PRODUCT MARKET STUDY: ICT in Indonesia

Date: May 2011

1.

Overview of the Industry

ICT sector in Indonesia is highly regulated by the Ministry of Telecommunication (www.depkominfo.go.id). and The Information Ministry of Technology and Communication

Information Technology (Departemen Komunikasi dan Informatika Republik Indonesia) is responsible for national policy formulation, policy implementation, and technical policies in the field of communication and informatics, including the postal, telecommunications, broadcasting, information technology and communications, multimedia services and the dissemination of information. The Minister of infomation and technology Tifatul Sembiring recently obtained exciting news through diplomatic correlation from Ambassador at the Permanent Representative of Indonesia in Geneva on news Indonesia ranked at the World Economic Forum Global Information and Technology Report (GITR) from 2010 to 2011. The Diplomatic correlation which is also addressed to the Minister for Economy, Minister of Foreign Affairs, Minister of Finance and Minister of Trade. According to the report, in GITR year 2010 - 2011, Indonesia ranked NRI (Networked Readiness Index) to-53, up from rank 67 in 20092010.

Thus, Indonesia is ranked ahead of NRI rankings from a number of certain developed countries (major emerging economies) and countries in Europe and Latin America such as Brazil, South Africa, Poland, Turkey, Russia and Argentina. Meanwhile, among the ASEAN member countries, Indonesia ranked no-3 after Singapore and Malaysia.

2.

Demand and Market Development

The Indonesian IT market should grow at a compound annual growth rate (CAGR) of 17% over the 2011-2015 period, with a revival in business spending building on momentum from consumer spending in 2010. In 2010, demand for IT products and services recorded doubledigit growth. Industry Development in 2010, Indonesias information society

development received a boost when the government said that the immigration office would start to introduce e-passports. Indonesia will thus follow in the footsteps of other South East Asian countries like Singapore, Malaysia and Thailand. The immigration department plans to distribute 10,000 e-passports in the first phase, with these being mainly available in immigration offices in Jakarta, Semarang and Surabaya. In April 2010, the government said it was ready eliminate duties on personal computer (PC) components in a bid to assist the local PC industry. Nearly all PC components, such as motherboards and graphic cards, used by the industry are imported which means manufacturers have to pay import duties.

ICT sector is also part of Government infrastructure development as stated in Instruksi Presiden No. 01 2010. The government has set a clear concept of developing ICT infrastructure so it would be useful in facilitating efficient public economic activities, especially the businessmens activities to support economic development. The concept is as follow:

distributing access trough universal service obligation (USO) program by developing access subscriber for 25,000 villages all over Indonesia.

developing desa pinter (smart village) which is distributing internet access to villages. Government has been preparing the project auction for developing 5,748 district internet service centres.

accelerating the development of broadband access or broadband, with or without cable, as well as broadband backbone network. The development of the backbone broadband network is the priority and has been started through Palapa Ring Project in Eastern Indonesia.

The Palapa Ring Project consists of a total of 35,280 km subsea cable (16,000 km shallow sea, 12,885 km middle sea and 6,394 km deep sea) including buoy. The total of 20,739 km land cable (Sumatera 7,402,5 km, Jawa 3,542 km, Kalimantan 5,345 km, Sulawesi 5,813 km, Maluku 2,988 km, Nusa Tenggara 3,480 km and Irian 4,958 km) and consist of 2,063 km Connecting Rings (redundancy, fail over loops)7 Rings connecting 465 municipals city within 33 Province.

3.

