Indonesia information technology report q4 2014

This supports our forecast for the Indonesian IT market to be a regional outperformer over the medium term - with IT market growth expected to benefit from strong economic growth, a low

Q4 2014 www.businessmonitor.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q4 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2014

Business Monitor International

© 2014 Business Monitor International

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT 9

Wireline SWOT 11

Political 13

Economic 15

Business Environment 17

Industry Forecast 18

Table: IT Industry - Historical Data And Forecasts (Indonesia 2011-2018) 18

Macroeconomic Forecasts 25

Economic Analysis 25

Table: Indonesia - Economic Activity 28

Industry Risk Reward Ratings 29

Table: APAC IT Risk/Reward Ratings - Q4 2014 32

Market Overview 33

Hardware 33

Software 43

IT Services 49

Industry Trends And Developments 52

Regulatory Development 56

Table: Key Ministers And Departments 56

Competitive Landscape 59

International Companies 59

Table: Lenovo Indonesia 59

Table: Intel Indonesia Corporation 60

Table: Microsoft Indonesia PT 61

Table: IBM Indonesia 62

Table: Foxconn Technology 63

Local Companies 64

Table: Performance PT Multipolar Technology Tbk (MLPT) 64

Table: Walden Global Services (WGS) 65

Table: Aprisma Indonesia 65

Table: ALTiUS ERP 66

Company Profile 67

Sigma 67

Regional Overview 70

Demographic Forecast 74

Table: Indonesia's Population By Age Group, 1990-2020 ('000) 75

Table: Indonesia's Population By Age Group, 1990-2020 (% of total) 76

Table: Indonesia's Key Population Ratios, 1990-2020 77

Table: Indonesia's Rural And Urban Population, 1990-2020 77

Methodology 78

Industry Forecast Methodology 78

Sources 79

Risk/Reward Ratings Methodology 80

Table: It Risk/Reward Ratings Indicators 81

Table: Weighting Of Components 82

BMI Industry View

BMI View: our bullish outlook for the Indonesian IT market is reflected in the latest consumer confidence

survey released by Nielsen in July 2014, which found Indonesians to be the second most optimistic from a cross-section of 60 markets This supports our forecast for the Indonesian IT market to be a regional outperformer over the medium term - with IT market growth expected to benefit from strong economic growth, a low PC penetration rate, enterprise and public service modernisation and an emerging middle class Retail hardware, enterprise software and cloud computing are expected to be key drivers of medium- term growth However, there is short-to-medium term downside in Indonesia as vendors face depreciation

of the rupiah, which has raised the cost of dollar denominated hardware and software imports, or required vendors to absorb the costs In the immediate future, IT spending is forecast to increase to IDR142.5trn in

2014, up 17.3% from 2013, with the IT market accounting for 1.4% of GDP.

Headline Expenditure Projections

Computer Hardware Sales: IDR85.5trn in 2014 to IDR131.7trn in 2018, at a compound annual growth

rate (CAGR) of 12.2% in local currency terms Growth boosted by deepening of the market as Androidtablet vendors and Microsoft notebook vendors compete aggressively on price

Software sales: IDR23.9trn in 2014 to IDR43.7trn in 2018, at a CAGR of 17.5% in local currency terms.

Piracy is a major drag on software market growth, but despite this demand growth in 2014 will be strong asenterprise software deployments drive spending, with modernisation in the manufacturing, mining andtourism verticals offering the greatest opportunities to vendors

IT Services Sales: IDR33.1trn in 2014 to IDR56.0trn in 2018, at a CAGR of 15.0% in local currency terms.

Cloud service adoption remains low in 2014, but as telecoms infrastructure improves and end-user

education levels increase cloud services are expected to gain traction

Key Trends & Developments

Indonesia's hardware market has in recent years been dominated by trends affecting markets across theregion, including the rapid growth of tablet volumes due to the wide array of low-cost Android devicesavailable since mid-2012 However, there is set to be a shift starting in 2014 as notebook volumes begin to

recover, and BMI forecasts solid medium term growth - particularly in emerging markets such as Indonesia.

The decision by Microsoft to slash OS licensing costs on low-cost devices will enable partner vendors to

compete more aggressively on price with Android tablet vendors, while integrating many of the mobilityadvantages of tablets into hybrid notebook designs We expect hybrid devices will prove popular withemerging market first-time buyer households, where functionality and productivity remain importantconsiderations for consumers.

