Australia information technology report q3 2015

This is in part a consequence of market maturity, meaning growth will underperform the APAC average, which is weighted to emerging markets, but there is also macroeconomic downside as BM

Q3 2015 www.bmiresearch.com

AUSTRALIA

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q3 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: June 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

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

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

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

of the publisher

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Operational Risk 15

Industry Forecast 17

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

2015 Outlook 17

Macroeconomic Forecasts 23

Economic Analysis 23

Table: Economic Activity (Australia 2010-2019) 29

Industry Risk Reward Index 30

Table: Asia Pacific IT Risk/Reward Index - Q315 32

Market Overview 33

Hardware 33

Software 39

Services 44

Industry Trends And Developments 52

Regulatory Development 58

Table: Government Authority 58

Government Initiatives 58

Regulatory News 60

Competitive Landscape 62

International Companies 62

Table: Dell 62

Table: Datacom 63

Table: SAP 64

Table: Panasonic 65

Local Company 65

Table: The Good Guys 65

Company Profile 66

SAP 74

Regional Overview 80

Demographic Forecast 83

Table: Population Headline Indicators (Australia 1990-2025) 84

Table: Key Population Ratios (Australia 1990-2025) 84

Table: Urban/Rural Population & Life Expectancy (Australia 1990-2025) 85

Table: Population By Age Group (Australia 1990-2025) 85

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

Methodology 88

Industry Forecast Methodology 88

Sources 89

Risk/Reward Index Methodology 90

Table: It Risk/Reward Index Indicators 91

Table: Weighting Of Components 92

BMI Industry View

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

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

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

Headline Expenditure Projections:

■ Computer Hardware Sales: AUD8.185bn in 2014 to AUD8.499bn in 2015, up 3.8% in local currency

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

■ Software Sales: AUD4.728bn in 2014 to AUD4.764bn in 2015, up 0.8% in local currency terms.

Security software will outperform, particularly for small and medium-sized enterprises (SMEs) andconsumers - but the effect of XP enterprise upgrades will be diminished

■ IT Services Sales: AUD9.742bn in 2014 to AUD10.678bn in 2015, up 9.6% in local currency terms IT

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

Key Trends And Developments: After a sustained boom since 2012, the Australian tablet market appears

to have peaked, in line with BMI's expectations High street consumer electronics retailer JB Hi-Fi reported

that sales in July 2014 fell by 5.5% year-on-year, mainly due to a significant slump in demand for new andreplacement tablet computers We believe this data reflects the level of consumer satisfaction with existing

products and the slower rate of innovation by leading vendors such as Apple and Samsung that have

produced iterative improvements rather than significant changes in recent announcements Although a smalluptick is expected in 2016 as mobile network operators seek to attract customers to their new 4G mobilebroadband networks by including tablets in new service bundles, sales are expected to fall in the followingyears as the operational lives of high-spec devices - as well as their high cost - obviates the need to buy areplacement in the short to medium term

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

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

■ Strong government support for ICT programmes.

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

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

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

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

rates

■ Sensitive to volatility in the global economy

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

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

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

■ Government cloud computing strategy creates opportunities for vendors in the publicand small- and medium-sized enterprise (SME) sectors

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

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

SWOT Analysis - Continued

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

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

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

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

Wireline SWOT

Australia Wireline SWOT

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

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

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

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

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

■ The business market supports strong demand for converged data services

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

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

Opportunities ■ The national broadband network, announced in April 2013, aims to be completed

sooner and more cheaply, 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 speed broadband services This has potential to drive demand for new data services

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

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

negative consequences for ADSL growth

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

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

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

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

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

SWOT Analysis

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

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

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

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

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

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

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

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

Australians abroad a target for Islamic extremists

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

in the region

SWOT Analysis

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

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

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

extension, currency volatility

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

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

diversifying trading ties from core European markets

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

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

funding poses a threat to sustained growth and financial stability

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

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

Operational Risk

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 USD5mn or more

■ With a population of just over 23mn, the domestic consumer base is small by regionalstandards

Opportunities ■ Australia is currently in talks with the Gulf Cooperation Council, India, and Indonesia

regarding bilateral free trade agreements It is also part of PACER and RCEP talks

