Vietnam information technology report q1 2012

BMI projects growth of around 17% in the Vietnam PC market this year, similar to the growth rate estimated in 2010 when the market bounced back from the effects of the economic slowdown

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INFORMATION TECHNOLOGY REPORT Q1 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2012

CONTENTS

Executive Summary 5

SWOT Analysis 8

Vietnam IT Sector SWOT 8

Vietnam Telecoms SWOT 9

Vietnam Political SWOT 10

Vietnam Economic SWOT 11

Vietnam Business Environment SWOT 12

IT Business Environment Ratings 13

Table: Regional IT Business Environment Ratings 13

Asia Market Overview 18

Sectors And Verticals 22

Market Overview – Vietnam 25

Government Authorities 25

Hardware 26

Software 28

Services 31

Industry Developments 33

Industry Forecast Scenario 37

Table: Vietnam's IT Sector – Historical Data & Forecasts (US$mn Unless Otherwise Stated) 40

Internet 41

Table: Telecoms Sector – Internet – Historical Data And Forecasts 41

Macroeconomic Forecast 43

Table: Vietnam – Economic Activity 45

Competitive Landscape 46

Hardware 46

Software 47

Operating Systems 48

Business Software 49

IT Services 51

Company Profiles 54

FPT Software 54

Country Snapshot: Vietnam Demographic Data 55

Section 1: Population 55

Table: Demographic Indicators, 2005-2030 55

Table: Rural/Urban Breakdown, 2005-2030 56

Section 2: Education And Healthcare 56

Table: Education, 2002-2005 56

Table: Vital Statistics, 2005-2030 56

Section 3: Labour Market And Spending Power 57

Table: Employment Indicators, 1999-2004 57

Table: Consumer Expenditure, 2000-2012 (US$) 57

BMI Methodology 58

Transport Industry 58 Sources 59

Executive Summary

Market Overview

The Vietnamese IT market is estimated to report 17% growth in 2012 In January – August 2011, PC imports grew by a double-digit factor in dollar terms, but economic cooling measures are forecast to have

an impact later in the year Factors such as rising PC penetration, economic growth, a range of

government ICT initiatives and a drive to develop Vietnam's domestic IT industry will help to sustain continued expansion going forward

An ambitious government IT plan for 2010-2020 should shape many segments of the Vietnamese IT market, while Vietnam's improving information and communication technology (ICT) infrastructure will also drive growth Vietnam's gradual integration into global trade networks such as the Association of South East Asian Nations (ASEAN) and the WTO has helped to bring down prices and increase

opportunities for importers

The Vietnamese IT market is estimated to grow at a CAGR of 16% over the 2012-2016 period The

addressable domestic market for IT products and services is projected by BMI to reach US$4.9bn by

2016 An increasing number of Vietnamese companies have shown an interest in cloud services

Environment (MONRE) has put in place a strategy for more utilisation of cloud computing in IT

applications

The Vietnamese government has also unveiled ambitious plans for developing the country's IT industry The plans, which state a revenues target for the sector of between US$17bn and US$19bn in the next five years, include major investments to develop production centres in software, services, hardware and electronics Revenues are projected at US$2bn from software sales, US$12.5bn from hardware, US$2bn from digital content, and US$1.5bn from IT services

Competitive Landscape

2011 saw a steep decline in the popularity of netbooks, with former segment leader Sony withdrawing its products from the local market Sony's P-series models, considered pioneers in the market, as well as the

high-end Vaio W product, have both been withdrawn Sony, like rival vendors such as Acer, Asus and Lenovo, is now focusing on tablets and ultrabooks

Vietnam's largest software company, FPT, has unveiled a major new restructuring plan which will

consolidate five technology subsidiaries in a search for higher growth The company's five subsidiaries; FPT Information System; FPT Telecom Corp; FPT Software; FPT Online and FPT Trading Group; will

be merged, with the company either buying out minority shareholders or facilitating a share swap In May

2011, FPT also announced a cloud-computing alliance with Microsoft

Meanwhile IBM has made a series of recent investments in Vietnam, many related to cloud computing IBM has created a cloud computing lab facility, and has enjoyed successes in this field in China,

including a contract to provide a cloud computing platform for the Ho Chi Minh City government

