Australia information technology report q1 2015

IT services will be fastest growth area of the IT market over the medium term, with cloud services the keygrowth driver as local companies try to use efficiencies enabled by the National

Q1 2015 www.businessmonitor.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q1 2015

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2014

Business Monitor International

© 2014 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International, 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

Wireline SWOT 11

Political 13

Economic 14

Industry Forecast 15

Table: IT Industry - Historical Data & Forecasts (Australia 2011-2018) 15

2014 Outlook 15

Macroeconomic Forecasts 21

Economic Analysis 21

Table: Macroeconomic Forecasts (Australia 2010-2016) 23

Industry Risk Reward Ratings 25

Asia Pacific Risk/Reward Index 25

Table: Asia Pacific IT Risk/Reward Index - Q1 2015 28

Market Overview 29

Hardware 29

Software 36

Services 41

Industry Trends And Developments 49

Regulatory Development 54

Table: Government Authority 54

Government Initiatives 54

Regulatory News 56

Competitive Landscape 60

International Companies 60

Table: Dell 60

Table: Datacom 61

Table: SAP 62

Table: Panasonic 63

Local Company 64

Table: The Good Guys 64

Company Profile 65

SAP 65

Hewlett-Packard 71

Table: Hewlett-Packard Financial Performance By Division: 76

Regional Overview 80

Demographic Forecast 84

Table: Population Headline Indicators (Australia 1990-2025) 85

Table: Key Population Ratios (Australia 1990-2025) 85

Table: Urban/Rural Population & Life Expectancy (Australia 1990-2025) 86

Table: Population By Age Group (Australia 1990-2025) 86

Table: Population By Age Group % (Australia 1990-2025) 87

Methodology 89

Industry Forecast Methodology 89

Sources 90

Risk/Reward Index Methodology 91

Table: It Risk/Reward Index Indicators 92

Table: Weighting Of Components 93

BMI Industry View

BMI View: Due to high labour costs, BMI believes Australian enterprises could be among the early

adopters for AI applications such as IBM's Ask Watson service, which has already been trialled by ANZ Bank Emerging technologies aside, the growth outlook is relatively weak in Australia This is in part a consequence of market maturity, meaning growth will underperform the APAC average, which is weighted

to emerging markets but there is also macroeconomic downside as BMI expects economic growth to slow over the medium term.

Headline Expenditure Projections

■ Computer Hardware Sales: AUD8.2bn in 2014 to AUD8.5bn in 2015, up 3.8% in local currency terms.

Slowdown in tablet demand due to market saturation will be offset by a stabilisation in desktop andnotebook sales in 2015 due to design innovation in the hybrid notebook market

■ Software Sales: AUD4.7bn in 2014 to AUD4.8bn in 2015, up 0.8% in local currency terms Security

software will outperform, particularly for small and mediumsized enterprises (SMEs) and consumers but the effect of XP enterprise upgrades will be diminished

-■ IT Services Sales: AUD9.7bn in 2014 to AUD10.7bn in 2015, up 9.6% in local currency terms IT

services will be fastest growth area of the IT market over the medium term, with cloud services the keygrowth driver as local companies try to use efficiencies enabled by the National Broadband Network(NBN)

Key Trends And Developments

After a sustained boom since 2012 the Australian tablet market appears to have peaked, in line with BMI's expectations High-street consumer electronics retailer JB Hi-Fi reported that sales in July 2014 fell by

5.5% year-on-year (y-o-y), mainly due to a significant slump in demand for new and replacement tabletcomputers We believe this data reflects the level of consumer satisfaction with existing products and the

slower rate of innovation by leading vendors such as Apple and Samsung that have produced iterative

improvements rather than significant changes in recent announcements Although a small uptick is expected

in 2016 as mobile network operators seek to attract customers to their new 4G mobile broadband networks

by including tablets in new service bundles, sales are expected to fall in the following years as the

operational lives of high-spec devices - as well as their high cost - obviates the need to buy a replacement inthe short to medium term

In contrast to the slowdown in tablet demand the Australian cloud computing growth story has plenty ofmomentum remaining The latest research by the Australian Communications and Media Authority

(ACMA) showed the adoption of cloud computing services continued in 2013 In March 2014 the ACMAclaimed that 36% of SMEs actively using cloud services believed that such services provided easier or moreconvenient access to data and key resources (36%), assisted in making key productivity tools accessiblefrom multiple locations (15%) and that disaster recovery would be facilitated through the use of cloud-basedplatforms (11%)

■ Strong government support for ICT programmes.

■ IT-literate population with high levels of PC ownership and a propensity for premiumdevices

■ Strong financial sector, a large source of demand for enterprise software andservices

■ Tablet boom has offset the decline in desktop and notebook sales

Weaknesses ■ Australia has a relatively mature domestic market, with correspondingly slow growth

rates

■ Sensitive to volatility in the global economy

Opportunities ■ High labour costs and proximity of low-cost competition make Australia a fertile

market for automation technologies such as IBM's Watson and other personalassistant products

■ Considerable demand for cloud computing services from both the public andenterprise sector

■ Government cloud computing strategy creates opportunities for vendors in the publicand SME sectors

■ Potential for a rebound in notebook sales as hybrid designs evolve

■ Other major IT projects in areas such as healthcare, education and smart cards

SWOT Analysis - Continued

Threats ■ A cheaper Australian dollar would affect consumer and business demand in the

import-dependent IT market, with downside weighted towards the latter years of ourforecast

■ Vendors face threat of parliamentary enquiry into product pricing and are comingunder pressure regarding tax arrangements

■ Data from retailers indicate a sharp slowdown in the tablet market in 2014, in line withour long-held view that saturation and slower rate of innovation would result in longerreplacement cycles

