Indonesia information technology report q4 2013

BMI Industry ViewBMI View: The Indonesian IT market is forecast to be one of the outperforming markets globally in the medium term on the back of strong economic growth and an emerging m

Q4 2013 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q4 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

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BMI Industry View 7

SWOT 9

IT 9

Wireline 11

Industry Forecast 13

Table: Indonesia IT Industry - Historical Data And Forecasts (IDRmn) 13

Broadband 18

Table: Internet - Historical Data And Forecasts, 2010-2017 18

Macroeconomic Forecasts 20

Macroeconomic Forecast 20

Moderating Growth Not Yet A Concern, But Darker Clouds Loom 20

Industry Risk Reward Ratings 25

Industry Risk/Reward Ratings 25

Table: Asia Pacific IT Risk/Reward Ratings - Q4 2013 28

Market Overview 29

Hardware 29

Software 37

IT Services 41

Industry Trends And Developments 45

Regulatory Development 49

Table: Key Ministers And Departments 49

Company Profile 53

Sigma 53

Regional Overview 56

Demographic Forecast 61

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 62

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 63

Table: Indonesia's Key Population Ratios, 1990-2020 64

Table: Indonesia's Rural And Urban Population, 1990-2020 64

Methodology 65

Methodology 65

IT Industry Forecasts 65

IT Risk/Reward Ratings - Methodology 66

Table: IT Business Environment Indicators 67

Weighting 68

Table: Weighting Of Components 68

Sources 68

BMI Industry View

BMI View: The Indonesian IT market is forecast to be one of the outperforming markets globally in the

medium term on the back of strong economic growth and an emerging middle class However, BMI has downwardly revised its forecast in Q413 following a slowdown in PC sales in the first quarter of the year and uncertainties about Indonesia's economic outlook The cheaper rupiah - the currency was one of the weakest regional performers - has had a constraining effect on household spending In the immediate future, IT spending is forecast to increase to IDR63.0trn in 2013, up from IDR54.6bn in 2012 The retail market will be a major driver of growth, with PC penetration estimated at below 10% in 2012, meaning significant growth potential from first-time buyers and upgrades/personal devices Meanwhile an upturn in government spending provided a boost to IT spending in Q113.

Headline Expenditure Projections

Computer Hardware Sales: IDR44.7trn in 2013 to IDR63.7trn in 2017, at a CAGR of 10.2% in local

currency terms Sales were down in Q113 but rising incomes and the growing affordability of devices,combined with credit availability, will increase sales in the consumer segment

Software sales: IDR7.6trn in 2013 to IDR12.7trn in 2017, a CAGR of 14.9% in local currency terms.

Windows 8 sales will boost spending in 2013, as the government launches a new roadshow to bring downillegal software use

IT Services Sales: IDR10.7trn in 2013 to IDR16.7trn in 2017, with a CAGR of 12.9% in local currency

terms Our forecast has been downwardly revised but a key growth area is cloud services, which could beworth more than IDR11.8trn by 2017

Risk/Reward Ratings: Indonesia's score was 47.5 out of 100.0 Indonesia remained in ninth position in our

latest RRR table, below the Philippines but ahead of Thailand

Key Trends & Developments

The tablet market is expected to experience rapid growth in 2013 as a wide range of low-cost based tablets hit the market Consumers have shown a clear preference for mobile computing devices,including netbooks and notebooks, but tablet adoption failed to take off prior to 2012 due the high price ofdevices, putting them out of reach for the majority of consumers Higher specification devices are now

Android-becoming available at affordable prices, and, with PC penetration at under 10% in 2012, there is a largeopportunity for tablets to be adopted as a first device, with consumers skipping ownership of a desktop or

notebook BMI believes OEMs from China, as well as local brands such as S Nexian will be the main beneficiaries of demand for low-cost devices However, global vendors such as Acer have stated their

intentions to target mid- and low-specification devices at the market in order to achieve growth

Although the consumer story in Indonesia means the retail hardware market is set to remain the dominanttheme in the Indonesian IT market, the cheaper rupiah - the currency was one of the weakest regionalperformers - has had a constraining effect on household spending PC sales were down by a low single-digitfactor in Q113, compared with the same period of the previous year However, there are also opportunitiesfor vendors to generate sales to the public and enterprise sectors Telkom Indonesia reported 20% growth inits data and IT services revenues in Q113