Computer Sales

BMI projects that sales in Vietnam's computer hardware market will be worth around US$2.0bn in 2012,

up from an estimated US$1.7bn in 2011 The main growth driver will be affordable notebooks BMI

projects growth of around 17% in the Vietnam PC market this year, similar to the growth rate estimated in

2010 when the market bounced back from the effects of the economic slowdown

PC penetration in Vietnam was estimated by BMI at about 18% in 2011 Notebooks are owned by an

estimated 7% of the Vietnamese population This points to significant growth potential for the local PC market, with the most potential being in rural areas Currently Hanoi and Ho Chi Minh City are thought to account for in the region of 85% of notebook sales

Software

In 2012, Vietnam software sales are projected by BMI to grow to US$238mn, and software CAGR for

2012-2016 should be in the region of 19% Software spending comprises around 9% of total Vietnamese

IT spending currently

The market is expected to reach a value of around US$380mn by 2016, with steady growth in demand for licensed software from government, enterprise and household segments Vietnam's software market is developing, despite the problem of software piracy, which still accounts for around 85% of software, compared with 76% in neighbour Thailand

Services

Vietnamese IT services spending is forecast to reach around US$494mn in 2012, up from US$409mn in

2011 The market has recovered after the economic crisis had an impact in 2009, with projects being put

on hold Sectoral CAGR is projected at 16% over the forecast period, as the market approaches

US$881mn by 2016

IT services now accounts for around 17% of total Vietnam IT spending Over the past few years, the size

of IT services deals has increased in key IT spending verticals Growing demand for digital infrastructure projects in segments such as banking, telecoms, energy and government has attracted global IT services providers to invest more in Vietnam

E-Readiness

Vietnam's fixed-line infrastructure is unreliable and offers poor coverage However, Vietnam has an exceptionally high penetration rate in the mobile market, reaching 126% at the end of 2009, and

registering around 110.8mn subscribers This has been aided by mobile network operators reducing tariffs

to encourage growth of their respective subscriber bases, as well as increased investment in the expansion

of infrastructure to areas outside major towns and cities Demand for mobile broadband has also been accelerated by the changing lifestyles of consumers, who use the service for accessing the internet for work and leisure

SWOT Analysis

Vietnam IT Sector SWOT

Strengths ƒ The domestic IT market is in a rapid growth phase, with trade liberalisation and

growing affordability driving projected double-digit growth of notebook computers

ƒ Expanding ICT infrastructure and internet penetration will continue to drive demand for

IT products and services

ƒ Vietnam's gradual integration into the global trade network via its accession into trade organisations such as ASEAN and WTO, as well as bilateral agreements with Japan and China

Weaknesses ƒ IT spend per capita much lower than in neighbouring Thailand, reflecting a much

lower GDP and GDP per capita

ƒ Low levels of access to credit and budgets restrain spending by SMEs

ƒ Highly cost-sensitive market, with 75% of software provided by lower-cost local software vendors

ƒ High level of software piracy at 85%, although it has fallen in the last few years

Opportunities ƒ High PC market growth potential particular in rural areas due to overall low PC

penetration rate of 15%

ƒ Vast and relatively under-penetrated rural market presents a significant growth opportunity as the government rolls out measures to boost rural connectivity and incomes

ƒ National IT Plan will drive spending on IT utilisation in areas like government, taxation and education

e-ƒ SMEs have much potential to increase spending on basic solutions, including customer relationship management and security

ƒ One Teacher-One Computer programme aims to deliver 1mn computers to schools by

Threats ƒ Continued depreciation of the dong against the US dollar would increase the pressure

on Vietnamese distributors of foreign IT goods

ƒ Falling prices may further undermine margins and profitability after steep discounting

in 2009

ƒ The implementation of the China-ASEAN free trade agreement means that established multinationals will face a growing challenge from low-cost Chinese vendors in the Vietnamese market

Vietnam Telecoms SWOT

Strengths ƒ Fixed-line penetration levels and internet user rates are high in major urban centres

such as Ho Chi Minh City, Hanoi, Danang and Haiphong

ƒ Competition exists in fixed-line and internet access markets; VNPT faces competition from several other state-owned companies and two privately-owned operators

ƒ High levels of literacy and other demographic factors bode well for strong and continued demand for wireline services over the next few years