Wireline SWOT

Australia Wireline SWOT

Strengths ■ Australia's overall wireline sector is host to a large number of service providers, many

of which offer a full range of voice, data and internet services

■ Many service providers offer broadband internet connectivity by means of severaldifferent technologies

■ The penetration rate, measured as a proportion of buildings reached with broadbandnetwork infrastructure, is extremely high

■ The residential market supports strong demand for pay-TV services

■ The business market supports strong demand for converged data services

■ Australia's leading broadband operators continue to report strong internet andmultimedia service sales

Weaknesses ■ Despite a significant number of service providers, the broadband market continues to

Opportunities ■ The National Broadband Network, announced in April 2013, aims to be completed

sooner and cheaper, with the trade-off being slower connectivity

■ Demand for wireless broadband services, including WiMAX, 3G datacard and USBmodem-supported services is growing

Australia Wireline SWOT - Continued

■ Australia's leading broadband operators are investing in the development of higherspeed broadband services This has potential to drive demand for new data services

■ The government revealed that it has set aside AUD60mn for regional, rural andremote telecoms projects; satellite and wireless broadband networks are seen as asource of potential investment in remote regions

Threats ■ Fixed-line sector may decline at a more rapid rate than expected, with potentially

negative consequences for ADSL growth

■ Proliferation of naked ADSL could hasten the decline of the fixed-line sector

■ Growing popularity of wireless broadband services could negatively affect the marketfor fixed broadband access based on DSL and cable

■ The high rate of broadband penetration reduces the scope for further growth in thebroadband sector; growth will slow as the market nears saturation point

■ Following the election of the new Liberal-National Coalition government in September

2013, the NBN is likely to offer slower connectivity than originally envisaged

SWOT Analysis

Strengths ■ Australia is a mature democracy with a broadly stable party system

■ Economic stability over recent years supports the current political system and radicalgroups are unlikely to gain substantial support

Weaknesses ■ As one of the region's largest and most stable states, the country attracts many

refugees and economic migrants The issue is a key source of domestic tension andhas been hotly debated in parliament in recent times as the capsizing of a boat led tothe death of a number of refugees The issue continues to be debated in the federalparliament with no sign that political parties will find a viable alternative that wouldensure the safe passage and fair processing of the refugees, while reducing thepossibility of people smuggling

■ The fragility of the state governments' finances compared to the large infrastructureprojects that they need to undertake has led to questions with regards to thecompatibility of the federal-state system with the country's current developmentneeds

Opportunities ■ Australia has historically enjoyed close military ties with the US However, with the

rise of regional economic powers such as China, it will need to balance competingmilitary and economic ties

Threats ■ Australia's early support for the US 'War on Terror', among other things, has made

Australians abroad a target for Islamic extremists

■ Australia's close alliance with the US, particularly under John Howard, has left alingering feeling among some Asian governments that it is America's 'deputy sheriff'

in the region

SWOT Analysis

Strengths ■ A free-market economy supported by a highly educated workforce

■ Blessed with rich natural resources, Australia's economic activity has beenaugmented by demand for commodity exports and the investments made in themining sector

Weaknesses ■ The persistent current account deficit increases vulnerability to capital flows and, by

extension, currency volatility

■ The export basket is highly concentrated in commodities, and consequently exposesthe economy and currency to fluctuations in world prices for metals, coal andagricultural goods

Opportunities ■ The rapid expansion of Asian economies in recent years offers new opportunities for

diversifying trading ties from core European markets

■ A low level of government debt has provided a certain amount of flexibility in fiscalpolicy to support domestic demand through the downturn

Threats ■ The high level of private sector debt - especially mortgage loans - fuelled by overseas

funding poses a threat to sustained growth and financial stability

■ A collapse in exports from a drop in resource demand from China and other hungry countries would severely impact headline GDP growth

resource-■ Australia is vulnerable to extreme weather that may lead to droughts and floods,which have become increasingly severe in past years as a result of global climatechange

AUDmn 7,584.7 7,756.5 7,904.2 8,185.2 8,499.3 8,718.8 9,006.9 9,241.0Personal computer sales, AUDmn 6,048.0 6,231.6 6,397.7 6,612.8 6,853.8 7,017.8 7,236.1 7,410.4 Software sales, AUDmn 4,087.1 4,162.3 4,345.1 4,728.1 4,764.4 5,099.4 5,272.1 5,483.8 Services sales, AUDmn 8,044.1 8,666.4 9,165.6 9,741.6 10,677.9 11,351.6 12,134.2 12,943.0

f = forecast Source: BMI

BMI made a minor downward revision to historical data for the Australian IT market in the Q414 update,

but our medium-term outlook is unchanged We maintain our view for solid growth in local currency terms,

as we forecast a CAGR of 5.3% 2014-2018 Over this period the market will remain stable at around 1.4%

of GDP The Australian IT market has considerable medium-term potential, particularly in areas such astablets, cloud computing, real-time enterprise software and data centre growth

However, it should be noted that as a result of BMI's in-house Country Risk forecast for significant

weakening of the Australian dollar against the US dollar over the forecast period, the IT market is forecast

to grow at a CAGR of just 0.1% in US dollar terms 2014-2018

of 2.3% in 2015 (the same as for 2014), and an increase from 1.3% real growth in 2014 to 1.6% in 2015

PC penetration is high in Australia, limiting growth potential, but nonetheless we expect sales growth tocontinue as high income consumers purchase personal devices on a short replacement cycle We expect

2015 to be a strong year for sales of traditional form factors such as desktops and notebooks after recent

declines The withdrawal of Microsoft official support for the legacy OS XP in April 2014 should continue

to cause hardware upgrades, particularly in the enterprise and public sector markets However, it will be

tablet sales that again outperform as the largest device category Meanwhile, BMI considers there to be

potential for growth of hybrid notebook sales running Windows 8/8.1 as a result of design innovation on thepart of vendors, while at the low-end, Microsoft's decision to cut OS licensing fees on low-cost notebooksshould make them more cost-competitive versus tablets