Meanwhile in the enterprise market the development of the cloud computing market is the leading trend.Cloud computing adoption remains low in Indonesia in 2014, with Fujitsu Indonesia Country Head ofInfrastructure Services and Solution (ISS) Dewi Mulia Karnadi, citing network infrastructure quality andcyber security as bottlenecks to wider deployment In 2013 it was reported that Indonesia was responsiblefor 38% of the world's malicious internet traffic, surpassing China as the leading root of online attacks This

has grown from only 0.7% of recorded attacks 12 months previously, according to the US-based Akamai Technologies The reasons behind the growth are under debate, but the implications of a dramatic increase

in online attacks have worried officials Cyber security is notoriously weak in Indonesia with heavy industries, such as oil and gas, most susceptible to data phishing attempts There is however scope forrapid growth in cloud deployments as the network quality and cyber security climate strengthens over themedium term to 2018

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

Weaknesses ■ Underdeveloped telecommunications infrastructure, due to years of government

control and slow progress in deregulation

■ History of recent political instability

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

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

Opportunities ■ Computer ownership is low, but rising incomes and wider internet access will enable

period of rapid 'catch-up growth'

■ 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

SWOT Analysis - Continued

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

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

internet access, or drive ICT sector development

■ The global economic slowdown may hit key demand segments

■ Rupiah weakness could have a dampening effect on household and businessspending

Wireline SWOT

SWOT

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

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

in an otherwise slowing market

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

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

80%-plus market share

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

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

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

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

awarding contracts to the likes of Nokia Siemens Networks and Ericsson

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

as Hong Kong and then onwards to Singapore and Vietnam

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

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

SWOT Analysis

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

2009 parliamentary and presidential elections passed peacefully, signalling theconsolidation of the democratic process Following 2009, the government showedfurther signs of improvement in both efficacy and engagement, but progress hasstagnated since 2012

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

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

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

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

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

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

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

SWOT Analysis - Continued

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

Indonesia Jemaah Islamiah is blamed for a series of attacks, including the Balibombings of October 2002 and the Jakarta bombings of July 2009

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

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

of political instability

SWOT Analysis

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

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

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

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

rate still relatively high at 5.9% as of Q113 Many are forced to work in the informalsector Of particular concern is the youth unemployment rate, which is five times theoverall rate

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

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

business environment, particularly through reform of its unreliable legal system

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

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

The country has therefore become a net importer of crude oil in recent years, puttingdownward pressure on its current account position Furthermore, rising oil priceshave begun to pressure Indonesia's current account, where it typically runs a healthysurplus The resumption of the Cepu field, which occurred in late 2009, may help toalleviate Indonesia's dependence on foreign oil given its small boost to productionoutput, but we expect this bounce to be short-lived

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

Strengths ■ Indonesia is South East Asia's largest economy with a nominal GDP of US$880bn and

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

■ 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

Weaknesses ■ Corruption remains a major problem Indonesia ranked 118th out of 176 countries

surveyed in Transparency International's 2012 Corruption Perceptions Index, where alow ranking denotes a higher degree of corruption

■ Indonesia's excessive bureaucracy makes it a difficult place to do business AmongAsian economies, Indonesia has the longest period to start a business Labour lawsare also considered excessive

Opportunities ■ President Susilo Bambang Yudhoyono's administration has gradually been reforming

the business environment, particularly by strengthening the legal system and fightingcorruption If sustained, this would boost investor interest in Indonesia However,reform has been slow, and divisions within the government could curb progressahead of 2014 elections

■ Indonesia has been amending its debt and banking regulations, with the aim ofattracting Islamic financial activities Over the past five years, Islamic banking growthhas averaged more than 65%

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

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

e/f - BMI estimate/forecast Source: BMI.

In the Q4 update BMI revised upwards historical data for the Indonesia IT market to better represent its

rapid development in recent years We also upgraded our growth outlook for IT spending over the medium

term to 2018 We have a bullish outlook for the Indonesian IT market in 2014 and over the medium term

based on our strong economic outlook and declining product and solutions prices However, there isdownside, with the depreciation of the rupiah will a drag on growth