Weaknesses ƒ Vietnam's fixed-line and internet access markets are both dominated by

state-controlled operators, VNPT and Viettel

ƒ Although alternative broadband infrastructures are currently being explored, broadband growth continues to be dependent on DSL

ƒ Low fixed-line penetration rates in rural regions limit the scope for DSL broadband growth

ƒ Internet user growth is slowing, despite the limited access to internet infrastructure in much of rural Vietnam

ƒ Broadband tariffs remain high, creating a barrier for low-income subscribers to access

ƒ

Opportunities ƒ The privatisation of VNPT could help to bring about increased investment revenues

and the arrival of new skills

ƒ On a national level, broadband penetration rates remain low; this means that the sector has considerable growth potential

ƒ VNPT plans to invest US$1bn in 2009, in order to upgrade its broadband networks and expand its international internet bandwidth

ƒ Significant opportunities exist to develop alternative broadband technologies, including WiMAX and fibre

ƒ WiMAX services are currently being trialled with a view to licensing a number of WiMAX service providers in the near future; WiMAX internet services have the potential to raise the level of internet user penetration in rural parts of Vietnam

ƒ Draft Bill of Law on Telecommunication has been put forward for discussion at the National Assembly Steering Committee If passed, the bill will allow private companies

to build network infrastructure for the first time and will open up the telecoms market to foreign investors

Threats ƒ Fixed-line sector may enter a period of decline, with potentially negative

consequences for ADSL growth

ƒ As the market for mobile data services grows, this could have potentially negative consequences for the growth of fixed broadband services

ƒ Slower economic growth in 2009 and 2010 could undermine wireline investment and expansion plans

Vietnam Political SWOT

Strengths ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-ƒ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent

Opportunities ƒ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ Macroeconomic instabilities in 2010 and 2011 are likely to weigh on public acceptance

of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule

ƒ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage

Vietnam Economic SWOT

Strengths ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.2% annually between 2000 and 2010

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 12.0% in 2009

Weaknesses ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2011 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw

ƒ The heavily managed and weak dong currency reduces incentives to improve quality

of exports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

ƒ The government will, in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

ƒ Vietnam's location – its proximity to China and South East Asia, and its good sea links – makes it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

ƒ Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2010 Corruption Perceptions Index was 2.7, placing it in 22nd in the Asia Pacific region

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and know-how

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American protectionism,

which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

IT Business Environment Ratings

Table: Regional IT Business Environment Ratings

Limits Of Potential Returns Risks To Realisation Of Returns

IT Market

Country Structure Limits

Market Risks

Country Risk Risks

IT BE Rating

Regional Ranking Australia 56 100 71 80 71 75 72.2 1Singapore 53 100 69 70 85 79 72.1 2Hong Kong 48 95 65 70 87 80 69.4 3South Korea 52 75 60 75 71 73 63.9 4Malaysia 41 50 44 35 77 60 49.1 5China 52 35 46 35 68 55 48.7 6

Philippines 37 45 40 43 52 48 42.2 8India 49 15 37 45 56 51 41.4 9Thailand 40 20 33 35 73 58 40.4 10Indonesia 38 35 37 35 52 45 39.1 11Sri Lanka 30 10 23 35 44 41 28.3 12

Scores out of 100, with 100 highest The IT BE Rating is the principal rating It comprises two sub-ratings, 'Limits Of Potential Returns' and 'Risks To Realisation Of Returns', which have a 70% and 30% weighting respectively In turn, the 'Limits' rating comprises Market and Country Structure, which have a 70% and 30% weighting respectively and are based upon growth/size/maturity/govt policy of IT industry (Market) and the broader economic/socio-demographic environment (Country) The 'Risks' rating comprises Market Risks and Country Risk, which have a 40% and 60%

weighting respectively and are based on a subjective evaluation of industry regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings methodology and is designed to enable clients to consider each rating individually or as a composite, depending on their exposure to the industry in each particular state For a list of the data/indicators used, please consult the appendix at the back of the report Source: BMI

