Australia information technology report q3 2014

Tablet sales continue to compensate for declining sales of desktop and notebook devices, and we believe hybrid notebooks have the potential to continue driving hardware spending growth o

Q3 2014 www.businessmonitor.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q3 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 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

Key Trends And Developments 8

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 17

Table: IT Industry - Historical Data And Forecasts (Australia 2011-2018) 17

Wireline 21

Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Australia 2011-2018) 21

Macroeconomic Forecasts 23

Economic Analysis 23

Pull-Back In Mining Investment Still The Biggest Drag 24

Other Sectors Ill-Placed To Drive Growth As Reform Drive Stalls 25

Fiscal Restraint Negative For Near-Term Growth 26

Table: Economic Activity (Australia 2010-2018) 27

Industry Risk Reward Ratings 28

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014 30

Market Overview 31

Hardware 31

Software 36

Services 39

Industry Trends And Developments 46

Regulatory Development 50

Table: Government Authority 50

Government Initiatives 50

Regulatory News 52

Competitive Landscape 55

International Companies 55

Table: Dell 55

Table: Datacom 56

Table: SAP 57

Table: Panasonic 58

Local Company 59

Table: The Good Guys 59

Company Profile 60

SAP 60

Hewlett-Packard 65

Regional Overview 72

Demographic Forecast 76

Table: Australia's Population By Age Group, 1990-2020 ('000) 77

Table: Australia's Population By Age Group, 1990-2020 (% of total) 78

Table: Australia's Key Population Ratios, 1990-2020 79

Table: Australia's Rural And Urban Population, 1990-2020 79

Methodology 80

Industry Forecast Methodology 80

Sources 81

Risk/Reward Ratings Methodology 82

Table: It Risk/Reward Ratings Indicators 83

Table: Weighting Of Components 84

BMI Industry View

BMI View: The Australian IT market is expected to continue growing in each year of our forecast period to

2018, remaining at a share of around 1.6% of GDP Tablet sales continue to compensate for declining sales

of desktop and notebook devices, and we believe hybrid notebooks have the potential to continue driving hardware spending growth over the medium term Meanwhile the government's One Education Programme aims to have distributed 50,000 laptops to school children across the country by June 2014 In terms of enterprise demand, Australia is well developed market, but two trends stand out First is the potential for

growth in cloud computing adoption, particularly among SMEs Second, 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.

Computer Hardware Sales: AUD9.0bn in 2013 to AUD9.3bn in 2014, up 3.6% in local currency terms.

Strong demand for tablets is compensating for a decline in desktops and notebook shipments, but we expectslower growth of tablet volumes - and slower decline in traditional PC volumes - in 2014

Software Sales: AUD4.6bn in 2013 to AUD4.7bn in 2014, up 3.5% in local currency terms Security

software sales are increasing, particularly for small and mediumsized enterprises (SMEs) and consumers but it is cloud delivery of enterprise software suites that will outperform

-IT Services Sales: AUD10.2bn in 2013 to AUD11.1bn in 2014, up 8.8% in local currency terms -IT

services will be continue to be the highest performing growth area, with cloud services the key growthdriver as local companies try to use efficiencies enabled by the National Broadband Network (NBN)

Key Trends And Developments

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 ACMA claimed that 36% of small andmedium-sized enterprises 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%)

As well as the familiar global players such as IBM, Oracle and Amazon Web Services - all of which have invested in cloud service delivery in Australia - BMI identifies local vendors that could pose a medium term threat A host of local specialised players have emerged in the Australian market, including Ninefold, Cloud Central, Ultraserve, Brennan IT and BitCloud Several have already been swallowed up by emerging broadband powerhouses such as iiNet and TPG Telecom, as they seek to diversify away from

relatively low-margin telecoms services and leverage their extensive backbone and data centre facilities, butone or more could develop into a challenger in the Australian market

IT SWOT

SWOT Analysis

Strengths ■ High incomes and strong supporting infrastructure drive high levels of IT spending per

capita

■ Strong government support for ICT programmes

■ IT-literate population with high levels of PC ownership

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

■ Tablet sales are compensating for 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 ■ Government cloud computing strategy creates opportunities for vendors in the public

and SME sectors

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

■ Tablet sales still have scope for growth

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

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

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

import-dependent IT market

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

SWOT Analysis - Continued

■ H213 'Smart Devices' sales figures may indicate the beginnings of market saturation

or 'user fatigue'