We expect Indonesia will be a regional and global outperformer over the duration of our forecast period.The retail outlook is robust as wages rise and vendors compete aggressively on price, while we expectstrong growth in enterprise demand over the medium term as modernisation initiatives gather pace andcloud delivery opens software deployments to a wider market by putting downward pressure on prices Weforecast a compound annual growth rate (CAGR) of 13.8% 2014-2018, with Indonesia's IT market expected

to reach a total value of IDR231.4trn in 2018

2014 Outlook

The latest consumer confidence surveys underline the buoyancy of the Indonesia economy in 2014, and weforecast the IT market will be a regional and global outperformer with growth of 17.3% expected in localcurrency terms The latest Nielsen survey of 60 countries, released in July 2014, found Indonesian

consumers to be the second most optimistic about job, finance and spending prospects after only India This

reflects BMI's view that the overall economic environment will be conducive for IT market expansion in

2014 We forecast 5.1% real GDP growth in 2014 and 4.7% real private final consumption growth, which

will see confidence levels remain high and boost retail and enterprise spending However currency

weakness will weigh on sales despite the announcement from several leading vendors that they will absorbsome of the potential impact on prices

The primary downside risk for the Indonesian IT market in 2014 is economic The weaker rupiah is asymptom of wider concerns about Indonesia's exposure to global headwinds that could derail its

development The sentiment towards emerging markets shifted fast in early 2014, and although BMI's core

view is for robust growth in Indonesia, business IT investment will be susceptible to shifting confidence

In 2014 the largest segment of the market will continue to be computer hardware sales, which while forecast

to underperform software and services growth rates, will make a key contribution in absolute terms There

is a large growth opportunity in Indonesia with household PC penetration of 15.1% at the end of 2012 - lessthan half the APAC average of 31% and below the global emerging market average of 27.6% This should

be considered alongside Indonesia's large and growing population, and trajectory of rising incomes enablingthe emerging middle class to acquire their first household computing device

There is also a supportive policy environment in Indonesia, with the development policy aiming to liftIndonesia into the ranks of the world's top 10 economies by 2025 a boon to ICT investment Direct

spending by the government on infrastructure will boost the market in 2014 Government IT spending isexpected to increase and continue to account for around 25% of the IT market, while the government is alsoencouraging state companies to use more IT

Finally, enterprise demand will be relatively broad based as firms across a range of verticals undertakemodernisation initiatives aimed at international expansion and defending market share domestically.However spending growth in some overweight IT verticals such as financial services and banking willremain critical to overall enterprise IT spending performance There is also great potential in currentlyunderpenetrated sectors, such as manufacturing Adoption of cloud computing services by enterprises will

also increase, and we identify the SME market as a large medium term opportunity Large enterprisescontinue to invest in datacentre and cloud computing presence For instance, in March 2014 US-based

social network company Facebook announced plans to expand its international footprint by opening a data

centre in Indonesia

Market Drivers

Industry Trends - IT Market

2011-2018

e/f - BMI estimate/forecast Source: BMI

Income growth trends in Indonesia should provide the foundations for robust growth in retail hardwaredemand Weak income growth among the poorest 20% of the population will be of little consequence to the

IT market, with incomes forecast to reach just IDR11.2mn (USD1,040) in 2018 - meaning they will remainoutside the device market However, strong income growth for the middle 60% and richest 20% of thepopulation - with forecast CAGR of 10.7% and 12.4% respectively 2014-2018 - will broaden the

addressable market Income growth among the richest 20% bodes well for more advanced sales, while theincome growth for the middle 60% of the population should deepen the market as consumers benefit fromincreased disposable income and acquire first household/personal devices

There are also important device trends within the hardware market In the short term it is tablets that are the

dominant trend, for instance, Taiwanese vendor Asus estimated that tablets accounted for 50% of its

Indonesian sales in 2013 Low-cost tablets running Android, particularly from OEMs in China, are expected

to prove particularly popular with Indonesian consumers in 2014 However, there has also been a

resurgence in the desktop and notebook market with sales boosted by the withdrawal of official support forthe XP OS, prompting enterprise and public sector upgrades, and the decision to cut OS licensing costs forlow-cost Windows devices, making them more cost competitive versus Android tablets

The enterprise market will also boost spending on IT products and services as modernisation initiatives areundertaken by firms looking to expand into neighbouring markets and/or defend domestic positions Privateenterprises, particularly SMEs, will provide a large part of PC sales, while ERP and other e-businessapplications are also finding increasing popularity in the SME market The SME sector of 42.2mn

companies will drive demand for basic hardware and applications, as enterprises look to enhance

productivity through automating inventory, accounting and other functions

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, driving the development of the market by offering new services and increasinglevels of education among customers about potential uses

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

Income Per Capita Breakdown

(2011-2018)

Poorest 20%, net income per capita, IDR Richest 20%, net income per capita, IDR Middle 60% of population, net income per capita, IDR