BMI's Asia IT Business Environment Ratings (BER) compare the potential of a selection of the region's

markets over our forecast period through to 2016 Our Q112 ratings reflect our consideration of political and economic risks, as well as risks associated specifically with IT intellectual property (IP) rights

protection and the implementation of state spending projects

Australia therefore retains its top regional rating in Q112 The market is expected to remain in positive growth territory, despite business concerns about the domestic carbon tax and the global economic situation One leading area of opportunity is growing demand for cloud computing services A wide range

of leading Australian private and public sector organisations, including many of the country's leading

banks, have launched cloud initiatives Meanwhile, the government has unveiled a six-year cloud

computing strategy

Australian IT verticals such as government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in future The government's commitment to continue to implement the National Broadband Network project will drive the development of Australia's digital economy and feed demand for PCs

The smaller, but mature IT markets of Singapore and Hong Kong take second and third positions

respectively in our ratings table, due primarily to their high Country Structure scores Hong Kong and Singapore are expected to emerge as cloud computing hubs due to growing interest in cloud computing across the region

We forecast solid IT market growth in these markets in 2012 However, this will depend on continued business and consumer confidence in the economic recovery, which could feel an impact if China

experiences a slowdown Key sectors of the Hong Kong economy such as financial services are investing

in modernisation as Hong Kong strives to maintain its regional hub status in the face of competition from rivals such as Shanghai Hong Kong also continues to offer IT investors opportunities associated with its growing links to the vast Chinese market

Meanwhile, Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor

investment in service capabilities Moreover, ambitious projects such as the national healthcare register and the schools standard operating environment will bolster the IT market Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan

Singaporean spending on IT services will be boosted by the continuing boom in IT-enabled services such

as call centres and back-office financial services Other promising sectors for IT services include

healthcare, as the government launches a series of initiatives to develop health technology

On the downside, the continued restructuring of both economies, towards a more service-oriented model, may limit long-term growth prospects However, this also brings opportunities in sectors such as financial services and banking Businesses will probably remain cautious and value focused over the short term

BMI forecasts that South Koreans will increasingly choose to spend money on IT products due to a

substantial increase in disposable incomes Consumers appear willing to upgrade their PCs, and there is also a trend for households to own more than one computer

Meanwhile, South Korea's government is encouraging the utilisation of cloud computing by small

businesses New cloud computing offerings and increased competition in this segment are expected to fuel growing demand for this technology IT outsourcing is also expected to show a strong demand trajectory

Malaysia remains in fifth position in our Q112 regional ratings Demand is expected to stay resilient, even

as economic growth moderates Government spending may become more constrained, because of

commitments to tackle the budget deficit, but there will be growth areas IT spending growth will be driven by the government's drive for greater broadband penetration It has set an optimistic target of 75%

by 2015

The roll-out of a Malaysian high-speed broadband network will boost IT spending outside the Klang Valley Other projected growth and PC market drivers include a rise in the PC penetration level from about 35%, tax exemptions for notebooks and growth in disposable incomes

There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Cloud computing will also

be a growth area and the government has named cloud computing as one of its top 10 strategic technology priorities

In China, despite an expected moderation in investment and retail spending over the next year, an

expansion in consumer credit will help drive IT market growth The rural electronics subsidy programme will continue to boost demand from the vast, underpenetrated rural areas The lower tier cities and towns are expected to be the fastest growing segment of the PC market but pressure on hardware prices is also a risk in the current environment

Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among other expected drivers In the Chinese IT services segment, growing interest in cloud computing will be stimulated by the establishment of government pilot programmes in five cities However, there are still market risks associated with IP rights protection in China, as well as piracy and a lack of business transparency

Vietnamese IT demand, although with a rather smaller market than its leading neighbour to the north, is expected to have several long-term drivers Vietnam's improving ICT infrastructure will facilitate the development of the nation's IT market in a country with just 15% PC penetration PC subsidy

programmes will support the PC market in 2012 as the government continues to roll out the One One Computer programme

Teacher-Vietnamese government digital divide programmes to boost internet and digital utility in rural areas will help addressable market growth and open PC ownership to a growing number of rural inhabitants

Vietnam's gradual integration into global trade networks such as ASEAN and the WTO has helped reduce tariff barriers and prices, and has increased opportunities

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow The

Philippines has a lower PC penetration than many other Asian countries and the IT market offers

corresponding high growth potential over the forecast period

However, the Philippines faces challenges such as labour shortages and rising wages In the enterprise segment, surveys suggest that many businesses including small and medium-sized enterprises (SMEs) plan to increase IT spending