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 (NBN), 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 (LNC) government inSeptember 2013, the NBN is likely to offer slower connectivity than originallyenvisaged

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

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 23mn, 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 agricultural and resourceextraction sector have raised fears that strategic assets will be lost to foreign players.This has led to more conditions attached to the sale agreements, which is likely to

SWOT Analysis - Continued

reduce the attractiveness of these assets It remains to be seen if the recentimplementation of a database to increase transparency around foreign-ownedAustralian assets will spur more regulation

AUDmn 8,638.5 8,838.9 9,012.0 9,337.7 9,700.6 9,958.0 10,291.5 10,565.4Personal computer sales, AUDmn 7,014.4 7,247.9 7,462.0 7,736.2 8,051.5 8,275.1 8,562.6 8,801.0 Software sales, AUDmn 4,318.1 4,392.0 4,585.6 4,745.5 5,023.0 5,381.3 5,559.2 5,780.3 Services sales, AUDmn 8,929.5 9,620.4 10,174.5 11,065.4 11,853.3 12,601.1 13,469.9 14,367.7

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

BMI has a positive outlook for IT market growth in Australia over the medium term, as we forecast a

CAGR of 5.3% 2014-2018 Over this period the market will remain stable at around 1.7% of GDP TheAustralian IT market has considerable medium-term potential, particularly in areas such as tablets, cloudcomputing, real-time enterprise software and data centre growth

2014 Outlook

We expect growth in 2014 to outperform that seen in

2013, with the growth rate forecast to increase by 1.8

percentage points (pps) to 5.8% This is despite our

forecast of a slowdown in real GDP growth to 2.3%

in 2014 versus 2.4% in 2013 Despite this small

deceleration we believe the economic backdrop

remains conducive for IT market expansion in

Australia

Sales of traditional form factors such as desktops

and notebooks declined in 2012 and 2013, but strong

tablet sales, and potential for growth of hybrid

notebook sales, mean volume growth continued and

should expand again in 2014 PC penetration is high

in Australia, limiting growth potential, but

nonetheless we expect sales growth to continue as

high income consumers purchase personal devices

on a short replacement cycle

The Australian government has a number of programmes that directly impact the IT market, for instance theNational Broadband Network (NBN), which is extending connectivity across the country We expect overallgovernment spending to increase by 2% in real terms in 2014, the same level as for 2013 Governmentprogrammes should also help keep computer hardware sales in positive growth territory Governmentsubsidies of computers in education will provide support for the market National and state governmentswill continue to roll out new initiatives, and the Victoria government has invested more than USD150mn 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 will see 50,000 laptops distributed tothe 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 There are however areas of rapid growth within the enterprise segment,which are mainly based on the increasing prevalence of connectivity Three key areas that stand to benefitare cloud computing, data analytics and machine-to-machine communications

IT Market Trends

2011-2018

Australia - IT market value, AUDmn

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

5,000 10,000 15,000 20,000 25,000 30,000 35,000

e/f = BMI estimate/forecast Source: BMI

In 2014, 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.

Management Office (AGIMO) consolidated its contracts with Microsoft through a single reseller to deliver

cost savings of AUD100mn

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

Meanwhile, in the enterprise segment, regulatory compliance will result in continued spending by banks,and intense 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 spendingsegment, where deregulation has led to new entrants High labour costs in Australia will generate demand

for services that replace labour, such as IBM's 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 due to the scale of potential labour cost savings

Segments

The maturity of the Australian hardware market means growth rates will be significantly slower than the

APAC average 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 thepersonal/upgrade device market as we expect 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 and ultrabooks that use Haswell and, soon, Broadwell

chips could gain traction in Australia

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

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 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 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

Summary

The hardware market is forecast to grow from AUD9.3bn in 2014 to AUD10.6bn in 2018, with PC sales(including accessories) forecast to rise from AUD7.7bn to AUD8.8bn, boosted by computer procurementfor education and new form factors Software spending is forecast to rise from AUD4.7bn to AUD5.8bn and

IT services from AUD11.1bn to AUD14.4bn

Inhabitants 46.1 44.1 42.3 40.5 38.0 35.7 33.5 31.4Internet users, '000 28,919.8 30,949.7 31,492.1 31,939.8 32,223.9 32,635.1 33,185.1 33,886.0 Internet users/100 inhabitants 127.2 134.3 134.9 135.2 134.7 134.7 135.3 136.5 Broadband internet subscribers,