The Australian government is an important factor in the IT market through programmes such as the

National Broadband Network (NBN), which is extending connectivity across the country National and stategovernments will continue to roll out new initiatives, and the Victoria government has invested more thanUSD150mn in IT in schools New South Wales and Queensland were also rolling out IT for schools

projects Meanwhile, an initiative by the not for profit organisation One Laptop Per Child saw 50,000laptops distributed to the nation's schoolchildren by June 2014

The enterprise IT outlook is the weakest out of retail, public sector and enterprise, with business confidencesusceptible to global headwinds and the domestic slowdown in economic activity There are however areas

of rapid growth within the enterprise segment, which are mainly based on the increasing prevalence ofconnectivity Three key areas that stand to benefit are cloud computing, data analytics and machine-to-machine communications, about which BMI holds a positive medium-term view

In 2015, uptake of cloud services will continue to increase Surveys indicate that cloud computing is apriority for Australian CIOs, while the release of the government's cloud computing strategy in Q213 shouldalso boost deployments Cloud initiatives have already been implemented by many of the country's leadingbanks, and across sectors cloud adoption is spreading from storage and email to areas such as humanresources management The government has adopted a six-year cloud computing strategy Cloud computingspending could reach around AUD4bn by 2017

Market Drivers

The medium-term outlook is for stable IT market growth, underpinned by economic stability BMI forecaststhe Australian economy will remain on a lower growth trajectory over the medium term, with real GDPgrowth forecast to average 2.6% 2014-2018 and real private consumption growth to average 1.7% annually2014-2018 However, we also highlight downside risk to this outlook, which could result in market

disruption We expect a weakening of the Australian dollar from an average of AUD1 to the US dollar in

2013 to AUD1.3 in 2017 and 2018 Depreciation could undermine domestic confidence levels, and reduce

consumer purchasing power of imported products, both of which would be detrimental to IT market

spending

The maturity of the Australian hardware market means growth rates will be significantly slower than theAPAC average 2014-2018 BMI estimates that household PC penetration in Australia at just below 90% in

2014, meaning there is little scope for growth in first-time PC sales However, there are large opportunities

in the personal/upgrade device market as we expect consumers will continue to be willing to spend oninnovative devices that offer new use cases Tablets are the most prominent device meeting these

requirements, but we believe hybrids/convertibles and ultrabooks that use Haswell and, soon, Broadwellchips could gain traction in Australia There is also a significant medium term opportunity in the wearabledevices market, although it is too early to gauge potential market impact in 2015

Increased reach of broadband infrastructure over the medium term will boost activities such as onlinebanking and shopping, while the increased upload speeds delivered by the NBN will be a crucial enabler forwidespread adoption of cloud computing services The expansion of broadband infrastructure will also act

as a foundation for the ongoing modernisation of retail operations, including improved logistics and

distribution, as well as a shift to online sales

One important feature of the Australian economy which could position it as a leader in emerging

technologies is the high labour costs in Australia that will generate demand for services that replace labour.For instance, IBM's Ask Watson was adopted by ANZ Bank in H113 to enhance customer services and cutcosts Such technology is in the early stages of commercial deployments, but BMI believes that Australiacould be a fertile market for such technology over the medium term due to the scale of potential labour costsavings

f = forecast Source: BMI

Segments

Enterprise software demand in key verticals will continue to be centred on enterprise resource planning(ERP), customer relationship management (CRM) and business intelligence solutions - but we also expectthese applications to gain traction among small- and medium-sized enterprise (SME) market A catalyst forwider adoption of enterprise software suites among SMEs is likely to be the provision of basic software

delivered in the cloud Further, BMI believes security software has potential for strong growth over the

medium term as awareness about threats grows, particularly among SMEs

In the enterprise segment regulatory compliance will result in continued spending by banks, and intensecompetition in the retail sector is spurring spending on CRM and back-office systems Competition in thetelecoms field is a driver for that key IT spending segment, where deregulation has led to new entrants

IT services are forecast to be the outperforming segment of the IT market in the medium term, as demand isdriven by cloud computing services, data analytics and machine-to-machine communications Cloud

computing should see strong growth with the rollout of the NBN and the release of the government's cloudcomputing strategy in 2013 Opportunities will exist in telecoms, healthcare and utilities verticals Cloudcomputing will be key as businesses look for opportunities to reduce cost and increase flexibility, and hasalready gained traction in the market and spread beyond initial core application areas, with around one-third

of Australian organisations estimated to be using some cloud services

Over the medium term the development of supporting infrastructure, new cloud computing offerings andincreased competition in this segment are expected to fuel further demand from end-users for this

technology The federal government has set out a timetable for migrating government agencies' computingsystems to a public cloud environment Australia's big four banks will remain in the vanguard of movestowards cloud computing after revaluating their IT spend during the economic downturn

Meanwhile, government initiatives such as e-government, healthcare and education will drive significantopportunities for IT vendors over the medium term The National E-Health Transition Authority aims tocreate a paperless environment in Australia's health sector, including public hospitals Although the

government is pursuing investments in IT in a number of areas, it is reviewing procurement procedures toreduce cost, which could squeeze vendor margins For instance, in early 2013 the Australian GovernmentInformation Management Office (AGIMO) consolidated its contracts with Microsoft through a singlereseller to deliver cost savings of AUD100mn

Australia GVA By Vertical (%)

IT services from AUD9.7bn to AUD12.9bn

Macroeconomic Forecasts

Economic Analysis

BMI View: We are revising up our real GDP growth forecast for 2014 to 2.8% from 2.3% previously, given

the stronger-than-expected growth rate seen in H114 However, we remain below consensus, and expect growth to slow to 2.3% in 2015 as the strong construction picture struggles to counteract the weakness in external demand.