India's IT market appears set to continue a strong recovery in 2012 thanks to a growing economy and healthy consumer sentiment The potential is clear, with less than 2% of the population owning a

computer, which is about 20% of the level in China It is estimated that around 400,000 Indian SMEs implement an IT solution annually Significant opportunities will be created by demand from Indian businesses and government agencies to help utilise cloud computing

There are expected to be strong growth opportunities in the next 200-400 smaller cities in India, where vendors are expanding their retail and distribution presence Realisation of India's growth potential depends on fundamental drivers such as increasing India's low computer penetration, rising incomes, falling computer prices and the government's ambitions to connect the country's vast rural areas to the rest

of the world

The last three markets in our regional ratings have low scores due primarily to business environment factors, despite considerable growth potential In Thailand, the fundamentals of growing affordability and low PC penetration should keep the market in positive territory during the forecast period The PC market received a severe impact from the recent floods, and this is expected to continue into H112, with forecasts for Q112 PC sales downwardly revised by around 10% in Q112 A number of factors should also support momentum, including the government's PC for Education programme and 3G mobile and WiMAX

broadband service rollouts BMI's view is that the fundamentals of growing affordability and low PC

penetration will keep the market on a positive growth trajectory

Similarly, with PC penetration at only around 6%, and development restricted to richer areas such as Java,

the Indonesian IT market has much growth potential BMI expects the Indonesian market to be one of the

fastest growing in the region over the five-year forecast period Government infrastructure investments should also provide a boost to Business IT investment, which will likely remain buoyant in line with the general economy as inflation moderates Spending in key IT verticals, such as financial services and banking should continue to be significant The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

Sri Lanka's IT market has benefited from the restoration of peace and improvements in the security situation, which helped release pent-up demand for IT solutions The country has felt the effects of instability over the years, from disruption of distribution channels and a flourishing grey market to the underdeveloped telecoms infrastructure However, Sri Lanka will feature on IT vendors' radars as one of the best potential growth prospects in South Asia Computerisation has only started in government

services and major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Asia Market Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will help to

drive increases in PC penetration during

BMI's five-year forecast period While

some cities and regions stand out, there

is an unbalanced pattern of regional

development, with PC penetration in

countries such as Singapore above 50%,

while in other countries, such as

Indonesia, it is below 5%

The two Asian leaders, China and India,

embody the region's growth potential, as

in both countries computer ownership

remains the preserve of a minority

In China, PC penetration was only around 25% in

2010 – although it was far higher in cities such as

Shanghai and Beijing and urban PC penetration is

projected to pass 60% by 2015 In India, less than

5% of people own a computer However, some

45% of the population is under 25, which provides

a promising demographic context for increased PC

ownership PC penetration in Vietnam was

estimated by BMI at around 15% in 2010

Notebooks are owned by an estimated 7% of the

Vietnamese population, which points to significant

growth potential for the local PC market

Lower prices will help to drive higher PC

penetration in developing markets The average price of a PC in the Indian market has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach of lower-income demographics Even in more mature markets, there is room for

development, however, with official data suggesting that as many as 25% of Hong Kong households do not have a computer at home

Around the region, affordable computer programmes continue to find favour with governments In China,

a subsidised household electronics products initiative aimed at rural residents has helped to boost PC sales

in areas where penetration was low In Australia in 2010, national and state governments continued to roll out new initiatives, with the Victoria government investing more than US$150mn in IT in schools

In Indonesia, PC penetration of around 2% could double by 2013 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising the current 1:3,200 ratio of PCs to students in public schools to 1:20 Meanwhile, in 2010, the Vietnamese government launched a programme entitled One Teacher-One Computer, which offered discounts on PCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in Singapore, South Korea, Hong Kong and Australia, with estimated 2011

penetration rates of 78.5%, 76.4% and 75.5% and 67.4% respectively Singapore has by far the highest rate of broadband penetration, which was estimated at 160.2% in 2011 Meanwhile, the Philippines has the one of lowest levels of internet usage, with just 7.1% narrowband and 6.1% broadband penetration estimated in 2011