Prospects of IT Industry in Indonesia

Progressive deregulation of the Indonesian telecommunication sector, increased technology adoption, and a large youth population (aged less than 25 years) represent both long-term opportunities and short-term challenges for the market. The recent establishment of copyright protection laws, Internet subscriber growth, and the increase in IT expenditure by corporate sectors will lead to a new chapter of IT development in Indonesia. Indonesia is expected to be one of the best regional IT market growth propects over Business Monitor International (BMI) five-year forecast period. IT spending is forecast to increase to US$5.1billion in 2011, up from US$4.5 billion in 2010. Some fundamental drivers, including low computer penetration and growing affordability, should ensure that the market remains firmly in positive growth territory. Growing investment in data centres and other ICT infrastructure will drive demand for IT services. By 2015, Indonesias hardware dominated IT market is projected to reach a value of US$9.6 billion. With information and communication technology (ICT) penetration of around just 20% and development restricted to richer areas such as Java, the market has much growth potential. The internet in Indonesia was launched in 1998 with 134,000 subscribers. In 2004 that figure had grown to 1.3 million and in 2010, there were 30 million Internet users in Indonesia or about 13 percent of the population. Broadband use is only about 18 percent of all internet users in Indonesia. At the moment, Indonesia is the 5th largest Internet market in Asia (after China, Japan, India, and South Korea). The number of Internet users in

Indonesia is growing really fast (the highest growth among Asia countries after China), especially the number of users who use their mobile phone to access the Internet. In five years, about half of the Indonesian population or 150 million people are projected to have access to the Internet (most of them through their mobile phone).

4.

Assessment of Prospects for and Opportunities for Malaysian Exporters

1. *

E-government E-government is expected to emerge as an area of growing opportunity for IT vendors over the next couple of years. Currently, several ministries at both federal and province level are planning to implement projects. In 2008, a number of projects were launched, including an e-procurement system by the State Ministry for State Enterprise, which covered 25 stateowned enterprises, including oil and gas company Pertamina and electricity company Perusahaan Listrik Negara.

The government is also rolling out new e-learning initiatives, which could see educations share of local IT spending rise from its estimated level of around 4%. The current ratio of PCs to students in public schools is around 1:3,200 and the government wants to increase this to 1:20. As there are 53 million students in Indonesias schools system, this would require at least 2.5 million computers.

2.

Hardware

Hardware BMI forecasts 2010 Indonesian computer hardware spending of around US$2.8 billion, up from US$2.5 billion last year. Growth decelerated in 2009 but is forecast to return to double digits this year, with the market rising to a value of nearly US$4.7 billion by 2014. Spending in 2009 surpassed initial expectations, due largely to notebook sales, which surged with the popularity of netbooks; notebook sales grew faster than desktop in year 2009.

Hardware accounts for more than 70% of Indonesian IT spending. In 2009, the main driver was the consumer segment, which accounts for around 25% of computer demand. In 2009, consumer demand was resilient, growing 5.5% in Quarter 1 2009. The main drivers were growing affordability and more credit availability.

3.

Software Indonesias software sales are projected by BMI at US$475 million in 2010, up from an estimated US$410 million in 2009. In 2010, sales of Microsofts new Windows 7 operating system has the potential to have an impact, although much will depend on consumer and business confidence.

There should also be a boost from systems upgrades delayed from 2009. One market inhibitor is the continuing software piracy problem which, by the local governments own figures, loses Indonesian software companies alone more than US$100 million a year. Over the forecast period, enterprise resource planning (ERP) software continues to be of most interest to the small and medium-sized enterprises (SMEs) market as currently only around 20% of Indonesian SMEs are estimated to make use of IT.

4.

IT Services

Indonesias IT services market was estimated to be worth US$683 million in 2010, recording double-digit growth from US$601 million in 2009, based on BMI estimates. Currently, IT services account for only 17% of Indonesias hardware-centric IT market sales. Hardware deployment services remain the largest Indonesian IT services category, with approximately a 20% share.

In 2009, the banking sector continued to provide opportunities for IT vendors, despite the fallout from the global financial crisis. Banks continued with transformation strategies driven by factors such as new technologies and services as well as regulatory compliance. However, most opportunities are currently in fundamental service areas such as system integration, support systems, training, professional services, outsourcing and internet services.

5.

E-Readiness Low telephone line density, high charges and low PC penetration are all significant obstacles to higher internet penetration. However, the picture is not all bad as there are signs of faster growth in user numbers and recent surveys have shown that, amongst 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. The government is encouraging fixed wireless deployments, including WiMAX, to bring the internet to more remote areas.

The

government

is

also

rolling

out

an

internet-based

National

EducationNetwork, which involves 1,000 network points in five clusters nationwide, designed to facilitate the use of the 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 20million people own fixed-line telephones.

5.

