Australia information technology report q3 2013

BMI Industry ViewBMI View: Australian IT sales are expected to reach AUD26.413bn in 2013, up 4%, with the market continuing to offer opportunities despite business concerns about a domes

Q3 2013 www.businessmonitor.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q3 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2013

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BMI Industry View 7

Headline Expenditure Projections 7

Key Trends & Developments 7

SWOT 9

IT 9

Wireline 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 17

Table: Australia IT Sector - Historical Data & Forecasts (AUDmn) 17

Broadband 21

Table: Telecoms Sector - Broadband - Historical Data & Forecasts 21

Macroeconomic Forecasts 23

Signs Of Overheating Weigh on Infrastructure Investments 24

Weakness In Other Sectors Further Weighing Down Economy 25

Austerity Measures To Be Reversed 26

Table: Australia - Economic Activity 28

Industry Risk Reward Ratings 29

Industry Risk/Reward Ratings 29

Table: Asia Pacific IT Risk/Reward Ratings - Q3 2013 32

Market Overview 33

Hardware 33

Software 39

Services 44

Industry Trends And Developments 50

Regulatory Development 53

Table: Government Authority 53

Government Initiatives 54

Regulatory News 55

Company Profile 57

SAP 57

Hewlett-Packard 62

Regional Overview 69

Demographic Forecast 74

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

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

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

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

Methodology 78

How We Generate Our Industry Forecasts 78

IT Industry 78

IT Ratings - Methodology 79

Table: IT Business Environment Indicators 80

Weighting 81

Table: Weighting Of Components 81

Sources 81

BMI Industry View

BMI View: Australian IT sales are expected to reach AUD26.413bn in 2013, up 4%, with the market

continuing to offer opportunities despite business concerns about a domestic economic slowdown and the global economic situation Tablet sales growth is compensating for the decline in desktop and notebook shipments, while investments in broadband infrastructure are boosting Australia's digital economy, and enabling wider adoption of services such as cloud computing, online banking and e-commerce High- income consumers make Australia a fertile ground for premium devices such as tablets and ultrabooks, while government tenders will also be supportive of spending levels in areas such as education, e-

government, transport and healthcare.

Headline Expenditure Projections

Computer Hardware Sales: AUD11.1bn in 2012 to AUD11.3bn in 2013, +2.2% in local currency terms.

Strong demand for tablets is compensating for a decline in desktops and notebook shipments The release of

new devices using Intel's latest Haswell chipset architecture could boost shipments in H213.

Software Sales: AUD4.1bn in 2012 to AUD4.3bn in 2012, +2.2% in local currency terms Security

software sales are increasing, particularly for SMEs and consumers Meanwhile, enterprise resource

planning and other e-business products to the small and medium-sized enterprise market will be a key trenddriving sales

IT Services Sales: AUD10.2bn in 2012 to AUD10.8bn in 2013, +5.8% in local currency terms IT services

will be the outperforming growth area, with cloud services the key growth driver as local companies try toutilise efficiencies enabled by the NBN

Risk/Reward Ratings: Australia's score is 68.0 out of 100.0 in the Q3 2013 update Australia's score has

declined this quarter due to a lower growth outlook and now ranks fourth in our latest Asia region RRRtable, behind South Korea, Hong Kong and Singapore, but still ahead of larger markets in the region such asChina, India and Indonesia

Key Trends & Developments

Cloud computing is expected to be one of the leading IT market trends globally, but in Australia there ispotential for particularly fast growth thanks to the investments in improving connectivity via the NationalBroadband Network Crucially, this will extend the reach of services, as well as providing the faster upload

speeds that are key to advanced cloud computing services Cloud computing has already gained traction in

Australia, with the big four banks deploying solutions and leading international vendors such as IBM, Oracle and Amazon Web Services investing in the market However, the NBN and the government's cloud

computing strategy, announced in May 2013, are expected to catalyse the cloud market's development in therelatively underpenetrated areas of the public sector and with SMEs

The latest data on Australia's hardware market show that tablets have made significant progress, while

shipments of desktops and notebooks are in decline BMI estimates tablet sales of 2.1mn in 2012, only just

behind notebook shipments, and we expect tablets to overtake notebook shipments in 2013 as a wider range

of form factors and price points deepen the market beyond premium/luxury devices However, the trend of

tablet sales replacing notebook purchases is less clear cut Microsoft's partner vendors have demonstrated

the potential for hybrids/convertibles, which combine productivity and content consumption use cases, inH113, and the release of Intel's latest Haswell chipset architecture in June 2013, enabling slimmer andlonger battery life devices, is expected to accelerate this innovation and blur the distinctions betweendevices

IT

SWOT Analysis

Strengths ■ High incomes and strong supporting infrastructure support high spending

■ Strong government support for ICT programmes

■ IT-literate population with high levels of PC ownership

■ Strong financial sector

■ Tablet sales are compensating for decline in desktop and notebook sales

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

■ Sensitive to volatility in the global economy

Opportunities ■ Government cloud computing strategy creates opportunities for vendors in the public

and SME sectors

■ Launch of Windows 8 increases growth potential for Microsoft partners in the tabletand laptop hybrid market, particularly following the release of Haswell chips in June2013

■ Considerable demand for cloud computing services

■ Phase two of the computers for schools project was expected to generate anadditional US$800mn of spending

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

Threats ■ The biggest threat is of an economic slowdown in 2013, leading to a scaling back of

IT budgets

■ A cheaper Australian dollar would affect consumer and business demand in theimport-dependent IT market

SWOT Analysis - Continued

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

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

Wireline SWOT - Continued

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

■ 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

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 of political parties co-operating to find an alternative thatwould ensure 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 will be augmented

by commodity exports and the high investment inflows into the mining 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, with the consequence thatthe economy and currency remain vulnerable to fluctuations in world prices formetals, coal and agricultural 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 - poses a threat to