The fastest growth is expected in Indonesia, where internet penetration is projected to leap from 36% in

2011 to 67.4% by 2015 India is now at above 28% internet penetration despite a lack of fixed-line infrastructure, and this should reach 36% by 2015 Steady growth is also projected for Sri Lanka, where penetration is projected to increase from 14.1% to 19.4% by 2015 Some 60.4% of Malaysians had internet access in 2010

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by growing numbers of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 33.1% by 2015 In India,

penetration should increase sixfold to reach 9.4% by 2015 from around 1.5% currently, although this remains below government targets Singapore will also see continued strong growth in broadband

penetration, which is projected to reach 186% by 2015

Across the region, government programmes are an important driver of ICT penetration The Chinese government has a five-year plan to make the internet available in every administrative village in central and eastern China and every township in the west In Australia, the government's commitment to develop the National Broadband Network should further the development of Australia's digital economy

Meanwhile, the growth of Wi-Fi coverage will be one driver of notebook sales in places such as Hong Kong, where the government has committed another HKD200mn to the deployment of a Wi-Fi network covering more than 200 public venues

IT Growth and Drivers

Across the region in 2011, IT spending should

benefit from improved economic circumstances

and tenders, previously deferred as a result of the

economic situation, although much will depend on

business confidence Strong fundamental demand

drivers of IT spending mean that there will be

continued opportunities Key factors common to

most markets include cheaper PCs and reform in

sectors such as telecommunications and finance,

as well as government initiatives

In some of the region's largest markets, such as

China, lower-tier cities and towns will be among

the fastest growing segment of the IT market

BMI expects China's IT market growth to be driven by an expansion into western China and rural areas

well as growing demand from small and medium-sized enterprises (SMEs) The Chinese IT market will also receive a boost in 2011 from a 50% increase in import tariffs on some electronics products, such as laptops

In Thailand in 2011, demand will be bolstered

by market expansion in the relatively

underpenetrated rural areas SIS estimates that

market growth in upcountry areas was 30% in

2011, double that forecast for the country as a

whole A similar situation pertains to India

where in 2011 there were expected to be strong

growth opportunities in smaller cities

The long-term potential of India's IT market is

plain: fewer than 3% of people in India own a

computer (about one-fifth of the level in

China), meaning particular potential in the

lower-end product range India's IT market

appears to be positioned for strong growth thanks to an improving economy and consumer sentiment, and government support for modernisation in lagging sectors Meanwhile, India's business process

outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

2011e IT Market Sizes

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional computer sale

drivers over the forecast period include

education, lower prices, IP telephony, cheaper

processors as well as notebook entertainment

and wireless networking features Meanwhile,

in Indonesia, the basic demographics of rising

computer penetration and growing affordability

should drive growth SMEs represent a growth

opportunity, as currently only around 20% of

Indonesian SMEs are estimated to make use of

IT Compliance with government and international regulations will be a driver in financial, manufacturing and other sectors

In more developed markets, such as Hong Kong and Singapore, robust retail sales led the way in early

2010 as spending recorded positive growth following a contraction in 2009 In Hong Kong consumer

spending is expected to remain strong in 2010, as evidenced by the positive early reception for Apple's

iPad IT market growth will be driven by government IT spending as well as cross-border trade and cooperation

The largest IT market in the region is, unsurprisingly, China, estimated at US$105.4bn in 2011, trailed distantly by Australia (US$20.8bn), India (US$19.7bn) and South Korea (US$17.8bn.) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.2%), followed by Hong Kong (2.1%) Thailand's IT market was affected last year by a number of exogenous events

including floods in the north east of the country, and political unrest However, in 2011 the country looks

to be back on track

The fastest growing IT markets over the forecast period are projected to be India and Indonesia with 2011-2015 compound growth of 109% and 91% respectively, driven by increasing PC penetration Sri

Lanka is third with the IT market growing by an estimated 89% over BMI's five-year forecast period,

while China's total growth is estimated at a still healthy 70%

IT Markets Compound Growth

2011f-2015f (%)

f=forecast Source: BMI

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% of total spending in all markets in 2010 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