Issues in ICT Market in Indonesia

Under Article 72 of the Copyright Law No.19 of 2002, the use of unlicensed software for commercial purposes is a criminal offence punishable with imprisonment of a maximum of 5 (five) years and/or a fine of a maximum of Rp. 500 million. Companies need to be reminded that software piracy does not only mean using an illegal piece of software bought from the streets. It includes copying from an original CD-ROM for commercial use without adequate licenses to use the software, and installing the software in more computers than what the license allows. As far as Indonesia is concerned, it remains one of the top ranking countries with one of the highest software piracy rates in the world. As Indonesia struggles to bring its problem with software piracy under control, industry players say the problem is not pricing but awareness. According to a representative from the Business Software Alliance, people in Indonesia are not fully aware of how to find genuine software or how to use official licenses. Software piracy rates in Indonesia rose 1 percentage point to 87 percent last year, according to the study, when commercial value of unlicensed software installed on personal computers in the country reached $1.32 billion.

6.

Conclusion

Malaysian companies interested to penetrate Indonesian ICT market is advice to have direct contact with the key players and market visits is often the best strategy. However, it has to be noted that many projects in Indonesia have a long gestation period. It is often necessary to have some in-market representation to maintain an awareness of project priorities, follow issues driving the decision making process and consult with interested parties on a regular basis. The e-business sector in Indonesia is heavily dependent on intermediaries such as software integrators, therefore a well established partner is advisable. For consumer related products, traditional marketing strategies such as advertising, promotions and product launches still apply. The trend for Indonesia is focusing on telecommunications infrastructure and solutions. There is also growing demand for mobile phone-related applications/contents, and for niche/creative solutions including banking and finance IT.

Useful Contact

Asosiasi Pengusaha Komputer Indonesia/Indonesia Computers Business Association (APKOMINDO)

Mr.Suhanda Wijaya (General Chairman) Harco Mangga Dua Blok I no.28 Jl. Mangga dua raya, Jakarta 10730 Tel: Fax: +62 21 6123781/6120143 +62 21 6120957

E-mail: Web:

apkomindo.indo.net.id www.apkomindo.or.id

Asosiasi

Piranti

Lunak

Telematika

Indonesia/Indonesia

Telematic

Software Association (ASPILUKI)

Mr. Djarot Subiantoro (President) c/o. Pt Sigma Cipta Caraka Menara Dea lt. 8 Mega Kuningan Jl. Kuningan Barat IX Kav. E4.3 No.1 Jakarta 12950 Tel: Fax: Email: Website: Federasi +62 21 5762150, 93640738 +62 21 5762155 aspiluki@indo.net.id www.aspiluki.or.id Teknologi Informasi Indonesia/Indonesian Information

Technology Federation (FTII)

Mr. Teddy Sukardi (President) Gedung Arthaloka lt. 11 Jl. Jend Sudirman Tel: Fax: Email: Website: +62 21 36697792 / 6221 95992368 + 62 21 57939152 ftii.info@gmail.com www.ftii.or.id

Association of Indonesian Internet Service Provider Cyber Bld 11th floor, Jl. Kuningan Barat No 8 Jakarta 12710 Indonesia,

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Tel: Fax: Website:

+62-21 5296 0634 +62-21 5296 0635 www.apjii.or.id

MASYARAKAT TELEMATIKA INDONESIA (MASTEL) Graha MIK Lt 5 R. 504A, Taman Perkantoran Kuningan. Jl. Setiabudi Selatan Kav.16-17, Jakarta 12920 Tel. Fax. +62-21 57941807, 57941813 , +62-21 57941813

Email : info@mastel.or.id, http://www.mastel.or.id

Indonesian Mobile and Online Content Provider Association www.imoca.or.id

Exhibition IndoComtech 2011 Exhibition Dates Exhibition Hours Venue Event Organiser : 9 13 November 2011 : 1000 1800 hrs : JCC (Jakarta Convention Center) : PT.Dyandra Promosindo The City Tower (TCT) 7th floor Jl. M.H.Thamrin 81, Jakarta Pusat Telp: 62-21-3199 6077 Fax: 62-21-3199 6177 Website: www.dyandra.com

Prepared by: MATRADE Jakarta May, 2011

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