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 Government ITspending was up in Q113, with a boost from projects previously delayed from Q412 Meanwhile, according

to government data, IT penetration in enterprises is low, particularly in the SME segment, representing ahuge potential market Modernisation is driving spending on applications such as CRM, ERP and financialmanagement in key sectors such as financial services, telecoms, utilities, government, retail and

manufacturing

IT

SWOT Analysis

Strengths ■ Large potential market

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

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

in 2012

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

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

■ History of recent political instability

■ High piracy rate continues to be a drag on the software market, with one of thehighest piracy rates in the region as of 2011

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

the government is showing signs of taking intellectual property more seriously

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

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

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

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

SWOT Analysis - Continued

■ IT services, with local telcos investing heavily in data centres and networks

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

internet access, or drive ICT sector development

■ The global economic slowdown may hit key demand segments

■ A weaker rupiah could have a dampening effect on household and businessspending

Wireline SWOT

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

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

in an otherwise slowing market

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

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

Wireline SWOT - Continued

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

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

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

■ Growing preference in the consumer segment for mobile broadband solutions

Industry Forecast

Table: Indonesia IT Industry - Historical Data And Forecasts (IDRmn)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

IT market value 40,532,778 46,570,952 54,646,356 62,958,06670,097,511 77,560,07386,303,788 93,087,266o/w Hardware 28,676,941 33,694,084 39,181,437 44,731,70649,348,648 54,098,15159,635,918 63,718,234

- PC 23,228,322 27,359,596 32,128,778 37,037,853 40,860,680 44,901,466 49,497,812 52,886,134

- Servers 2,580,925 3,032,468 3,526,329 4,025,854 4,441,378 4,868,834 5,367,233 5,734,641 o/w Software 4,863,933 5,215,947 6,338,977 7,554,968 8,692,091 9,927,689 11,392,100 12,659,868 o/w Services 6,991,904 7,660,922 9,125,941 10,671,392 12,056,772 13,534,233 15,275,771 16,709,164

IT market, % of GDP 0.63 0.63 0.66 0.68 0.68 0.68 0.67 0.65

e/f = BMI estimate/forecast Source: BMI

BMI forecasts the Indonesian IT market to be a regional and global outperformer over the duration of our

forecast period to 2017 We forecast a compound annual growth rate (CAGR) of 11.2% over 2013-2017,with Indonesia's IT market reaching a total value of IDR93.09trn by 2017

BMI has downwardly revised its forecast in Q413 following a slowdown in PC sales in the first quarter of

the year and a degradation of Indonesia's economic outlook Some fundamental drivers, including risingcomputer penetration and growing affordability, should ensure that the market remains firmly in positivegrowth territory

Market Trends

Our forecast for the Indonesian IT market has been

downgraded in Q413 in response to a negative

currency trends and a weaker global outlook

negatively impacting the Indonesian economy PC

sales were down around 2% in the first quarter of

2013, compared with the same period of the previous

year The cheaper rupiah - the currency was one of

the weakest regional performers - has had a

constraining effect on household spending Business

IT investment also fell short of vendor hopes as

Indonesian enterprises adopted a wait-and-see

approach to hardware and systems upgrades in the

face of concerns about Indonesia's exposure to

economic headwinds

Even after the downgrade, we are still forecasting

strong growth of 15.2% in 2013, albeit a slowdown

from 17.3% growth in local currency terms in 2012 Government IT spending took up much of the slackcaused by the dip in private IT investments in Q113, with a boost from public sector procurements delayedfrom Q412 Moreover, Indonesian businesses remain the most optimistic in Asia, and consumer confidence

is also high by regional standards Indonesia will still be one of the region's fastest-growing IT markets in

2013, consolidating a strong performance in most market segments during 2012

There are strong fundamentals in the Indonesian market Real GDP growth is forecast to reach 6.1% in

2013, with private final consumption expected to increase by 5.5% in real terms Meanwhile, PC

penetration is below 10%, giving this huge market unrivalled long-term growth potential as incomes rise tolevels where large parts of the emerging middle class can afford their first household computing device

Although PC penetration is relatively low across Indonesia, there are differences across the country ICTpenetration remains heavily concentrated in the capital Jakarta and its surrounding area Regions beyondJakarta offer greater first-time PC buying potential, but, with a strong middle class emerging around thecapital, there is a large mobile computing device opportunity In Q113, the fastest PC market growthoccurred in regions outside of Java and Bali, while some other regions reported negative growth

Industry Trends - IT Market

2010-2017

e/f = BMI estimate/forecast Source: BMI

The government's masterplan to lift Indonesia into the ranks of the world's top 10 economies by 2025,should fuel ICT investments Spending in some key IT verticals, such as financial services and banking, will

be central to growth in enterprise IT spending However, there is also great potential in currently

underpenetrated sectors such as manufacturing Business IT investment should remain buoyant in line withthe general economy Adoption of cloud computing services by enterprises will also increase, with the value

of the market potentially increasing to IDR10.1trn by the end of BMI's five-year forecast period 2013-2017.

