Indonesia information technology report q4 2015

BMI believes that retail hardware, enterprise software and cloud computing in particular would provide strong growth opportunities.. Headline Expenditure Projections ■ Computer Hardware

Q4 2015 www.bmiresearch.com

INDONESIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q4 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: July 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

Q4 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: July 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Political 11

Economic 13

Operational Risk 15

Industry Forecast 17

Table: IT Industry - Historical Data And Forecasts (Indonesia 2012-2019) 17

Macroeconomic Forecasts 24

Indonesia - Economic Growth Unlikely To Rebound Significantly 24

Industry Risk Reward Index 27

Table: Asia Pacific IT Risk/Reward Index - Q415 30

Market Overview 31

Hardware 31

Software 39

Cloud Computing 43

IT Services 47

Industry Trends And Developments 51

Regulatory Development 56

Table: Key Ministers And Departments 56

Competitive Landscape 61

International Companies 61

Table: Lenovo Indonesia 61

Table: Intel Indonesia Corporation 62

Table: Microsoft Indonesia PT 63

Table: IBM Indonesia 64

Table: Foxconn Technology 65

Local Companies 66

Table: Performance PT Multipolar Technology Tbk (MLPT) 66

Table: Walden Global Services (WGS) 67

Table: Aprisma Indonesia 68

Table: ALTiUS ERP 68

Regional Overview 69

Demographic Forecast 72

Demographic Outlook 72

Table: Population Headline Indicators (Indonesia 1990-2025) 73

Table: Key Population Ratios (Indonesia 1990-2025) 73

Table: Urban/Rural Population And Life Expectancy (Indonesia 1990-2025) 74

Table: Population By Age Group (Indonesia 1990-2025) 74

Table: Population By Age Group % (Indonesia 1990-2025) 75

Methodology 77

Industry Forecast Methodology 77

Sources 78

Risk/Reward Index Methodology 79

Table: It Risk/Reward Index Indicators 80

Table: Weighting Of Components 81

BMI Industry View

BMI View: Low PC penetration rate, enterprise and public service modernisation and an emerging middle

class coupled with strong economic growth will be driving the Indonesian IT sector growth GDP growth of CAGR 6.5% over the next four years will outweigh depreciation of rupiah Boosted by a number of key drivers, IT spending will increase to IDR289.7trn in 2019 BMI believes that retail hardware, enterprise software and cloud computing in particular would provide strong growth opportunities.

Headline Expenditure Projections

■ Computer Hardware Sales: IDR100.5trn in 2015 to IDR142.0trn in 2019, at a compound annual growth

rate (CAGR) of 9.5% in local currency terms Even after strong growth in recent years a high hardwarespending growth rate should be maintained in Indonesia with plenty of spare capacity due to new entrants

to the market 2015-2019 as household incomes rise

■ Software Sales: IDR29.18trn in 2015 to IDR56.64trn in 2019, at a CAGR of 18.5% in local currency

terms Piracy is a major drag on software market growth, but new legislation could help reduce the dragfrom 2015, pushing the software growth rate higher as enterprise modernisation initiatives gather pace

■ IT Services Sales: IDR46.63trn in 2015 to IDR91.12trn in 2019, at a CAGR of 18.7% in local currency

terms Improvements in network infrastructure and increased awareness among local enterprises willensure strong growth in cloud service adoption, which we expect to be a key demand driver for ITservices 2015-2019

Services Subsector To Outperform In IT Sector

Indonesia IT Sector Growth, 2012-2019, IDRbn

Source: BMI

(ASEAN) markets over the forecast period.

■ 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 ■ Booming mobile and e-commerce market, creating demand for devices and

enterprise retail solutions

■ Investment in telecoms and datacentre infrastructure should lay the foundations forrapid growth of cloud computing services, with small- and medium-sized enterprisesconsidering a particularly attractive target group

■ New copyright law in 2015 should help reduce incidence of software piracy

■ Computer ownership is low, but rising incomes and wider internet access will enableperiod of rapid 'catch-up growth'

SWOT Analysis - Continued

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

■ 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

■ Regional economic instability could derail economic growth

■ Cyber security risks, both from criminals and state actors, could undermineconfidence in networked infrastructure; i.e cloud computing and IoT

■ Data sovereignty and content control initiatives from the government could bring itinto conflict with ICT vendors

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 Despite a lengthy challenge by PrabowoSubianto, 2014's elections also passed peacefully, resulting in the election of Joko'Jokowi' Widodo

■ 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 ■ Indonesia has built a more stable democracy following peaceful handovers of

executive power dating back to the early 2000s We expect this trend to continue tobolster political stability over the coming years

■ 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

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

SWOT Analysis - Continued

■ 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 Q314 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 The resumption of the Cepu field,which occurred in late 2009, may help to alleviate Indonesia's dependence on foreignoil given its small boost to production output, 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

