectively, driven by increasing PC penetration Sri

Lanka is third with the IT market growing by an estimated 89% over BMI's five-year forecast period,

while China's total growth is estimated at a still healthy 70%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% of total spending in all markets in 2010 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

In mature markets such as Australia and Singapore, PC sales are dominated by replacement sales In Australia, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households More than 90% of Australian households now have a PC, but consumers have appeared willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

Tablet sales will lead to a new PC market growth area, with triple-digit growth projected in many

markets In China it is estimated that tablets could account for around 6-7% of computer sales in 2011 However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations In Australia, netbooks sales growth slowed from the first quarter of 2010, and this has continued into 2011

In less-developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth Another driver will be replacement of desktops with notebooks SMEs will be one

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

Falling prices is another major driver, placing pressure on margins As of the third quarter of 2010, the average price of a PC in China was estimated to have fallen to around US$600, considerably below the price level in developed markets In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach

of lower income demographics

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

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

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

At the end of 2010, Australian telecoms operators such as Telstra were competing to offer affordable

tablets bundled with data services

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 However, netbooks and notebooks face competition from other form factors such as

smartphones from Palm, RIM, Apple and other vendors, and tablet notebooks, spearheaded by Apple's

iPad,

Due in part to high levels of piracy, software's share of IT spending is relatively low, ranging from 9-25%

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

In 2011, sales of Microsoft's Windows 7 operating system and new Intel core technology retain the

potential to help trigger hardware upgrades, although much will depend on business confidence

Hundreds of large enterprises and thousands of small enterprises in China have already started migrating

to Windows 7, and this process is expected to continue in 2011

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install back-office systems to meet efficiency requirements

In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business intelligence, where faster growth is possible Although the market remains relatively small, more companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver

applications such as payroll, tax-return processing and recruitment

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

New platforms and services in the telecoms field is a driver for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile, expanding technology adoption in the logistics industry and public transport will be a source of IT

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

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

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2010,

a brightening business climate should mean more opportunities in key IT-spending verticals such as Financial Services, Telecoms, Government, Healthcare and Logistics

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

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

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

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

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

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

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

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Indonesia Market Overview

Government Authority

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

as from the government

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

Table: Key Ministers And Departments

Key Departments

Badan Koordinasi Penanaman Modal (BKPM) Ministry for Investment/Investment Coordinating BoardBadan Pengkajian dan Penerapan Tehnologi

(BPPT)

Ministry for Research and Technology/Agency for the

Assessment and Application of TechnologyDepartemen Perindustrian dan Perdagangan

Background

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

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

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

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

to several universities

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

However, despite inherent potential, the IT market's development is restrained by a number of factors, including poor telecommunications infrastructure, partly as a result of slow progress in deregulation and liberalisation Deregulation has been slow in other sectors of the economy as well, with the local business environment highly bureaucratic even by regional standards Another problem has been the lack of government support for the market and domestic sectors, as shown by the lack of a dedicated IT ministry Programmes to increase computer ownership and internet access have been modest in scale and lacking in effect compared with elsewhere in the region, and it remains to be seen whether this will change under the latest Yudhoyono administration Legal issues such as IP rights have also been barriers to foreign

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

Hardware

BMI forecasts 2011 Indonesian computer hardware spending of US$3.8bn, up from US$3.2bn in 2010

The market is forecast to rise at a CAGR of 17Q% to a value of US$7.1bn by 2015 PC shipments grew strongly in 2010 a deceleration in 2009 had been mitigated only by the popularity of low-cost netbooks

In 2011, Indonesia is again expected to be one of the fastest-growing regional PC markets, driven again

by notebooks Retailers hoped that promotions linked to the Independence Day holiday in August would

provide a boost to consumer sales over the summer shopping season Migrations to Microsoft's Windows

7 operating system retain the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence The Indonesian Computer Association Apkomindo has targeted 40% growth this year for its members, while BMI projects a revenues increase of 23%