Meanwhile, government infrastructure investments should also provide a boost to the business

sector Government IT spending is expected to increase, however, and continue to account for around 25%

of the IT market, while the government is also encouraging state companies to use more IT

The enterprise market will also boost spending on IT products and services Private enterprises, particularlySMEs, will provide a large part of PC sales, while ERP and other e-business applications are also findingincreasing popularity in the SME market The SME sector of 42.2mn companies will drive demand forbasic hardware and applications as enterprises look to enhance productivity through automating inventory,accounting and other functions Around 30-35mn Indonesian companies are estimated to lack any IT-basedsolutions IT services for this segment will be dominated by basic services such as system integration,support systems, training, professional services, outsourcing and internet services There is also an

opportunity for cloud computing vendors in the SME market, but this market will only open up as telecomsoperators invest in improving wireless and wireline broadband infrastructure

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

programmes are likely to be favoured as increasing internet penetration and computers in schools

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

Segments

Although the consumer segment is relatively small as a proportion of the total market, it is estimated thatretail accounts for 70% of the hardware market by units shipped However, demand for traditional

notebooks is being eroded by the popularity of new form factors, particularly tablets Taiwanese vendor

Asus has projected that tablets will account for 50% of its Indonesian PC sales in 2013.

In the medium term, demand growth will be fuelled by lower prices and new entertainment and wirelessconnectivity features Low-cost tablets running Android, particularly from OEMs in China, are expected toprove particularly popular with Indonesian consumers The government's plans to establish fixed wirelessnetworks in major cities and encourage WiMAX build-out in rural areas will also be drivers There are also

an increasing number of Wi-Fi 'hotspots' Telecoms operators are increasingly pushing tablets as devices tobundle with wireless data subscriptions as a means of winning market share and increasing network usage

While the emerging middle class in Indonesia is promoting consumption, a large portion of sales are reliant

on government initiatives to increase penetration It will remain dominated by the lower-price tiers, whichwill account for about 80% of sales The popularity of lower cost netbook computers, which flooded themarket a few years back, has helped to sustain volume sales, but demand for the devices has dropped offsharply - largely replaced by tablets, but also by low-cost and slimline notebooks Computer sales will alsoreceive a boost from programmes to increase computer penetration in education, as the government seeks tomeet its growth targets for this sector

Increased corporate demand for IT products and services will reflect a growing awareness of the value oftechnology in various sectors Despite cutbacks due to the financial crisis, the financial services segmentwill continue to be significant, with spending on regulatory compliance and security, for example, lesssusceptible to cutbacks The market also remains relatively under-penetrated, with IT implementationslargely limited to transactions support Islamic banking also presents strong growth opportunities for thenext few years

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

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

cloud services in Indonesia and demand should grow as more vendors enter the market

Table: Internet - Historical Data And Forecasts, 2010-2017

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 26,211 29,758 37,597 45,116 50,981 55,569 58,348 61,265

No of internet users/100 inhabitants 10.9 12.3 15.4 18.3 20.4 22.1 23.0 23.9

No of broadband internet subscribers ('000) 2,280 2,736 2,983 3,222 3,383 3,552 3,729 3,841

No of broadband internet subscribers/100

f = BMI forecast Source: BMI ITU, Kominfo, operators

New data from the ITU show that there were

approximately 37.6mn internet users in Indonesia at

the end of 2012, down from 29.8mn a year earlier

These figures are lower than those previously

reported, although it remains unclear why the data

have been revised downwards Kominfo, the agency

charged with publishing statistical analyses of the

postal and communications markets, has not

disclosed any useful information since 2010

Therefore, BMI is using the new ITU figures and

adjusting its five-year forecasts to account for the

newly revealed market growth dynamic

The ITU data also show that there were 2.983mn

fixed broadband subscribers in the country at the end

of 2012, up from 2.736mn a year earlier This is

broadly in line with our previous estimate for 2012,

so there is only a small change to our forecast for

fixed broadband adoption

We are yet to include mobile broadband connections in the forecast owing to a lack of clarity from

operators regarding the number of dedicated mobile broadband connections (ie, those that are primarily

Industry Trends - Broadband

Sector

2010-2017

f = BMI forecast Source: BMI, ITU, Kominfo, operators

voice in nature) However, the top three operators indicate that there is a high level of usage of voice services, although we note considerable quarterly variations in growth.