'000 11,123.0 12,161.0 12,647.4 13,090.1 13,482.8 13,887.3 14,303.9 14,733.0Broadband internet subscribers/

100 Inhabitants 48.9 52.8 54.2 55.4 56.4 57.3 58.3 59.3

e/f = BMI estimate/forecast Source: BMI, operators, ACMA

We have lowered our broadband forecast for

Australia to reflect the risk of disruption to the

National Broadband Network (NBN) project

Following the appointment of new Communications

Minister Malcolm Turnbull, the entire board of

state-owned NBN Co has resigned Besides having to

revisit the ownership structure of the NBN Co,

which could involve private sector participation to

fund the rollout, massive changes will also be

needed to renegotiate contracts with network

vendors, causing delay to the protracted NBN

project

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 a fixed and mobile broadband connection

The NBN aims to deliver broadband services, either by fixed or wireless means, to the entire population,

Industry Trends - Wireline Sector

(2011-2018)

Broadband internet subscribers, '000 Main telephone lines in service, '000

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

5,000 10,000 15,000 20,000

e/f = BMI estimate/forecast Source: BMI, operators, ACMA

and achieving this goal on target should provide a boost to the broadband uptake towards the end of ourforecast period.

Macroeconomic Forecasts

Economic Analysis

BMI View: Even with investment in residential and public infrastructure ramping up, the Australian

economy continues to struggle to offset the drag from the ongoing pull-back in mining investment The manufacturing and services sectors are unlikely to provide a significant boost, as they also face profit margin pressures, which will weigh on businesses' appetite to hire and invest With Federal Senate politics likely to stall any reform drive and fiscal restraint expected to weigh on both business confidence and economic activity, we maintain our forecast for real GDP growth to slow to 2.0% in 2014, from 2.4% in 2013.

We maintain our outlook for Australia's real GDP growth to slow in 2014 to 2.0% from 2.4% in 2013, as webelieve that economy will struggle to find other growth drivers in the face of an ongoing decline of privateinvestment in the mining sector Indeed, the outlook for the demand for iron ore and coal, Australia's keyexports, continues to dim, in comparison with the strong pace of expansion we have seen over the pastdecade While exports volumes are not expected to contract, weakening economic activity from China,Japan and South Korea will likely cap the growth in demand for these end products, thereby reducing theeconomic rationale to undertake further mining investments Unsurprisingly, this has translated to a fewernew mining projects from the private sector

Mining Investment Tapering Off

Australia - Value Of Work Yet To Be Done, Engineering Construction, By Quarter, By Sector (AUDbn)

Source: BMI, Australian Bureau of Statistics

Pull-Back In Mining Investment Still The Biggest Drag

Both our infrastructure and mining teams have written about the decline of new engineering projects in themining sector, noting that news of delays and cutbacks have become more common (see, 'More Cutbacks InSight As Boom Cools', April 3) Together with data from Australian Bureau of Statistics evidencing a fast-shrinking pipeline of outstanding projects from its 2012-highs, we see possible downside risks to ourforecast for overall gross capital formation to come in at a tepid pace of 1.2% in 2014 This is despite PrimeMinister Tony Abbott's drive to push through more infrastructure projects and the notably strong residentialbuilding activity in certain key states like New South Wales on the back of strong investor buying interest.Indeed, the construction sector contracted as a whole in April, according to the Australian Industry Group'ssector performance index, mainly on the back of poor activity and weak new orders in commercial andengineering construction sub-sectors As we have previously highlighted, the value of residential buildingprojects and public infrastructure projects remains far smaller than the value of commercial and engineeringprojects that the country has witnessed over the last few years, and therefore the former will provide littlereprieve as the latter declines

Little Support From Manufacturing And Services

Australia - Sector Performance Indices

*A reading above 50 indicates the sector in expansion Source: BMI, Australian Industry Group

Other Sectors Ill-Placed To Drive Growth As Reform Drive Stalls

Moreover, it does not appear that the other sectors of the economy, namely manufacturing and services, arenow better placed to offset the slowdown in the mining investment Profit margins in both sectors remainunder pressure, with wages, in particularly, pushing costs higher Indeed, the performance indices for bothmanufacturing and services sectors recorded another month of contraction in April, with input pricesmarking a successive expansion while selling prices declined further With few signs of input prices easing,

we expect narrowing profit margins to remain a drag on businesses' appetite to hire and invest

