Indonesia information technology report q4 2012

In 2012, buoyant private consumption should support demand for IT products and services and PC penetration remains at around 6%, giving this huge market unrivalled long-term growth poten

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TECHNOLOGY REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Indonesia IT Sector SWOT 7

Indonesia Telecoms Industry SWOT 8

Indonesia Political SWOT 9

Indonesia Economic SWOT 10

Indonesia Business Environment SWOT 11

Asia Pacific IT Risk/Reward Ratings 12

Table: Asia Risk/Reward Ratings, Q412 15

IT Markets Overview 16

IT Penetration 16

IT Growth and Drivers 18

Market Overview 24

Table: Key Ministers And Departments 24

Table: Bandung High-Tech Valley SWOT 25

Hardware 25

Software 28

Services 29

Special Focus: Banks 31

Industry Developments 32

Industry Forecast 35

Table: Indonesia IT Sector - Historical Data & Forecasts , 2009-2016 37

Industry Forecast Internet 38

Table: Telecoms Sector – Internet – Historical Data And Forecasts 38

Competitive Landscape 40

Hardware 40

Software 42

IT Services 43

Internet Competitive Landscape 45

Macroeconomic Forecast 46

Table: Indonesia - Economic Activity, 2011-2016 48

Company Profiles 49

IBM 49

Hewlett-Packard 54

Oracle Corp 60

Sigma (telkomsigma) 64

Indonesia Demographic Outlook 66

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 67

Table: Indonesia's Key Population Ratios, 1990-2020 69

Table: Indonesia's Rural And Urban Population, 1990-2020 69

BMI Methodology 70

How We Generate Our Industry Forecasts 70

Transport Industry 70

Sources 71

Executive Summary

BMI View: Indonesian IT spending is expected to reach US$5.9bn in 2012, up 11%, slightly lower than previously forecast, due to our expectation of a deteriorating investment climate BMI still expects the

Indonesian market to be one of the region's fastest-growing IT markets over our five-year forecast period

In 2012, buoyant private consumption should support demand for IT products and services and PC penetration remains at around 6%, giving this huge market unrivalled long-term growth potential Rising computer penetration and growing affordability should ensure that the market remains firmly in positive growth territory

Headline Expenditure Projections

Computer hardware sales: US$3.8bn in 2011 to US$4.2bn in 2012, +10.0% in US dollar terms

Forecast in US dollar terms unchanged, with growing affordability and credit availability driving sales in

the consumer segment, and a trend towards slimline, lightweight notebooks

Software sales: US$594mn in 2011 to US$681mn in 2012, +15% in US dollar terms Forecast in US dollar terms unchanged and progress will depend on the success in bringing down illegal software use

IT services sales: US$873mn in 2011 to US$1.0bn in 2012, +12.0% in US dollar terms Forecast in US dollar terms unchanged, with a key growth area being cloud services, which could be worth around

US$100mn by 2016

Risk/Reward Ratings: Indonesia's score was 42.7 out of 100.0 Indonesia remained fifth from bottom of

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

Key Trends & Developments

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

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

Spending in some key IT verticals, such as financial services and banking, should continue to be

significant in 2012 as Bank Indonesia turns dovish Banking IT spending is expected to grow by a digit factor in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market in 2011, with reports that the government was encouraging state

double-companies to use more IT services

SWOT Analysis

Indonesia IT Sector SWOT

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

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

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

internet access, or drive ICT sector development

Indonesia Telecoms Industry SWOT

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

ƒ

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

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

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

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

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

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

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

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

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

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

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

Indonesia Economic SWOT

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

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

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

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

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

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

Indonesia Business Environment SWOT

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

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

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

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

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

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%

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

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

Asia Pacific IT Risk/Reward Ratings

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

markets over our forecast period through to 2016 Our Q412 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

While there were slight changes to the countries' individual scores, their respective rankings were

unaffected Singapore remained the most attractive investment destination on a risk-reward basis among the 12 countries that were assessed with an IT Rating score of 74.1 Developed countries Australia, Hong Kong and South Korea occupied the second, third and fourth position respectively, which is mainly due to their more stable macroeconomic environment as well as factors such as the governments' receptiveness

to innovations and greater protection of IP On the opposite end of the spectrum are emerging markets such as Vietnam and Sri Lanka Besides weak Country Structure and Country Risk scores, their IT markets are still in the infancy stage, with significant barriers holding back growth in the near term