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

service adoption mainly in urban cities among businesses and more affluent consumers that require speed connectivity The masses' generally low purchasing power and lack of need for high-speed broadbandservices mean that 3G-based mobile broadband services will continue to struggle to achieve traction in themedium term We forecast 3.841mn fixed broadband subscribers by 2017, representing a penetration rate ofjust 1.5%, up from 1.2% in 2012

higher-Macroeconomic Forecasts

Macroeconomic Forecast

Moderating Growth Not Yet A Concern, But Darker Clouds Loom

BMI View: Despite a moderation in real GDP growth to 6.0% in Q113, the Indonesian economy continues

to expand at a healthy clip That being said, we believe that headwinds are growing, particularly in view of both tightening monetary policy conditions and the government's ongoing policy incongruencies As a result, we have lowered our headline 2013 and 2014 real GDP growth forecasts slightly to 5.9% and 6.0% from 6.1% and 6.5%, respectively, and note that investment activity in particular could be set to disappoint.

The Indonesian economy expanded by 6.0% in real terms in Q113, slightly underperforming expectationsfor a 6.1% expansion The quarter's growth also exhibited a moderation from Q412's 6.1% clip, and was theslowest quarterly growth figure since Q310 That being said, the economy continues to exhibit a notableresilience in the face of myriad headwinds, defying both a difficult external position as well as a spate ofdomestic policy quagmires

Investment Pillar On The Wane

Indonesia - Real GDP By Expenditure Category, % chg y-o-y

Source: BMI, BI

As we have written before, Indonesia experienced a rapid deterioration in its terms of trade beginning inearly 2012, as prices among the country's major commodity exports (including coal, natural gas, and palmoil) witnessed a significant decline, particularly in relation to crude oil, of which the country is a net

importer This rapid shift in prices was, along with a downturn in external demand, the major impetus forIndonesia's dour trade figures in 2012 (exports contracted by 6.5% in nominal terms for the year)

Meanwhile, strong domestic demand ensured continued growth in imports (expanding by 8.8% in nominalterms for the year), leading to Indonesia's first current account deficit since 1997 Although, as we hadexpected, price levels have stabilised somewhat throughout the first half of 2013, a recovery in the country'sterms of trade has yet to take effect

Indeed, it is difficult to envision a return to a current account surplus in the near future, particularly givenour expectations for China's economic slowdown to intensify over the second half of 2013 It is against thisbackdrop that we have begun to see signs of a deceleration in Indonesia's domestic economy, indicating thatthe country's external woes have begun to feed through Imports in Q113 declined by 0.4% y-o-y (in GDPaccounting terms), against an expansion of 7.6% in Q412 In particular, Indonesian has seen a considerable

retrenchment in capital goods imports, which often prove to be an accurate leading indicator of investmentactivity.

Imports Point To Softening Domestic Economy

Indonesia - Capital & Total Imports, % chg y-o-y

Source: BMI, Statistik Indonesia

Investment Sphere In The Crosshairs As BI Turns Hawkish

As we wrote in 2012 (see 'Domestic Economy Resilient, But 2013 Slowdown Looms,' September 2012),

Indonesia's investment boom is looking increasingly long in the tooth Despite the fact that Bank Indonesia(BI) has gone to lengths to maintain its record low benchmark interest rate of 5.75%, expectations of atightening in policy have been rising since H212 Recently, pressures on the central bank to tighten policyhave ramped up considerably, with headline inflation rising above BI's target range of 3.5%-5.5% in each ofthe past three months While BI has cited dovish core inflation of 4.0% in its decision to keep its policyrates on hold (even refraining from a hike to the FASBI deposit rate, which would help to manage liquidity

in the system without effecting a large rise in lending rates), we believe that it will no longer be able to holdits benchmark rate at 5.75% as the government looks to significantly raise the price of subsidised fuel

Coming Back Down To Earth

Indonesia - Real GDP & Gross Domestic Capital Formation, % chg y-o-y

Source: BMI, BI

As such, we now forecast that BI will hike its benchmark rate by at least 25 basis points (bps) by the end of

2013, with a move potentially arriving as soon as Q313 The interest rate hike will arrive at an awkwardtime for the economy, and we expect the investment sphere in particular to be hit as higher interest ratesraise borrowing costs Credit growth (22.2% in March) and fixed capital formation growth (5.9% in Q113,down from 7.3% in Q412) have already begun to moderate, further complicating BI's agenda