In mature markets such as Australia and Singapore, PC sales are dominated by replacement sales In Australia, upgrades are estimated to account for at least 80% of business purchases and more than 50% in the case of households More than 90% of Australian households now have a PC, but consumers have appeared willing to spend on upgrading their notebook computers and it is also becoming more popular to purchase a second household PC Indeed, around 30% of households have more than one PC

Tablet sales will lead to a new PC market growth area, with triple-digit growth projected in many

markets In China it is estimated that tablets could account for around 6-7% of computer sales in 2011 However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations In Australia, netbooks sales growth slowed from the first quarter of 2010, and this has continued into 2011

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth Another driver will be replacement of desktops with notebooks SMEs will be one

of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

Falling prices is another major driver, placing pressure on margins As of the third quarter of 2010, the average price of a PC in China was estimated to have fallen to around US$600, considerably below the price level in developed markets In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach

of lower income demographics

In both emerging and more mature markets, the growing popularity of broadband will help to support

computer sales China Telecom is among regional telecoms companies to have rolled out PC bundling

offers as part of its broadband packages Meanwhile, broadband plans will also help to popularise tablets

At the end of 2010, Australian telecoms operators such as Telstra were competing to offer affordable

tablets bundled with data services

Meanwhile, a wave of 3G launches across the region should also provide a stimulus to sales of notebooks,

with Vodafone Hong Kong among service providers offering 3G/HSPA USB modems bundled with

their 3G services However, netbooks and notebooks face competition from other form factors such as

smartphones from Palm, RIM, Apple and other vendors, and tablet notebooks, spearheaded by Apple's

iPad,

Due in part to high levels of piracy, software's share of IT spending is relatively low, ranging from 9-25%

among countries covered by BMI Efforts are being made to tackle the issue of piracy, but despite

government crackdowns in China and the Philippines, software piracy remains above 70% in most of emerging Asia

In 2011, sales of Microsoft's Windows 7 operating system and new Intel core technology retain the

potential to help trigger hardware upgrades, although much will depend on business confidence

Hundreds of large enterprises and thousands of small enterprises in China have already started migrating

to Windows 7, and this process is expected to continue in 2011

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install backoffice systems to meet efficiency requirements

In general, enterprise resource planning (ERP) and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business intelligence, where faster growth is possible Although the market remains relatively small, more companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver

applications such as payroll, tax-return processing and recruitment

The hosted application model may already account for between one-fifth and one-quarter of Chinese software revenues and SaaS has also enjoyed steady growth in the Hong Kong market over the past few years Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia Meanwhile, around one-third of Australian organisations already use some cloud computing

New platforms and services in the telecoms field is a driver for that key IT spending segment, where an industry restructuring with the advent of 3G mobile services has led to more competition Meanwhile, expanding technology adoption in the logistics industry and public transport will be a source of IT

services projects Sectors such as hospitals and real estate will also provide opportunities

The IT services segment accounts for 17-40% of spending in the Asian markets covered by BMI The

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2010,

a brightening business climate should mean more opportunities in key IT-spending verticals such as financial services, telecoms, government, healthcare and logistics

Government spending will account for a larger share of spending in many markets In China, government stimulus packages have helped to drive IT-related investments, while in Singapore government ICT projects such as SOE2 provide significant opportunities Meanwhile, the Hong Kong government's Digital 21 initiative will continue to generate spending

Regionally, hardware deployment services remain the largest IT services category, with other

fundamental services including system integration, support systems, training, professional services, outsourcing and internet services Main spenders across the region include banks and financial institutions

as well as governments Even in emerging markets such as India, IT vendors are having to pay more attention to value-added services such as technical support and product troubleshooting, or basic IT and hardware consulting

In many countries, the number and size of local outsourcing deals are increasing Outsourcing could account for as much as 30% of China's IT services spending by 2013, while in India there have been some

large contracts such as that awarded by Idea Cellular to IBM Singapore and Hong Kong have both seen

a trend towards larger outsourcing projects in the public and private sectors

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Market Overview – Vietnam

Government Authorities

Government Authority Ministry of Information and Communications (MIC)

Minister Le Doan Hop

The Ministry of Information and Communications (MIC) is the main Vietnamese policymaking and regulatory body in the fields of IT, although its brief also covers a number of other areas such as

telecommunications, broadcasting and publishing

The MIC's major functions include proposing and drafting laws, regulations and development plans related to IT and other policy areas The current national framework for IT is the Strategy for IT