Australian real GDP came in at 1.9% quarter-on-quarter (q-o-q) annualised in Q214, slightly higher thanconsensus expectations but nonetheless marking a slowdown in growth from the strong growth seen inQ114 Given the stronger-tan-expected growth rate seen in H114, we are revising up our real GDP growthforecast for 2014 to 2.8% from 2.3% previously We remain below consensus (3.0%), however, and expectdomestic and external economic weaknesses to continue to result in a slowdown in growth, with our 2015forecast remaining at 2.3%

Lower Trend Growth To Be Expected

Australia - Real GDP Growth, % chg q-o-q annualised

Source: BMI, ABS

Looking at the breakdown of the Q214 data, the most dominant trend was the acceleration in domesticdemand Both private consumption and investment rebounded strongly, with domestic demand surging by5.5% q-o-q annualised However, net exports subtracted 3.7 percentage points from headline q-o-q growth

as exports fell by 3.2% and imports rose by 14.9%, resulting in a sharp rise in the trade and current accountdeficit Corresponding with the relatively strong performance of domestic demand, form an industryperspective, manufacturing output expanded by 8.4% q-o-q, construction expanded by 5.6% q-o-q, whilemining contracted by 5.6% q-o-q

Going forward, we continue to expect the mining industry to struggle under the weight of declining externaldemand for Australia's raw materials, which should keep overall export growth subdued, if not negative.Meanwhile, we believe that domestic demand will fail to maintain its current pace of growth The

Australian Industry Group's performance of manufacturing and services gauges have both fallen back

below 50 in recent months, with profit margins remaining under pressure as input prices rise faster thanselling prices We expect this to weigh on domestic economic activity over the coming months

Construction Sector In The Driver's Seat

One area of significant strength over recent months has been the construction sector, with the performance

of construction activity surging above 50 amid a rapid rise in property prices, a renewed pickup in mortgagelending, and strong commercial property construction There is potential for rising property prices tosupport continued construction growth over the coming quarters, as well as providing a boost to privateconsumption However, this is unlikely to arrest the trend of gradually declining economic activity acrossthe economy as the country's terms of trade weaken, putting downside pressure on household budgets.Furthermore, with housing affordability once again coming under pressure thanks to higher property prices,this will make it difficult for a self-sustaining cycle of rising property prices and rising consumer spending

to take hold The rise in the unemployment rate, which we believe is partly structural in nature, will act as adrag to further house price growth

Speculative Property Demand Not Sustainable

As we recently pointed out, data from the Australian Bureau of Statistics shows that the proportion ofhousing-related financial commitments attributable to investors (rather than owner-occupiers) is closing in

on previous peaks last seen in 2004 and 2008, which coincided with house prices easing in the followingmonths Investment-related housing credit has increasingly driven both housing-related and overall creditgrowth in recent quarters, and price declines could force these investors to sell in a downward trendingmarket With an overvalued property market being the main source of economy-wide credit expansion, any

weakness has the potential to lead to a sharp decline in overall credit and money supply growth, whichwould in turn lead to weakness in economic activity and further weakness in the employment picture.

Table: Macroeconomic Forecasts (Australia 2010-2016)

Population, mn 22.4 22.7 23.1 23.3 23.6 23.9 24.2 Nominal GDP,

USDbn 1,247.3 1,499.6 1,555.1 1,501.2 1,474.2 1,454.3 1,452.3GDP per capita,

USD 57,009 67,165 66,663 61,709 64,105 62,630 61,947Real GDP growth,

% y-o-y 2.7 2.5 3.8 2.4 2.8 2.3 2.5Industrial

production, %

y-o-y, ave 4.7 1.2 4.6 3.6 1.6 1.6 2.1Consumer price

inflation, % y-o-y,

ave 2.8 3.4 1.7 2.4 2.4 2.1 2.3Consumer price

inflation, % y-o-y,

eop 2.7 3.1 2.2 2.7 2.1 2.1 2.4Central bank policy

rate, % eop 4.75 4.25 3.00 2.50 2.50 2.50 2.50Exchange rate

AUD/USD, ave 1.09 0.97 0.97 1.04 1.11 1.18 1.23Exchange rate

AUD/USD, eop 0.98 0.98 0.96 1.12 1.14 1.22 1.25Budget balance,

AUDbn -58.1 -37.2 -32.4 -31.2 -41.3 -43.7 -43.7Budget balance, %

of GDP -4.3 -2.6 -2.2 -2.0 -2.5 -2.6 -2.4Goods and

services exports,

USDbn 289.5 319.6 312.3 284.0 297.7 298.5 309.5Goods and

services imports,

USDbn 282.5 307.7 336.8 293.1 296.4 290.8 297.7Current account

balance, USDbn -48.7 -41.0 -65.4 -44.9 -32.2 -20.3 -12.4Current account

balance, % of GDP -3.9 -2.7 -4.2 -3.0 -2.2 -1.4 -0.9Foreign reserves ex

gold, USDbn 34.1 42.8 44.9 50.1 53.5 57.0 60.4Import cover,

months 1.4 1.7 1.6 2.1 2.2 2.4 2.4Total external debt

stock, USDmn 1,168,828.6 1,286,128.8 1,392,940.5 1,353,181.5 1,322,072.1 1,233,162.8 1,205,491.8

Macroeconomic Forecasts (Australia 2010-2016) - Continued

Total external debt

stock, % of GDP 93.7 85.8 89.6 90.1 89.7 84.8 83.0Crude, NGPL &

other liquids prod,

000b/d 569.2 495.7 484.2 411.8 409.3 430.0 441.0Total net oil

exports (crude &

products), 000b/d -455.6 -574.0 -607.0 -689.4 -702.1 -694.5 -693.9Dry natural gas

production, bcm 45.9 45.6 48.2 49.8 52.6 85.2 109.3Dry natural gas

consumption, bcm 33.4 35.1 36.1 37.0 38.0 38.9 39.9

Source: National Sources/BMI

Industry Risk Reward Ratings

Asia Pacific Risk/Reward Index

BMI View: BMI's Asia Pacific IT Risk/Reward Index (RRI) compares the potential of a selection of the

region's markets over our medium-term forecast period to 2018 The Q115 index reflects our analysis of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government initiatives to develop IT markets and local industry.

