The document discusses opportunities and issues in Indonesia's IT sector. Key issues include poor telecommunication infrastructure quality, a weak regulatory environment, and lack of skilled IT personnel. Opportunities include growing internet usage, potential for IT outsourcing, and IT-enabled services. Recommendations to address issues and capitalize on opportunities are also discussed.

1. IT Issues & Opportunities GMBA 5885 Richa Arora & Shiya Hsu 4-27-2011

2. Agenda Introduction Environment Overview Social Environment Cultural Environment Economic Environment Technological Environment Issue: Telecommunication Infrastructure Quality IT Regulatory Environment IPR Protection (Software Piracy) IT Personnel Supply Opportunities: Internet Access/Usage Opportunities for IT Outsourcing Existing IT Providers and Potential Partners IT Enabled Opportunities Recommendations

3. Social Environment Republic of Indonesia- Southeast Asian country. Capital - JAKARTA 17,508 islands with distinct ethnic, and religious groups. Official Language- Indonesian Currency- RUPIAH Population- 245 million (est. 2011) (world’s 4 th populous country)

4. Literacy rate has been consistently improving with over 90% of people able to read and write, but education remains unequal and levels remain low. Population by Age group- 245 million

5. The majority, 86% of the population follow Islam. Culture- mix of Chinese, European, Indian, and Malay. The families have traditional structure Hierarchical-structure with group orientation. Decisions on group discussion and consensus. Indonesian language has 12 ways of saying "No" and other ways of saying "Yes" when the actual meaning is "No" !! Cultural Environment

6. Economic Environment – Economy on the raise Indonesia’ Economic History – Per Capita Real GDP (1961-2008. Rp million) Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.6, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp

7. but still falls behind others .... Per Capita GDP (in 2000 $) - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.7, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp - Labour and Social Trends in Indonesia 2010: Translating Economic Growth into Employment Creation, International Labour Organization, Jakarta, p.7 & 8, http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-jakarta/documents/publication/wcms_154355.pdf Services sector drives GDP growth

8. Underemployment rate shows employment quality has not improved Unemployment Rate, Underemployment Rate, and Real GDP (2000=100, 1980-2009) Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.54, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp

9. 13.3% below poverty line & 50% borderline poor Headcount Indexes based on Four Poverty Lines in Selected Southeast Asian Countries (2002-2006, %) Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.15, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.14, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp Poverty is region-specific Poverty Headcount Rate by Region (1996-2009, %)

10. Technological Environment Substantial Improvements 34 million use landlines 260 million cell users Mobile penetration @ 54% in 2010 20 million online users Top 10 Facebook markets worldwide 4 th Twitter market worldwide Mobile Phone penetration in Indonesia Triples in Five Years, Feb. 23, 2011, http://blog.nielsen.com/nielsenwire/global/mobile-phone-penetration-in-indonesia-triples-in-five-years/

11. ISSUE 1: Assessing Telecommunication Infrastructure from Physical Infrastructure Infrastructure Quality & Global Competitiveness Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.28 & 29, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp Low infrastructure = Low Global Competitiveness Quality of Key Infrastructure (among 133 countries)

12. Areas lacking in Telecommunication Infrastructure: low level of teledensity, due to low investment in and unequal distribution of infrastructure low and uneven Internet penetration lack of competition in the sector as state-owned businesses occupy the majority of the market lack of consistent and independent regulations on telephone and Internet services - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.31, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp

13. Impacts to Poor Infrastructure: Higher cost of doing business Unstable electricity = generating one’s own power Poor road conditions = prolonged unnecessary travel time - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.75 & 77, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp

14. ISSUE 2: IT Regulatory Environment Decentralization ineffectiveness & corruption Dissatisfaction towards regulatory environment Telecom Regulatory and Policy Environment in Indonesia: Results and Analysis of the 2008 TRE Survey, Wattegama, C., Soehardjo, J. and Kapugama, N., 3/18/2008, p.7 Administrative agencies are weak & ineffective Overlapping authorities between governing agencies add confusion New laws conflict with the old Institution to ensure competitive behavior lacks legislative backing and is ineffective in enforcing rules

15. Impacts to Weak Regulatory Environment Low Government effectiveness = slow delivery of government services and infrastructure High corruption rate = additional entry barrier/constraint 86% business have had informal payment & bribes to officials which averaged 6% of annual production Government officials visited the firms often and are expected to receive gifts or bribes during their visits Weak regulation leads to operational uncertainty Regulatory bodies unable to maintain a fair market and are often prejudiced toward protecting local business - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.38, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp Weak Regulation = Higher Cost of Doing Business