Although Singapore's IT market is significantly smaller than many of its regional peers, the country has other redeeming factors Besides a pool of skilled labour in a highly urbanised environment, the country

is strategically located in the heart of South East Asia amid emerging markets such as Indonesia and Thailand, which allows Singapore to form the hub for companies' regional expansion plans Its strong infrastructure, which includes access to major submarine cable networks and high-speed broadband connectivity, political stability and pro-business environment attract foreign investors and spur

Hong Kong's position as one of Asia's most important financial hubs presents significant IT services growth opportunities We expect enterprises to increasingly turn to IT solutions to reduce operating costs and facilitate cross-border transactions, in addition to affordable high-speed broadband connectivity - the territory has some of the world's lowest fibre broadband tariff rates Further, Hong Kong's geographical proximity and relationship with China makes it a good investment location for IT companies interested in tapping into the Chinese market

New offerings such as cloud computing, machine-to-machine (M2M) and telecare are some areas that are driving demand for IT solutions in South Korea Besides government-led initiatives, telecoms operators are playing their part by deploying the latest technologies to ensure networks are able to cope with

bandwidth-intensive services At present, South Korea has the most number of LTE subscribers in Asia Pacific, largely due to the fact that all three mobile operators have launched commercial services The market also has a growing pool of M2M subscribers, which grew by 9.6% from 1.429mn in November

2011 to 1.566mn in May 2012

Malaysia remained in fifth position in our Q412 regional ratings with an IT Rating score of 51.8 There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme (ETP), which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities The roll-out of the High Speed Broadband network will also boost IT spending outside the Klang Valley and help the country achieve a household broadband penetration rate of 75% by 2015

China's HSBC manufacturing purchasing managers' index posted its eighth consecutive sub-50 print (at

48.2) in June 2012, meaning that the country's structural slowdown is becoming increasingly difficult to ignore The country's manufacturing sector, which accounts for roughly 40% of the economy, is clearly in

a prolonged contractionary phase, and we do not envisage a turnaround anytime soon Not only is the headline index on the decline, but new export orders also came in at their weakest level in seven months, and the employment reading contracted for a fourth month running A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to

modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers However, market risks such as poor IP rights protection and a lack of business transparency remain threats to IT development

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

The number of internet users in Indonesia is projected to increase from the estimated 84.755mn in 2011 to 171.183mn in 2016, representing 68.9% penetration rate While the country's low personal computer ownership and fixed broadband penetration imply significant room for growth, we believe that

development is largely limited to richer areas such as Java We expect government-led initiatives to help narrow the digital divide and encourage small and medium enterprises to adopt IT solutions to lower cost

Like China, India's IT Market score was bolstered by the county's population size, which in turn attract

businesses According to Dimension Data, which partnered with Bharat Sanchar Nigam Limited in

April 2012 to provide data centre services such as video-as-a-service and infrastructure-on-demand, India's IT market is worth INR24bn Dimension Data expects the sector to grow a compound annual growth rate of 22% to INR65bn in 2016.However, India faces a host of challenges if it wishes to fulfil its potential For example, at present, India's business environment is clouded with regulatory uncertainties, which have caused ICT investments to grind to a halt

Thailand's IT sector is gradually recovering from the floods, partially due to the government's Smart Thailand project, which was unveiled in September 2011 Like Malaysia's ETP, the Smart Thailand project aims to boost the country's competitiveness through greater ICT development by integrating ICT

in the government sector At a cost of THB80bn, Thailand aims to increase broadband coverage to 95% of the population by 2020, up from 80% in 2015 and the current 33% At the same time, all 800 government services across the education, health, government service and agriculture sectors are to be migrated to an electronic platform, which should improve service quality and the communication between agencies

Vietnam is trying to catch up with regional peers, with the government pledging to invest US$8.5bn in the ICT sector in the next 10 years The government is also looking to attract US$5bn worth of foreign

investments in the IT sector by 2015, according to Avaya Consequently, business communications

solutions provider Avaya opened a representative office in Ho Chi Minh in end-June with an eye on the country's enterprise telephony, internet protocol and contact centres sectors