■ 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 toreduce the attractiveness of these assets It remains to be seen if the recent

SWOT Analysis - Continued

implementation of a database to increase transparency around foreign-ownedAustralian assets will spur more regulation

e/f = estimate/forecast Source: BMI

We maintain our view for solid growth in Australia's IT market in local currency terms, as we forecast acompound annual growth rate (CAGR) of 5.3% 2014-2019, with the market reaching AUD28.929bn by theend of our five-year forecast period in 2019 Over this period, the market will remain stable at around 1.4%

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

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

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

at a CAGR of just 0.1% in US dollar terms 2014-2019

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

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

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

declines The withdrawal of Microsoft official support for the legacy operating system (OS) XP in April

2014 should continue to cause hardware upgrades, particularly in the enterprise and public sector markets

However, it will be tablet sales that again outperform as the largest device category Meanwhile, BMI

considers there to be potential for growth of hybrid notebook sales running Windows 8/8.1 as a result ofdesign innovation on the part of vendors, while at the low-end, Microsoft's decision to cut OS licensing fees

on low-cost notebooks should make them more cost-competitive versus tablets

The Australian government is an important factor in the IT market through programmes such as the nationalbroadband network (NBN), which is extending connectivity across the country National and state

governments will continue to roll out new initiatives, and the Victoria government has invested more thanUSD150mn in IT in schools New South Wales and Queensland were also rolling out IT for schools

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

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

of rapid growth within the enterprise segment, which are mainly based on the increasing prevalence ofconnectivity Three key areas that stand to benefit are cloud computing, data analytics and machine-to-

machine communications, about which BMI holds a positive medium-term view.

In 2015, uptake of cloud services will continue to increase Surveys indicate that cloud computing is apriority for Australian chief information officers, while the release of the government's cloud computingstrategy in Q213 should also boost deployments Cloud initiatives have already been implemented by many

of the country's leading banks, and across sectors cloud adoption is spreading from storage and email toareas such as human resources management The government has adopted a six-year cloud computingstrategy Cloud computing spending could reach around AUD4.00bn by 2017

Market Drivers: The medium-term outlook is for stable IT market growth, underpinned by economic stability BMI forecasts the Australian economy will remain on a lower growth trajectory over the medium

term, with real GDP growth forecast to average 2.6% 2015-2019 and real private consumption growth toaverage 1.7% annually 2015-2019 However, we also highlight downside risk to this outlook, which couldresult in market disruption Depreciation in the Australian dollar over the duration of our five-year forecastperiod could undermine domestic confidence levels, and reduce consumer purchasing power of imported

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

Asia Pacific average 2014-2019 BMI estimates household PC penetration in Australia at just below 90% in

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

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

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

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

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

distribution, as well as a shift to online sales

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

technologies is the high labour costs in Australia that will generate demand for services that replace labour;

for example, IBM's Ask Watson was adopted by ANZ Bank in H113 to enhance customer services and cut costs Such technology is in the early stages of commercial deployments, but BMI believes that Australia

could be a fertile market for it over the medium term due to the scale of potential labour cost savings

IT Market Growth

(2012-2019)

IT market value, mn (RHS) IT market value, AUDmn, % y-o-y (LHS)

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 3.5

4 4.5 5 5.5 6

0 10,000 20,000 30,000 40,000

e/f = estimate/forecast Source: BMI

Segments: Enterprise software demand in key verticals will continue to be centred on enterprise resource

planning (ERP), customer relationship management (CRM) and business intelligence solutions - but we alsoexpect these applications to gain traction among small- and medium-sized enterprise (SME) market Acatalyst for wider adoption of enterprise software suites among SMEs is likely to be the provision of basic

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

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

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

IT services are forecast to be the outperforming segment of the IT market in the medium term, as demand isdriven by cloud computing services, data analytics and machine-to-machine communications Cloudcomputing should see strong growth with the rollout of the NBN and the release of the government's cloud

computing will be key as businesses look for opportunities to reduce cost and increase flexibility, and hasalready gained traction in the market and spread beyond initial core application areas, with around one-third

of Australian organisations estimated to be using some cloud services

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

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

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

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

Australia GVA By Vertical (%)

