Q2 2015 www.bmiresearch.com AUSTRALIA INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 2041-7160 Published by:BMI Research Australia Information Technology Report Q2 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: March 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved. 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All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Australia Information Technology Report Q2 2015 CONTENTS BMI Industry View . SWOT IT SWOT 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Industry Risk Reward Ratings 29 Industry Risk Reward Index . 29 Table: Asia Pacific Risk/Reward Index - Q2 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Market Overview . 32 Hardware . 32 Software . 40 Services 44 Industry Trends And Developments 52 Regulatory Development 58 Table: Government Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Government Initiatives 58 Regulatory News 60 Competitive Landscape 63 International Companies . 63 Table: Dell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Table: Datacom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Table: SAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Table: Panasonic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Local Company . 66 Table: The Good Guys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Company Profile 67 © Business Monitor International Ltd Page Australia Information Technology Report Q2 2015 SAP 67 Hewlett-Packard . 73 Table: Hewlett-Packard Financial Performance By Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Regional Overview 82 Demographic Forecast . 86 Table: Population Headline Indicators (Australia 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table: Key Population Ratios (Australia 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table: Urban/Rural Population & Life Expectancy (Australia 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table: Population By Age Group (Australia 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table: Population By Age Group % (Australia 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Methodology 91 Industry Forecast Methodology 91 Sources 92 Risk/Reward Index Methodology . 93 Table: It Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 © Business Monitor International Ltd Page Australia Information Technology Report Q2 2015 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: AUD8.2bn in 2014 to AUD8.5bn in 2015, up 3.8% in local currency terms. Slowdown in tablet demand due to market saturation will be offset by a stabilisation in desktop and notebook sales in 2015 due to design innovation in the hybrid notebook market. ■ Software Sales: AUD4.7bn in 2014 to AUD4.8bn in 2015, up 0.8% in local currency terms. Security software will outperform, particularly for small and medium-sized enterprises (SMEs) and consumers but the effect of XP enterprise upgrades will be diminished. ■ IT Services Sales: AUD9.7bn in 2014 to AUD10.7bn 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 key growth driver as local companies try to use efficiencies enabled by the National Broadband Network (NBN). © Business Monitor International Ltd Page Australia Information Technology Report Q2 2015 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 and replacement 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 small uptick is expected in 2016 as mobile network operators seek to attract 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 as their high cost - obviates the need to buy a replacement in the short to medium term. In contrast to the slowdown in tablet demand the Australian cloud computing growth story has plenty of momentum 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 the ACMA claimed that 36% of SMEs actively using cloud services believed that such services provided easier or more convenient access to data and key resources (36%), assisted in making key productivity tools accessible from multiple locations (15%) and that disaster recovery would be facilitated through the use of cloud-based platforms (11%). © Business Monitor International Ltd Page Australia Information Technology Report Q2 2015 SWOT 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 and a propensity for premium devices. ■ Strong financial sector, a large source of demand for enterprise software and services. Weaknesses ■ Tablet boom has offset the decline in desktop and notebook sales. ■ Australia has a relatively mature domestic market, with