There are several changes in the position of markets in our Q115 index, and a net improvement in theregional average score This was driven by stronger sales of PCs (including desktops, notebooks and tablets)

in several key markets, as well as large scale investments by international IT enterprise vendors looking totap into the region's growth story The average regional IT score increased 0.7 percentage points

(pps) quarter-on-quarter (q-o-q) to 56.3 out of 100, slightly behind the European average of 57.0, but withgreater upside potential as the region continues to develop

There was a change at the top of the table, as South Korea reclaimed top spot from Singapore South Korea

moved up with a 1.2pps q-o-q improvement in its overall score, as BMI's in-house Country Risk team

upgraded the country rewards score, reflecting the medium-term growth prospects for the economy as awhole South Korea continues to score highly in the industry rewards category, second only to China, with ascore of 70 out of 100, supported by high per capita spending and high penetration not only of desktops andnotebooks but also of tablets and increasingly hybrid notebooks There is scope for an uptick in enterprise

IT spending in the medium term as vendors focus on cloud computing and IT services opportunities.Adoption levels among South Korean firms remain low considering the country's advanced economy status,but we expect this to change as competition in a range of sectors in the wider region intensifies, drivinginvestments in cost saving products and solutions

Singapore dropped to second position in the rankings in Q115, although there was no change to its score of72.8 out of 100 Singapore has always scored highly in our index, as one of only two countries with themaximum score of 100 in the country rewards category However, it scores slightly below average in theindustry rewards categories due to the relatively small size of its population, and therefore its IT market.This is offset by Singapore's position as a regional hub for cloud computing services and data centres, which

is continuing to attract major inward investment by global and regional vendors

Hong Kong is in third position in the index, closing the gap with Singapore as a result of a 1.7pps

improvement in the industry rewards category BMI upgraded the outlook for medium-term IT spending

growth, a key input in the industry rewards category Like Singapore, Hong Kong receives the maximumscore of 100 in the country rewards category As an economically developed city-state, Hong Kong offersmany advantages to firms, and is a a regional financial services and cloud computing hub However, there isdownside risk to Hong Kong's continued status as an affluent regional city-state, with financial servicesvolumes under threat from the rapid rise of Shanghai, as well as political risks, as shown by protests inH214, that create some uncertainty regarding Hong Kong's future political development.

Australia's score is unchanged, and it remains in fourth place, 12.8pps clear of Malaysia in fifth The maindifferentiator is the high incomes enjoyed by Australians compared to emerging markets in Asia Pacific.This supports a lucrative retail hardware market with very high per capita spending The developed

economy ensures strong demand for enterprise solutions, while high labour costs make it a fertile market for

the development of a new generation of labour saving technologies such as IBM's Watson-as-a-Service,

which has already been trialled by local financial institutions Investments in supporting infrastructure,particularly the National Broadband Network (NBN), present medium-term upside potential

Malaysia has moved up one place to fifth, overtaking China, as the former's score increased by 0.8pps whilethe latter's fell by 0.7pps However, the drawback of Malaysia's far smaller market is only partly offset byhigher incomes and development levels There is a difference of just 0.2pps in the two countries'

overall scores, and in future quarters we expect China to move back up the table However, Malaysia alsohas strong growth prospects as incomes rise and as a result of a supportive government policy environment

For instance, MSC Malaysia has made cloud computing development a strategic priority and is working to

develop a national cloud computing platform State governments are also exploring cloud computing, whichshould fuel growth in on-premises deployment of enterprise solutions

China has dropped one place, but continues to be the market with the strongest medium-term potential,owing to its huge population and relatively advanced IT market in the context of income levels We have abroadly positive outlook, with the latest round of economic reforms, scheduled for implementation by 2020,considered to be a positive for IT market development Strengthening institutions and reform of the one-child policy are all expected to boost growth and increase private sector confidence in the IT market.Support for the service sector and modernisation of state-owned enterprises, including finance, telecoms,healthcare, education and professional services (eg call centres) will provide new avenues for revenuegrowth

Indonesia's IT score increased faster than any other market in the region q-o-q in Q115, as it overtook Indiaand moved up to seventh in the table We have restated historical data for the Indonesian IT market better to

reflect the boom in consumer and enterprise spending on IT products and solutions in recent years BMI has

a bullish outlook for IT sector development over the medium term as a result of the strong growth story,enterprise modernisation initiatives and the large-scale investment by global and regional vendors toestablish and expand their presence in the country Indonesia will become an increasingly important engine

of the world's largest IT services players, such as Wipro, Tata Consultancy and

Infosys However, ineffectual governance and weak institutions obstruct faster development, and we do not

see a short-term improvement despite the new government's reform-focused rhetoric That said, shouldPrime Minister Narendra Modi's government succeed in generating economic reform and improvingstandards of governance, India could move to a higher growth trajectory

The Philippines' IT score improved by 0.7pps after we upgraded its spending growth outlook due to thecontinuation of large-scale investments in the business process outsourcing (BPO) industry We expect this

to generate demand for IT products and solutions, particularly as outsourcing firms move up the value chaintowards services such as software development