Operational Risk

SWOT Analysis

Strengths ■ There has been significant progress made in recent years towards achieving universal

primary education due to major government investment

■ There are some diversification options for supply chains with road and railwaynetworks on the main island of Java This is also the location of several airports andthe country's most important seaports

■ The domestic financial market is well developed, providing opportunities for portfolioinvestment, access to credit and links to international finance centres

■ Indonesia has a lower rate of violent crime than some neighbouring countries

Weaknesses ■ Historically low enrolment rates have hindered progression through the education

system, and attainment levels remain poor

■ The transport network is severely underdeveloped on most islands of the Indonesianarchipelago, including the large and resource-rich territories of Sumatra, Kalimantanand Papua

■ Opportunities for foreign direct investment are limited by a variety of restrictions onforeign ownership of businesses in Indonesia

■ Criminal gangs retain some degree of influence and cause disruption to legitimatebusiness activity

Opportunities ■ An expanding pool of technical workers and staff with specialised degrees in science

and engineering can be found in Indonesia's larger cities

■ Connections to international maritime trade routes facilitate efficient export times andvery low cost trade procedures

■ Tariff and non-tariff trade barriers to trade with the country's neighbours are lowereddue to Indonesia's membership of the Association of South East Asian Nations(ASEAN) Free Trade Agreement

SWOT Analysis - Continued

■ Membership of ASEAN will continue to foster greater cooperation between SouthEast Asian countries, improving the response to terrorism and reducing the risk ofinterstate conflict

Threats ■ Strong population growth will place further pressure on the struggling education

■ The significant presence of Western interests means that terrorist attacks are likely tocontinue to affect foreign workers and businesses

sales,

IDRmn 64,838,028 83,198,136 90,376,226 100,496,832 110,643,485 121,227,038 131,117,334 141,974,363 Personal

computer

sales,

IDRmn 50,281,890 64,403,677 69,571,619 76,930,325 84,221,821 91,756,745 98,678,906 106,239,416 Software

sales,

IDRmn 15,740,422 20,526,753 24,202,447 29,179,343 34,802,405 41,285,812 48,333,449 56,644,874 Services

e/f = BMI estimate/forecast Source: BMI

BMI has a bullish outlook for the development of enterprise spending on IT products and solutions

2015-2019 in Indonesia Due to relatively low levels of PC penetration among Indonesian enterprises,especially among the large base of SMEs, we expect demand for desktops to be maintained for the duration

of our forecast period However, the consumer market is also expected to remain dynamic and offer

considerable growth opportunities for hardware vendors Strong economic growth and significant workingage population and increasing forecast private consumption will support private spending on IT softwareand hardware

Demand for traditional notebooks has been eroded by the popularity of new form factors in recent years by

combination form low-cost 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 positiveover tablets not running full versions of operating systems

2015 Outlook

BMI forecast IT market growth of 15.1% in 2015 in local currency terms, with total market value expected

to reach a value of IDR176.3trn The strong economic outlook is fundamental to our IT market forecast asIndonesian consumers remain optimistic about job, finance and spending prospects We forecast real GDPgrowth of 5.3% in 2015 and 4.8% real private final consumption growth Furthermore, we forecast aslowdown in rupiah depreciation against the dollar in 2015 compared to 2012-2014, although it will remain

a drag on growth by eroding the purchasing power of Indonesian households and enterprises in globalproduct markets

e/f = BMI estimate/forecast Source: BMI

The largest component of the Indonesian IT demand continues to be for computer hardware sales, butthey are forecast to underperform software and services growth rates in 2015 Nonetheless demand growthwill remain robust as a result of income growth and the relatively low penetration rate - ensuring demandcomes from both first-time buyers and the replacement/upgrade market Household PC penetration reached

15.1% in Indonesia at the end of 2012 - less than half the APAC average of 31% and below the globalemerging market average of 27.6% This fact, when considered alongside Indonesia's large and growingpopulation and trajectory of rising incomes, illustrates the growth opportunity in the retail hardware market.

We forecast hardware sales growth will make an important contribution in absolute terms with growth of11.2% forecast in local currency terms for 2015

BMI considers Indonesian government IT policy to be supportive of IT market growth in 2015, although

there is downside Indonesian development policy is aiming to lift Indonesia into the ranks of the world'stop 10 economies by 2025 - a boon to ICT investment Direct spending by the government on infrastructurewill boost the market in 2015 Government IT spending is expected to increase and continue to account foraround 25% of the IT market, while the government is also encouraging state companies to use more IT.The Indonesian government's attempts to control radical content online and push for greater data

sovereignty could bring it into conflict with the interests of ICT vendors; however, this is not our corescenario