We believe that labour reform could help ease these pressures on businesses, but the lack of progress on thisfront suggests that businesses will continue to face hurdles to adjust to this increasingly difficult

environment Indeed, there have been a number of instances in which businesses have been unable to shed

the excess labour or lower their wages (examples include Toyota's initial negotiations with workers which was upended by a court order and the stalling of Tey Australia's new enterprise bargaining agreement due

to union action) One key obstacle is the fragmented Federal Senate which will delay policy passage andtherefore stall any significant reform in the near term, despite positive initial efforts by Prime Minister TonyAbott to reform industrial relations and restrain the power of unions

Fiscal Restraint Negative For Near-Term Growth

We have previously noted that the government's attempts to enact a temporary tax and cut back on certainareas of spending (namely, healthcare) would be an overall negative for near-term growth, as consumersand businesses would pare back spending That said, we do not expect authorities' efforts to contain thefiscal deficit to meet with much success, especially since we believe that tax revenues will come in farbelow government forecasts

Private Consumption: High levels of household debt, threats of higher taxes, softening job market and

income outlook, together with possible declines in house prices lead us to maintain our subdued outlook forprivate consumption for 2014 We forecast this expenditure component to grow at 1.3% compared togrowth rates of 2.0% and 2.5% respectively in 2013 and 2012 Indeed, we believe that Australian

households will undergo a period of deleveraging, and forecast this to weigh on private consumption growthover the next few years

Gross Capital Formation: Due to declines in the mining investment, overall gross capital formation

contracted by 1.3% in 2013 While we expect further delays and project cancellations from this sector, wenote that strong growth from residential housing and public-driven infrastructure should help offset thedeclines to some degree That said, our forecast for gross capital formation to grow by 1.2% in 2014 isbarely a recovery, as decline in value of projects from the mining sector outweighs the improvements fromall the other sectors

Public Consumption: We have highlighted the austere stance that the Liberal-National coalition

government is keen to adhere to, although we note that without reforms to taxes and expenditure, the fiscaldeficit is likely to increase While the federal government has started to make plans to cut back on publichealth services, we believe that with automatic economic stabilisers (such as unemployment/welfarepayouts) set to grow as the economy weakens, we believe public consumption will inevitably rise Thus, weexpect public consumption to increase slightly to 2.0% in 2014, up from 1.1% in 2013

Net Exports: Australian exports have had a strong start to 2014, with exports so far recording double-digit

nominal growth rates for the first two months While we expect real export growth to remain fairly

supported in 2014, owing to the needs of its North Asian trading partners (China, Japan and South Korea),

we believe that the pace of growth will moderate significantly in the coming years as the Chinese economyweans off its investment binge With imports likely to rise in 2014, after a 2.7% contraction in 2013, webelieve net exports will provide less of a support going forward until 2016, adding only 0.5 percentagepoints (pp) to headline real GDP growth in 2014 compared 2.0pp in 2013

Table: Economic Activity (Australia 2010-2018)

2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 1,247.3 1,499.6 1,555.1 1,501.2 1,396.3 1,354.7 1,357.5 1,403.2 1,483.5 Real GDP growth, % y-o-y 2.7 2.5 3.8 2.4 2.0 2.3 2.5 2.8 2.9 GDP per capita, USD 57,009 67,166 66,664 61,709 60,719 58,341 57,905 59,269 62,065 Industrial production, % y-o-y, ave 4.7 1.2 4.6 3.6 1.6 1.6 2.1 2.0 2.0 Population, mn 22.4 22.7 23.1 23.3 23.6 23.9 24.2 24.5 24.8 Unemployment, % of labour force,

e/f = BMI estimate/forecast Source: National Sources, BMI

Industry Risk Reward Ratings

The IT sector in Asia Pacific is one of the most dynamic globally owing to a combination of key growthfactors, including high levels of productivity across different industry verticals, large populations in manycountries in the region and rapid development of high-speed broadband networks The region is home to

leading global vendors, including Lenovo, Samsung, Huawei, Infosys, and Wipro, with strong

development of the entire ICT value chain

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

markets over our forecast period, ending 2018, based on macroeconomic and country risk factors thatimpact the IT market, as well as key market trends and industry-specific risks The combined real GDP ofthe 12 countries in our table is forecast to reach USD10.5 trillion in 2014