2014e

e = estimate Source: National statistics, World Bank, UN, BMI

Summary: The hardware market is forecast to grow from AUD8.499bn in 2015 to AUD9.460bn in 2019,

with PC sales (including accessories) forecast to rise from AUD6.854bn to AUD7.572bn, boosted bycomputer procurement for education and new form factors Software spending is forecast to rise fromAUD4.764bn to AUD5.693bn and IT services from AUD10.678bn to AUD13.776bn

Macroeconomic Forecasts

Economic Analysis

BMI View: Australia's Q414 real GDP growth figures painted a mixed picture, but still show the Australian

economy on a slowing trend We maintain our forecast for real GDP growth to come in at 2.3% in 2015, versus consensus expectations of 2.5% as the ongoing terms of trade shock continues, with economic weakness likely to extend to the real estate and domestic services sectors The agriculture and export- focussed industries are likely to benefit from a weaker Australian dollar.

Australia's real GDP growth slowed slightly in Q414 in year-on-year (y-o-y) terms, coming in at 2.5%versus 2.7% in Q314 In seasonally adjusted quarter-on-quarter (q-o-q) annualised terms there was a pick-

up to 2.2%, from 1.4% in Q314 Overall, the trend remains one of slowing trend growth, with the peak ofthe cycle coming in Q114 We maintain our forecast for real GDP growth to come in at 2.3% in 2015,versus consensus expectations of 2.5% as the ongoing terms of trade shock continues As trend real GDPgrowth settles at around 2.3% over the coming years (or possible below), we expect continued low inflation,and further Australian dollar weakness

Growth Slowing On Any Measure

Australia - Real GDP Growth, y-o-y and q-o-q S.A.

Source: BMI, ABS

PMI Off To A Poor Start In 2015

More timely economic data show the economic growth slowdown has continued into 2015 The

performance of services index (PSI) and the performance of manufacturing index (PMI) from the AustralianIndustry Group tend to reflect trends in the overall economy While the PSI bounced slightly in February,the strength was outweighed by weakness in the PMI, resulting in the average of the two coming in belowthe 50 level for the seventh consecutive month

Remaining Below 50

Australia - Performance Of Manufacturing And Services Indices

Source: BMI, AIG

Real Exports And Investment In Role Reversal

From an expenditure perspective, the overriding theme of the past few quarters has been the surge in netexports as a contributor to real GDP growth Net exports have contributed to growth for the past 10

quarters, while fixed capital formation (a combination of new investment, maintenance, and inventorychange) have acted as a drag for the past eight These trends go hand in hand, with declining mining sectorinvestment dragging down imports while exports continue surge to new highs Indeed, in real terms importspeaked in 2012, and the decline is accelerating, while exports are posting strong growth

Tide Turns For Investment Spending

Australia - Real GDP Growth, Percentage Point Contribution To Growth

Source: BMI, ABS

Swimming Against The Tide Amid Terms Of Trade Reversal

That said, the ongoing terms of trade crunch that Australia is going through is rendering this rebalancing oftrade in volume terms ineffective in monetary terms, which is what ultimately counts The trade account innominal terms remains in deficit as revenues from overseas remain weak despite surging volumes This isillustrated most starkly in the iron ore and coking coal markets In volume terms, shipments are at new all-time highs in the case of both commodities, but revenues are stagnating Iron ore export revenues peaked inDecember 2013, when the volume of exports was 20% below current levels Coking coal export revenues,meanwhile, peaked in November 2008, when the volume of exports was 25% below current levels

Mirror Image

Australia - Percentage Point Contribution To Growth

Source: BMI, ABS

Trend Growth Rate To Fall

Our Commodities team continues to hold a downbeat view on these commodity prices, and we therefore donot expect a reversal in Australia's terms of trade any time soon This will continue to put downside

pressure on trend real GDP growth Lower export revenues essentially make acquiring overseas inputs forgrowth much more difficult, so while lower imports appear to boost GDP from an accounting perspective,they undermine the growth in output across all industries

Real Estate And Domestic Services Sectors At Risk

The mining industry is clearly feeling the brunt of the impact at present However, as the Australian dollarcontinues to fall, the impact will be shared across the economy The weaker exchange rate provides support

to the domestic natural resource industries, cushioning the blow of declining terms of trade, but at the sametime acts as a drag on other sectors We continue to believe that the residential real estate and domestic-focussed services sectors are yet to feel the full impact of the weakening currency, as lower disposable

income growth will expose the lack of affordability of the domestic housing market Manufacturing,meanwhile, is unlikely to see a revival any time soon.