correspondingly slow growth rates. Opportunities ■ Sensitive to volatility in the global economy. ■ High labour costs and proximity of low-cost competition make Australia a fertile market for automation technologies such as IBM's Watson and other personal assistant products. ■ Considerable demand for cloud computing services from both the public and enterprise sector. ■ 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. ■ Other major IT projects in areas such as healthcare, education and smart cards. © Business Monitor International Ltd Page Australia Information Technology Report Q2 2015 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 our forecast. ■ Vendors face threat of parliamentary enquiry into product pricing and are coming under pressure regarding tax arrangements. ■ Data from retailers indicate a sharp slowdown in the tablet market in 2014, in line with our long-held view that saturation and slower rate of innovation would result in longer replacement cycles. © Business Monitor International Ltd Page 10 Australia Information Technology Report Q2 2015 Number of employees Company Details ■ October 2011: 349,600 ■ Hewlett-Packard Company ■ 3000 Hanover Street Palo Alto California 94304 United States ■ Tel: +1 650 857 1501/ ■ www.hp.com © Business Monitor International Ltd Page 81 Australia Information Technology Report Q2 2015 Regional Overview BMI View: Asia Pacific has been the outperforming region in the global IT market over recent years, with IT market growth considerably faster than developed regions, as well as other emerging markets. BMI expects continued strong growth over the medium term as favourable economic trends and policy initiatives drive market expansion. However, we also point to potential spill over to the IT market from regional and global data security trends that could yet stymie growth. Outperformance Set To Continue Asia Pacific has become a major global engine of IT market expansion in the past decade, as is the case for the wider global economy. BMI data show that the region registered the fastest IT market value growth of any region in 2011-2014, and our outlook going into 2015 is for it again to be the fastest growing region in each year except 2018, when we expect it to be narrowly outperformed by Latin America. The booming Asia Pacific IT market is driven by a range of factors including the clustering of hardware production in the region, the contribution of China as the outperforming global economy of the past decade and rapid economic development across the region. Governments in the region have in general shown a high capacity to deploy IT market-promoting policies aimed at increasing domestic demand and expanding the base of local enterprises and expertise. BMI believes the economic environment will remain supportive of IT market expansion in most markets in the region, but there is significant downside risk to this outlook in the event of a hard landing in China. This is not however our core scenario, but would have such far reaching regional impact that it must be considered as part of the medium-term outlook. © Business Monitor International Ltd Page 82 Australia Information Technology Report Q2 2015 Regional IT Market Growth 2011-2018 (USD, % change y-o-y) e/f = estimate/forecast. Source: BMI However, in our core scenario of strong economic growth, the increasing maturity of regional IT markets is of greater significance. Emerging Asia Pacific markets have undergone a period of rapid catch-up growth, with IT adoption spurred by declining device and solution prices at a global level, after vendors gain scale through demand from early adopters in the US, Western Europe and other developed states. For more advanced, but still emerging, regional markets such as China and Malaysia, BMI believes growth will slow as a result of diminished opportunities for relatively cheap and easy adoptions of IT products and solutions in the public and private sectors. Growth rates will begin to resemble the slower, though still robust, rates seen in regional leaders such as South Korea, Singapore, Australia and Hong Kong. China is demonstrating strong credentials for transition from emerging market catch-up growth to technological leadership. It is home to world-leading firms in the PC (Lenovo), server (Lenovo, Inspur, Huawei), and network equipment (Huawei) industries. However it is expected to face challenges in the development of a vibrant software and IT services ecosystem owing to the trust