Additional Policy Concerns To Weigh On Growth

On top of rising borrowing costs, investment is also being hampered by uncertainty surrounding

government policy In BMI's view, the Yudhoyono administration's reform credibility has been underminedconsiderably over the past two years, beginning with the Democratic Party's failure to implement all-but-guaranteed fuel subsidy reductions in Q212 However, the administration's policy shortcomings did not endthere, as the government also attempted to implement a series of protectionist mining regulations The mostdeleterious of these policies was the attempted ban on the export of 65 unprocessed minerals, against whichthe government has already levied a 20% tax Notably, our mining team has long forecasted that the

complete ban (which would take place in 2014) would be an unachievable target, and the government hasalready begun to backtrack by retracting its ban on the export of unprocessed coal (coal, not coincidentally,accounts for approximately 85% of Indonesia's total mining revenue).

Although we expect the government to continue to roll-back the wider ban on unprocessed mineral exports,its willingness to introduce such aggressive policy measures without the proven ability to implement themhas undermined confidence in the mining sector as a whole As a result, mining related infrastructure such

as ports, railroads, and even roads could be hampered, particularly in regions that are heavily dependent onthe production of coal and other minerals This will begin to have knock-on effects on the broader

infrastructure space, and while our infrastructure team remains relatively sanguine on the space as a whole,

we note that risks are nevertheless building

Investment Woes Take Bite Out Of Headline GDP Forecast

In view of these headwinds, we have downgraded our 2013 real fixed capital formation growth forecast to7.2% from 8.8% previously, and caution that risks to this forecast are likely still to the downside We havealso made considerable revisions to our trade forecasts for 2013, with real export growth now expected at4.1% (against 6.1% previously) and import growth forecasted at 3.7% On the whole, this takes our 2013real GDP forecast slightly lower to 5.9% against 6.1% previously Additionally, given our expectations for afurther 50 bps of interest rate hikes occurring in H114, we have downgraded our full-year 2014 real fixedcapital growth forecast to 7.1% from 8.5% previously, which, in combination with a minor downgrade toour 2014 private consumption forecast, takes next year's headline GDP figure to 6.0% from 6.4%

previously With general and presidential elections scheduled for 2014, we continue to note that Indonesiafaces heightened political risk over the coming year, particularly with the growing possibility that a moreprotectionist, and potentially nationalist, candidate accedes to the office

Industry Risk Reward Ratings

Industry Risk/Reward Ratings

There are several positional changes in BMI's Asia Pacific IT Risk/Reward Ratings (RRR) in the Q4 2013

update, as well as minor adjustment to country scores Our ratings compare the potential of a selection ofthe region's markets over our forecast period through to 2017 Key factors affecting the IT market ratingsinclude our growth forecasts and political and economic risks, as well as the risks associated specificallywith IT intellectual property (IP) rights protection and the implementation of state spending projects

Singapore has leapfrogged South Korea to take top spot in the Q4 2013 ratings Its overall rating increased

by 0.8pps q-o-q to 72.1, driven higher by a 1.7pps improvement to its industry rewards score The industryrewards score continues to be limited by the relatively small size of the market compared to other APACmarkets - however, it improved this quarter due to strong retail sales and Singapore's emerging position as aregional datacentre and cloud services hub The improvement in the industry risks category adds to a strongprofile across the other three categories Singapore's country rewards score of 100 reflects the favourablelogistics of operating in the country, while the high industry risks score reflects the proactive nature of theICT regulator Besides rolling out 4G and fibre broadband networks, the country encourages developmentssuch as creating smart districts and exportable enterprise mobility solutions

South Korea has been demoted to second position in Q4 2013 as its overall score has declined by 1.2pps o-q to 71.0 The decline is a result of a weaker country rewards score; however, its position is maintained byits strong score in the industry rewards category South Korea's score benefits from the advanced

q-development of its LTE market, which is one of the most mature in the world, and the fact the country

houses the two largest consumer electronics firms - Samsung Electronics and LG Electronics These

features of the domestic market ensure that it is at the forefront of developments, for instance South Korea

is one of the first markets globally in which hybrids/convertibles appear to be gaining traction and cloudservice providers are also taking advantage of the advanced network infrastructure