Business Environment

SWOT Analysis

Strengths ■ A highly educated workforce and comparatively modern transport infrastructure

underpin economic prospects

■ A number of free trade agreements with countries such as New Zealand, Thailand andthe US serve as a boon for trading activities

Weaknesses ■ Despite its openness, Australia requires the Foreign Investment Review Board to

approve any commercial real estate investment by a foreign company or individualvalued at US$5mn or more

■ With a population of just over 22mn, the domestic consumer base is small by regionalstandards

Opportunities ■ Australia is currently in talks with China, Malaysia, the Gulf Co-operation Council,

Indonesia, India, Japan and South Korea regarding potential bilateral free tradeagreements It is also part of negotiations for the Trans-Pacific Partnership and aregional south pacific pact, PACER plus

■ Upgrade and expansion of urban infrastructure will be needed to sustain populationgrowth in Australia's main cities, providing opportunities for public-private

partnerships in the future The government is also targeting infrastructureimprovements to rural areas

■ More healthcare infrastructure will be needed to support the ageing population, andwith the introduction of the federal government's National Disability InsuranceScheme, the industry is likely to see increasing demand for services

Threats ■ Corporate taxes for foreign investors in Australia remain higher than in other

countries, and it seems unlikely that the government will succeed to reduce the rates

in the near future

■ Recent investment proposals by Chinese firms regarding the resource extractionsector have raised fears that strategic assets will be lost to foreign players This hasled to more conditions attached to the sale agreements, which is likely to reduce the

SWOT Analysis - Continued

attractiveness of these assets It remains to be seen if the recent implementation of adatabase to increase transparency around foreign-owned Australian assets will spurmore regulation

■ Changes to the industrial relations law by the ruling party to boost its re-electionchances could make it more complicated and costly for businesses to hire and fireworkers

Industry Forecast

Table: Australia IT Sector - Historical Data & Forecasts (AUDmn)

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

IT market value 23,383 24,318 25,390 26,413 27,943 29,530 31,045 32,578 O/w hardware 10,569 10,814 11,090 11,334 11,772 12,255 12,617 13,064

- PC 8,561 8,781 9,094 9,385 9,747 10,147 10,447 10,817

- Servers 951 973 998 1,020 1,060 1,103 1,135 1,176 O/w software 3,835 4,068 4,118 4,303 4,435 4,695 5,048 5,200 O/w services 8,979 9,435 10,181 10,777 11,736 12,580 13,380 14,315

IT market, % of GDP 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7

e/f = BMI estimate/forecast Source: BMI

BMI has maintained its forecast of 4% growth for the Australian IT market in 2013 in the Q3 2013 update.

Although PC sales have declined, strong tablet sales mean the overall performance of the hardware market

is in line with our expectations We expect the IT market to reach a total of AUD26.413bn in 2013, up fromAUD25.390bn in 2012 We expect growth to be on average faster than in 2013 We forecast CAGR of total

IT market spending of 5.1% in 2013-2017, with the market reaching AUD32.578bn in 2017 Over thisperiod the market will remain stable at around 1.7% of GDP

The Australian IT market holds considerable potential over the medium term, particularly in areas such as

tablets, cloud computing and real-time enterprise software However, in the short term, BMI forecasts a

slowdown in economic growth in 2013, which we expect to spill over to the IT market Despite the widereconomic uncertainty, the IT market will continue to grow throughout our forecast period

2013 Outlook

We expect growth in 2013 to be slower than 2012,

dropping 0.4pps to 4% The key factor behind this

slowdown is the more downbeat economic outlook

for Australia in 2013 We expect real GDP growth

will fall to just 2.1% in 2013 from 3.2% in 2012,

with the real terms increase in private final

consumption falling to 1.2% from 3.0% over the

same period This will dampen spending both in the

retail and business market Furthermore, we expect

unemployment will peak in 2014 at 6.2%, before

falling for the rest of our forecast period to 2017

The slowdown in economic growth will be a drag on

the IT market in 2013; however, Australia remains a

very attractive market due to a range of factors, not

least of which is the high level of GDP per capita at

a forecast US$69,483 in 2013 This gives Australian

consumers high levels of purchasing power to spend on consumer products such as tablets, laptop-hybridsand ultrabooks Data for Q113 show that, while demand for desktops and notebooks declined in Q113, sales

of tablets have continued to surge Although consumers are facing a less accommodating environment, theyare still willing to spend on attractive mobile PCs With this in mind, we believe the release of a new

generation of desktops, notebooks, convertibles/hybrids and tablets based on Intel's new Haswell chip

architecture could boost sales after being released from June 2013

Meanwhile, government spending levels are increasing generally, and it has a number of programmesspecifically boosting IT spending, for instance the National Broadband Network (NBN), which is extendingconnectivity across the country We expect government spending to increase by 2% in real terms in 2013,

up from 1% in 2012 Government programmes should also help keep computer hardware sales in positivegrowth territory Government subsidies of computers in education will provide support for the market.National and state governments will continue to roll out new initiatives, and the Victoria government hasinvested more than US$150mn in IT in schools The New South Wales and Queensland authorities werealso rolling out IT for schools projects

Industry Trends - IT Market

2010-2017

e/f = BMI estimate/forecast Source: BMI

Looking at the enterprise segment, with the exception of a few key areas, demand for IT products andservices will continue to be squeezed by weak business confidence due to an uncertain economic outlook In