issues from end-users with respect to the relationship between vendors and the Chinese state. © Business Monitor International Ltd Page 83 Australia Information Technology Report Q2 2015 Late developing markets in the region are in a strong position for rapid IT market development. Not only is strong economic growth deepening markets for retail hardware as incomes rise, but there is potential for countries such as Vietnam, the Philippines and Indonesia to benefit from a restructuring of regional supply chain networks as upward pressure on labour costs continues in China. There have been several major regional investments in 2014, primarily in the handset production industry, but we see similar medium-term potential for a diversification of computer hardware manufacture and assembly. AEC: Adding To The Positive Outlook With a few notable exceptions, namely India and Sri Lanka, most of Asia Pacific's fast-growth emerging markets are in South East Asia, and we consider the push for the creation of the ASEAN Economic Community (AEC) as a welcome boost to market development. Although the deadline of December 31 2015 for the official creation of the AEC is unlikely to be met, there has been strong progress towards achieving this goal in a variety of sectors. In the ICT space we have seen tariffs on hardware and software products reduced to 0% across virtually all ASEAN countries. ASEAN is also working towards the elimination of non-tariff barriers by 2015. The elimination of tariffs and free flow of products and investment makes South East Asia, with a market of 600mn people, more attractive for vendors. As noted already, the region has attracted significant investment for relocation of production from global giants, including Foxconn Technology Group, Samsung Electronics, Intel, Nokia and LG. Another important trend arising from increased IT market integration in South East Asia has been the rapid expansion of e-commerce vendors across the region. BMI expects it will become a battleground for global e-commerce brands. Chinese e-commerce superpower Alibaba, Japanese retailer Rakuten, as well as Lazada, the South East Asian e-commerce unit of Rocket Internet, are among those already staking a claim in a region where internet penetration is rising rapidly. © Business Monitor International Ltd Page 84 Australia Information Technology Report Q2 2015 Top Four Regional Markets For Internet Growth Internet User Net Additions, 2013-2018 ('000) Source: BMI E-commerce firms will face different challenges in ASEAN countries than in their domestic markets, with logistics and supply chain problems, such as unreliable postal services. Furthermore, payments are largely made in cash upon delivery, rather than the credit/debit cards common in the US and Japan. The region still has a long way to go in terms of development but e-commerce will not be put off by these risks; the opportunities are far too enticing. © Business Monitor International Ltd Page 85 Australia Information Technology Report Q2 2015 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy. Population (1990-2050) 40 30 20 10 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 Australia - Population, mn f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 86 Australia Information Technology Report Q2 2015 Australia Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Australia 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 17,096 19,259 20,520 22,404 23,923 25,439 26,919 na 1.2 1.5 1.7 1.2 1.2 1.1 Population, total, male, '000 8,525 9,556 10,189 11,151 11,900 12,641 13,359 Population, total, female, '000 8,570 9,702 10,331 11,253 12,022 12,797 13,560 Population ratio, male/female 0.99 0.98 0.99 0.99 0.99 0.99 0.99 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast. Source: World Bank, UN, BMI Table: Key Population Ratios (Australia 1990-2025) Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age © Business Monitor International Ltd 1990 2000 2005 2010 2015f 2020f 2025f 11,433 12,877 13,813 15,147 15,755 16,324 16,932 66.9 66.9 67.3 67.6 65.9 64.2 62.9 5,663 6,381 6,707 7,257 8,167 9,115 9,987 49.5 49.6 48.6 47.9 51.8 55.8 59.0 Page 87 Australia Information Technology Report Q2 2015 Key Population Ratios (Australia 1990-2025) - Continued Youth population, total, '000 1990 2000 2005 2010 2015f 2020f 2025f 3,766 3,994 4,054 4,244 4,584 4,948 5,186 32.9 31.0 29.3 28.0 29.1 30.3 30.6 1,897 2,386 2,652 3,012 3,582 4,167 4,800 16.6 18.5 19.2 19.9 22.7 25.5 28.4 Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age f = BMI forecast. Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Australia 1990-2025) 1990 Urban population, '000 Urban population, % of total 2000 2005 2010 2015f 2020f 2025f 14,600.7 16,787.4 18,095.6 19,950.3 21,476.7 22,992.5 24,465.7 85.4 87.2 88.2 89.0 89.8 90.4 90.9 2,496.1 2,471.9 2,425.1 2,454.2 2,446.4 2,447.0 2,454.0 Rural population, % of total 14.6 12.8 11.8 11.0 10.2 9.6 9.1 Life expectancy at birth, male, years 73.8 76.9 78.7 79.9 80.5 81.2 81.9 Life expectancy at birth, female, years 79.9 82.3 83.4 84.3 85.0 85.8 86.4 Life expectancy at birth, average, years 76.8 79.6 81.1 82.1 82.8 83.5 84.2 Rural population, '000 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group (Australia 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 1,262 1,289 1,298 1,457 1,604 1,664 1,696 Population, 5-9 yrs, total, '000 1,263 1,357 1,346 1,373 1,529 1,676 1,736 Population, 10-14 yrs, total, '000 1,241 1,346 1,408 1,413 1,450 1,607 1,753 Population, 15-19 yrs, total, '000 1,398 1,334 1,409 1,507 1,504 1,541 1,698 Population, 20-24 yrs, total, '000 1,365 1,302 1,443 1,651 1,607 1,604 1,642 Population, 25-29 yrs, total, '000 1,421 1,447 1,383 1,664 1,745 1,702 1,700 Population, 30-34 yrs, total, '000 1,397 1,442 1,516 1,535 1,746 1,827 1,784 Population, 35-39 yrs, total, '000 1,316 1,512 1,497 1,621 1,598 1,808 1,889 Population, 40-44 yrs, total, '000 1,259 1,457 1,550 1,558 1,657 1,635 1,845 Population, 45-49 yrs, total, '000 984 1,348 1,473 1,585 1,570 1,670 1,648 © Business Monitor International Ltd Page 88 Australia Information Technology Report Q2 2015 Population By Age Group (Australia 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 50-54 yrs, total, '000 822 1,262 1,346 1,476 1,576 1,562 1,662 Population, 55-59 yrs, total, '000 728 968 1,242 1,330 1,453 1,553 1,542 Population, 60-64 yrs, total, '000 738 800 950 1,215 1,296 1,418 1,518 Population, 65-69 yrs, total, '000 662 681 765 911 1,165 1,247 1,368 Population, 70-74 yrs, total, '000 493 635 628 713 852 1,095 1,178 Population, 75-79 yrs, total, '000 375 510 551 554 635 766 992 Population, 80-84 yrs, total, '000 222 315 402 429 451 524 639 Population, 85-89 yrs, total, '000 100 171 204 272 297 318 377 Population, 90-94 yrs, total, '000 33 58 80 102 141 158 175 Population, 95-99 yrs, total, '000 12 17 25 34 49 57 Population, 100+ yrs, total, '000 10 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group % (Australia 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 7.38 6.70 6.33 6.51 6.71 6.54 6.30 Population, 5-9 yrs, % total 7.39 7.05 6.56 6.13 6.39 6.59 6.45 Population, 10-14 yrs, % total 7.26 6.99 6.86 6.31 6.06 6.32 6.51 Population, 15-19 yrs, % total 8.18 6.93 6.87 6.73 6.29 6.06 6.31 Population, 20-24 yrs, % total 7.99 6.76 7.04 7.37 6.72 6.31 6.10 Population, 25-29 yrs, % total 8.31 7.52 6.74 7.43 7.30 6.69 6.32 Population, 30-34 yrs, % total 8.18 7.49 7.39 6.85 7.30 7.18 6.63 Population, 35-39 yrs, % total 7.70 7.85 7.30 7.24 6.68 7.11 7.02 Population, 40-44 yrs, % total 7.37 7.57 7.55 6.96 6.93 6.43 6.85 Population, 45-49 yrs, % total 5.76 7.00 7.18 7.08 6.57 6.57 6.12 Population, 50-54 yrs, % total 4.81 6.55 6.56 6.59 6.59 6.14 6.18 Population, 55-59 yrs, % total 4.26 5.03 6.05 5.94 6.07 6.11 5.73 Population, 60-64 yrs, % total 4.32 4.16 4.63 5.43 5.42 5.57 5.64 Population, 65-69 yrs, % total 3.88 3.54 3.73 4.07 4.87 4.90 5.09 Population, 70-74 yrs, % total 2.88 3.30 3.06 3.18 3.56 4.31 4.38 Population, 75-79 yrs, % total 2.20 2.65 2.69 2.48 2.66 3.01 3.69 Population, 80-84 yrs, % total 1.30 1.64 1.96 1.92 1.89 2.06 2.38 © Business Monitor International Ltd Page 89 Australia Information Technology Report Q2 2015 Population By Age Group % (Australia 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 85-89 yrs, % total 0.59 0.89 1.00 1.22 1.24 1.25 1.40 Population, 90-94 yrs, % total 0.20 0.30 0.39 0.46 0.59 0.62 0.65 Population, 95-99 yrs, % total 0.05 0.06 0.08 0.11 0.14 0.19 0.21 Population, 100+ yrs, % total 0.01 0.01 0.01 0.01 0.02 0.03 0.04 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 90 Australia Information Technology Report Q2 2015 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. They allow us to forecast a variable using more than its own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity;. © Business Monitor International Ltd Page 91 Australia Information Technology Report Q2 2015 BMI uses the selected best model to perform forecasting. Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology A number of criteria drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are affected by consideration of a variety of internal and external political and economic factors. Within best-practice techniques of time-series modelling, our quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: ■ Overall economic context, and GDP and demographic trends; ■ Underlying 'information society' trends; ■ Projected GDP share of industry; ■ Maturity of market structure; ■ Regulatory developments and government policies; ■ Developments in key client sectors such as telecommunications, banking and e-government; ■ Technological developments and diffusion rates; ■ Exogenous events. Estimates are calculated using our own macroeconomic and demographic forecasts. Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication © Business Monitor International Ltd Page 92 Australia Information Technology Report Q2 2015 Union (ITU), officially released company results and figures, and international and national industry news agencies. Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRI system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. This is further broken down into two sub categories: ■ Industry Rewards (an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors). • Country Rewards (a country-specific category, factoring in favourable political and economic conditions for the industry). Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. This is broken down into two sub categories: ■ Industry Risks (an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry and the relative maturity of a market). • Country Risks (a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score). We take a weighted average, combining industry and country risks, or industry and country rewards. These two results in turn provide an overall Risk/Reward Score, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country. For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Score a weighted average of the total score. As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly basis. This ensures the score draws on the latest information and data across our broad range of sources, and the expertise of our analysts. © Business Monitor International Ltd Page 93 Australia Information Technology Report Q2 2015 Sector-Specific Methodology In constructing these indices, the following indicators have been used. Almost all indicators are objectively based. Table: It Risk/Reward Index Indicators Rationale Rewards Industry IT market value, US$bn Denotes breadth of IT market. Large markets score higher than smaller ones. Sector value growth, % year-on-year (y-o-y) Denotes sector dynamism. Scores based on annual average growth over five-year forecast period. Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development. Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales, compared to services/ software, indicates that the overall IT market is immature. Country Urban-rural split Urbanisation is used as a proxy for development. Mainly rural states score lower. GDP per capita, USD A high GDP per capita supports long-term industry prospects. Overall score for Country Rewards is also affected by the coverage of the power transmission network across the state. Risks Industry Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting. ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code. Country Short-term external risk Score from BMI's Country Risk Index (CRI). It evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment. Short-term financial risk Score from CRI, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding. Trade bureaucracy Score from CRI to denote ease of trading with the state. Legal framework Score from CRI denotes the strength of legal institutions in each state - security of investment can be a key risk in some emerging markets. Bureaucracy Score from CRI denotes ease of conducting business in the state. Corruption Score from CRI denotes the risk of additional illegal costs/possibility of opacity in tendering/ business operations affecting companies' ability to compete. Source: BMI © Business Monitor International Ltd Page 94 Australia Information Technology Report Q2 2015 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components equal weight. The following weighting has been adopted: Table: Weighting Of Components Component Rewards Weighting, % 70, of which - Industry 65 - Country 35 Risks to 30, of which - Industry 40 - Country 