Data centre investment is expected to remain on its strong growth trajectory in 2015, which will open up the

market for cloud computing to a much wider user base in Indonesia For instance, telecoms incumbent, PT Telkom Group, expects to be operating the fourth-largest data centre business in the world, with 100,000

square metres (sq m) of capacity by the end of 2015 New tier-2 and tier-3 facilities were scheduled forcompletion by YE14 and, with the completion of Indonesia's first tier-4 facility also scheduled for YE14,Telkom already has an estimated 70,000sq m of capacity at its disposal at the start of 2015 We expectcapacity increases to result in lower infrastructure-as-a-service costs, catalysing adoption

In May 2015 the Indonesian government signed two MoU's - with Huawei to develop an ICT development

centre in Indonesia and with the governments of three Kalimantan provinces - East Kalimantan, NorthKalimantan and West Kalimantan - to boost development of ICT Infrastructure

Market Drivers

BMI's Country Risk forecast for Indonesia is a key component of our bullish medium-term IT market

growth outlook Real GDP growth is forecast to average 6.5% annually 2015-2019, with real private finalconsumption growth forecast to be slightly slower at a 6.3% annual average Our income stratificationforecast provides additional insight, with particular relevance for retail hardware vendors Weak incomegrowth among the poorest 20% of the population will be of little consequence to the IT market, withincomes forecast to reach just IDR10.9mn (USD991) in 2019 - meaning they will remain outside the device

market However, strong income growth for the middle 60% and richest 20% of the population - withforecast CAGR of 10.5% and 12.2% respectively 2015-2019 - will broaden the addressable market.

We have added an analysis of household income trends in Indonesia to provide additional context to theincome stratification forecast In 2015 Indonesia remains a highly price sensitive market, derived from the

predominance of USD1,000-10,000 households at around two-thirds of the total BMI considers

sub-USD5,000 households to be external to the IT market due to insufficient purchasing power, but as ourforecast shows, we expect this group to reduce in size by around 50% by 2019, which will deepen the ITmarket, albeit predominantly at the low value end of the market

BMI believes strong income growth for the richest 20% of Indonesian bodes well for premium devices sales, which should benefit premium oriented vendors including Apple, while the income growth for the

middle 60% of the population should deepen the market as consumers benefit from increased disposableincome and acquire first household/personal devices We believe this second grouping is captured in ourhousehold income forecast through the large scale migration of households from the USD1,000-5,000 andUSD5,000-10,000 bands to the USD5,000-10,000 and USD10,000-25,000 bands respectively

Indonesia Household Income Distribution (%) LHS And Change ('000) RHS

2015 & 2015-2019f

f = BMI forecast Source: National sources, BMI

A more active approach by the government to encourage IT development, including the establishment of theNational ICT Council, should stimulate spending through a series of infrastructure and education initiatives.The Indonesian government's Master Plan for Acceleration and Expansion for Indonesia Economic

Development (MPEEI) states that connectivity between the islands of the country is a priority area Majorgovernment infrastructure and ICT initiatives, particularly the Palapa Ring Project, have been rolled out tocreate the infrastructure to support IT market growth

Two significant government policies were announced in late 2014 with implications for IT market

development First, Indonesia's House of Representatives passed a draft of Indonesia's new Copyright Bill

in September 2014, which will come into law in 2015 The new law is aiming to increase efficiency andeffectiveness of Indonesia's copyright system, particularly its enforcement mechanisms The new law hasbeen received well by copyright owners, with the removal of ambiguity evident in previous legislationwelcomed and potentially a boost to software market spending growth Meanwhile, under the 2014-19Indonesia Broadband Plan, up to IDR278trn (USD23.2bn) is to be invested in extending wireline broadbandservices to 30% of the urban population and 6% of the rural population, while mobile broadband servicesare to be rolled out to 52% of rural consumers

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

in absolute terms in early 2015, but as network infrastructure improves alongside increased supply of cloud

products, BMI forecasts bullish medium term growth at a CAGR of 35.2% 2015-2019 We expect the

strategies of Indonesian telecoms operators, and global vendors such as Microsoft and IBM, will drivemedium term cloud service adoption both among large enterprises and Indonesia's huge base of SMEs

Indonesia GVA By Sector (%)

2015f

f = forecast Source: National statistics, World Bank, UN, BMI

Turning to enterprise software and services 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 the largest three contributors to IT market spend in 2015 and there are

modernisation drives underway in all three verticals Additionally, we expect inward investment in

manufacturing facilities as wages rise in China to create demand for enterprise software deployments inIndonesia 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

BMI believes the healthcare IT opportunity, and other public services, will be a major contributor to growth

over the medium term As an emerging market with a relative lack of legacy public service delivery

infrastructure - and challenging geography combined with the demands of urbanisation - we expect ITservices vendors with innovative solutions could win major contracts in the years to 2018 Japanese vendor

Fujitsu, and a collaboration between TelkomSigma and REDtone Data Centre, are both targeting the

informatisation of Indonesia's healthcare system as major medium-term opportunities