2011 business demand was hit by concerns about the economic situation in Europe and the US, as well asdomestic issues such as the proposed carbon tax However, sectors such as government, telecoms,

healthcare and banking should continue to supply demand for implementation, consulting and managedservices The potential for a Chinese hard-landing would likely have far-reaching consequences for

Australia, which could go beyond the impact of the crisis in developed markets

Economic concerns aside, there are areas of growth in the enterprise segment, which are predominantlybased on the increasing prevalence of connectivity After the narrow victory of the Labour party-led

coalition in Australia's 2010 elections, the eventual decision to continue the development of the NBN had apositive impact by boosting the reach and quality of broadband infrastructure Three key areas that stand tobenefit are cloud computing, data analytics and machine-to-machine communications

In 2013, leading Australian private and public sector organisations are expected to continue their

deployment of cloud services Surveys indicate that cloud computing is a key priority for Australian CIOs,while the release of the government's cloud computing strategy in Q213 should also boost deployments.Cloud initiatives have already been implemented by many of the country's leading banks, and across sectorscloud adoption is spreading from storage and email to areas such as HR management Meanwhile, thegovernment has adopted a six-year cloud computing strategy Cloud computing spending could reacharound AUD4bn by 2017

Market Drivers

The squeeze on the IT market from a slowdown in economic growth in 2013 will alleviate over the medium

term BMI forecasts the Australian economy will register an average of 2.4% real GDP growth 2013-2017,

with private final consumption increasing slightly slower annual average of 1.5% real growth Australia is ahigh-income market and we expect it to remain attractive for premium products, with low inflation andunemployment, a contrast to many other high-income economies around the world that have higher risklevels

Government initiatives such as e-government, healthcare and education will drive significant opportunitiesfor IT vendors over the medium term The National E-Health Transition Authority aims to create a

paperless environment in Australia's health sector, including public hospitals Although the government ispursuing investments in IT in a number of areas, it should be noted that it is reviewing procurement

procedures to reduce cost, which could squeeze vendor margins For instance, in early 2013 the Australian

Government Information Management Office (AGIMO) consolidated its contracts with Microsoft through asingle reseller to deliver cost savings of AUD100mn.

As noted already, the government's ambitious broadband plans will provide a boost to the development ofAustralia's digital economy Increased reach of broadband infrastructure 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

Meanwhile, in the enterprise segment regulatory compliance will result in continued spending by banks, andintense competition in the retail sector is spurring spending on customer relationship management (CRM)and back-office systems Competition in the telecoms field is a driver for that key IT spending segment,where deregulation has led to new entrants Additionally, high labour costs in Australia will generate

demand for services that replace labour, such as Ask Watson, adopted by ANZ Bank in H113 Such technology is in the early stages of commercial deployments, but BMI believes that Australia could be a

fertile market for such technology over the medium term on the basis of potential cost savings

Segments

BMI estimates that household PC penetration crossed the 90% threshold in H113, meaning there is little

scope for growth in first-time PC sales This means the market will grow slower relative to emergingmarkets in the region However, there are large opportunities in the personal/upgrade device market as weexpect consumers will continue to be willing to spend on innovative devices that offer new use cases.Tablets are the most prominent device meeting these requirements, but we believe hybrids/convertibles andultrabooks that utilise Haswell chips could gain traction in Australia in the coming years

The software market is expected to register faster growth than the hardware market, growing with a CAGR

of 4.8% from 2013 to 2017 Even so it will still remain at less than half the hardware market size by 2017.Enterprise resource planning (ERP), CRM and business intelligence solutions will be increasingly popularwithin the small and medium-sized enterprise (SME) market, as companies aim to enhance productivity

through the automation of essential functions Meanwhile, BMI believes security software has potential for

strong growth over the medium term as awareness about threats grows, particularly among SMEs

BMI expects IT services will be the outperforming segment of the IT market in the medium term as demand

is driven by cloud computing services, data analytics and machine-to-machine communications Cloudcomputing 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 As noted,

cloud computing will be key as businesses look for opportunities to reduce cost and increase flexibility.Cloud computing has already 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

Summary

The hardware market is forecast to grow from AUD11.334bn in 2013 to AUD13.064bn in 2017, with PCsales (including accessories) forecast to rise from AUD9.385bn to AUD10.817bn, boosted by computerprocurement for education and new form factors Software spending is forecast to rise from AUD4.303bn toAUD5.200bn and IT services from AUD10.777bn to AUD14.315bn

Broadband

Table: Telecoms Sector - Broadband - Historical Data & Forecasts

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

No of internet users ('000) 16,922 17,859 18,752 19,690 20,675 21,708 22,685 23,706

No of internet users/100 inhabitants 76.0 79.0 81.8 84.8 88.0 91.2 94.2 97.2

No of broadband internet subscribers ('000) 9,739 11,123 12,013 12,613 13,118 13,643 14,461 15,474

No of broadband internet subscribers/100

inhabitants 43.7 49.2 52.4 54.3 55.8 57.3 60.0 63.5

e/f = BMI estimate/forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

BMI has not changed its forecasts for the Q313

period due to limited new available data from the

regulator and operators We believe the number of

internet users will continue trending upwards in light

of the growing affordability of internet subscriptions

The large-scale deployment of Australia's National

Broadband Network (NBN) will ensure that the

country's entire population will have access to

high-speed internet connectivity We envisage 23.7mn

internet users by end-2017, representing a

penetration rate of 97.2%

According to the Australian Bureau of Statistics,

there were 12.0mn internet subscribers in the

country at the end of June 2012 The majority of the

subscribers, 96.4%, were using some forms of

broadband connections, while a decreasing number

of users were using dial-up services Mobile

broadband overtook DSL as the main form of broadband connection in December 2010, and the gap

between the two continues to widen

We expect the Australian broadband market to continue exhibiting growth potential with the mobile

broadband segment forming the main growth driver It is also increasingly common for customers to own afixed and mobile broadband connection The NBN aims to deliver broadband services, either by fixed orwireless means, to the entire population, and achieving this goal on target should provide a boost to thebroadband uptake towards the end of our forecast period

