BMI View: The consumer story in Indonesia is one of the most attractive in the region over the next decade and has the potential to be a medium-term outperformer due to favourable demographic dynamics, rising levels of urbanisation, greater household leverage and more than a doubling of GDP per capita. These dynamics translate into our positive outlook for the consumer electronics market, which also has the low device penetration and local vendor investment to support our forecast at the industry-level. Encouraging uptake in the most advanced smartphones has become a focus for the Indonesian government since the start of 2015, following the launch of 4G by the major mobile operators. As the youthful Indonesian population sees its income rise over the next few years, smartphones and other high-cost devices will become more affordable. Overall, market growth will see the market reach USD20.5bn in 2019, equal to a compound annual growth rate of 5.2% in US dollar terms 2015-2019.
Headline Expenditure Projections
Computer Hardware Sales: USD6.7bn in 2015 to USD9.5bn in 2019, compound annual growth rate (CAGR) of 7.0% 2015-2019. Due to low penetration, we expect continued growth in notebook volumes, alongside booming volumes in the tablet market, with growth set to accelerate from 2016.
AV Sales : Rising from USD2.1bn in 2015 to USD2.3bn in 2019, CAGR of 1.1% 2015-2019. Unfavourable device trends including Price erosion in the TV set market and the squeeze on audio device and digital cameras demand from the rise of multi-functional smartphones will continue to limit growth.
Handset Sales: Rising from almost USD7.5bn in 2015 to USD8.7bn in 2019, a CAGR of 4.6% 2015-2019. Market value growth will slow over the medium term due to a combination of market saturation and intense price competition in both the Android and Windows ecosystems.
Key Trends And Developments
The Ministry of Communications and Information Technology is supporting the Indonesian Cellular Telecommunications Association's (ATSI) proposal to increase taxes on 2G devices in a bid to encourage users to migrate to 4G phones. The proposed tax increase will only be effective if the targeted 2G users are limited to those in areas with 4G coverage. The risk is prices of 4G-enabled phones will not fall to an affordable level as per government predictions. The likelihood is prices will rise, undermining the state's digital inclusion goals.
In the Q315 update, BMI added an analysis of household income trends in Indonesia to the consumer electronics devices market forecast, providing a framework for analysing device demand trends in the context of the wider Indonesian economic growth story. In 2015, Indonesia remains a highly price sensitive market, a view derived from local retailer and vendor reports, and illustrated through the predominance of USD1,000-10,000 households at around two-thirds of the total in Indonesia in 2015. We consider sub-USD5,000 households to be external to the devices market - with the exception of non-smartphone handsets - due to insufficient purchasing power, but under our forecast, we expect this group to reduce in size by about 50% by 2019. This will deepen the consumer electronics market over the medium term, with particular significance for volume growth at the low value end of the PC and AV markets.
One potential block on the bullish growth outlook for handset sales is the new regulation unveiled in January 2015 by the Ministry of Trade and the Ministry of Communications and Information Technology requiring 40% of a smartphone's components to be made in Indonesia, and devices failing to meet the requirement would not receive a permit for sale. The regulation will apply to all 4G smartphones entering Indonesia and will come into effect from January 1 2017. BMI believes the regulation could have medium-term implications for the smartphone market, particularly the boost it will give to the electronics manufacturing segment. The size of Indonesia's market, and the relatively large pool of first-time buyers, means the regulation is resulting in a large scale inward investment by vendors and contract manufacturers. However, the impact of the regulations could be asymmetric, for instance premium smartphone market leader Apple is almost totally reliant on contract manufacturing and could lose out in Indonesia if its primary partner Foxconn fails to resolve its stalemate with the Indonesian government regarding land and other incentives for its potential investment. A more in-depth analysis of vendor investment plans in Indonesia is provided in the Industry Trends and Developments section.