The average aggregate score for our ratings increased marginally this quarter from 55.3 to 55.9, mainly due

to improvements in the Industry Rewards and Industry Risks scores of some countries These were

sufficient to offset a slight decline in the average regional Country Rewards score The average regionalCountry Risk score is unchanged in this quarter's update In terms of ranking, there was only one change onour table; Indonesia moved up two places to eight, pushing down the Philippines and Thailand to ninth and

10th respectively

Industry Rewards

The main factors in BMI's industry rewards rating are value of the addressable IT market, our five year

growth outlook, government initiatives and IT spending as well as market depth, which assesses the

proportion of hardware sales to other IT products and services sales South Korea, China and India are theonly countries with a score of more than 70 in this category, although for different factors South Korea isone of the most matured markets in the region, with hardware sales accounting for less than 25% of total ITsales China's IT market is by far the biggest in the region, with the value projected to reach USD150bn in

2014 For its part, India's IT market is forecast to record double-digit growth over our forecast period, albeit

it from a low base

Australia is the only other country with an Industry Rewards score above the regional average, despitehaving the lowest five-year average growth rate at just 0.1% in US dollar terms The remaining countriesscore between 50 and 59, except Sri Lanka, the lowest ranked country on our table, which scores 46.7 The

country score in this category is held back by the small market size, forecast to reach USD530mn in 2014,and lack of depth in its IT market, with hardware sales accounting for more than 65% of total IT sales.

proportion of their populations live in rural areas and lack access to reliable broadband services

Industry Risks

We upgraded the Industry Risk scores of four countries - Australia, Malaysia, Indonesia and Sri Lanka - thisquarter to reflect notable improvements in the enactment or implementation of laws to protect intellectualproperty (IP) rights Despite these efforts, the region remains a hotbed for product counterfeiting andsoftware piracy as evidenced by the low regional average score in this category South Korea and Singaporeoutperform their regional peers in this category with scores of 75 and 70 respectively At the other end ofour table, Thailand and Vietnam recorded the lowest score of 35

Country Risk

The country risk category assesses the impact of key macroeconomic factors on the IT market Some of thefactors we consider in our analysis include short-term external and financial risks, trade bureaucracy andlegal framework We also incorporate Transparency International's corruption index in our ratings Thescores in the country risk category have the narrowest range and highest average score among the four

categories in our table Hong Kong has the highest score of 77.7, followed by Singapore on 74.4 HongKong's score is boosted by its strong legal framework, transparent and efficient trade policies and a strongcorruption score.

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014

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

South Korea 75.0 80.0 75.0 65.4 74.5 1 1 Singapore 58.3 100.0 70.0 74.4 72.8 2 2 Hong Kong 58.3 100.0 45.0 77.7 70.4 3 3 Australia 60.0 95.0 57.5 66.9 69.5 4 4

Indonesia 53.3 35.0 42.5 51.4 47.2 8 10 Philippines 53.3 30.0 42.5 50.9 45.9 9 8 Thailand 55.0 20.0 35.0 62.9 45.5 10 9

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 the Australian computer hardware market value will increase by 3.6% in 2014 to a total of

AUD9.3bn.The popularity of tablets will maintain total PC shipment growth by countering the decline indesktop and notebook sales However, in 2014 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

Our positive outlook extends over the medium as we forecast a compound annual growth rate (CAGR) of3.2% 2014 to 2018, with total demand set to reach a value of AUD10.6bn in 2018 Over the medium term

we identify new products such as hybrid/convertible ultrabooks and tablets as the main opportunities forgrowth Meanwhile, government procurement programmes and growing broadband penetration will alsoboost sales

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 the broader range of devices by price and

screen size In 2014 BMI expects the PC market is

projected to report low single-digit growth

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 offer

the mobility benefits of tablets and the productivity

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

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

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

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.