The Australian broadband sector grew by 12.2% y-o-y at the end of June 2012, and the growth rate shouldsoon fall into the single-digit range in light of market saturation We expect this scenario played out in 2012with the number of broadband subscribers reaching 12.0mn, up from 11.6mn in June 2012 Thereafter, weforecast the number of broadband subscribers to reach 15.5mn in 2017, up from 12.6mn in 2013

Industry Trends - Broadband

2010-2017

e/f = BMI estimate/forecast Source: BMI, ITU, Australian Bureau of Statistics, operators

Macroeconomic Forecasts

BMI View: Despite the uptick in mineral prices and Chinese demand, we expect rising costs in Australia to

weigh on investment growth in the mining and energy sectors Furthermore, we believe that the weak new orders in the manufacturing and services sectors suggest that growth malaise in the domestic economy remains As such, we believe that the weakness in the job market will frustrate the government's efforts to lift the economy through public spending and policies that encourage household spending Therefore, we maintain our expectations that an uptick in the growth of investment and public spending will be insufficient

to avert a slowdown in Australia's growth to 2.1% in 2013, from an estimated 3.2% in 2012.

The recent bounce in mineral and coal prices, alongside the news of a resurgence in new Chinese

investment projects, has once again lifted investor optimism towards resource exporters like Australia Thishas led to much optimism that Australia's mining sector and the economy as a whole could be lifted bythese positive tailwinds Unsurprisingly, there has been news of miners reopening mines as higher metal

prices now justify operational costs Iron ore miner, Fortescue, for example, is planning to resume

expansion plans (see Fortescue's Kings Project Back In The Game, 28 Dec 2012) We have revised up our

growth forecast to 2.1% for the full year in 2013 on expectations that investment growth will be strongerthan our previous forecast, but we are still expecting economic activity to slow from the 3.2% pace ofexpansion estimated in 2012

Rising Prices Lift Mining Sector Sentiment

Australia - Iron Ore Fines, USD/Dry MT & Newcastle Coal, USD/MT

Source: BMI

Signs Of Overheating Weigh on Infrastructure Investments

We do not believe that the rebound in the Chinese economy is permanent as structural imbalances remain,and we also expect that Australia's domestic shortcomings will eventually outweigh any positive impactfrom the improving global economy We believe that the current uptick in the mining sector will be

insufficient to drive economic growth as it has before, despite its impressive contribution to the broadereconomy over the past decade

We expect rising costs and increasingly restrictive environmental policies from the federal government toplace downward pressure on the pace of project development Investment decisions for large energyprojects such as the Liquid Natural Gas (LNG) projects on Curtis Island (by Arrow Energy) and nearBroome (by Woodside Petroleum and Shell), now due in 2013, were previously delayed due to escalatingcosts Given that costs are likely to keep rising with the short supply of skilled labour, the rise of cheaperalternatives overseas (such as the US shale gas) and the government's strict ruling on environment andlabour issues suggest further delays are very possible As such, we believe that growth from these

investments, like many other smaller projects, is far from guaranteed

More Structural Changes Due In The Labour Market?

Australia - Labour Force By Industry In 1992 (LHS) & 2012 (RHS)

Source: BMI, Australian Bureau of Statistics

Weakness In Other Sectors Further Weighing Down Economy

The historical ramp-up in capital employed in the mining sector came at the expense of growth in commodity sectors, and has left Australian manufacturing and services sectors uncompetitive compared toits global peers as evidenced by an increase in outsourcing and imports of manufactured goods Indeed,these two sectors experienced contractionary pressures for much of 2012 and we maintain a dim outlook asnew orders have remained in contraction according to the Australian Industry Group's survey in January

non-2013 Moreover, margins have continued to narrow, on the back of heavy discounting by retailers looking toboost sales, together with rising input costs We expect both these sectors to suffer further contraction in thequarters ahead and thus, believe that further job cuts are likely As such, we maintain our sombre outlookfor Australian's job market, forecasting the unemployment rate to rise to 6.0% by the end of 2013 from therate of 5.4% recorded in January

On top of our downbeat outlook for jobs, the overstretched balance sheet of households suggest that there islittle room for current debt growth to be sustained Indeed, we believe that the declines in retail sales growth

in the last three months of 2012 are the start of a slowdown in private consumption growth So far, the lack

of debt deleveraging by households and the lack of reallocation of capital and labour to other sectors ofeconomy lead us to maintain a languid outlook for the Australian economy

Austerity Measures To Be Reversed

Given the upcoming elections in September 2013, we believe that the ruling Australian Labor Party (ALP)will reverse its previous austere fiscal plans, but still maintain environment-friendly policies that are vital tothe preservation of its political ties with the Green Party We expect the government to refrain from furthercuts in public sector jobs in the election year, although we believe that this will be insufficient to undo theimpact of private sector cuts

Together with an increase in community aid and funds for the rebuilding of damaged infrastructure, weexpect the federal and state governments to embark on more policies that encourage household spending(such as stamp duty cuts) However, we are inclined towards the view that households are unlikely torespond to these incentives as readily as before (for example, home buyers' grant in 2008/09), given thesofter job market and more leveraged households As such, we believe that the uptick in the mining sectorand fiscal stimulus will be insufficient to avert a slowdown in growth in 2013, estimating full year growth tocome in at 2.1%