Telecom operators are emerging as key players in the smart services segment in Indonesia, with Telkomsel partnering with Jasper Technologies in late 2014 for a nationwide Internet of Things (IoT) platform, while Ooredoo, the parent company of local telecoms operator Indosat, stated in January 2015 that it is targeting the IoT 'Smart City' opportunity in Jakarta Subsequently, in April 2015 Indosat added to its IoT

capabilities by partnering with Swedish telecoms equipment vendor Ericsson to deploy a cloud-based

machine-to-machine (M2M) platform in Indonesia, via the Ericsson Device Connection Platform

The SME opportunity is highly significant over the medium term, with government data showing 70% ofthe 56.5mn Indonesian SMEs use no IT solutions IT services for this segment will be dominated by basicservices such as system integration, support systems, training, professional services, and outsourcing Weexpect cloud vendors to be in a strong position to tap this demand, with cloud cost structures favourable forSMEs versus the economics of on-site deployment

Local players will capture a share of this growth through to 2019, but the SME market has also attracted theattention of global leaders, for instance, in October 2014 IBM promoted it SoftLayer infrastructure-as-a-service (IaaS) product in Indonesia to SMEs, offering server, processor, RAM, and storage in the cloud for

USD100 per month Meanwhile, global software giant Microsoft launched the latest Office 365 SMB

software package aimed at businesses with less than 250 employees This combination of local and globalsupply should make the SME market a hard-fought battleground among vendors over the medium term

Macroeconomic Forecasts

Indonesia - Economic Growth Unlikely To Rebound Significantly

BMI View: Indonesia's real GDP growth will likely recover versus the Q115 level over the coming

quarters, but significant headwinds stemming from weak domestic demand, poor external dynamics, and failures in government infrastructure spending will likely cap upside potential As such, we have

downgraded Indonesia's real GDP growth forecast for 2015 and 2016 to 5.0% and 5.6%, respectively, versus 5.3% and 6.5% previously.

Indonesia's real GDP growth over the remainder of 2015 will likely improve from the first quarter's

disappointing result of 4.7% year-on-year (y-o-y) However, we believe that the pace of recovery will bemodest as significant headwinds such as sluggish domestic demand, weakness in global commodity prices,

as well as a slower-than-anticipated government infrastructure spending cap upside potential As such, wehave downgraded Indonesia's real GDP growth forecast to 5.0% in 2015 and 5.6% in 2016, versus 5.3% and6.5% previously

Consumption Under Pressure As Rate Cuts Pushed Back

With headline inflation rising to 7.2% y-o-y in May (versus the government's inflation target of 3.0-5.0%)

as a result of higher administered and food prices, we believe that Bank Indonesia (BI) will likely keep itsbenchmark interest rate on hold over the near-term Previously, we expected supportive factors such asbenchmark interest rate cuts from BI to spur economic growth momentum in H215 However, given risinginflationary pressures in the archipelago, we now foresee that the central bank will delay its benchmarkinterest rate cuts until end-2015, when disinflationary fuel price developments and less volatile food prices

should provide adequate room for easing (see 'Rate Cuts Pushed To End-2015 On Inflation Jump', June 3 2015).

Private consumption has struggled over recent quarters as high interest rates and the depreciating rupiahhave hit purchasing power, particularly for big ticket items This trend has continued into Q215, as thevolume of auto sales in Indonesia declined by 23.6% y-o-y in April 2015, as compared with a 12.1% y-o-ycontraction in March Meanwhile, the rupiah has broken weaker through short-term technical support nearthe IDR13,250/USD level, and the currency is now trading at a 17-year low The rupiah is now about 57.0%

weaker than its post-GFC high of IDR8,450/USD, and we expect further volatility and weakness ahead (see 'Further Volatility Likely For The Embattled Rupiah', June 8 2015).

Recovery To Remain Weak

Indonesia - GDP At Constant Prices, % chg

Indonesia - Real GDP growth, % y-o-y

2011 2012 2013 2014 2015f 2016f

4.5 5 5.5 6 6.5 7

BMI/IMF

Meanwhile, the Jakarta Composite Index (JCI) gave up approximately 5.0% over the past two weeks (May

26 to June 8), as worries over the country's weak economic growth outlook and the possibility of an than-expected US Federal Reserve interest rate hike have sparked negative market sentiment Pressure will

earlier-be on investors to pull out and hold off their entry into the Indonesian market until policymakers are able toprovide clearer indications of efforts to improve economic conditions

Exports Unlikely To Pick Up Over Near-Term

Indonesia posted a trade surplus in April, but that was brought about by a larger plunge in imports relative

to exports, indicating that economic growth remains sluggish in the second quarter Indonesia's exportsplunged 8.5% y-o-y in April 2015, marking the 7th consecutive month in which Indonesia's exports

contracted on a y-o-y basis This reinforces our negative outlook for Indonesia's trade performance despite aboost to export competitiveness from the weak rupiah