Desktops And Notebooks

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

convertibles and ultrabooks BMI believes traditional device categories will become less significant in

coming years, as tablets become higher powered, and hybrids/convertibles gain ground The outlook fortraditional form factors including conventional desktops and notebooks is weak, although desktops shouldfare slightly better due to demand from the enterprise segment

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

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 to

conventional 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

Tablets

BMI estimates tablet sales of 3.74mn in 2013 in Australia, surpassing notebooks to become the largest

device category by volume We expect the growing popularity of tablets to continue through 2014, withshipments reaching around 4.37mn units However, it should be noted that hybrids/convertibles will

increasingly blur the distinction between tablets and notebooks over the medium term, and this trend isexpected 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 12.5% of Australian PC browsing traffic in May

2014, a figure that was up by 3.1 percentage points (pps) year-on-year (y-o-y) Meanwhile, Google's Android OS, which is used on Samsung, Asus and Google's own Nexus range, accounted for just 1.0% of

PC browsing traffic (unchanged y-o-y) Android has had relatively little success in the higher income

Australian market compared to in Europe, where Android devices have made serious inroads into Apple'sdominance.

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

Another development that will affect both the tablet and notebook markets is the arrival of Windows 8 InOctober 2012, with the launch of the new OS, Windows vendors were able to introduce touch devices, with

a number of tablets released The addition of more vendors and another touch OS will add to competition inthe market, a trend set to intensify following Microsoft's announcement in Q114 that it was slashing OSlicensing costs for low-end devices This however is a development that will primarily impact emergingmarkets rather than high-income markets such as Australia

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 an opportunity for vendors to leverage this strength over rivaliOS and Android devices by designing tablets with strong productivity functionality alongside the passivemedia consumption 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 ofthe tablet market by offering a stronger value proposition to consumers while not compromising userexperience

Some vendors have heavily promoted the concept of ultrabooks, which are being touted as premium, morefully featured notebooks, and a reaction to the previous market dominance of netbooks Ultrabooks, higherperformance notebooks designed as a response to Apple's increasingly popular MacBooks, are an emergingproduct category that Intel and certain vendors backed heavily However, sales fell 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 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%, 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

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-yearcontract in partnership with an IT deployment company to roll out 10,000 netbooks to Victoria publicschools over 2009-2012 The project will provide Lenovo and Acer netbooks to students in years fivethrough 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, will provide IThardware for the whole of government as part of the NSW government's IT policy reforms It will initiallycover desktops, 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 extensionoffers

Australia's PC Browsing Traffic By

OS (% and percentage point

change y-o-y)

May 2014

Source: Statcounter

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 JBN 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

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

Software is expected to account for about18.9% of the Australian IT market in 2014, with forecast spending

of AUD4.7bn Software sales are forecast to have a CAGR of 4.7% 2014-2018, with the total marketexpected to reach a value of AUD5.8bn in 2018

Operating Systems

In terms of operating systems, migration to the Windows 8 operating system retained the potential to have apositive impact on sales in 2014 as a result of the withdrawal of official support for XP This should act as apush factor for OS upgrades, particularly in the enterprise segment, as businesses look to maintain

information security Recent research by Statcounter shows that Australian consumers are upgrading fromMicrosoft's Windows XP operating system more quickly than their counterparts in The US and UK markets

XP usage has fallen in Australia from 71% in 2008 to 5.6% in May 2014

Enterprise Software

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 the most growth potential

However, due to global economic uncertainties,

some companies, 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 create 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

Piracy

Software piracy has fallen in Australia in recent years, but remains an issue in some segments of the market.According to the Business Software Alliance, the overall software piracy rate dropped to 23% in 2011 from31% in 2003 However, most of the fall occurred in the consumer segment, where the drop in 'white box'

Software Market

(2011-2018)

Software sales, mn

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

2,000 4,000 6,000 8,000

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

unbranded PCs was credited with reducing the use of pirated software Some studies have found a rise in theuse of illegal software among western Australian companies, particularly in the booming mining sector Theoverall trend, however, has been one of improved general awareness, backed by appropriate legislation thathas seen Australia with one of the lowest piracy rates in APAC.