0 25,000,000 50,000,000 75,000,000 100,000,000

e/f - BMI estimate/forecast Source: BMI, National Statistics

Segments

The enterprise hardware market will remain robust for the duration of our forecast, and continue to producestrong demand for desktops However it is in the consumer market where there will be faster growth andmore dynamism Demand for traditional notebooks has been eroded by the popularity of new form factors,

particularly tablets, but BMI expects hybrids/convertibles could gain traction as prices decline over the

medium term, with first-time buyers likely to see multi-functionality as a major positive over tablets notrunning full versions of operating systems

In terms of enterprise demand BMI identifies the large manufacturing, mining and tourism sectors as

potentially fruitful verticals for vendors of enterprise products and solutions These are expected to be thelargest three segments of the Indonesian economy in 2014, and there are modernisation drives underway inall three verticals We expect inward investment in manufacturing facilities as wages rise in China to createdemand for enterprise software deployments to connect with global supply chains, as well as create

efficiencies

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

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

Around 30-35mn Indonesian companies are estimated to lack any IT-based solutions IT services for thissegment 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 computingvendors in the SME market, but this market will only open up as telecoms operators invest in improvingwireless and wireline broadband infrastructure

Indonesia GVA By Sector (%)

is forecast to rise from IDR23.9trn to IDR43.7trn, and IT services spending is expected to increase fromIDR33.1trn to IDR56.0trn.

Macroeconomic Forecasts

Economic Analysis

BMI View: Current Jakarta governor Joko Widodo's (Jokowi) runaway favourite tag for the presidential

elections leads us to believe that it may not be too premature to deliberate Indonesia's economic trajectory under a Jokowi-led administration While we have yet to see his policy platform, Jokowi's ability to

streamline bureaucratic inefficiencies, improve public finances, strike a balance between pro-business and pro-welfare policies, as well as willingness to take politically unpopular but necessary measures to right economic imbalances could provide some upside potential for the infrastructure, mining and oil and gas sectors.

As it presently stands, Governor of Jakarta Joko Widodo (Jokowi) of the Indonesia Democratic Party Struggle (PDI-P) appears to be the runaway favourite for the presidential elections, which will be held onJuly 9 Jokowi has consistently ranked at the top of polls since talk of him becoming president surfaced andthe ratings of both himself and the PDI-P have surged since his candidacy for the presidency was announced

-by the PDI-P in March While the legislative elections are only just about to begin and the presidentialelections are two months away, Jokowi's runaway-favourite tag leads us to believe that it may not be toopremature to deliberate Indonesia's economic trajectory under a Jokowi-led administration Below, wehighlight three sectors that could witness upside potential if and when Jokowi assumes the presidency

The Jokowi Effect

Indonesia - Jakarta Stock Exchange Index

Source: Bloomberg

Infrastructure: As our infrastructure team has outlined (see 'Bearish Outlook For Construction Takes Root

', January 22), the near-term outlook for the sector remains relatively subdued Against a backdrop of

elevated borrowing costs, policy uncertainty, a poor business environment and a misallocation of thegovernment's finances towards expensive fuel subsidies, our infrastructure team is expecting constructiongrowth (in real terms) to slow marginally from 6.7% in 2013 to 6.3% in 2014 Despite this, however, wehighlight that a Jokowi-led administration could provide some upside surprise over the longer term

To us, this surprise stems more from Jokowi's proven ability to streamline inefficient bureaucratic processesand improve the government's tax collection (as he did in Jakarta), than the widely perceived expectationthat he will personally push for the much-needed infrastructure upgrades To be sure, it appears that theprivate sector may have played a larger role than Jokowi in restarting a number of key infrastructureprojects within Jakarta The potential upside in Indonesia's infrastructure sector therefore lies in a possibilitythat Jokowi may revamp the country's tax system, increase the government's revenue collection stream,improve public finances and consequently carve out the ability to allocate more financial resources towardsinfrastructure upgrades and development

Mining: Regarding the mining sector, amid a confluence of factors - depleting grades of copper, a limit on coal production, progressively higher taxes on coal exports and a slowdown in China, among others - BMI

holds a less sanguine view of the industry over the longer term At present, the main risk facing the miningsector stems from whether the new administration maintains its nationalistic leanings post-elections Thatsaid, we presently believe that these inclinations are likely to merely be political maneuvering and are

consequently unlikely to extend beyond the elections (see 'Elections Crib Sheet: Jokowi Ascendant', March

