Indonesia Information Technology Report Q2 2008

Market Overview The conditions appear in place for the Indonesian IT market to grow at a CAGR of at least 11% between 2007 and 2012. Driven by strong notebooks sales growth, PC sales were strong in 2007 despite government moves to crack down on software piracy. By 2012, the hardware-dominated IT market should approach a value of US$5bn as Indonesia is now growing faster than some ASEAN neighbours, despite a number of constraints.

With information and communication technology (ICT) penetration of only around 20% and development restricted to richer areas such as Java, Indonesia's uneven development (and resultant digital divide) is a barrier to still faster growth within the potentially huge IT market. However, economic factors look favourable, with Indonesia's GDP enjoying its fastest expansion last year since 1996, and average GDP growth of 6% expected over our forecast period of 2008-2012. The uncertain global economic environment is not expected to present substantial downside risk to our forecast scenario.

A more active approach by the government, including the establishment of a new committee headed by President Susilo, should stimulate IT spending through a series of infrastructure and education initiatives.

The government has also recently signalled a retreat on its policy of aggressively promoting open source software. Government spending remains relatively small compared with regional neighbours such as Singapore and India, but a relaxed monetary policy and buoyant economy should help the consumer segment, which is now becoming a stronger focus of vendor attention.

Industry Developments The Indonesian government has said that it is considering new co-operation agreements with US software giant Microsoft. Over the past four years the Indonesian government has made a number of initiatives to promote open source software. However, relatively little progress has been made. The government now says that it is drafting 'new kinds of co-operation agreements' that could be made between Microsoft and the Indonesian government.

Meanwhile, the government has said that it is to review component duties to ensure that these do not become a barrier to continue IT sector growth. The government sees the IT industry as a key economic growth sector capable of creating 67000 new jobs. The Department of Industry said recently that the government will keep an eye on component duties to ensure that they do not get out of line with product prices.

Competitive Landscape International vendors dominate the Indonesian brand PC market, with Acer the leader in the notebook sector and HP the overall leader. In 2008 Dell is developing a strategy to target Indonesia's consumer segment for the first time, launching four new series of laptops and slim build desktops. The company is also expanding an existing distribution partnership with local company Metrodata. Vendors are also stepping up initiatives to reach out to SMEs in a market which remains dominated by the enterprise segment.

Meanwhile, turning to IT services, major vendors are reporting a growing demand from Indonesian clients particularly in the telecoms, manufacturing and banking sectors. Telkom Indonesia has recently acquired an 80% stake in leading local company PT Sigma Cipta Caraka (Sigma). The giant telecoms company is hoping for synergies between its 6,000 corporate customers and Sigma's core customer base of 170, mainly banks. The move is one of the largest IT services acquisitions in Indonesia's history.

Computer Sales Notebook sales were the main driver of PC market growth in 2007, and accounted for around 60% of unit sales according to industry association Apkomindo. Computer sales (including notebooks and peripherals) will be worth an estimated US$1.9bn in full year 2008, according to BMI estimates, up from US$1.7bn in 2007. Notebooks are now growing faster than the PC market as a whole, with demand being driven by falling prices as well as smaller and lighter form factors and entertainment and wireless networking features. Prices of both notebooks and desktops are falling, with desktop prices now as low as US$400 while notebooks start from around US$700. While the consumer market is only around one quarter of the whole, it is growing fast and has become a growing focus of attention for some vendors.

Around one-third of the market is accounted for by non-branded locally assembled PCs.

Software For 2008, legal software sales are forecast by BMI at US$361mn, up from an estimated US$310mn in 2007, despite the continuing piracy problem. One the key functions of the new Information and Communications Technologies Council founded last year (see Industry Developments) is to address the piracy issue, with Indonesia having one of the worst records in the world in terms of its failure to bring down the piracy rate. IT Minister Sofyan recently commented that the president was concerned with Indonesia's rate of piracy and the fact that it has limited the country's development. The piracy issue lay behind the MoU signed last year between the government and Microsoft. Under the agreement, the government reportedly agreed to purchase 35,496 licensed copies of the MS Windows operating system and 117,480 copies of the MS Office package for a total price of around US$41.9mn. Over the 2007-2012 period, overall software sector CAGR is forecast at 15%.

IT Services Indonesia's IT services market is expected to be worth US$500mn in 2008, recording year-on-year (y-oy) growth of 14% from US$439 in 2007, based on BMI estimates. Hardware deployment services remain the largest Indonesian IT services category, with approximately a 20% share. Currently, opportunities are mainly in fundamental services such as system integration, support systems, training, professional services, outsourcing and internet services. Sector CAGR over the 2005-2010 period is expected to be around 13%.

E-Readiness With an ICT penetration rate of around 20%, only about 14% of Indonesians have internet access currently, translating into around 32mn users. Low telephone line density, high charges and low PC penetration are all significant obstacles. Moreover, research last year indicated that only 42% of those Indonesians with internet access have ever made purchases through the internet. However, the picture is not all bad, as there are signs of faster growth in user numbers, and recent surveys have shown that among a very small elite, there is fast adoption (by regional standards) of broadband and a willingness to pay for video conferencing, security and other additional features. BMI estimated that there were just under 1mn broadband users in 2007, representing a 0.4% penetration rate. The government is encouraging fixed wireless deployments, including WiMax, to bring internet to more remote areas.

The government is also rolling out new e-learning initiatives, attempting to use IT as a means to close the national education gap. The new internet based National Education Network involves one thousand network points in five clusters nationwide and is designed to facilitate the use of internet in schools.

Despite some advances in e-education, constraints remain due to poor infrastructure and lack of public awareness in a country where only 20mn people own fixed-line telephones.