Vendor Performance

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

mid-2012 the company won a three-year, AUD14.5mn tender from the New South Wales Trade &

Investment agency to deliver cloud-based solutions, including SAP Business By Design, SAP Payroll andcloud consulting services

Rivals to SAP, Microsoft and Oracle have made inroads into the enterprise software market In 2012,

Microsoft reported a number of local cloud computing business software deals These include a SaaS CRM

deal with Redback Conferencing Then in April 2013 retailer Spend-less Shoes purchased the Microsoft Dynamics ERP system, implemented by Microsoft partner OST Microsoft's retail ERP solution is designed

to provide firms with capacity adapt to the marketplace with in-store sales techniques and monitoringconsumer buying preferences OST will introduce the ERP system in three phases, integrating POS, multi-channel management, store operations, merchandising and supply chain Previously the firm's businesssystem was labour intensive, with high labour costs putting pressure on margins

In 2010 Microsoft Australia received a boost when Qantas, one of the largest corporate users of Lotus

Notes in Australia, announced it had dumped the IBM email system in favour of Microsoft Outlook Along-time user of Notes, Qantas announced it would migrate 20,000 workers to Outlook by the end of 2010,

with the project being managed by Fujitsu Microsoft regards smaller businesses as a growth area and has

cooperated with Telstra to launch a suite of products for SMEs

Services

IT services is forecast to be the outperforming segment of the IT market over the medium term as cloudcomputing pushes growth rates higher IT services are forecast to account for about 44% of the domestic ITmarket in 2014, with spending of AUD11.1bn, up 8.8% from 2013

We expect growth to slow slightly but remain robust over the medium term CAGR for the segment isforecast at 7.1% 2014-2018 Key verticals include government, telecoms, healthcare and banking shouldcontinue to supply demand for implementation, consulting and managed services, with the growing

popularity of cloud computing creating new opportunities

Cloud Computing

The cloud computing market has already developed

well in the large enterprises segment, and, with the

NBN progressing and the government announcing

its cloud strategy in H113, BMI expects it to

maintain high growth rates in the medium term as

adoption by public authorities and SMEs picks up

Strong growth in demand for cloud computing

services is expected in 2014 A broad range of

Australian organisations, from Australia Post to

CBA, now use cloud computing as a means to

deliver individual services Given many businesses'

focus on controlling costs, cloud computing models

have also grown in popularity and spread beyond

initial core application areas An explosion in stored

data is another factor behind the cloud trend

Organisations in many industries are keen to drive down costs by using cloud computing models

However, one priority for IT services vendors will be to address concerns about cloud security that is still adrag on service uptake

5,000 10,000 15,000 20,000

0 5 10 15 20

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

Telecoms companies such as Telstra and Optus have rolled out cloud computing service offerings from Australian datacentres Meanwhile, most of Australia's top banks, such as ANZ and CBA, have launched

cloud computing strategies In 2010 an initiative was launched to develop a shared services platform formore than 60 small government agencies, following initiatives by larger bodies such as the Department ofHuman Services

The move towards cloud computing has been encouraged by the global economic slowdown In 2009Telstra launched a consolidation exercise to reduce its number of IT services providers from four to two.The goal was to cut IT system management costs In the short term maintenance and other services regarded

as operating expenses were less vulnerable to cutbacks than new projects requiring major capital

expenditure

E-government projects will be an important opportunity for IT services vendors and a driver of IT projects

in various sectors Projects such as the standardised reporting systems scheme for enterprises will encouragebusiness spending on system updates Businesses are likely to remain cautious However, there will be afocus on operational efficiency and the bottom line The retail sector will be one source of opportunity assector players try geographic expansion and new formats to boost growth

Cloud computing may remain a relatively small slice of the overall IT budget, but the indications are that

this could grow to a level exceeding 10% As a sign of things to come, a 2012 survey by research firm Frost

& Sullivan found that 53% of Australian companies using cloud computing services spend more than 10%

of their total IT budgets on cloud solutions or services, while 31% spend more than 20% About 70% ofthem will increase their cloud-based budget significantly over the next 12 months Larger companies spendmuch more on cloud computing than smaller firms, but the latter are expected to represent a growingopportunity

Surveys indicate that cloud computing is a top priority for Australian CIOs New cloud computing offeringsand increased competition in this segment are expected to fuel demand from end-users In addition to costsavings, businesses will aim to boost efficiency and increase flexibility in response to customer needs.Large businesses are most likely to put IT applications such as mail, phone systems and document

management into the cloud Australia also enjoys a relatively cloud-favourable regulatory environment,with a 2012 survey by the Business Software Alliance ranking Australia the second friendliest country inthe world for global cloud interoperability

In 2010 many Australian organisations launched cloud pilot programmes By 2012 most of these

organisations, across a range of Australian sectors, had moved to full cloud deployments Australia's big