Private Consumption: On the back of our sombre outlook for jobs and our view that households will start

to deleverage, we forecast private consumption to grow at a subdued rate of 1.2% slowing from an

estimated growth rate of 3.0% in 2012

Gross Capital Formation: The uptick in metal prices and news of stimulus from the Chinese government

has reignited interest in mining and energy investments in Australia However, the rising costs in theindustry and increasingly intrusive federal government-led policies lead us to keep a more conservativeoutlook for the growth rate for investment, forecasting it to come in at 2.1% in 2013

Public Investment And Consumption: The government already announced in December 2012 that it will

not meet its budget surplus goal this fiscal year (July 2012 to June 2013) As federal elections draw closer,

we believe that the government will reverse its austerity stance for the upcoming fiscal year (July 2013 toJune 2014) in an effort to stave off any economic deterioration that may affect voters' decisions to thedetriment of the ruling ALP Therefore, we forecast a 2.0% growth in government consumption in 2013,increasing from an estimated 1.0% in 2012

Signs Of Import Contraction On The Way

Australia - Trade Balance, Trend & Seasonally-Adjusted (LHS) & Merchandise Exports & Imports,

AUDmn

Source: BMI, ABS

Net Exports: In line with our expectations for households to begin deleveraging, we believe that the overall

improvement in external demand will be supported by import contraction of 1.2% Furthermore, we expectimproving external demand conditions in H113 to help boost export growth slightly to 2.0% for the full year

in 2013, from a weak estimated growth rate of 1.5% in 2012

Table: Australia - Economic Activity

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

Nominal GDP, AUDbn 2 1,353.40 1,440.50 1,513.00 1,571.50 1,630.80 1,713.90 1,810.10 1,913.70 Nominal GDP, US$bn 2 1,242.43 1,486.94 1,566.83 1,571.13 1,459.57 1,353.99 1,357.59 1,435.31 Real GDP growth, % change y-o-

y 1,2 2.9 2.3 3.2 2.1 1.8 2.5 2.8 2.9 GDP per capita, US$ 2 56,786 66,598 69,483 68,992 63,470 58,312 57,908 60,626 Population, mn 3 22.3 22.6e 22.9 23.2 23.5 23.8 24.1 24.4 Industrial production index, % y-

o-y, ave 2 3.9 -0.4 2.9 1.7 1.2 1.6 2.1 2 Unemployment, % of labour

force, eop 2 4.9 5.2 5.4 6 6.2 5.8 5.5 5.5

Notes: e BMI estimates f BMI forecasts 1 Base Year = FY2008/09 (July-June) Sources: 2 ABS/BMI calculation; 3 World Bank/UN/BMI.

Industry Risk Reward Ratings

Industry Risk/Reward Ratings

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

markets over our forecast period through to 2017 Our Q313 ratings reflect our consideration of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects There were several changes to this quarter'srankings as we have updated our macroeconomic and industry data

Rising to the top is South Korea with an IT Rating score of 72.2, up from 65.2 the previous quarter Thesignificant improvement was due to an increase in the country's Industry Rewards score, which partiallyoffset a decline in its Country Risks score Two key factors form the foundation for the Industry Rewardsupgrade: South Korea's LTE market is one of the most mature in the world and the country houses the two

largest consumer electronics firms - Samsung Electronics and LG Electronics The close working

relationship between telecoms operators and the two manufacturers means that there is a portfolio of mobiledevices to support the 4G service, which in turns allows companies to develop new services such as cloudsolutions to leverage on the high-speed connectivity

Singapore fell to second rank after its IT Rating score decreased from 74.1 to 71.3 due to a combination ofdeclines in its Industry Rewards and Country Risks scores However, Singapore's Country Score of 100 andthe proactive nature of the ICT regulator continue to provide support Due to the lack of natural resources,Singapore relies heavily on technological innovations to attract businesses Besides rolling out 4G and fibrebroadband networks, the country encourages developments such as creating smart districts and exportableenterprise mobility solutions The Infocomm Development Authority also collaborated on an interoperableNFC infrastructure in the country

Hong Kong remained in third position with an IT Rating score of 68.9, down from 72.2 the previous quarter

in light of a decline in its Country Risks score Hong Kong's trade performance thus far has been in linewith our expectations We acknowledge that the uptick in trade could have further room to run However,

we are still convinced that this momentum is likely to be unsustainable and are maintaining our call foreconomic activity to slide towards the latter stages of the year Hong Kong is a well-established financialhub, and IT solutions present an opportunity for companies to reduce operating costs and improve

operational efficiency when carrying out transactions, particularly cross-border trade

Australia fell to fourth position after its IT Rating score decreased from 73.3 to 68.0 Like several of itspeers, the score revision was due to a change in its Country Risks score Although Australia has its

ambitious National Broadband Network, which will vastly improve broadband coverage and speeds

throughout the country, thereby providing a boost to the IT sector, the project is facing an uncertain futurewith the federal elections approaching in September 2013 The opposition government has announced that itwill rely on less of fibre and more on the existing copper networks to save costs and time We believe thatthis is a short-term solution that will materially impact developments in the IT industry

China rose to fifth position with an improvement in its Industry Rewards score offsetting a decline in itsCountry Risk score While our view for a bounce in the Chinese economy has played out, should the newleadership reduce support for loss-making state-dominated industries, this would mean a much weakerH213 and 2014 for China's economy than the consensus currently expects However, our long-term viewthat China will shift its economy away from infrastructure investment and towards consumer services bodeswell for the IT sector The introduction of next generation broadband technologies will also provide thenecessary growth foundation, providing impetus to new IT services and consumer electronics