Thailand and Vietnam are in 10th and 11th place, respectively, with unchanged scores However, the twomarkets have significantly different risk profiles, with Thailand's outlook weighted to the downside due tothe political crisis and the military's increasingly aggressive stance towards IT and telecoms services.Vietnam has considerable upside potential as it emerges as a hub for regional manufacturing, a trend thatcould accelerate with the development of the ASEAN Economic Community The first major investment

was announced in 2006 by chip manufacturer Intel, 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, as well as Nokia and LG The growth of manufacturing will have an impact on employment and

wages, and will provide an incentive for students to pursue ICT-related skills development

Sri Lanka remains at the bottom of the table, but its score has improved by 0.7pps as IT spending growth

momentum continues to gather This is reflected in recent product 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 That said, the country scores poorly in all categories of the index, with incomes andinstitutions only just recovering from a lengthy civil conflict However, there are bright spots as confidencereturns and local and international firms invest.

Table: Asia Pacific IT Risk/Reward Index - Q1 2015

Country Industry rewards Country rewards Industry risks Country risks IT score Rank Previous rank

South Korea 70.0 85.0 75.0 65.4 73.4 1 2 Singapore 58.3 100.0 70.0 74.4 72.8 2 1 Hong Kong 60.0 100.0 45.0 77.7 71.2 3 3 Australia 61.7 95.0 57.5 66.9 70.3 4 4 Malaysia 60.0 55.0 37.5 67.7 57.5 5 6 China 73.3 35.0 45.0 55.1 57.3 6 5 Indonesia 65.0 35.0 42.5 51.4 52.5 7 8 India 66.7 15.0 45.0 50.9 48.6 8 7 Philippines 55.0 30.0 42.5 50.9 46.6 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 48.3 15.0 37.5 50.9 39.3 12 12

Average 60.4 50.0 47.3 60.6 56.3 -

-Scores out of 100, with 100 the best -Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks' at 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

Market Overview

Hardware

BMI forecasts the Australian computer hardware market value will increase by 3.8% in 2015 to a total of

AUD8.5bn, although in US dollar terms we forecast a contraction of 0.7% due to depreciation of theAustralian dollar The outlook extends over the medium as we forecast a compound annual growth rate(CAGR) of 3.2% 2014 to 2018, with total demand expected to reach a value of AUD9.2bn in 2018

Over the medium term we identify new products such as hybrid/convertible ultrabooks and tablets as themain opportunities for growth However, in 2015 we expect the decline in desktop and notebook sales willdecelerate, and tablet unit growth will slow, as a result of tablet market maturity and the availability ofcompetitive hybrid notebooks from Windows partner vendors Meanwhile, government procurementprogrammes and growing broadband penetration will also boost sales

Government programmes are significant factors in the PC market Government subsidies of computers ineducation provide support for the market National and state governments have continued to roll out newinitiatives, with the Victoria government investing more than USD150mn in IT in schools Large educationprogrammes were rolled out in Queensland and New South Wales in 2012

The government's ambitious broadband plans will also drive expansion The National Broadband Network(NBN) plan should further the development of Australia's digital economy and services such as onlinebanking and shopping Converged multimedia services such as internet protocol television (IPTV) will alsofeed demand for PCs and notebooks with entertainment features Bundling deals by 3G mobile telecoms

service providers such as Vodafone will help drive sales of portable computers as connectivity devices.

PC Market

Data for 2013 show the market performed in line with our expectations Research firm Gartner reported

that desktop and notebook shipments declined, while tablet sales continued to soar, driven higher by thebroader range of devices by price and screen size

In 2015 BMI expects the PC market to report low single-digit growth, however, there is downside risk

emerging with a faster than expected slowdown in tablet demand High-street consumer electronics retailer

JB Hi-Fi reported that sales in July 2014 fell by 5.5% year-on-year (y-o-y), mainly due to a significant

slump in demand for new and replacement tablet computers

In addition to secular slowdown in tablet demand, there is a fightback under way from Microsoft's partner

vendors The launch of touch-integrated Windows 8 operating system, a new wave of lower-cost ultrabooks,

and the release of Intel's new Haswell chipset architecture should stimulate new cycles of hardware

upgrades, and also blur device categories by enabling ultrabooks and convertibles/hybrids to offer themobility benefits of tablets and the productivity benefits of notebooks

Despite recent discounting, prices remain on average higher in Australia compared with many other

development country markets, a fact that triggered a parliamentary enquiry The Parliamentary Committeelooking into IT said in 2012 that the enquiry had struck a chord with the public, resulting in a high level ofsubmissions from consumers Consumer groups have blamed differential pricing by multinationals forprices, sometimes as much as 80% higher than for equivalent products in other countries In a study of more

than 200 products, consumer group Choice found that a selection of 12 Dell computers were 41% more

expensive on average in Australia However, IT companies argued that higher Australian prices were notIT-specific They pointed to higher wages and distribution costs, and high prices charged by Australianchannel agents

Hardware Market

(2011-2018)

Personal computer sales, AUDmn Servers sales, AUDmn

2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

2,500 5,000 7,500 10,000

f = forecast Source: BMI

Desktops And Notebooks

There is a well-established shift in demand away from desktops and notebooks to tablets, hybrids/

convertibles and Ultrabooks that has occurred over the decade to 2014 Looking ahead, BMI believes

traditional device categories will become less significant in coming years, as tablets become higher

powered, and hybrids/convertibles gain ground

The outlook for traditional form factors including conventional desktops and notebooks is weak Theenterprise market is a stalwart for desktop sales, but PC penetration is high among Australian businesses,with around 95% of small businesses and 100% of medium-sized and large businesses having computers.Small business comprises more than 99% of all Australian businesses and slightly more than 50% ofbusiness PC sales