Hardware accounts for more than 70% of Indonesian IT spending In 2010, the fastest growth segment was the consumer segment, which accounts for about 25% of computer demand The main drivers are growing affordability and more credit availability Computer penetration in Indonesia remains at around 20%, pointing to exceptional growth potential going forward Computer utilisation in education is also forecast to grow rapidly and provide a major segment of demand

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

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

country where only about 20% of the population have access to a PC, compared with above 40% in some other South East Asian countries such as Malaysia or Thailand

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

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

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

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

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

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

connectivity solutions and often include a Wi-Fi option Other vendors are expected to follow Apple in

releasing tablet devices that have a form factor between the size of a smartphone and a netbook Unlike in many other markets, where tablets were initially perceived primarily as a consumer device, in Indonesia early adopters were usually from the business segment However the popularity of the devices has spread rapidly to other market segments with retailers reporting explosive growth in tablet demand in Indonesian market in H111 This uptake is expected to lead to the decline of the netbook category and could also constrain growth for notebooks and desktops

In H111, telcom operator Telekom Indonesia reported rapid growth in demand for tablets Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media

or surfing the web, but for whom a netbook is still too big or heavy Tablets are expected to be

significantly more expensive than smartphones, but despite a previous mixed record with this form factor, are seen as a growth area in 2010-2011 Another area that vendors will watch is the e-reader market

In 2011, consumer spending is expected to be reinforced by a revival in business IT hardware spending that could get stronger as the years go on While the consumer market is growing, the business sector looks set to continue to account for around two-thirds of sales opportunities during the forecast period Sales to this segment are projected to double by 2015 Aside from PCs, the data storage system market is growing as more large public and private sector organisations invest in datacentres

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

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

Business spending on IT hardware was hit in 2009 as local firms cut budgets due to falling domestic and external demand Trading companies with exposure to export markets affected by the global economic slowdown deferred some hardware replacements in H109 However, the low levels of computer

penetration in manufacturing segments mean there are still plenty of opportunities for growth The biggest opportunity is from SMEs, which in 2009 were estimated to have accounted for nearly 80% of business

PC demand, with sales of more than 900,000 computers There will be increased demand, too, for storage products, as organisations in sectors such as government, financial services and banking, and

manufacturing explore potential efficiencies and cost-savings from virtualisation

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

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

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

components tariff to be abolished The low-end price tier will continue to dominate and will account for

Software

Indonesia's software sales are forecast by BMI to reach US$589mn in 2011, up from an estimated

US$535mn in 2010 During BMI's five-year forecast period to 2015, the software sector CAGR is

forecast at 22% In 2011, demand is expected to grow strongly in line with robust economic growth and a continual expansion of the installed computer base Migrations to the Windows 7 operating system, released in October 2009, retain the potential to make an impact

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

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

systems in H111 was Acuatico Air Indonesia which implemented a new Oracle solution for its water

distribution operations in Indonesia

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

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

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

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

stage

There should be a continued boost in 2011 from systems upgrades previously delayed as a result of the global economic crisis Compliance with government and international regulations is a long-term driver

in the financial sector, manufacturing and other sectors

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

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

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

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

its local revenues and it has been growing at about 50% per year

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

responses to customer needs Large businesses are most likely to put IT applications such as mail, phone systems and document management into a cloud Applications for tax and finance regulations are also

potential candidates for cloud computing For a small business, the cost of running inventory software for

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

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

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

of US$1.32bn last year, more than previously forecast

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

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

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

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

Services

Indonesia's IT services market is forecast to be worth US$866mn in 2011, recording double-digit growth

from US$769mn in 2010, based on BMI estimates IT services account for only 17% of Indonesia's

hardware-centric IT market sales The Indonesian IT services market is dominated by the financial services and banking sector, as well as telecoms Together, these two industry verticals account for around 50% of spending of IT services Banking is emerging as the most important vertical, responsible for roughly 30% of IT spending, followed by telecoms and government

Services sector CAGR over 2011-2015 is expected to be around 19% Improvements in Indonesia's telecoms and ICT infrastructure are expected to drive long-term growth in the Indonesian IT services

market In H111, Telekom Indonesia reported double-digit growth in its revenue category that includes

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

providers such as Telekom Indonesia and PT Indosat The development of these facilities is linked to