Rural Exports To Outperform

Australia - Rural Exports, % of Total Exports

Source: BMI, ABS

Non-Mining Export-Focussed Industries To Benefit

It is certainly not all doom and gloom for the Australian economy, however, and as this economic

rebalancing takes place, certain sectors are likely to become much more competitive Agriculture stands tobenefit from a weaker Australian dollar together with a benign global demand outlook and increased marketaccess owing to the recent signing of trade deals Meanwhile, the externally-focussed services sector shouldcontinue to benefit Tourism revenues, finance and business services revenues, and education servicesrevenues have all been surging over recent years, and the outlook remains bright

Table: Economic Activity (Australia 2010-2019)

2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Nominal GDP, USDbn 1,245.9 1,500.9 1,555.4 1,496.6 1,441.8 1,230.6 1,214.6 1,257.0 1,340.4 1,409.1

GDP per capita, USD 56,945 67,225 66,678 61,519 62,698 52,997 51,809 53,092 56,075 58,400 Industrial production, % y-

Unemployment, % of

f = BMI forecast Source: National sources, BMI

Industry Risk Reward Index

BMI's IT Risk/Rewards Index has been updated for Q315, incorporating the latest macroeconomic and

industry data Although a number of countries saw minor revisions to their scores in various categories,these have had no impact on their ranking relative to one another Singapore and Hong Kong lead thefield; Vietnam and Sri Lanka continue to languish at the bottom The most significant change to the Indexthis quarter is the addition of Japan to our analysis, extending our coverage to 13 markets Unsurprisingly,

as one of the largest producers of advanced technology, Japan scores very highly and enters the Index infirst position

As we have remarked in the past, high-spend markets that are home to large international companies tend tofare best, relying on established connectivity to support ongoing growth Emerging economies suffer fromweaker telecommunications infrastructure, which underpin the growth of IT services in particular

Consumers and companies may own hardware without the requirement of internet access, but it is datausage that supports much of the ongoing growth of the IT market

It is therefore no coincidence that Sri Lanka remains at the bottom of our indices, below Vietnam Whileboth have vibrant mobile markets, the broadband sectors lag behind in both countries Mobile broadbandservices offer some opportunities but the markets' growth will be towards the end of our forecast period.Both are starting from a low base of PC penetration, and weak consumer spending capability compared withregional peers also limit prospects These markets still require hardware growth to take off in order toencourage the growth in IT services and software that denote more developed IT sectors

India, the Philippines and Thailand hold similar scores India and the Philippines in particular have

generated strong revenues from business process outsourcing (BPO) Although the spending on theseservices largely takes place in other markets, the development of BPO sites requires spending on hardwareand software in the local market to support the development of these platforms India's IT market hasboomed, but largely as through selling services overseas

Thailand has benefited from investment in data centres by several international companies and local usershave turned to cloud computing quickly Although the segment remains comparatively small, it will drivemuch of the overall market growth, starting from a low base Thailand pulled ahead of its lower rankedpeers with a brightening economic outlook and greater political stability combining to improve the country's

India saw no change to its score with the country remaining one of the key global BPO destinations.However, IT spending among local companies remains low and the country's limited reach of PCs meanshardware does not exist in many regions to support the growth of IT services The trend is similar in thePhilippines, which has built a strong BPO presence also, but lacks India's scale The internal market for ITservices is weak in both countries although companies present in the markets have increased spending ontechnology.