Despite the weak outlook as tablet sales dominate, it is worth noting that data from UK telecoms regulator

Ofcom indicates household notebook penetration increased again in 2013 after declining in 2012 BMI

believes this potentially relates to first-time buyer households opting for the additional functionality ofnotebooks over tablets Meanwhile, higher income households have preferred to acquire tablets as

complimentary to a traditional PC form factor

Meanwhile, household PC penetration is high, approaching 90% by 2014 This means there is a limitedfirst-time buyer market, with vendors instead focusing on the upgrade/replacement market when it comes toconventional desktops and notebooks Upgrades are estimated to account for at least 80% of businesspurchases, and more than 50% in the case of households However, we believe this figure is beginning toerode, with the lifecycle of desktops especially lengthened as consumers maintain devices and insteadpurchase mobile computing devices

In the notebook market, sales of netbooks have declined since 2010, due in large part to the popularity oftablets, as well as a blurring of the netbook and notebook categories Netbooks were the fastest growingsegment during the economic downturn and reached nearly 15% of notebook sales in Q209, with more than90,000 units sold However, the popularity of netbooks added to the downward pressure on average salesprices as consumers preferred lower-priced models Netbooks were never as popular in Australia as in someother markets, peaking at around 16% of the PC market, and the emergence of tablets is expected to result

in a continued decline in the netbook share

Australia Household Penetration By Device (%)

We expect to see 4.29mn units sold in 2015, which represents a slight decline from 2014 as fewer newcustomers look for tablets Although a small uptick is expected in 2016 as mobile network operators seek toattract customers to their new 4G mobile broadband networks by including tablets in new service bundles,sales are expected to fall in the following years as the operational lives of high-spec devices - as well astheir high cost - obviates the need to buy a replacement in the short to medium term

However, it should be noted that hybrids/convertibles will increasingly blur the distinction between tabletsand notebooks over the medium term, and this trend is expected to gain traction from 2014

The diffusion curve of tablets has been steeper than for any other consumer electronics product of recent

years According to an estimate by market research firm Telesyte, by the end of September 2010 around

300,000 tablets had been sold in Australia, of which the large majority were understood to be iPads

Telesyte estimates tablet sales reached 2.4mn in 2012, with Apple again leading the market.

BMI estimates a lower sales figure for 2012 compared to Telesyte However, we share their assessment of

Apple dominating the market This is unsurprising given the high incomes of Australian consumers,

meaning they have the disposable income to pay a premium for the cachet of owning Apple devices

Meanwhile, data from Statcounter support our view that the iPad dominates the tablet market The data

show that Apple's iOS, run on its tablets, accounted for 14.4% of Australian PC browsing traffic in August

2014, a figure that was up by 4.4 percentage points (pp) y-o-y, and a higher share of total traffic than that

observed in the majority of developed markets Meanwhile, Google's Android OS, which is used on

Samsung, Asus and Google's own Nexus range, accounted for just 1.2% of PC browsing traffic (down

0.1pp y-o-y) Android has had relatively little success in the higher income Australian market compared toemerging markets, with Australian consumer demonstrating a propensity for premium products extendingfrom tablets to Apple's range of desktops and notebooks running MacOSX

While Android has had little immediate impact on Apple's dominance of the Australian tablet market it isimportant to note the gap between the strategies of some of the leading players Apple and Samsung are

hardware vendors and look to profit from the sale of devices, while Google and Amazon are services firms

and offer tablets almost at cost The strategies of services firms (combined with low cost OEM tablets fromChina) will likely put pressure on the margins of hardware-centric vendors

Hybrids And Ultrabooks

The most significant medium-term development derived from Windows 8, and the arrival of more efficient Haswell chipsets, is the impact on innovation and form factors Windows has a traditional strength

energy-in productivity use cases and software, with the OS beenergy-ing central to the enterprise market and Microsoft'sOffice Suite ubiquitous There is an opportunity for vendors to leverage this strength over rival iOS andAndroid devices by designing tablets with strong productivity functionality alongside the passive mediaconsumption features

Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard (HP)'s Envy, Dell's Idea Pro range and Lenovo's Yoga and Helix Although design innovation has some

way to go, and prices of hybrids will need to decline, the multi-use device has scope to capture a share of

the tablet market by offering a stronger value proposition to consumers while not compromising userexperience The arrival of Haswell chipsets in June 2013 enabled a new generation of higher powered,slimline and long battery life devices, as well as presaging cheaper Ivy Bridge prices This has deepened the

ultrabook and hybrid/convertible market, which BMI believes boosted sales higher in H213 and 2014.

Industry Trends - PC Volume Forecast ('000)

2011-2018

e/f = estimate/forecast Source: BMI

Vendor Developments

Multinational brands dominate the Australian PC market The major players include HP, Apple, Dell,

Lenovo and Acer The share of unbranded 'white box' products in Australia has dropped to less than 20%.

HP has around a 19% share of the brand PC market, ahead of nearest rival Apple with around 17%, andDell has a share of around 14% The top five vendors, including Acer and Dell, together account for morethan 70% of the market

Competition for government tenders continues to be a significant part of the market, particularly in

connection with the computers in education programme Chinese vendor Lenovo has won a number of

tenders to provide computers to New South Wales schools These have included a three-year contract inpartnership with an IT deployment company to roll out 10,000 netbooks to Victoria public schools over2009-2012 The project will provide Lenovo and Acer netbooks to students in years five through to eight.