Hong Kong has received an unchanged score this quarter, remaining in third position with an IT rating score

of 68.9 Hong Kong has a large financial sector, which results in large opportunities for software and ITservices firms Most recently this has been in the provision of cloud services, with the financial servicesindustry an early adopter of new services This, along with Hong Kong's proximity to mainland China, ishelping it to challenge Singapore as a regional datacentre and cloud services hub as vendors expand into theAsia Pacific market

Australia sits in fourth position in the Asia Pacific IT ratings with a score of 68.0 Australia has an

ambitious National Broadband Network plan, which will vastly improve broadband coverage and speedsthroughout the country, and thereby provide a boost to the IT sector, for instance cloud computing

However, the project is facing an uncertain future with the federal elections approaching in September 2013

as the opposition government has announced that it will rely on less of fibre and more on the existingcopper networks to save costs and time An additional factor holding back the market is the high price ofretail devices and software in Australia as vendors sought to aggressively maximise profitability, resulting

in pushback from the government

China has received a stronger IT rating in Q4 2013, up 1.3pps to 58.8 However, it remains in fifth position

as its strong industry rewards score, the highest in the region, is offset by weakness in its country rewardsand risks scores The sheer size of the Chinese market supports a high industry rewards score, even thoughthe growth trajectory of the economy is becoming more uncertain While our view for a bounce in theChinese economy has played out, should the new leadership reduce support for loss-making state-

dominated industries, this would mean a much weaker H213 and 2014 We hold to our long-term view thatChina will shift its economy towards consumption, which will provide a boost to an already buoyant ITsector The introduction of next generation broadband technologies will also provide the necessary growthfoundation, making way for new IT services and consumer electronics

Malaysia's IT rating has increased 0.8pps to 57.2 in Q4 2013, but it remains in sixth position just behindChina, while some distance ahead of India Malaysia's IT market has benefited from the government'sEconomic Transformation Programme, which has earmarked areas such as cloud computing as one of itstop 10 strategic technology priorities Meanwhile, the country has also identified business opportunities inareas such as fixed and mobile services as well as semiconductors and industrial electronics In the retailsegment, we expect rising incomes to support higher spending, particularly as a greater choice of lowerpriced devices hit the market, particularly tablets from OEMs in China

India's score has slipped 3pps q-o-q in Q113 to 48.6; however, it maintains seventh position in our Risk/Reward Ratings table A lower industry rewards score is behind the drop in IT market score as we

downgraded our forecast for medium-term growth Although initiatives such as the Akash tablet are

widening access to devices by making them more affordable, we caution that widespread poverty, weakeducation, poor infrastructure and corruption are all barriers to the development of the market Once theseissues are tackled, and some progress is being made for instance in telecoms infrastructure, India haspotential to move rapidly up the ratings tablet due to size of its population and the fact it is home to some of

the world's largest players in the IT services industry such as Wipro, Tata Consultancy and Infosys.

Indonesia jumped one position to eighth in Q4 despite a 1.2pps decline in its score to 46.3 Often theIndonesian market is highlighted for its size and underlying economic growth story, views we share;however, we also point to advanced technological developments such as progress made in machine-to-

machine communications In February 2013, telecoms operator XL Axiata partnered with Ericsson in an

M2M deal to use its Device Connection Platform, which will give the former the ability to develop M2Mproducts for enterprises on the latter's platform in the first such deal in South East Asia

Thailand also has moved up a position to ninth despite a decline in its IT market score to 46.2 The

government is taking policy measures to promote the IT market including the distribution of tablets toschoolchildren - a process that is well under way with almost 900,000 tablets distributed by January 2013.There have also been improvements in supporting infrastructure such as data networking including thelaunch of 3G services, which will satisfy pent-up demand from consumers and businesses These initiaitives

have in turn attracted investments into the country's IT sector In April 2013, NetApp announced that it is

tripling its investment in the country to capitalise on the rapidly growing datacentre market

The Philippines has dropped two positions this quarter due to a significant downgrade of its score to 45.1.Challenging geography and low incomes limit the IT market's potential, but there are many positive features

of the market It is a well-established player in the business process outsourcing (BPO) industry and thereare signs that the country is trying to move towards high-value services There have also been reports ofincreased interest from Japanese corporate customers that are looking to relocate outsourcing from Chinaand India

At the bottom of the table, Vietnam and Sri Lanka occupy 11th and 12th positions with unchanged scores inQ4 2013 Both countries have strong growth potential, but we favour Vietnam The government there haspledged to invest US$8.5bn in its ICT sector in the next 10 years and is also working to attract US$5bnworth of foreign investments in the IT sector by 2015 Meanwhile, Sri Lanka lags behind its peers, in partdue to the detrimental impact of the country's recent civil war Progress is being made though, with somegrowth momentum building as enterprises invest in ERP and adopt cloud services, while there is also anascent outsourcing industry