16. Strategies to Weak Regulatory Environment Be region-selective as laws are often region specific ‘ local manufacturing policy’ (50% locally produced) Up to 65% foreign ownership in telecom sector Work with local partners Hire local and employ then for management position Maintain good relationship with government agencies Indonesia: Cellular Services, U.S. Commercial Service, Kalung Riang, 9/2010

17. ISSUE 2.1: IPR Protection Piracy & Counterfeiting thrives (especially optical disc piracy) Cable signal piracy and illegal downloading are pervasive Impact is costly Estimated 40% of drugs in Indonesia are counterfeits, costing losses in tax revenue of $65.4 million in 2005 along Actions: Write a cease and desist letter File a compliant to the police who will conduct a raid (However, all operational costs generated by the police have to be covered by the initiator and prosecution process may be hindered by corruption) Bring the infringer to court (can be ineffective as the court may favor local) Best to have a comprehensive Indonesia-registered IP portfolio ndonesia, Kin Wah Chow, p.2, Pharmaceutical Trademarks 2010 - A Global Guide, http://www.iprights.com/document.aspx?fn=load&media_id=787 Managing Intellectual Property, Indonesia Supreme Court Strengthens Protection for Well-Known Marks, Oct. 1, 2007, http://www.managingip.com/Article/1450509/Indonesia-Supreme-Court-strengthens-protection-for-well-known-marks.html

18. ISSUE 3: Assessing IT Personnel Supply from the National Labor Pool Share of Labor Force by Age Group and Educational Attainment (age 15+, %) - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.27, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp - Translating Economic Growth into Job Creating and Poverty Reduction, http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-jakarta/documents/presentation/wcms_154512.pdf Lack of Education Poor Labor Quality Low Labor Productivity

19. Skill Shortage = High-tech, Knowledge-intensive jobs cannot be generated Hourly Nominal Wages by Educational Attainment (Rp) - Indonesia: Critical Development Constraints, Asian Development Bank, July 2010, p.28 & 48, http://www.adb.org/Documents/Studies/indonesia-critical-development-constraints/main-report-Indonesia-Critical-Development-Constraints/default.asp Low Educational Attainment = Less highly skilled workers Disaggregation of Exports by Technological Sophistication Group

20. Labour and Social Trends in Indonesia 2010: Translating Economic Growth into Employment Creation, International Labour Organization, Jakarta, p.38, http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-jakarta/documents/publication/wcms_154355.pdf A labor-intensive work force may indicate opportunities for foreign businesses…. Indonesia IT Pay scale in Comparison to U.S. Title Pay scale Source date Software Engineer 7.9% of US Feb. 2010 Senior Software Engineer 26.7% of US March 2010 IT Project Manager 30.8% of US March 2010 Junior Business Process Outsourcing 9.5% of US March 2010 Skilled Business Process Outsourcing 21.3% of US March 2010 Operations Manager 32% of US March 2010

21. Strategies to Shortage of IT Talent Pool Jobs with Lower level of technological sophistication and value addition Equip the young with skills through company sponsored education Offer better employee benefits/compensation program for talent retention Indonesia: Cellular Services, U.S. Commercial Service, Kalung Riang, 9/2010

22. First Internet Service… UUCP (Unix to Unix Copy Protocol) Exchange of emails. First ISP – INDONET (1994) Some ISPs in Indonesia Indonet, Telkom, CBN, Rednet, Centrin, Biznet First Internet Service… http://www.internetworldstats.com/asia/id.htm

23. The number of Internet subscribers have been gradually increasing ….. Indonesia had an estimated 30 million internet users in 2010 (13% of the total population). Internet World Stats http://www.internetworldstats.com/asia/id.htm

24. T he highest percent growth in 2009-10, with 32% rise in the internet users over other Southeast Asian countries

25. International ISPs- AOL & AT&T with US$ fee. Broadband usage only 18% of all internet users ISP purchase bandwidth from INDOSAT. Newer modems have max transmission speed of 56 kbps - www.indo.net & www.expat.org.id

26. Internet Users in Indonesia 30 million in 2010 (13% of the population) Internet Users in Indonesia

27. Developments… Enable higher efficiency for access of foreign websites. Growth of Web 2.0 Promoting wireless broadband (Bakrie Telekom and PT Telekom were the first movers ) (Bakrie Telecom acquired the CDMA unit of PT Telekomunikasi for $1 billion - 2010) Developments…