Malaysia's IT Rating score increased from 52.3 to 56.4, but the country still fell from fifth to sixth position.The country's score revision was due to an improvement in its Industry Rewards score, which mitigate adecline in its Country Risks score Malaysia's Economic Transformation Programme has earmarked areassuch as cloud computing as one of its top 10 strategic technology priorities For the ICT sector, the countryhas identified business opportunities areas such as fixed and mobile services as well as semiconductors andindustrial electronics

India moved up the Risk/Reward Ratings table as we have factored in the country's longer-term growthpotential - the country's IT Rating score increased from 42.1 to 51.6 India's IT market houses some of the

world's largest players - Wipro, Tata Consultancy and Infosys - and we note that companies in the country

are becoming more receptive to engaging the services of professional IT firms to reduce cost and focus ontheir core competency Assuming that the government is able to eventually sort out the chaotic situation inthe telecoms sector, 3G and 4G services could be unshackled, thereby leading to growth in IT services such

as telemedicine and cloud computing, and consumer electronics products such as tablet computers

The Philippines fell to ninth position even though its IT Rating score increased from 43.8 to 49.6 thisquarter The country follows the theme of an increase in Industry Rewards score offsetting a decline inCountry Risks score The Philippines is a well-established player in the business process outsourcing (BPO)

industry but there are signs that the country is trying to move towards high-value services The Philippine

Long Distance Telephone Company agreed to sell its majority stake in BPO unit, SPi, to CVC Capital Partners' Asia Outsourcing Gamma.

There were no changes to the rankings of the last four countries - Indonesia, Thailand, Vietnam and SriLanka - although there were adjustments to their IT Rating scores Indonesia's IT Rating score came in at47.5 One of the most populous country in the world, Indonesia is experiencing strong IT developments inricher areas such as Java, where IT infrastructure is more established Growing urbanisation means thatmedium-tier cities are also becoming investment hotspots, which will lead to demand for IT services Bothconsumer- and business-facing solutions have strong growth opportunities, especially with the governmentkeen to spur developments For example, the Indonesian government is currently in negotiation with

Foxconn Technology Group to set up a manufacturing facility.

Thailand's ICT industry is looking increasingly brighter with the National Broadcasting and

Telecommunications Commission able to implement changes Besides facilitating the launch of 3G

services, which will satisfy pent-up demand from consumers and businesses, the regulator is targeting tokick start the digital TV sector These developments have in turn attracted investments into the country's IT

sector In April 2013, NetApp announced that it is tripling its investment in the country to capitalise on the

rapidly growing datacentre market

Vietnam has pledged to invest US$8.5bn in its ICT sector in the next 10 years The government is also

looking to attract US$5bn worth of foreign investments in the IT sector by 2015, according to Avaya In

April 2013, construction for the Danang Hi-Tech Park, which costs US$278mn and follow the same model

as the US' Silicon Valley and Taiwan's Hsinchui Science Park, was started The project is expected to houseabout 100 businesses, create 25,000 jobs and generate revenue of US$3bn Vietnam's IT Rating score hasincreased from 34.2 to 41.1

Sri Lanka saw its IT Rating score increase from 27.7 to 35.2 due to improvements to its Industry Rewardsand Country Risks scores However, the country continues to lag behind its peers, although telecomsoperators have started to roll out LTE services In January 2013, the Sri Lanka Institute of Information

Technology joined the EMC Academic Alliance programme, which will offer courses on areas such as

cloud computing, backup recovery systems and architecture and big data analytics to students Sri Lankanreal GDP growth came in much stronger than expected in the final quarter of 2012, surging to 6.3% year-on-year from 4.8% in Q312, surpassing consensus expectations for a 5.5% expansion We are holding on toour core view for full-year real GDP growth to remain flat this year, implying a similar 6.4% economicexpansion for 2013 (up from our previous forecast of 5.4%) We are likely to see renewed headline

weakness through H113, before the economy turns up in the second half of the year Looking further ahead,

we still see growth improving from 2014 onwards

Table: Asia Pacific IT Risk/Reward Ratings - Q3 2013

Rewards Risks

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

South Korea 70.0 80.0 75.0 65.4 72.2 1 4 Singapore 55.0 100.0 70.0 74.4 71.3 2 1 Hong Kong 55.0 100.0 45.0 77.7 68.9 3 3 Australia 60.0 95.0 45.0 66.9 68.0 4 2

Malaysia 58.3 55.0 35.0 67.7 56.4 6 5

Philippines 53.3 45.0 42.5 50.9 49.6 8 7 Indonesia 53.3 40.0 35.0 51.4 47.5 9 9 Thailand 58.3 20.0 35.0 62.9 47.0 10 10 Vietnam 51.7 15.0 35.0 53.7 41.1 11 11 Sri Lanka 40.0 15.0 35.0 50.9 35.2 12 12

Average 58.8 50.8 45.2 60.6 55.5

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

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

Market Overview

Hardware

BMI forecasts Australian computer hardware will increase to a total of AUD11.3bn in 2013, with the

popularity of tablets keeping total PC shipments in positive growth territory by countering the decline indesktop and notebook sales We expect the hardware market to grow at a CAGR of around 3% 2013 to

2017 and reach a value of AUD13.1bn by 2017, with drivers including new products such as hybrid/convertible ultrabooks and tablets Meanwhile, government procurement programmes and growing

broadband penetration will also boost sales

Data for Q113 show the market is performing in line

with our expectations Research firm Gartner

reported that desktop shipments declined 20.2%

y-o-y to 393,352 in Q113 while notebook sales were

down 16.8% y-o-y to 724,822 Meanwhile, tablet

sales have continued to soar, driven higher by the

broader range of devices by price and screen size,

and compensated for declining unit shipments of

desktops and notebooks As a result, in 2013 BMI

expects the PC market is projected to report low

single-digit growth

An additional factor in Australia is the cooling of

economic growth, as well as budgetary pressures,

meaning enterprises will remain cautious about IT

investments This helps explain why the Australian

hardware market saw a steeper decline in desktops

and notebooks compared to some other developed

markets

It should be noted that, while tablet sales are booming, 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 offerthe mobility benefits of tablets and the productivity benefits of notebooks