27) Moreover, we also believe that a Jokowi-led administration may help to restore confidence within the

mining sector, which has been shaken by the introduction of a mining ban by the current administration.Jokowi has thus far exhibited the ability to balance investors' interests and citizen's welfare interests Inassuming that he extends this to the mining sector and does not compel foreign mining companies to partake

in projects that are widely seen to be politically popular but economically infeasible, Jokowi could providethe sector with a much-needed boost

Oil & Gas: The oil and gas industry is perhaps one of the industries whose growth has been most

constricted by the current administration's nationalistic policies The country may carry considerable oil andgas potential However, political uncertainty remains pervasive within the upstream and downstreamsegments, due to the different policy directions undertaken by the central and local governments, and this

has been one of the main deterrents to foreign investment By way of example, French supermajor Total

announced in late-2013 that it may hold back expansion efforts on its assets along the South MahakamStrait unless the government could provide it with the assurance that the firm could hold on to its existingproduction sharing contract (PSC) when the existing contract reaches its term in 2017 This came shortly

before the government chose not to extend Chevron's PSC to operate the Siak oil block in Riau and instead hand operations of the block over to state-owned oil company Pertamina.

At present, questions about Jokowi's policy direction have drawn a blank That being said, some semblance

of direction could be gleaned from Jokowi's overt stance towards progressively lifting fuel subsidies Byopting to allow the consumer to bear the brunt of higher fuel prices as opposed to revisiting existing

contracts with producers as a means of sharing the burden, this could be a signal that Jokowi is aware of theimportance of foreign investment towards Indonesia's long term economic growth prospects Given thenature of Indonesian politics where the personality is more important than party politics, Jokowi stands agood chance of being able to canvass strong enough public support in order to push through such unpopularbut necessary reforms

Table: Indonesia - Economic Activity

Nominal GDP,

IDRbn 2 7,427,086 8,260,335 9,291,710 10,472,619 11,652,255 13,004,381 14,545,227 16,282,016 Nominal GDP,

USDbn 2 846.5 879.9 889.2 929.2 1,059.3 1,187.6 1,322.3 1,507.6 Real GDP

growth, %y-o-y

1,2 6.5 6.2 5.8 5.4 6.0 6.3 6.5 6.6 GDP per capita,

USD 2 3,472 3,564 3,559 3,676 4,143 4,593 5,060 5,709 Population, mn 3 243.8 246.9 249.9 252.8 255.7 258.6 261.3 264.1 Industrial

production,

%y-o-y, ave 2 4.2 5.0 5.3 5.8 6.0 6.5 6.5 7.0 Unemployment,

% of labour

force, eop 2 6.6 6.1 6.0 6.0 6.0 6.0 6.0 6.0

Notes: e BMI estimates f BMI forecasts 1 Base Year = 2000 Sources: 2 BMI/IMF; 3 World Bank/UN/BMI.

Industry 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 medium term forecast period to 2018 The Q414 ratings reflect our analysis of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects

There was only one positional change in the Q414 ratings as Singapore returned to the top position

However, scores remain tight at the top of the table and there is scope for further positional changes in thecoming quarters Meanwhile, there was a 0.3pps decline in the regional average IT risk/reward rating to55.6 - with the decline primarily caused by a decline in South Korea's industry rewards score

Singapore now tops the Asia Pacific RRRs in Q414, after being overtaken by South Korea in Q114

Singapore moved up the table despite receiving an unchanged overall score of 72.8 Singapore has alwaysscored highly in our ratings, as one of only two countries with the maximum score of 100 in the countryrewards category The only area of weakness is that Singapore scores slightly below average in the industryrewards categories due to the relatively small size of its market However, this is offset by Singapore'sposition as a regional hub for cloud computing services and data centres, which is continuing to attractmajor inward investment by global and regional vendors

South Korea dropped to second position in the table in Q414 as its score in the industry rewards categorydeclined 5pps q-o-q The South Korean hardware market is one of the most valuable in the region in percapita terms - with high penetration of not only desktops and notebooks but also tablets and increasinglyhybrid notebooks However this maturity results in more limited growth prospects over the medium termcompared to emerging markets in the region The rapid growth of the tablet market, which we now believe

to be largely saturated in terms of first-time buyers, has resulted in a downgrade to the industry rewards

score as BMI expects a plateau in the hardware market over the medium term.