As seen in the emerging market economies of our Asia Pacific Risk Reward Indices there is growingdemand for cloud computing among small- and medium-sized enterprises (SMEs) in order to cut costs andintroduce technology in a cost-effective manner Indonesia in particular has encouraged the growth in datacentres to serve international companies and drive more investment into IT services In all cases, a lack ofhardware in smaller companies limits the reach of these products As desktops and notebooks are madeincreasingly affordable, enterprises will spend more on IT service products

In the centre of the table, Malaysia is separated from Indonesia by more than four points, marking a

considerable difference in outlook Only China joins Malaysia in the top half of the table with China's sheerscale the key determining factor in its high position China shares the characteristics of its emerging marketpeers - low PC penetration, limited spending on IT services - but the large government sector and growinginterest in developing businesses in the country encourage greater spending By adding Japan to the

analysis, the regional averages have been raised and China only just attains the new industry average scorefor the region, of 57.3 points

The large 11.3-point gap between the top five markets and China, the highest-ranked emerging market,reflects the maturity of IT development in Japan, Singapore, Hong Kong, South Korea and Australia Thesecountries have high PC penetration rates with growth over 2011-2014 focused on tablets sales as additionaldevices rather than alternatives to notebooks IT services and software comprise the bulk of enterprisespending, pushing the markets' growth rates Services such as enterprise resource planning and customerrelationship management are gaining ground as companies seek to automate processes and learn from datagenerated internally

The relative position of the markets is based principally on the size of the economies, and the ease ofreaching businesses City states Singapore and Hong Kong have a number of advantages in this, allowingthem to place highest in our Index Japan, too, is highly urbanised, yielding a very high Country Rewardsscore and it is on a par with South Korea in terms of Industry Risks as both countries host numeroustechnology-dependent multinational businesses and pro-technology governments

Japan's Country Risks score is lower than those for Singapore and Hong Kong, and this is linked to its lessattractive economic growth outlook Our Country Risk team has a bearish 2015 real GDP growth forecast of0.8% (compared with consensus expectations of 1.0%); Japan is facing upside risks as the economy appears

to be slowly emerging from recession The ongoing decline in oil and gas prices should provide significantsupport for Japan's manufacturing industries, while incipient reforms as part of Prime Minister Shinzo Abe's'Third Arrow' initiative are boosting corporate profitability These positive developments could help Japanstave off the worst-case scenario of a fiscal and financial crisis, allowing the economy to 'muddle through'over the coming years That said, woeful demographics, huge levels of fiscal debt, and excessively easymonetary policy will prevent any sustainable acceleration in real GDP

Table: Asia Pacific IT Risk/Reward Index - Q315

Rewards Risks Country Industry

Rewards Rewards Country Industry Risks Country Risks IT Score Rank Previous Rank

Market Overview

Hardware

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

AUD8.499bn, although in US dollar terms we forecast a contraction of 0.7% due to depreciation of theAustralian dollar The outlook extends over the medium term as we forecast a compound annual growth rate(CAGR) of 3.2% 2015 to 2019, with total demand expected to reach a value of AUD9.460bn by the end ofour five-year forecast period to 2019

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

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

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

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

PC Market: Data for 2013 show the market performed in line with our expectations Research firm

Gartner reported that desktop and notebook shipments declined, while tablet sales continued to soar, driven

higher by the broader range of devices by price and screen size

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

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

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

slump in demand for new and replacement tablet computers

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

vendors The launch of touch-integrated Windows 8 operating system (OS), 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

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

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

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

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

Hardware Market

(2012-2019)

Personal computer sales, AUDmn Servers sales, AUDmn

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

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

e/f = estimate/forecast Source: BMI

Desktops And Notebooks: There is a well-established shift in demand away from desktops and notebooks

to tablets, hybrids/convertibles and Ultrabooks that has occurred over the decade to 2014 Looking ahead,

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

higher-powered, and hybrids/convertibles gain ground

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

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

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

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

complimentary to a traditional PC form factor

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

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

in a continued decline in the netbook share

Australia Household Penetration By Device (%)

2011-2013

Source: Ofcom ICMR Household Survey 2013

Tablets: We believe that 3.740mn tablet computers were sold in Australia in 2013, up by 95.8% from

1.910mn in 2012 Growth was driven by solid demand for new tablets as well as replacements of older or

lower-featured devices, which we believe continued somewhat in 2014, but, with the Apple iPad and Samsung Galaxy devices outselling lower-spec products, we anticipate replacement cycles to lengthen and

the pool of new customers to dwindle, causing a sharp slowdown in total sales

We expect to see 4.290mn units sold in 2015, which represents a slight decline from 2014 as fewer newcustomers look for tablets Although a small uptick is expected in 2016 as mobile network operators seek toattract customers to their new 4G mobile broadband networks by including tablets in new service bundles,sales are expected to fall in the following years as the operational lives of high-spec devices - as well astheir high cost - obviates the need to buy a replacement in the short to medium term