60 Source: BMI © Business Monitor International Ltd Page 95 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... International Ltd Page 15 Australia Information Technology Report Q2 2015 SWOT Analysis - Continued implementation of a database to increase transparency around foreign-owned Australian assets will spur more regulation © Business Monitor International Ltd Page 16 Australia Information Technology Report Q2 2015 Industry Forecast Table: IT Industry - Historical Data And Forecasts (Australia 2012-2019) 2012... with the precarious nature of the housing market, is a major reason for our below consensus view on Australian growth in 2015 and 2016 © Business Monitor International Ltd Page 27 Australia Information Technology Report Q2 2015 Table: Economic Activity (Australia 2010-2019) 2010 2011e 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f Nominal GDP, USDbn 1,247.30 1,499.60 1,555.10 1,501.20 1,476.20 1,300.30... 31 Australia Information Technology Report Q2 2015 Market Overview Hardware BMI forecasts the Australian computer hardware market value will increase by 3.8% in 2015 to a total of AUD8.5bn, although in US dollar terms we forecast a contraction of 0.7% due to depreciation of the Australian dollar The outlook extends over the medium term as we forecast a compound annual growth rate (CAGR) of 3.2% 2015. .. expensive on average in Australia However, IT companies argued that higher Australian prices were not IT-specific They pointed to higher wages and distribution costs, and high prices charged by Australian channel agents © Business Monitor International Ltd Page 33 Australia Information Technology Report Q2 2015 Hardware Market (2012-2019) 10,000 7,500 5,000 2,500 0 2012 2013 2014e 2015f Personal computer... cost, which could squeeze vendor margins For instance, in early 2013 the Australian Government Information Management Office (AGIMO) consolidated its contracts with Microsoft through a single reseller to deliver cost savings of AUD100mn © Business Monitor International Ltd Page 21 Australia Information Technology Report Q2 2015 Australia GVA By Vertical (%) 2014e e = estimate Source: BMI, national statistics,... Business Monitor International Ltd Page 30 Australia Information Technology Report Q2 2015 Table: Asia Pacific Risk/Reward Index - Q2 2015 Rewards Risks Industry Rewards Country Rewards Industry Risks Country Risks IT Score Rank Previous Rank Singapore 58.3 100.0 70.0 74.4 72.8 1 2 Hong Kong 60.0 100.0 45.0 77.7 71.2 2 3 South Korea 65.0 85.0 75.0 65.4 71.2 3 1 Australia 63.3 95.0 57.5 66.9 71.0 4 4 China.. .Australia Information Technology Report Q2 2015 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... Ltd Page 18 Australia Information Technology Report Q2 2015 undermine domestic confidence levels, and reduce consumer purchasing power of imported products, both of which would be detrimental to IT market spending The maturity of the Australian hardware market means growth rates will be significantly slower than the APAC average 2014-2098 BMI estimates that household PC penetration in Australia at... believes that Australia could be a fertile market for such technology over the medium term due to the scale of potential labour cost savings © Business Monitor International Ltd Page 19 Australia Information Technology Report Q2 2015 IT Market Growth (2012-2019) 6 40,000 5.5 30,000 5 20,000 4.5 10,000 4 3.5 0 2012 2013 2014e IT market value, mn (RHS) 2015f 2016f 2017f 2018f 2019f IT market value, AUDmn,... Demand for wireless broadband services, including WiMAX, 3G datacard and USB modem-supported services is growing © Business Monitor International Ltd Page 11 Australia Information Technology Report Q2 2015 Australia Wireline SWOT - Continued ■ Australia' s leading broadband operators are investing in the development of higher speed broadband services This has potential to drive demand for new data services . Q2 2015 www.bmiresearch.com AUSTRALIA INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 2041-7160 Published by:BMI Research Australia Information Technology Report Q2 2015 INCLUDES. longer replacement cycles. Australia Information Technology Report Q2 2015 © Business Monitor International Ltd Page 10 Wireline SWOT Australia Wireline SWOT Strengths ■ Australia& apos;s overall. USB modem-supported services is growing. Australia Information Technology Report Q2 2015 © Business Monitor International Ltd Page 11 Australia Wireline SWOT - Continued ■ Australia& apos;s leading broadband