Table: Asia Pacific IT Risk/Reward Ratings - Q4 2013

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

Market Overview

Hardware

The hardware market in Indonesia is forecast to reach a value of IDR45trn in 2013, an increase of 14.2% from 2012 BMI has downwardly revised its 2013 forecast following a dip in sales in the first quarter

of the year However, BMI still forecasts that hardware spending will increase with a CAGR of 10.2%

from 2013 to 2017 in local currency terms Even with this fast pace of growth, the share of hardware in theoverall IT market will decline by 2pps during our forecast period

BMI maintains a positive growth outlook for the IT

hardware market in 2013, with wider economic

performance providing key impetus for growth

However, the effects of a depreciating currency and

a slowing economy appear to have had an impact on

PC sales in the last quarter of 2012 and first quarter

of 2013 Retailers reported that sales in the first three

months of 2013 were down on the same period of

the previous year, even though they were up on

Q412 Government spending remained robust but

amid continued economic uncertainty there were

indications that businesses were delaying upgrades

The forecast for 2013 comes on the back of a strong

2012 during which the market grew by an

impressive 17.3% The Indonesian economy seems

to be enjoying the fruits of political stability under a

government that is liberal, yet sensitive, to the demands of the market A weaker dollar translated intocheaper imports, boosting sales in the local currency, although the same effect will not be visible whenlooked at in terms of US dollar sales However, in 2013 the equation between the US dollar and the

Indonesian rupiah appears unlikely to make the same contribution to driving PC sales As of June 2013, therupiah was among the weakest performing regional currencies of the year, falling by around 0.6% Thisreduced purchasing power has affected household spending and counts among factors contributing to aweakening of demand for PCs

Hardware Market (IDRmn)

2010-2017

e/f = BMI estimate/forecast Source: BMI

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

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

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

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

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

estimates are slightly higher at around 9-10% for 2012 This is still considerably lower than regional

peers such as Malaysia and Thailand as well as even Philippines and Vietnam Given BMI's forecast for

real private final consumption growth to average 6.5% annually 2013-2017, during which time GDP percapita will increase from US$3,595 in 2012 to US$6,031 in 2017, the lack of PC penetration is acompelling business opportunity

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on metros such as Jakarta, according to estimates, providing a much clearer picture of themarket opportunity In Q113, regions outside Java and Bali were reported to show the fastest quarterlygrowth, while some other regions showed a decline

■ Indonesia presents an attractive demographic distribution with more than half the population under 30years of age, as of 2013 The distribution places the segment most receptive to IT in a clear majority,which bodes well for IT hardware vendors over the medium term

The notebook category has been an outperformer in the retail market, and is the largest market in South East

Asia BMI estimates that the combined shipment units for notebooks and tablets in Indonesia grew by an impressive 31% during 2012 to 4.2mn units According to BMI estimates, 3.3mn notebooks were shipped

during the whole of 2012, with sales of a further close to 1mn tablets These numbers are a resoundingendorsement of the health of the market

Notebooks have gained greatest traction in the retail market, where BMI estimates that account for upwards

of 80% of sales, compared to around one-third of units in the enterprise market However, in the retailsegment, the popularity of traditional notebooks is being undermined by enthusiasm for newer form factorslike tablets This difference between retail and corporate and business users is supported by statements from

Chinese equipment vendor Lenovo Lenovo also contends that notebooks are the main drawers for first time

PC users, including students Given the demographic profile of Indonesia, it is obvious that the mostpromising customer segment is overwhelmingly in favour of mobile PCs Lenovo, in fact, pegs the

proportional share of notebooks among the retail user's PC purchases at a formidable 85% Recognising theappeal of notebooks in the largely aspirational segment comprising of the youth, Lenovo offered its IdeaPadproducts at a very competitive price of US$250 in January 2013

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

the country in 2012 were occupied by Acer and Asus respectively, according to IDC.