The other developed city-state in APAC with a maximum score of 100 in the country rewards category isHong Kong, which sits in third position in our table Despite the limitations of its small population HongKong could in fact be higher up the table without the drag of being under the China policy umbrella on theindustry risk category However, Hong Kong remains a prime financial hub, a high-spending vertical for ITsolutions, and is driving the development of the cloud computing market as banks demand advancedsolutions

Australia's score increased 0.4pps q-o-q but remained in fourth position in Q414 High incomes support alucrative retail hardware market, while the developed nature of the wider economy ensures strong demandfor enterprise solutions Meanwhile, investments in supporting infrastructure, particularly the NationalBroadband Network (NBN), present upside potential over the medium term Cloud computing is expected

to be a key trend, with strong demand from SMEs for cloud services evident in surveys in 2014

China is the largest market in the region owing to its huge population and relatively advanced IT marketconsidering income levels The outlook has been boosted by the latest round of economic reforms that willtake place through the forecast period and on to 2020 Major reforms include urbanisation development,strengthening institutions and reform of the one-child policy, all of which are expected to boost growth andincrease private sector confidence in the IT market Wider support for the service sector and modernisation

of state-owned enterprises, including finance, telecoms, healthcare, education and professional services (egcall centres) will be the most important reforms for boosting the IT sector, with software and services well

placed for faster growth BMI considers the intention of the reforms positively, and could present upside to

its overall score, however we have held-off changing our ratings until more detail about the reforms isreleased

Malaysia sits just below China in sixth position, with its far smaller market only partially offset by thehigher incomes and level of development Although trailing regional leaders such as Singapore and HongKong, Malaysia is home to a vibrant cloud computing market that should ensure medium term growth.Growth has been catalysed by government policy, with MSC Malaysia seeing it as a strategic priority andworking to develop a national cloud computing platform Cloud projects are not confined to the nationallevel, as state governments are also exploring this area

There is then a substantial gap in the ratings to India which scores 8.1pps below Malaysia Several of thecountries in the bottom section of the table have considerably larger populations than some countries ahead

of them in our table; they are held back by weak country rewards scores which reflect lower GDP per capitaand rate of urbanisation, as well as higher rates of unemployment

India is a market of great contradiction - on the one hand it is home some of the world's largest players in

the IT services segment such as Wipro, Tata Consultancy and Infosys However, on most metrics it falls

far behind its regional peers, for instance in PC penetration, broadband access, IP protection, adoption ofsolutions by enterprises and public authorities Ineffectual governance and weak institutions have been themain obstructions to faster development, and we do not see a short term improvement despite the positiverhetoric of reform from the incoming government That said, rising incomes and the sheer size of the Indian

market will ensure vendors continue to invest, and there is upside potential if Modi's reform agenda gathersmomentum.

Indonesia and the Philippines are unchanged in 8th and 9th positions respectively The Philippines is a established player in the business process outsourcing (BPO) industry but there are signs that the country istrying to move towards high-value services such as software development Meanwhile Indonesia is

well-emerging as a regional powerhouse but the depreciation of the rupiah - which has a knock on impact onprices in the hardware market - has meant it continues to score well down the regional ratings

Thailand remains in 10th place this quarter, but its position could be weakened further if the newly-installedmilitary junta were to extend its control over the telecoms sector to the broader IT market The military isgenerally distrustful of the ease with which dissenters could utilise telecoms services to organise protestsand has shown its willingness to clamp down on social media and broadband-delivered services It hasalready cancelled two upcoming spectrum auctions and has withheld financing for a long-awaited fibre-to-

the-home (FTTH) project run by incumbent telco TOT and is being lobbied by the state utility to ensure

that next-generation mobile licensees are forced to use the state operators' infrastructure Clearly, this hassignificant long-term implications for the IT sector, if these proposals are pushed through

Vietnam is becoming a more important manufacturing hub for the region The first major investment came

from chip manufacturer Intel, announced in 2006, but other investments have followed from Samsung Electronics, which expects to produce as much of 40% of its global smartphones and tablets in Vietnam by

2015 Vietnam is also an emerging destination for outsourcing, with multinationals increasingly turningaway from China in favour of lower cost and higher security locations

Sri Lanka continues to be at the bottom of the APAC RRRs in 12th position with an aggregate score of38.6 Sri Lanka scores poorly in all categories of the ratings, with incomes and institutions only just

recovering from a lengthy civil conflict However, there are bright spots and confidence returns and localand international firms invest This can be gauged from recent launches, for instance, SAP announced the

launch of its cloud portfolio in Sri Lanka in April 2014, following the launch of Amazon Web Services