There was a slight deterioration in Sri Lanka's IT Rating score of 28.3, which fell from 28.3 the previous quarter to 27.7 However, we maintain our view that the country holds long-term potential in light of the restoration of peace and improvements in the security situation, which will help to release pent-up

demand for IT solutions Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Asia Risk/Reward Ratings, Q412

Risks To Realisation Of Potential Returns

Country

IT Market

Country

Market Risks

Country

IT Rating

Region

al Rank

Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1 Australia 60.0 95.0 72.3 80.0 72.9 75.7 73.3 2 Hong Kong 53.3 100.0 69.7 70.0 85.7 79.4 72.6 3 South Korea 53.3 70.0 59.2 75.0 75.4 75.2 64.0 4 Malaysia 44.0 55.0 47.9 35.0 78.3 61.0 51.8 5

Scores out of 100, with 100 highest The IT Risk/Reward Rating is the principal rating It comprises two sub-ratings, 'Limits Of Potential Returns' and 'Risks To Realisation Of Returns', which have a 70% and 30% weighting

respectively In turn, the 'Limits' rating comprises Market and Country Structure, which have a 70% and 30% weighting respectively and are based upon growth/size/maturity/govt policy of IT industry (Market) and the broader

economic/socio-demographic environment (Country) The 'Risks' rating comprises Market Risks and 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

Risk/Reward methodology and is designed to enable clients to consider each rating individually or as a composite, depending on their exposure to the industry in each particular state For a list of the data/indicators used, please

consult the appendix at the back of the report Source: BMI

IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will help to

drive increases in PC penetration during

BMI's five-year forecast period While

some cities and regions stand out, there is

an unbalanced pattern of regional

development, with PC penetration in

countries such as Singapore above 50%,

while in other countries, such as

Indonesia, it is below 5%

The two Asian giants, China and India,

embody the region's growth potential, as

in both countries computer ownership

remains the preserve of a minority In China, PC penetration is only around 30% in 2012 - although it is far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by

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

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

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

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

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

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

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

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

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

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

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

Narrowband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

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

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

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

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

in 2012

The fastest growth is expected in

Indonesia, where internet penetration is

projected to leap from 45.4% in 2012 to

68.9% in 2016, and the Philippines,

where penetration is forecast to reach

12.6% by 2016 India is still at only

11.8% internet penetration despite an

improvement in fixed-line infrastructure,

and penetration is forecast to reach only

16.2% by 2016 Steady growth is also

projected for Sri Lanka, where

penetration is projected to increase from

18.8% to 25.4% by 2016 Some 56.4% of

Malaysians have internet access in 2012

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

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

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

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

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

Broadband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

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

IT Growth and Drivers

Across Asia in 2012, IT spending should

benefit from improved economic

circumstances and tenders previously

deferred as a result of the economic

situation, although a forecast slowdown

in China could act as a drag on some

markets Strong fundamental demand

drivers of IT spending meant that there

will be continued opportunities Key

factors common to most markets include

cheaper PCs and reform in sectors such

as telecommunications and finance, as

well as government initiatives

In some of the region's largest markets

largest markets, such as China, lower-tier cities and towns will be among the fastest growing segment of

the IT market BMI expects China's IT market growth to be driven by an expansion into western China

and rural areas as well as growing demand from small and medium-sized enterprises (SMEs)

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

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

education, healthcare and manufacturing will sustain market growth

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

India's IT market appears to be positioned for strong growth thanks to an improving economy and

consumer sentiment as well as government support for modernisation in lagging sectors Meanwhile, India's business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

2012 IT Market Sizes

US$mn, forecast

f = BMI forecast Source: BMI

In Thailand, demand will be bolstered by

market expansion in the relatively

underpenetrated rural areas SIS

estimates that market growth in

upcountry areas should be 30% in 2011,

double that it has forecast for the country

as a whole A similar situation pertains in

India where in 2012 there are expected to

be strong growth opportunities in smaller

cities

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional computer sale drivers over the forecast period include education, lower prices, IP telephony and cheaper processors as well as notebook entertainment and wireless