IT Hardware Market Segments

(AUDmn)

2010-2017

e/f = BMI estimate/forecast Source: BMI

In 2012, business demand was hit by concerns about the economic situation in Europe and the US, as well

as domestic issues such as the proposed carbon tax Meanwhile, in the first quarter, there was a shortage inthe supply of hard-disk drives (HDDs) resulting from the floods in Thailand, although ultimately this wasnot as severe as first expected Large Australian retailers were given priority by regional suppliers, but theexpectation of shortages meant a curtailment of seasonal promotions, and was therefore a drag on themarket Against the backdrop of economic headwinds, promotions and discounting by retailers (such as

Harvey Norman with its 2-for-1 offer) and sales of tablets have generally helped to shore up volume sales.

Despite the recent discounting, prices remain on average higher in the Australian market compared withmany other development country markets, a fact that triggered a parliamentary enquiry The ParliamentaryCommittee looking into IT said in 2012 that the enquiry had struck a chord with the public, resulting in ahigh level of submissions from consumers Consumer groups have blamed differential pricing by

multinationals for prices, which are 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 higherAustralian prices were not IT industry specific They pointed to higher wages and distribution costs, andhigh prices charged by Australian channel agents

Government programmes are significant factors in the PC market Firstly, government subsidies of

computers in education provide support for the market National and state governments have continued toroll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools.Large education programmes were rolled out in Queensland and New South Wale 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.

Desktops And Notebooks

Single-digit growth in PC shipments is forecast in

2013, as the market is affected by weaker consumer

confidence There is also a shift underway from

desktops and notebooks to tablets, hybrids/

convertibles and ultrabooks Although it is true that

device categories will become less significant in the

coming years as tablets become higher powered, and

hybrids/convertibles gain ground, BMI forecasts

continued declines in conventional desktops and

notebooks

Household PC penetration is high in Australia We

estimate it crossed the 90% threshold in early 2013

This means there is a limited first-time buyer market,

with vendors instead focusing on the upgrade/

replacement market when it comes to conventional desktops and notebooks Upgrades are estimated toaccount for at least 80% of business purchases, and more than 50% in the case of households However, webelieve this figure is beginning to erode, with the lifecycle of desktops especially lengthened as consumersmaintain devices and instead purchase mobile computing devices

The enterprise 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 havingcomputers Small business comprises more than 99% of all Australian businesses and slightly more than50% of business PC sales

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

Household PC Penetration (%)

2000-2012

e = BMI estimate Source: OECD, BMI

BMI estimates tablet sales of 2.1mn in 2012 in Australia, just behind total notebook sales of 2.29mn

(according to Gartner data) We expect the growing popularity of tablets to continue in 2013, with

shipments reaching around 3mn units; however, it should be noted that hybrids/convertibles will

increasingly blur the distinction between tablets and notebooks

By the end of 2012, it has been forecast that as many as 40% of Australians could be using a tablet PC, withpopulation penetration at around 20% On this forecast, the diffusion curve of tablets would be steeper thanfor almost 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 already been sold in the

Australian market, 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 to pay apremium for the cache of owning Apple devices

Data from Statcounter support our view that it dominates the tablet market The data show that Apple's iOS,run on its tablets, accounted for 9.4% of Australian PC browsing traffic in May 2013 - a figure that was up

by 4.3pps y-o-y Meanwhile, Google's Android OS, which is used on Samsung, Asus and Google's own

Nexus range, accounted for just 1% of PC browsing traffic (up 0.6pps) y-o-y Android has had relativelylittle success in the higher income Australian market compared to in Europe where Android devices havemade serious inroads into Apple's dominance

Despite a longer relatively unchallenged reign at the top of the market, BMI expects Android will make an

impact in Australia, with a range of high-quality devices running the OS now available and offering serious

competition to Apple The release of popular tablets such as the Kindle Fire from Amazon, the Nexus 7 and

10 and Samsung's Galaxy Tab range represented a turning point globally, and we believe this dynamic willimpact Australia as well in 2013 and 2014

The success of Android vendors came only after the release of lower cost tablets and were predominantlythe smaller 7" form factor This contrasted with Apple's larger and more expensive iPad - and the popularity

of the smaller, cheaper devices, catalysed the development of Apple's own iPad Mini Apple is set to facecompetition throughout 2013 from rival Android vendors that will offer consumers a greater choice in terms

of price and size, as well as specifications and features

It is also important to note the gap between the strategies of some of the leading players On the one hand,Apple and Samsung are hardware vendors and look to profit from the sale of devices, while, on the otherside, Google and Amazon are services firms and offer tablets almost at cost The strategies of services firms(combined with low cost OEM tablets from China) will likely put pressure on the margins of hardware-centric vendors in the medium term.