-the leading global cloud hosting provider - in December 2013 A continuation of this trend could see SriLanka's score improve over the medium term

Table: APAC IT Risk/Reward Ratings - Q4 2014

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

Singapore 58.3 100.0 70.0 74.4 72.8 1 2 South Korea 70.0 80.0 75.0 65.4 72.2 2 1 Hong Kong 58.3 100.0 45.0 77.7 70.4 3 3 Australia 61.7 95.0 57.5 66.9 70.3 4 4 China 75.0 35.0 45.0 55.1 58.0 5 5 Malaysia 58.3 55.0 37.5 67.7 56.7 6 6 India 66.7 15.0 45.0 50.9 48.6 7 7 Indonesia 53.3 35.0 42.5 51.4 47.2 8 8 Philippines 53.3 30.0 42.5 50.9 45.9 9 9 Thailand 53.3 20.0 35.0 62.9 44.7 10 10 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 46.7 15.0 37.5 50.9 38.6 12 12

Average 59.0 49.6 47.3 60.6 55.6

Scores out of 100, with 100 highest The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks' Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/

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

Market Overview

Hardware

BMI upgraded the forecast for the hardware market in Indonesia in the Q4 2014 update to better reflect the

rapid growth of tablet and notebook sales We now expect the hardware market to grow by 15.4% in localcurrency terms in 2014 to reach a value of IDR85.5trn The withdrawal of official Microsoft support for the

XP operating system (OS)will boost enterprise/public sector upgrades, while competition between Androidtablet vendors and low-cost Microsoft partner notebook vendors benefitting from the cuts to OS licensingcosts will drive growth in retail spending

The Indonesian hardware market also has solid medium-term potential BMI forecasts that hardware

spending will increase over the medium term at a compound annual growth rate (CAGR) of 12.2%

2014-2018 in local currency terms Even with this fast pace of growth, the share of hardware in the overall

IT market will decline by three percentage points (pps) during our five-year forecast period to 56.9%

in 2018

There is downside to our bullish outlook for computer hardware spending growth The depreciation of the

rupiah has been a drag on PC market growth in recent years, and BMI expects this trend will continue into

2014 before the rupiah is forecast to strengthen against the US dollar 2015 to 2018 In 2014 the depreciation

of the rupiah will continue to be a drag on market growth, an important feature in a price sensitive market

The impact on prices is already being felt, for instance in September 2013 Lenovo announced plans to raise

prices of its PCs by about 20% in Indonesia Chief operating officer at Lenovo Indonesia, Sandy Lumy saidthe company will adjust its prices upward by 10% to 20% in accordance with the latest exchange rate Lumysaid the prices across all market segments would increase as the import costs for the products were in USdollars Lenovo's move came after the Indonesian rupiah weakened by 16% against the US dollar in 9M13,and with further depreciation forecast for 2014

Despite this challenge for vendors the underlying trend of rising incomes and low PC penetration willensure continued growth in terms of both volumes and value There are a range of factors that combine tounderpin our outlook for the Indonesian hardware market and still make it one of our picks for

outperforming growth both regionally and globally

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

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

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

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

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

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

average 6.4% annually 2014-2018, during which time GDP per capita will increase from USD3,489 in

2013 to USD5,566 in 2018, the low PC penetration rate is a compelling business opportunity

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on cities such as Jakarta, according to estimates, providing a much clearer picture of themarket opportunity In 2013, 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 over half of the population under 30 years

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

Local Manufacturers

Indonesia enjoys a strong base of local manufacturers and assemblers Apart from being price leaders, thesecompanies also cater to custom requirements These companies account for a sizeable fraction of overall PCsales

e/f - BMI estimate/forecast Source: BMI.

Enterprise Demand

SMEs form an important, yet comparatively unexplored component of the Indonesian hardware market TheMinistry of SMEs and Co-operatives asserts that SMEs account for 99% of the registered firms in thecountry and provide employment to 97% of its workforce Their share in exports and value-added products

is not commensurate with their overall dominance otherwise Investment in IT can offset this imbalance to aconsiderable extent

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

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

Government Push

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

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

■ The Palapa Ring Program, also known as the Nusantara Superhighway Project, driven by the Ministry ofCommunication and Information Technology, will create a backbone of optical fibre on a nationwidescale spanning more than 55,000 km and including terrestrial, as well as undersea cables

■ The ongoing computerisation of government procurement, also known as e-GP had covered more than 25enterprises in 2012, according to the Global Business Guide Indonesia