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

In more developed markets, such as

Hong Kong and Singapore, robust retail

sales the led way in 2011, as evidenced

by the strong advance sales of Apple's

iPad2 In 2012 vendors hope that the iPad

3 and ultrabooks will provide new growth

areas Economic expansion and

improving business conditions are

underpinning stronger business sector

demand while a strong property market

and lower unemployment have boosted

confidence among consumers However,

a potential cooling of the Chinese

economy as a result of monetary

tightening would quickly spread to both markets

IT Market Sizes

As % Of National GDP

f = BMI forecast Source: BMI

IT Markets Compound Growth

2012f-2016f (%)

f = BMI forecast Source: BMI

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

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

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

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

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

Sectors And Verticals

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

features

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

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

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

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

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the

main source of growth In India, 2011 saw a wave of computer procurements by local governments Another driver in emerging Asian markets will be replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

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

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

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

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

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

services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market Structure (% of IT Market)

2012f (LHS) & 2016f (RHS)

f = BMI forecast Source: BMI

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

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

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

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

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

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

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

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

Market Overview

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

as from the government

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

Table: Key Ministers And Departments

Key Departments

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

Badan Pengkajian dan Penerapan Tehnologi (BPPT)

Ministry for Research and Technology/Agency for the

Assessment and Application of TechnologyDepartemen Perindustrian dan Perdagangan

Source: BMI

Background

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

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

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

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

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

Table: Bandung High-Tech Valley SWOT

corporations

ƒ More than 500,000 hi-tech workers

ƒ Some tax incentives

ƒ Weak telecommunications infrastructure

ƒ No international airport

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

even elsewhere in Indonesia, eg, Bali Camp

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

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

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

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

Hardware

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

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

considerable market potential.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Software

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

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

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

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

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

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

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

water distribution operations in Indonesia

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

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

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

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

stage

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

in the financial sector, manufacturing and other sectors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Services

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

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

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

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

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

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

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

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

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

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

or at least under planning

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

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

forecast period

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

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

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

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

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

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

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

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

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

increase further (see below)

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

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

Special Focus: Banks

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

Indonesian IT spending by some estimates The Indonesian Software Association has

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

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

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

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

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

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

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

principles of Islamic banking

SMEs

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

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

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

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

Industry Developments

Launch of Bandung Digital Valley

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

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

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

E-Government

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

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

electricity company Perusahaan Listrik Negara

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

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

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

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

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

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

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

applications and key public infrastructure

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

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

Local Government

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

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

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

IT In Education

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

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

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

own fixed-line telephones

E-Passports

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

PC Component Duties

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

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

Open-Source Software

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

IT Sector Development

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

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

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

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

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

IT sector

Industry Forecast

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of 11% over

2012-2016, with Indonesia 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$5.9bn in 2012, up from US$5.3bn in 2011 Some fundamental drivers, including rising computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory

Market Trends

BMI has downgraded its Indonesian growth forecasts against a weakening economic backdrop However,

we still expect Indonesia to be one of the region's fastest-growing IT markets in 2012, consolidating a strong performance in most market segments during 2010 and 2011 PC penetration remains at around 6%, giving this huge market unrivalled long-term growth potential Consumer demand will remain the main driver, with PC imports' value expected to rise by around 30% in 2011, after growth of around 40% was reported in 2010

Indonesia's IT market has reported rapid growth for several years However, ICT penetration remains heavily concentrated in the capital Jakarta and its surrounding area, which offers a significant opportunity

in other areas of the country PC sales are forecast to achieve double-digit growth in 2012, driven mainly

by portable computers Vendor focus will shift to thinner and lighter laptops with more features and longer battery life, and to other form factors such as tablets Strong wage growth looks set to continue in

2012 and will also boost consumer purchasing power

The government's masterplan to lift Indonesia into the ranks of the world's top 10 economies by 2025, should fuel ICT investments Resident capital investment should enable the market to outperform the region Spending in some key IT verticals, such as financial services and banking, should continue to be significant in 2012 However, there is potential in currently underpenetrated sectors such as

manufacturing Business IT investment should also remain buoyant in line with the general economy as inflation moderates and Bank Indonesia turns dovish Government infrastructure investments should also provide a boost to the business sector

Government IT spending is expected to increase and could have accounted for as much as 25% of the IT market in 2011, with reports that the government was encouraging state companies to use more IT Meanwhile, vendors will be attracted by the growing cloud services opportunity, which could be worth

around US$100mn by the end of BMI's five-year forecast period

Market Drivers