More recently, in June 2013, Lenovo and Dell became the first two technology companies to sign up to theNew South Wales government's IT hardware panel The panel, worth USD85.68mn, provides IT hardwarefor the whole of government as part of the NSW government's IT policy reforms It initially covereddesktops, laptops and tablets but will be extended to servers, storage, imaging devices and virtualisation.Both companies will be on the panel until April 30 2015, with three 12-month extension offers

Lenovo remains a relatively small player in Australia and spends little in the country on mass mediaadvertising Lenovo's brand is hardly a presence in major consumer electronics retail chains such as Harvey

Norman and JB HiFi Instead the company relies on smaller independent retailers However, it still has some large organisation clients inherited from IBM, including several banks It also has an ongoing

relationship with several government departments, with the New South Wales Education department beingone major client

Australia's PC Browsing Traffic By OS (% and percentage point change

y-o-y)

August 2014

Source: Statcounter

Software

High penetration rates for enterprise software mean the software market will underperform emerging

markets in APAC over the medium term However, BMI believes there is potential for further investment in

Australia due to the high cost of labour, meaning automation software that can provide a cost basis forimplementation is likely to find a receptive market Given the extremely high labour costs in Australia, andits proximity to low-cost markets, we believe it could prove a testing ground for new deployments, forinstance IBM's Watson-as-a-Service initiative

Software is expected to account for 19.9% of the Australian IT market in 2015, with forecast spending ofAUD4.8bn Software sales are forecast to have a CAGR of 4.8% 2014-2018, with the total market expected

to reach a value of AUD5.5bn in 2018

Operating Systems

In terms of operating systems, migration to the Windows 8/8.1 operating system retained the potential tohave a positive impact on sales in 2014 as a result of the withdrawal of official support for XP and cuts to

OS licensing fees by Microsoft The cut to OS licensing fees for notebooks under USD250 should make

notebooks more competitive against Android tablets at the low-end - although BMI believes the impact in

Australia will be relatively muted due to consumer affluence and a propensity for premium products

The withdrawal of official support for XP in April 2014 acted as a push factor for OS upgrades, particularly

in the enterprise segment, as businesses sought to maintain information security However, the developednature of the Australian IT market meant that many organisations had already migrated to Windows 7/8/8.1.Recent research by Statcounter shows that Australian consumers are upgrading from Microsoft's Windows

XP operating system more quickly than their counterparts in the US and UK markets XP usage has fallen inAustralia from 71% in 2008 to 4.0% in August 2014 (and down 5.6pp y-o-y)

However, due to global economic uncertainties, some companies, particularly in the export segment, willcontinue to experience a difficult trading environment, leading to caution about IT investments

Business intelligence demand has grown at a double-digit rate for the past few years and accounts foraround 5% of the total software market Australia will remain a major market for business intelligencesoftware in Asia Pacific, but growth may slow as users try to get value from existing investments Security

is likely to be another growth area

Meanwhile, the cost efficiencies of virtualisation, running multiple systems on a single piece of hardware,make sense in the current economic climate, but create new security issues Local research has suggested

that, for the past few years, Australia has been the global vanguard of virtualisation of X86 servers, even ifthe rate is slackening.

We also have a positive outlook for enterprise security software spending in Australia as a result of a rising

awareness of cyber security risks among enterprises Security software vendors such as Kaspersky,

Symantec and AVG will all target the SME market, while demand from large enterprises is expected to

primarily be captured by integrated enterprise IT vendors, such as HP, Dell and IBM, as part of othercontracts with firms

Software Market

(2011-2018)

Software sales, mn

2011 2012 2013 2014f 2015f 2016f 2017f 2018f 0

2,000 4,000 6,000

f = forecast Source: BMI

Local Software Development

Australia does not have a strong heritage of software development, but the government is hoping to boostthe segment In July 2014 Australia's Information and Communications Technology Research Centre ofExcellence, NICTA, along with Swinburne University of Technology, launched a new software innovationlaboratory in Swinburne's Hawthorn campus in Melbourne Software engineering, information visualisation,

mobile and cloud computing and software security will be the lab's primary focus areas Cash and in-kindcontributions from industry partners and institutions will be utilised to finance the Swinburne SoftwareInnovation Lab The software development hub will accommodate more than a dozen research and

development staff members, as well as nearly the same number of PhD and project students

Piracy

Software piracy is low in Australia, and the government has made progress in reducing the piracy rate inrecent years, making it one of the best performing APAC markets According to the Business SoftwareAlliance, the overall software piracy rate dropped to 21% in 2013, higher only than Japan and New Zealand,and down from 28% in 2007

While the overall anti-piracy drive is succeeded, most of the fall occurred in the consumer segment, wherethe drop in 'white box' unbranded PCs was credited with reducing the use of pirated software However,some studies have found a rise in the use of illegal software among western Australian companies,

particularly in the booming mining sector The overall trend, however, has been one of improved generalawareness, backed by appropriate legislation that has seen Australia with one of the lowest piracy rates inAPAC

APAC Piracy Rates* (%)

2013

*those responding that they always, mostly, occasionally, or rarely use pirated software Source: BSA Global Piracy Survey 2013.

Vendor Developments

In the enterprise software segment, European giant SAP has enjoyed recent successes in the Australian

markets SAP Australia reported a 283% increase in profit in 2014 to AUD30.8mn on revenues of

AUD667mn SAP Australia reported significant growth in its cloud business, as well as benefitting from afivefold expansion of its partner network

Among the company's high-profile contracts wins in 2012 was a deployment of version 7.0 of its CRMplatform for the Victoria government's Environmental Protection Authority (EPA) The EPA went live withthe first phase of the transformation project in July 2012 Other local SAP clients include the

Commonwealth Bank of Australia (CBA), whose estimated AUD1bn core banking replacement project SAP worked on with partner Accenture.

Other high-profile deals have included a project for the National Australia Bank, as well as companies like AGL Energy and public sector entities such as Queensland Rail and the Department of Defence In