28. Outsourcing to Indonesia? Why? Avg. labor cost going up in China Cheap & skilled labor force Lower cost Tax benefits. American-type democracy system Outsourcing to Indonesia? Why? http://comm215.wetpaint.com/page/Indonesia%3A+Internet+Penetration

29. Types of Outsourcing services.. BPOs Payroll Labor supply Business Consulting Security services Maintenance & technical support Credit & Risk operations Storage & Data services Types of Outsourcing Services

30. American companies like Microsoft, Cisco, Hewlett Packard, Honeywell, Dell etc. have been outsourcing their services to Indonesia . Outsourcing Indonesia (CNN, Citibank, Chevron etc.) ( www.outsourcing.co.id ) Accenture, IBM, TCS, Cisco- partnership with local clients to manage increasingly specialized business operations, such as finance and accounting, IT, applications development and maintenance, help-desk services and HR. Outsourcing Services to Indonesia http://www2.hhs.se/eijswp/124.PDF

31. IT Providers Accenture, IBM, Microsoft Indonesia, Oracle, HP, TCS IT Services Indonesia- $ 898 million (2011) ($ 769 million in 2010) Local IT providers (PT Outsourcing Indonesia, PT Walden Global Services, Bhinneka Mentari Dimensi) Oracle has an agreement with local IT provider- PT Sigma Cipta Caraka to provide outsourcing services. IT Providers Reference http://goarticles.com/article/Seven-amazing-information-About-Indonesia/4268186/ http://www.robertsetiadi.net/articles/indo_itoutsourcing.htm

32. IT Opportunities Technology adoption, educated population & deregulation of telecom sector. Copyright Protection Laws, internet growth, increase in IT expenditure. http://www.expat.or.id/business/companyestablishment.html Due to increase in ….. IT Development Opportunities in Indonesia are boosting up .

33. Focusing on Telecommunication infrastructure & communication. Growing demand for IT in banking & finance. Evolving from basic ERP applications to strategic modules like CRM & business analytics. Opportunities in support system, outsourcing and system integration. New IT Trends in Indonesia… http://www.bhinneka.com/aspx/bhindexpc.aspx Growth OF Service Sector in Indonesia (growing @ 5.9%) 2006 48.9% of GDP 2009 51.9% of GDP

34. emphasize domestic innovative efforts (building domestic R&D) utilize external sources (FDI, licensing, subcontracting,) The two different technology sources – domestic and foreign – have both been used in varying degrees in Indonesia. Latest official estimates by the government of Indonesia suggest FDI inflow for the country in 2011 could increase by 174% Getting Technological Capabilities http://www.thejakartapost.com/news/2010/04/12/services-sector-an-alternative-route-high-growth.html

35. Many local IT services providers deal in Product development. Develop both desktop & web-based applications. Software, systems & servers, security system development. Huawei Technologies does a lot of R&D work providing next-generation telecommunication network Providing software solutions for telecom companies GSM & CDMA access products IT is used in Rubber Industry R&D facility Organization like BATA use IT for their R&D in Shoe Technology Product Development & Research http://www.thejakartapost.com/news/2010/04/12/services-sector-an-alternative-route-high-growth.html

36. Microsoft Indonesia reports that cloud computing accounts for 20% of its local revenues is growing at about 50% per year. Use of Platform-as- a-service (PaaS)- application development & delivery. SaaS- renting software from a provider. Cloud Computing in Indonesia… http://en.indonesiafinancetoday.com/read/3430/Cloud-Computing-Boosts- Accounting-Software-Service-Business

37. Future plans.. Double Internet users to 1.2 billion by 2015 (with Brazil, Russia, India & China) Growth at media companies and phone carriers. Wireless subscription to 100% of the population by 2015. Promoting WiMax based services The Indonesia Information Technology Report Strategies for Future The Indonesia Information Technology Report

38. 4 th most populated country means huge domestic market 66% of population between 15-64 years indicating a massive work force High initial investment due to lack of infrastructure and uneven regional developments High entry barrier due to weak and ineffective regulatory environment not always friendly to foreign businesses Prolong upfront cost in training local skilled labor Recommendations Are you willing to turn issues into opportunities?

39. Indonesia shows higher degree of technological sophistication in their exports compared with other Asian countries. Pool of skilled professionals at cheaper cost. High technological development Increased FDI over the coming years. Developing domestic R&D capabilities. Recommendations