■ Computerisation of road toll collection Issuing of electronic identification cards to citizens, also known

as e-KTP, covered close to 60% of the target population by 2012

Household PC Penetration (%)

2010-2012

Source: National Regulator, ITU

Notebooks have gained the greatest traction in the retail market, compared to around one-third of units inthe business market However sales growth in the notebook segment was squeezed by competition from

tablets BMI estimates a total of 3.38mn notebooks were sold in 2013,but we expect stronger growth over

the medium term Microsoft's decision in 2014 to cut OS licensing costs on low-cost devices has enabledpartner vendors to be far more cost competitive against Android tablet vendors As such they can now offer

a mix of mobility and functionality, which we have long argued to be an attractive mix of features for time buyer households where an existing desktop/notebook cannot act as a hub for a tablet

first-The notebook market is driven by retail sales, in contrast to the enterprise segment where the desktopremains a stalwart This difference between retail and corporate and business users is supported by

statements from Chinese equipment vendor Lenovo Lenovo contends that notebooks are the main draws forfirst-time PC users, including students Given the demographic profile of Indonesia, it is obvious that themost promising customer segment is overwhelmingly in favour of mobile PCs Lenovo, in fact, pegs theproportional share of notebooks among the retail user's PC purchases at a formidable 85% Recognising theappeal of notebooks in the largely aspirational youth segment, Lenovo offered its IdeaPad products at a verycompetitive price of USD250 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 ASUS retained its

lead in the Indonesian consumer notebook segment in 2013, with sales up 10% from 2012 ASUS had a27.3% share of notebook sales in 2013 according to Gfk This includes a leading position in conventionalnotebooks (26.1%) and ultra-thin notebooks (36.8%) The latest data for Q214 show ASUS strengthened itsleadership position in the Indonesian notebook market with a share of 32.6%, according to GfK

Netbooks

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

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

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

Tablets experienced a sharp uptick in sales in 2012 and continued to grow rapidly in 2013.We estimatetablet volumes boomed in Indonesia, rising from 1.4mn in 2012 to 3.5mn in 2013 In that sense, tablets inIndonesia 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 Android devices have seen volumes increase markedly, although Apple remains

a market leader despite its premium focus

Industry Trends - PC Device Volume Forecast

2011-2018

e/f - BMI estimate/forecast Source: BMI.

Statcounter data show that iOS (the operating system on Apple's iPad) continues to account for a large share

of tablet browsing traffic in Indonesia, reflecting the large installed base Further, the share of tablet trafficfrom iOS was up 5.6pps year-on-year (y-o-y) to 43.3% in June 2014 Meanwhile Android gained

momentum from 2012 as vendors capitalised on the price sensitive nature of the Indonesian hardwaremarket However its share remained flat y-o-y to June 2014

Samsung was overtake by Apple in March 2014 in terms of tablet browsing traffic share in Indonesia, as

Samsung lost out to rival players in the Android ecosystem, with its share of traffic down 4.9pps y-o-y toJune 2014 This data is in line with Samsung claims that it achieved 50% tablet market share in 2012through its Galaxy Tab products (as well as an 80% share of Android smartphones), moving it ahead ofApple However as is the case in the majority of emerging markets, price erosion in the Android ecosystemhas seen Samsung fall back slightly, losing share to Acer, ASUS and Lenovo - as well as a host of low-costlocal/regional vendors

The significance of tablets to vendors as a driver of sales is considerable Taiwanese vendor Asus has said

that it expected 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 Statcounter is supportive of ASUS making inroads, with a 0.7ppsincrease in its share of tablet browsing traffic in Indonesia to 0.7% in March 2014

Meanwhile, the latest IDC states that Acer was not even among the top 10 tablet vendors in 2012, duringwhich over 1.3mn tablets were shipped Acer's success in Indonesia will depend partly on its ability to reachbeyond the largest cities to establish a dealer network that will repair as well as sell its devices As part ofits drive to meet the target, from the last quarter of 2012, the company has launched an intensive marketingcampaign for its tablets Asus has introduced a broad portfolio of tablets models at various price points, withthe newest Fonepad tablet following on from Memopad, VIotab and Padfone

BMI believes that low-priced alternatives from Chinese OEMs and local manufacturers are the ones to take the tablet truly mass market Other important low-to-mid range vendors 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 storagewith a 1,024x768 resolution The device is available for IDR1.5mn (USD155), 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.

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 USD485 in 2012, which was a considerable drop from USD651, as recorded in 2011,according to Gfk Indonesia