However, it should be noted that hybrids/convertibles will increasingly blur the distinction between tablets

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

Data from Statcounter support our view that the iPad dominates the tablet market The data show that

Apple's iOS, run on its tablets, accounted for 14.4% of Australian PC browsing traffic in August 2014, afigure that was up by 4.4 percentage points (pp) y-o-y, and a higher share of total traffic than that observed

in the majority of developed markets Google's Android OS, which is used on Samsung, ASUS and

Google's own Nexus range, accounted for just 1.2% of PC browsing traffic (down 0.1pp y-o-y) Androidhas had relatively little success in the higher income Australian market compared to emerging markets, withAustralian consumer demonstrating a propensity for premium products extending from tablets to Apple'srange of desktops and notebooks running MacOSX

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

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

and offer tablets almost at cost The strategies of services firms (combined with low cost original equipmentmanufacturer [OEM] tablets from China) will likely put pressure on the margins of hardware-centricvendors

Hybrids And Ultrabooks: The most significant medium-term development derived from Windows 8, and

the arrival of more energy-efficient Haswell chipsets, is the impact on innovation and form factors

Windows has a traditional strength in productivity use cases and software, with the OS being central to theenterprise market and Microsoft's Office Suite ubiquitous There is an opportunity for vendors to leveragethis strength over rival iOS and Android devices by designing tablets with strong productivity functionalityalongside the passive media 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 The arrival of Haswell chipsets in June 2013 enabled a new generation of higher powered,slimline and long battery life devices, as well as presaging cheaper Ivy Bridge prices This has deepened the

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

Industry Trends - PC Volume Forecast ('000)

2011-2018

e/f = estimate/forecast Source: BMI

Vendor Developments: Multinational brands dominate the Australian PC market The major players include HP, Apple, Dell, Lenovo and Acer The share of unbranded 'white box' products in Australia has

dropped to less than 20% HP has around a 19% share of the brand PC market, ahead of nearest rival Applewith 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 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 over2009-2012 The project will provide Lenovo and Acer netbooks to students in years five through to eight

More recently, in June 2013, Lenovo and Dell became the first two technology companies to sign up to theNew South Wales government's IT hardware panel The panel, worth USD85.68mn, provides IT hardware

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 extension offers.

Lenovo remains a relatively small player in Australia and spends little in the country on mass mediaadvertising Lenovo's brand is hardly a presence in major consumer electronics retail chains such as HarveyNorman and JB HiFi Instead the company relies on smaller independent retailers However, it still has

some large organisation clients inherited from IBM, including several banks It also has an ongoing

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

Australia's PC Browsing Traffic By OS (% And pp chg y-o-y)

August 2014

Source: Statcounter

Software

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

markets in Asia Pacific 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 costbasis for implementation is likely to find a receptive market Given the extremely high labour costs in

Australia, and its proximity to low-cost markets, we believe it could prove a testing ground for new

deployments, for instance IBM's Watson-as-a-service initiative.

Software is expected to account for 19.9% of the Australian IT market in 2015, with forecast spending ofAUD4.764bn Software sales are forecast to have a CAGR of 4.8% 2014-2019, with the total marketexpected to reach a value of AUD5.693 in 2019

Operating Systems: In terms of OS, migration to the Windows 8/8.1 OS retained the potential to have a

positive impact on sales in 2014 as a result of the withdrawal of official support for XP and cuts to OSlicensing fees by Microsoft The cut to OS licensing fees for notebooks under USD250 should make

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

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

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

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

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

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 and medium-sized enterprise (SME) market, as companies try to enhance productivity through automatingessential functions and ease the pressure of high labour costs As evidence of the importance of this segment

small-to vendors, Microsoft recently teamed up with Telstra small-to offer a suite of enterprise software products small-to

SMEs The public and financial sectors, healthcare, telecoms, utilities and SMEs are among the verticalsvendors believe have the most growth potential

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

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