Another development that will affect both the tablet market and the notebook market is the arrival ofWindows 8 In October 2012, with the launch of the new OS, Windows vendors were able to introducetouch devices - with a number of tablets released The addition of more vendors and another touch OS willadd to competition in the market - putting further pressure on prices

Hybrids And Ultrabooks

The more significant development derived from Windows 8, and the arrival of more energy-efficientHaswell chipsets, is the medium-term impact on innovation and form factors Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous There is therefore an opportunity for vendors to leverage this strengthover rival iOS and Android devices by designing tablets with strong productivity functionality alongside thepassive media consumption features Early examples have been hybrid devices such as Microsoft's own

Surface (RT & Pro), Hewlett-Packard (HP)'s Envy 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 tocapture a share of the tablet market by offering a stronger value proposition to consumers while not

compromising user experience

Meanwhile, some vendors have heavily promoted the concept of ultrabooks, which are being touted aspremium, more fully featured notebooks, and a reaction to the previous market dominance of netbooks.Ultrabooks, higher performance notebooks designed as a response to Apple's increasingly popular

MacBooks, are an emerging product category that Intel and certain vendors backed heavily However, salesfell short of Intel's projections due to initially high prices

Vendors appear to have realised that high prices stunted adoption of ultrabooks and are moving ahead withplans to supply low-end ultrabooks Intel reportedly has resisted lowering Ivy Bridge CPU prices, butmanufacturers are attempting to reduce costs by using cheaper Sandy Bridge CPUs and cheap batteries Thearrival of Haswell chipsets in June 2013 will enable a new generation of higher powered, slimline and longbattery life devices - as well as presaging cheaper Ivy Bridge prices This should deepen the ultrabook and

hybrid/convertible market, which BMI believes will drive sales higher in H213 and 2014.

Vendor Performance

Multinational brands dominate the PC market in

Australia The major players include HP, Apple,

Dell, Lenovo and Acer The share of unbranded

'white box' products in the Australian market 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%, and Dell has a share of

around 14% The top-five vendors, including Acer

and Dell, together account for more than 70% of the

market

The release of Apple's iPad created a new

competitive battleground, with Apple's rival vendors

releasing their own products Moreover, Apple has

gained major momentum in the Australian market

from its aggressive retail store expansion as well as

the launch of the MacBook Air Sandy Bridge refresh model However, Apple has so far dominated tabletsales in the Australian market, with the Apple iPad 2 featuring new cameras and an 8.8mm slim body

The iPad has received a boost in the Australia market by local telecoms companies Telstra and Optus

offering what were claimed to be some of the cheapest data rates in the world for iPad users As of the end

of 2010, it was estimated that around 250,000 iPads had been sold in Australia, although firm sales figureshad not been confirmed by Apple Meanwhile, the number of competitor tablet devices continues to grow,with Samsung, Lenovo, HP, Acer and Dell all reportedly working on new tablets Telecoms operators such

as Telstra are competing to offer tablets bundled with data services Telstra has released its own-brandedtablet, called the T-touch Tab, which runs on its Next G network

Many of the competitor devices, including Telstra's T-touch Tab, are powered by Google's Android

operating system Other such devices include one from Lenovo named LePad, and Dell's Streak device.Samsung has enjoyed success with its Galaxy Tab, which was available from all of Australia's majortelecoms carriers for a price of AUD999 However, the device's progress in the Australian market wasstalled by a patent injunction brought by Apple against it In December 2011, a court overturned a sales ban

Australia PC Browsing Traffic By

OS (%) And Y-O-Y Change (pps)

May 2013

Source: Statcounter

that had prevented Samsung from marketing or selling the Galaxy 10.1 However, the injunction wassubsequently extended, disrupting Samsung's bid for the Christmas holiday 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 oftenders 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 over the2009-2012 period The project will provide Lenovo and Acer netbooks to students in years five through toeight

However, Lenovo remains a relatively small player in the Australian market and spends little in the country

on mass media advertising Lenovo's brand is hardly a presence in major consumer electronics retail chains

such as Harvey Norman and JBN HiFi, and instead the company relies on smaller independent retailers However, the company still has some large organisation clients inherited from IBM, including several

banks The company also has an ongoing relationship with several government departments, with the NewSouth Wales Education department being one major client

Australian hardware vendors have been trying to expand their client bases by targeting the small businessmarket with new payment models to stimulate spending A former executive at Dell set up an organisation

called PowerBuy that aimed to leverage the combined buying power of small businesses in negotiations

with IT suppliers

Meanwhile, vendors in the Australian market have also broadened their retail strategies to take advantage ofrelatively robust demand in the consumer segment In 2008, Dell moved further away from its former directselling model when it started to sell its range of desktops and notebooks through 104 Officeworks stores.The move marked a dramatic shift after 10 years in the country, but was in line with its new global strategy

Dell has expanded this new strategy through an arrangement with the Good Guys discount chain.

Software

Despite high penetration rates of enterprise software in Australia, BMI believes there remains potential for

further investment by enterprises in Australia Behind this view is the fact that labour costs are very high inAustralia, so any automation software that can provide a cost basis for implementation is likely to find areceptive market with enterprises looking to remain competitive against international competition Software

is expected to account for about 16% of the Australian IT market in 2013, with forecast spending of

AUD4.3bn As the focus moves from hardware to services and solutions, the share of the market accounted

for by software is forecast to rise by 2017, with businesses seeking greater leverage from their investments.Software sales are forecast to have a CAGR of 4.8%, rising to AUD5.2bn by 2017.

Cost-saving software including enterprise resource planning (ERP), customer relationship management(CRM) and other e-business products will be increasingly popular in the small and medium-sized enterprise(SME) market, as companies try to enhance productivity through automating essential functions and ease

the pressure of high labour costs As evidence of the importance of this segment to vendors, Microsoft recently teamed up with Telstra to offer a suite of enterprise software products to SMEs The public and

financial sectors, healthcare, telecoms, utilities and SMEs are among the verticals vendors believe have themost growth potential

Meanwhile, in terms of operating systems, migration to the Windows 8 operating system retained thepotential to have a positive impact on sales in 2012 However, due to global economic uncertainties, somecompanies, particularly in the export segment, will continue 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 creates new security issues Local research has suggestedthat, for the past few years, Australia has been the global vanguard of virtualisation of X86 servers, even ifthe rate is slackening