The key drag on the export account has been oil and gas exports, with the category plummeting 45.0%

y-o-y in April 2015 due to weakness in global oil and gas prices Meanwhile, non oil and gas exports also

declined by 0.1% y-o-y, led by a decline in rubber, coal, and chemical exports We do not expect a

significant improvement in exports over the near-term, as poor commodity demand (owing largely to theongoing regional and China slowdown) and low commodity prices continue to weigh on shipments ofcommodities Exports of commodities such as natural gas, coal, and palm oil, which constitute 40.0% oftotal exports, have suffered along with oil, hitting the value of exports

Hold-up In Infrastructure Spending To Dampen Growth

The Indonesian government has struggled to boost growth momentum despite ambitious plans PresidentJoko 'Jokowi' Widodo's administration got off on the right foot earlier this year with his highly acclaimedpolicy to scrap fuel subsidies, and allocate the savings to infrastructure development However, according toour Infrastructure team, land disputes still remain a major stumbling block for the implementation of

infrastructure projects (see 'Land Disputes Still A Major Stumbling Block', April 1 2015) Through April,

Jokowi's administration had spent less than 2.0% of its proposed annual budget allocation on infrastructure,and through May, only 1.5% of the overall capital budget had been utilised For example, during Jokowi'svisit to Tokyo in March, the president announced his plans for the Batang power plant project to kick off inApril However, up to June, the long-delayed construction of the USD4.0bn coal-fired power plant was stillmired in bureaucratic red tape Such an episode belies the government's optimism that economic growthcould be revived via government infrastructure spending That said, we recognise that infrastructure projectsrequires a long timeframe for planning and execution, hence, the effects will only be reflected in the longerterm

Back To Consumption

As Indonesia's economy continues to face significant headwinds from the abovementioned factors, theadministration has opted to lower taxes to boost consumption, announcing that 'luxury' taxes on householditems ranging from electronics, home appliances, to furniture will be lifted by end-June However, giventhat the sluggish economy has prompted some Indonesian firms to slash payrolls and headcounts, themultiplier effect of a tax reduction on consumer goods is likely to be limited over the near-term

Industry Risk Reward Index

BMI's IT Risk/Rewards Index (RRI) for Asia Pacific in Q4 2015 draws on the latest macroeconomic and

industry data, as well as technological and regulatory trends, to provide a snapshot of regional IT markets.The APAC RRI remains stable in Q4, with no change in positions, but several markets received revisedscores, primarily due to shifts in the growth outlook that affect the industry rewards category Indonesia andSouth Korea received small upgrades in the industry rewards category in Q4, while Thailand was the onlymarket to see its score downgraded this quarter

Japan retained top spot in the APAC RRI in Q4 after entering the index for the first time in the previousquarter Japan's score is unchanged and it continues to score well above its nearest rivals based on a

combination of market size, level of development, IT ecosystem and policy environment Market size is theprimary factor separating Japan from the high income city states of Singapore and Hong Kong in secondand third positions

Although Japan already has a dominant position in the APAC RRI, BMI believes there is potential for it to

extend its lead, at least in the short-term before the largest APAC emerging markets (China, India,

Indonesia) close the gap over the medium-to-long term Japanese enterprise IT spending as a share ofrevenue remains low compared to the most advanced IT markets such as the US, and it is here we identify arobust medium term growth driver Additionally, with a technologically literate population and a stronginnovation ecosystem we believe Japan is likely to be at the forefront of emerging technology adoption in

the region as local vendors including Fujitsu and Toshiba target the Internet of Things (IoT) opportunity.

Singapore and Hong Kong are unchanged in second and third position in Q4 - and continue to be separated

by just 0.1pps and share the highest Country Rewards scores in the region, reflecting their status as highly

developed city states As a result of the highly developed status of both IT markets BMI considers the

prospects for domestically driven spending growth to be diminished relative to emerging APAC, but theywill outperform developed markets in other regions due to hub status in the fast-growth APAC market.Additionally, there is some scope for IT enterprise sales growth, with both Singapore and Hong Konghaving large financial services sectors, which is a traditionally overweight IT spending vertical and isexpected to continue to be lucrative for vendors

South Korea is in fourth position again in Q4, but its upgraded score saw it draw level with Hong Kong Weconsider the South Korean IT market to share many of the characteristics of Japan's as an affluent APACmarket with a strong ecosystem of local IT vendors - particularly in the hardware segment In direct

comparison however, it scores behind Japan because of a smaller population and lower income levels,meaning it is a less lucrative market for vendors Income growth in South Korea forecast for 2015-2019should result in a narrowing of the gap to Japan in the industry rewards category, while a strong position in

the IoT marketplace through domestic firms such as Samsung offers bright prospects in the enterprise

segment There is however downside risk for South Korea due to relations with North Korea, and the latter'ssophisticated cyber attack capabilities, which is expected to remain a challenge over the medium term

Australia sits in fifth position in Q4 as the lowest scoring of the high income APAC markets High incomessupport a lucrative retail hardware market, but in other factors affecting our ratings Australia scores

relatively poorly In contrast to Japan and South Korea, the other large developed markets, Australia has a

weak domestic IT ecosystem and a lack of innovation capacity, a legacy that BMI believes means Australia

is unlikely to be at the forefront of IoT or cloud computing deployments over the medium term Instead itseconomy is oriented to different sectors, most notably its huge mining industry This economic focus doesnot however yield as many lucrative opportunities for IT vendors in comparison to financial services,manufacturing, and the ICT industry There is however one emerging technology for which we considerAustralia the most attractive market in the region - cognitive computing High labour costs and cheap

capital in Australia make it fertile ground for AI applications such as IBM's Ask Watson service, which has already been trialled by ANZ Bank.