Tablets

Tablets have experienced a sharp uptick in sales in 2012, and are set to grow rapidly in 2013 IDC

estimates a 42% increase in the number of tablet shipments in the country in the year 2012 In that sense,tablets in Indonesia are following in the footsteps of their success globally Tablet uptake in Indonesia was

initially slow, with an Apple-centric market meaning the devices were out of reach for the majority of

consumers However, more affordable devices have seen volumes increase markedly

Statcounter data show that iOS (the operating system on Apple's iPad) and Android respectively accountedfor 2.1% and 3% of PC browsing traffic in March 2013 This is a small share of overall traffic, as would beexpected, but, with Android's share up by 2.4pps and iOS up 1.2pps, they are rising rapidly It is notablethat Android is ahead of iOS, a feature not seen in the vast majority of markets, even with low incomes

Samsung claims to have achieved 50% tablet market share in 2012 through its Galaxy Tab products (as

well as an 80% share of Android smartphones), moving it ahead of Apple

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has saidthat it expects tablets to contribute 50% towards its total Indonesia market sales in 2013 The vendor hopes

to capture 20% market share in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in aneffort to target the emerging middle class IDC states that Acer was not even among the top 10 tabletvendors in 2012, during which over 1.3mn tablets were shipped Acer's success in Indonesia will dependpartly on its ability to reach beyond the largest cities to establish a dealer network that will repair as well assell its devices As part of its drive to meet the target, from the last quarter of 2012 the company has

launched an intensive marketing campaign for its tablets Asus has introduced a broad portfolio of tabletsmodels at various price points, with the newest Fonepad tablet following on from Memopad, VIotab andPadfone

Samsung is also well positioned to sell large numbers of tablets, with tablets expected to eventually surpassnotebook volumes However, we believe that low-priced alternatives from Chinese OEMs and local

manufacturers will be the ones to take the tablet truly mass market Key local vendors in the market include

Advan, MITO and Smartfen among others Meanwhile, Indonesia manufacturer S Nexian launched six

new devices in March 2013, including an 8-inch Android tablet The S Nexian device will come with 8GB

to 32GB of storage with a 1,024x768 resolution The device is available for IDR1.5mn (US$155),

approximately 50% of the cost of the Asus Google Nexus 7 and is available subsidised through a

partnership with telecoms operator Indosat, giving the user access to the operators 5,000 Wi-Fi locations

across the country S Nexian is targeting the sale of 250,000 tablets over the course of 2012

The decline in the average price of a tablet sold in Indonesia reflects the focus on the low end of the market.The average price was US$485 in 2012, which was a considerable drop from US$651, as recorded in 2011,according to Gfk Indonesia

Ultrabooks

Despite little traction being gained in 2012, Intel, the key driver behind the ultrabook concept, remains

bullish about it in Indonesia It plans to stick to its guns by employing the more advanced, and thus moreexpensive, Ivy Bridge processor There were suggestions from certain vendors about reverting to the costeffective, but feature limited Sandy Bridge processors; but Intel plans to stick to Ivy Bridge, for its betterendurance Some of the ultrabook models available in Indonesia as of Q412 include Acer Aspire S3, Asus

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

While premium pricing of ultrabooks can be a showstopper in a price sensitive market at Indonesia, Intel isconfident economies of scale will make the price more palatable The release of Windows 8 in October

2012 could also provide a boost to adoption of ultrabooks as consumers and businesses upgrade to the new

operating system BMI expects lower cost ultrabooks to become widely available in H213 and 2014 as

vendors risk losing out on volumes to tablet manufacturers Lower cost slimline Ultrabooks (or near

equivilents) have already been seen in Vietnam

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

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

notebooks have become more affordable to local consumers, and competition has intensified from low-costtablets

The advent of Windows 8 could be the final blow for the netbook market in the country, but even then weexpect there to be demand for the devices through 2013 and 2014 Globally, netbooks are now increasinglyseen as low performing and bulky devices However, Indonesian customers have appreciated its price-performance ratio in a kinder light than other markets The appeal of netbooks is evident from the fact thatAcer launched its TravelMate B113 netbook in the Indonesian market as late as February 2013, whereasglobally the company is in the process of withdrawing from this product altogether Over the medium term,

we expect netbooks to essentially become an obsolete device category in the face of competition fromultrabooks and tablets

Windows 8

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

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

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

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

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

-competition in the market - putting further pressure on prices

However, the more significant development is the medium-term impact on innovation and form factors.Windows has a traditional strength in productivity use cases and software, with the OS being central to theenterprise market and Microsoft's Office Suite ubiquitous There is therefore an opportunity for vendors toleverage this strength over rival iOS and Android devices by designing tablets with strong productivityfunctionality alongside the passive media consumption features Early examples have been hybrid devicessuch as Microsoft's own Surface (RT & Pro), HP's Envy and Lenovo's Yoga and Helix Although design