China is the highest scoring emerging APAC market in the Q4 RRI - although due to much lower ITspending per capita levels it remains a full 10.3 points below Australia in the ratings China's large

population and rapidly developing IT industry, as well as supportive government policy, place it ahead of

higher income emerging markets BMI expects China to continue to move up the RRI over the medium

term, with factors behind our positive view including government and large enterprise support for thedevelopment of a Chinese cloud computing ecosystem and co-investment between Chinese and leadingglobal vendors in other areas of emerging technology including the IoT

As China progresses towards the creation of a stronger domestic software and services ecosystem, the otherregional giant India is looking to emulate China's previous success through an enlarged base of domesticelectronics manufacturing under Modi's 'Made In India' initiative The increased momentum in electronicsmanufacturing, as well as the wider Modi reform agenda, has brightened the IT forecast for India, but inorder for it to move up the RRI faster we highlight the lack of purchasing power in the mass market, and achallenging operating environment in terms of regulation, logistics and other infrastructure as impediments

to development

Indonesia is one market that currently scores ahead of India, and the gap widened in Q4 with an upwardrevision to the former's score based on our household income forecast, which points to robust retail

hardware spending growth over the medium term In 2015 Indonesia remains a highly price sensitivemarket, as illustrated through the predominance of USD1,000-10,000 households at around two-thirds ofthe total in Indonesia, we expect this group to reduce in size by around 50% by 2019, which will deepen the

IT market, albeit predominantly at the low value end of the market Broad based economic growth inIndonesia is considered a strength in our RRI, both through a direct benefit to retail spending and thetransmission to higher enterprise confidence levels

The bottom four positions in the APAC RRI are occupied by the relatively small and low income markets ofthe Philippines, Thailand, Vietnam and Sri Lanka The Philippines scores above its peers in large part due tothe boom in its outsourcing industry For instance, Information Technology and Business Process

Association of the Philippines (IBPAP) Chairman Danilo Reyes reported BPO revenue increased 16.1%from 2013 to USD18bn in 2014, with over 1mn jobs created in the Philippines Low-cost skilled labour and

a robust policy environment, including data protection legislation, make Philippines an attractive

destination, but BMI believes over the medium term it will have to compete against Vietnam, which also

offers low cost labour

Although starting from a lower base, we believe Vietnam has the potential to close the gap to the

Philippines in the outsourcing industry, as well is more broadly in the RRIs Our Country Risk team

forecasts robust and broad based economic growth 2015-2019, while the rapid development of the

electronics manufacturing and outsourcing segments are driving the development of the local IT industry.Meanwhile, supportive government policy is helping to promote moves up the value chain, for instance, inJune 2015 the Hi-Tech Parks plan was extended - with new parks set to be constructed between 2015 and

2030 through a combination of central government direction, local government funds and private capital Inaddition to creating new parks, it also plans to further develop existing facilities including Hoa Lac Hi-TechPark in Hanoi City, Saigon Hi-Tech Park in Ho Chi Minh City and Danang Hi-Tech Park

Table: Asia Pacific IT Risk/Reward Index - Q415

Market Overview

Hardware

BMI has not changed its outlook for Indonesia in the Q415 update, but we continue to highlight the squeeze

on growth from rupiah depreciation against the US dollar, which will erode Indonesian purchasing power inglobal markets We forecast local currency growth of 11.2% for the Indonesian hardware market in 2015 to

a total value of almost IDR100.5trn We maintain our bullish view for medium-term growth potential of

Indonesia's IT hardware in the Q4 update BMI forecast hardware spending will increase over the medium

term at a compound annual growth rate (CAGR) of 9.5% to 2019 in local currency terms Even with thisfast pace of growth, the share of hardware in the overall IT market will decline by eight percentage points(pp) during our five-year forecast period to 49% in 2019 as services and software growth is expected tooutperform as the market becomes more developed

Market Trends

BMI expects strong medium-term income growth will enable vendors to tap potential demand from the low

PC penetration rate in Indonesia as large numbers of first-time buyers enter the market, which should ensuregrowth in terms of both volumes and value 2015-2019 There are a range of factors that combine to

underpin our outlook for the Indonesian hardware market and still make it one of our picks for

outperforming growth both regionally and globally:

■ The sheer size of its economy places Indonesia among the top markets in Asia Pacific, even though PCpenetration remains low It is the only country in South East Asia to feature in the G20 Indonesia, at itspresent growth rates, is well on the way towards featuring in the top 10 global economies by the year2025

■ The latest regulatory data show household 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 6.3% annually 2015-2019, during which time GDP per capita willincrease from USD3,511 in 2015 to USD5,396 in 2019, the low PC penetration rate is a compellingbusiness opportunity

■ Indonesia's regions offer particularly strong growth opportunities The modest national PC penetrationremains centred on cities such as Jakarta

■ 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, with potential for acceleration ininvestment in 2015 as the Association of Southeast Asian Nations (ASEAN)'s Economic Community

(AEC) develops (see Industry Trends And Developments for more details) Apart from being price leaders,

these companies also cater to custom requirements These companies account for a sizeable fraction ofoverall PC sales

Hardware Market

(2012-2019)

Personal computer sales, IDRmn Servers sales, IDRmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

25,000,000 50,000,000 75,000,000 100,000,000 125,000,000

e/f = BMI estimate/forecast Source: BMI

Enterprise Demand

Small- and medium-sized enterprises (SMEs) form an important, yet comparatively unexplored, component

of the Indonesian hardware market

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:

■ National Broadband Plan 2015-2019: Aims to extend wireline broadband services to 30% of the urban

population and 6% of the rural population, while mobile broadband services are to be rolled out to 52%

of rural consumers

■ The Palapa Ring Program: Also known as the Nusantara Superhighway Project and driven by the

communication and information technology ministry, the programme will create a backbone of opticalfibre on a nationwide scale spanning more than 55,000km and including terrestrial and undersea cables

■ E-GP: The ongoing computerisation of government procurement had covered more than 25 enterprises 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

BMI estimates a total of 3.65mn notebooks were sold in 2014, an increase of just 8% from 2013, a

slowdown from growth in recent years as booming tablet demand cannibalised notebook sales Local mediasuggested that vendor performance showed weakness particularly in the second half of the year, due toweaker demand from China However, we expect stronger growth over the medium term as first-time buyerhouseholds are attracted to the greater functionality offered by notebooks compared to tablets We forecastnotebook volumes will grow at a CAGR of 12.1% 2015-2019, with total volumes expected to reach almost6.50mn in 2019

Microsoft's decision in 2014 to cut operating system (OS) licensing costs on low-cost devices has enabled partner vendors to be far more cost-competitive against Android tablet vendors, which boosted BMI's

outlook for notebook sales growth over the medium term As such they can now offer a mix of mobility andfunctionality, which we have long argued to be an attractive mix of features for first-time buyer householdswhere an existing desktop/notebook cannot act as a hub for a tablet

The notebook market is driven by retail sales, with only around one-third of units in sold in the enterprisemarket, with the desktop a stalwart in enterprise sales 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 for first-time PC users, including students Given the demographic profile ofIndonesia, it is obvious that the most promising customer segment is overwhelmingly in favour of mobilePCs Lenovo, in fact, pegs the proportional share of notebooks among the retail user's PC purchases at aformidable 85%

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

the country have been occupied by Acer and ASUS respectively in recent years In January 2015 Lenovo

stated it was targeting second position in the Indonesian notebook market with a market share of 25%, whilemaintaining its overall leadership of PC sales

The growth opportunity in the Indonesian notebook market means vendor interest has been maintained, with

Japanese vendor Fujitsu announcing two new E-Series Lifebook notebooks in June 2014 The notebooks

are aimed primarily at the enterprise segment, where Fujitsu has a strong position as a hardware provider,but it was still targeting growth of 20% across all product lines in Indonesia in 2014

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 By 2013 netbooks had declined to a peripheral device category

in the Indonesian market in terms of sales

2,500 5,000 7,500

e/f = BMI estimate/forecast Source: BMI

Tablets

BMI estimates tablets were again the largest PC device category in 2014, having narrowly surpassed

notebook volumes in 2013 We estimate shipments of 4.70mn in 2014, an increase of 36.8% from 2013, and

we forecast a CAGR of 5.6% to 2019 We expect tablets to remain popular in Indonesia due to the low-cost

of devices relative to notebooks - critical to success in a low-income, price-sensitive market

However, we caution that the cuts to Windows OS licensing fees and vendor innovation in the hybridnotebook category could erode the attractiveness of tablets over the medium term Additionally, the intensedynamic of price competition means that profitability is limited in the tablet market in Indonesia unlessvendors carve out a significant share of sales to ensure the benefit of scale Finally, the growth dynamic ofthe tablet market, with a rapid diffusion of ownership in core user groups and subsequent lengthening ofreplacement rates, means the tablet market could be subject to a significantly slower growth rate over themedium term

Adding to the downside, Indonesian mobile operator smrtfren said in February 2015 that it will stop selling

tablets, arguing that larger screens on new smartphones will eliminate the need to buy a tablet

Tablet uptake in Indonesia was initially slow, with an Apple-centric market meaning the devices were out

of reach for the majority of consumers due to low-incomes and the premium price tags of iPads However,more affordable Android devices have seen volumes increase markedly since 2012, although Apple remains

a market leader

Statcounter data show that Apple was surpassed as the leading tablet vendor by browsing traffic share inIndonesia in January 2015 Samsung took the lead with a share of 39.8% of tablet browsing traffic, ahead ofApple's share of 38.9%, with tablet traffic share a proxy for installed base of devices By June 2015, the gaphad widened, with Samsung leading with a share of 41.9%, clear of Apple's share of 32.6% Despite its

declining share of the tablet market, BMI believes Apple has benefitted from increased focus on Indonesia,

which despite being a low income emerging mass market, is home to a significant pool of premium orientedconsumers as a result of the size of its population

The top two have a dominant position in the Indonesia tablet market, but as is the case in the majority ofemerging markets, price erosion in the Android ecosystem has seen Samsung fall back slightly, losing share

to rivals undercutting its Galaxy range to establish market share - for example, Acer, ASUS and Lenovo - as

well as a host of low-cost local/regional vendors Based on browsing traffic share, BMI believes both Apple

and Samsung lost some market share to smaller rivals in 2014, but only ASUS is presenting a significantchallenge, and even then we do not consider it to be a viable candidate to take one of the top two spots, atleast in the short term

Taiwanese vendor ASUS stated that it expected tablets to contribute 50% towards its total Indonesia marketsales in 2013 ASUS introduced a broad portfolio of tablets models at various price points, with the newestFonepad tablet following on from Memopad, VIotab and Padfone The vendor hoped to capture 20% marketshare in 2013, up from around 1% in 9M12, by focusing on low-cost tablets in an effort to target theemerging middle class Statcounter is supportive of ASUS making inroads from a low base, with a 5.53ppincrease in its share of tablet browsing traffic in Indonesia to 6.35% in June 2015

When it announced the latest version of the Yoga Tablet 8 and 10 in Indonesia in October 2014, global PCmarket leader Lenovo stated it was aiming for a 10% share of the Indonesia tablet market in 2015 - up from

a share of around 6% in 2014 Lenovo officials stated its Indonesian business had been adversely affected

by device trends, political instability and the economy, with its business down 10% (however, they did notmention whether this was in value or volume terms)

BMI believes that low-priced alternatives from Chinese original equipment manufacturers and local

manufacturers are a major threat to global brands in Indonesia and are playing a significant role in making

tablets truly mass market 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 eight-inch Android tablet The S Nexian device comes with 8GB to 32GB of storage, with a1,024x768 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 operator's 5,000 Wi-Fi locations across the country.

Meanwhile, it was announced in October 2014 that local smart devices manufacturer Speedup had

partnered with Microsoft and Intel and planned to release an eight-inch Windows tablet in December 2014

or January 2015 aimed at the consumer and commercial segments It also plans to release a 10-inch version

of the tablet aimed at the education segment The partnership means the devices come with an attractivepackage of software and services including Microsoft Office 365, 1TB of One Drive cloud storage and 60minutes of free Skype calls per month for a year

ASUS Gaining Ground But Top Two Remain Clear

Indonesia Tablet Browsing Traffic By Vendor (%) & y-o-y Change, June 2015

Source: StatCounter

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 to leverage this strength over rival iOS and Android devices

by designing tablets with strong productivity functionality alongside the passive media consumption

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), HP's Envy and Lenovo's Yoga and Helix More recently, a range of hybrids including the Dell Venue range and

ASUS Transformer run full versions of Windows 8, increasing the functionality gap versus Apple andAndroid tablets

Although design innovation has some way to go, and prices of hybrids will need to decline, the multi-usedevice has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience However, Microsoft must first overcome a brandperception deficit it faces against Apple and Android

Software

BMI forecast the Indonesian software market will grow by 20.6% in local currency terms in 2015, and at a

CAGR of 18.6% 2015-2019 We expect total spending on software will reach a total of just over

IDR56.64trn in 2019, and the share of software in the overall IT market will increase by around 3.0pp from

2015 to 2019 We expect software spending growth to outperform the hardware segment by a considerablemargin as the market matures, and the piracy incidence is reduced

Enterprise Software

Indonesia has a vibrant enterprises resource planning (ERP) market with the presence of global leaders

including SAP, which has a solid presence in the region However, it is believed in certain quarters that

Indonesian business practices require high levels of customisation in ERP, which is delivered by

home-grown companies such as Epicor

Telecoms operators have been a major source of enterprise software demand, and along with the financialservices vertical, has been the cornerstone of the market for more complex solutions Strong demand

continued in April 2015, when Telkomsel selected Cloudera's enterprise analytic data management

solution, powered by Apache Hadoop, to aid its progression from a voice- and SMS-based business to a