Development, which was approved in 2005 and covers the 2010-2020 period

Background

The Vietnamese IT market, including computer hardware, packaged software and IT services, was valued

at US$2.3bn in 2011 Vietnam IT spend per capita, at around US$25 in 2011, is considerably lower than the US$225 estimated for ASEAN neighbour Thailand However, IT spend per capita is expected to more than double to US$52 by 2016

Computer hardware, including desktops, notebooks, and accessories, is the largest IT market segment in Vietnam, accounting for around 74% of spending in 2011 Packaged software was valued at US$194mn that year, equivalent to around 9% of spending IT services and outsourcing comprised 17% of spending

Tariff reform, expanding internet infrastructure, a growing economy and government programmes will all play a part in driving Vietnamese IT market growth over our five-year forecast period Vietnam has a relatively good IT and telecommunications infrastructure, with particularly high mobile telecoms

penetration However, with PC penetration at below 20%, there is still a large portion of the population that do not participate in the digital society and are unable to afford the latest IT products

The household sector, which accounts for only below 15% of the IT market currently, should increase its share by 2016 The country's vast, under-penetrated rural market offers the most PC market growth potential, with Hanoi and Ho Chi Minh City accounting for most sales currently, also presents a

significant growth opportunity as the government rolls out measures to boost rural incomes

The government sector is a key segment of the Vietnamese IT market and comprises about 30% of national IT spending Public IT spending by around 7,000 government organisations at national,

provincial and municipal levels will provide important opportunities to vendors A number of

programmes exist to increase IT utilisation in areas like e-government, e-taxation and education The national IT plan has regional components, focused on northern, eastern and southern regions

The private sector accounts for around 60% of IT demand and both domestic and foreign enterprises are investing in IT to boost performance Large corporations are more likely to buy software from top-tier vendors, but SMEs account for the majority of Vietnam's 400,000 enterprises and are increasingly a target for multinationals There is a lot of potential for Vietnamese enterprises of all sizes to increase spending

on basic solutions, including customer relationship management (CRM) and security

The Vietnamese IT market remains constrained by high levels of grey market activity, and particularly by software piracy, which accounts for around 85% of installed software However, the rate has come down from 95% in the last two years due to a more proactive government approach to the problem

ICT Sector

The ICT sector is a key growth priority for the Vietnamese government, which has a plan to grow it The value of the ICT sector was put by government figures at around 330bn Dong (US$16.5bn) in 2010, but around two-thirds of those revenues were telecoms related Hardware sales were estimated at around US$7bn, while revenues from software and digital media development were put at US$2bn The total of around US$9bn represented growth on an equivalent figures of around US$6.6bn in 2009 Electronics companies in Vietnam focus mainly on assembly, with value-added contributing only about 10% of revenues Vietnam has around 150 software companies, many of which are focused on export markets

In 2009, the government set an ambitious target of 14% annual growth for the ICT sector, with total turnover to reach US$50bn by 2014 US$14bn is to come from hardware and US$5bn from software Telecommunications is projected to account for half the total, or US$25bn

Hardware

BMI projects that sales in Vietnam's computer hardware market will be worth around US$2.0bn in 2012,

up from an estimated US$1.7bn in 2011 The main growth driver will be affordable notebooks BMI

projects growth of around 17% in the Vietnam PC market this year, similar to the growth rate estimated in

2010 when the market bounced back from the effects of the economic slowdown

In H111, vendors reported further rapid growth in PC sales According to information from the Vietnam Government Statistics Office, in the first eight months of 2011, the country spent US$3.91bn on imports

in the category of computers, electronics products and spare parts This represented a rise of 28% on the same period of 2010 Imports in the category reached US$600mn in August, up from a revised figure of US$569mn in July

In 2010, overall PC sales were reported to have achieved double-digit growth, compared with 2009 The growth was driven mainly by imported laptops, with shipments up by around one-third in H110, both

sequentially and y-o-y Desktop sales, however, remained in negative growth territory The depreciation

of the dong restrained demand by leading to higher prices for imported laptops Vendors reported the number of first-time buyers in the market was relatively limited, with most sales coming from purchases

of typically lower-priced second computers Going into H210, growth received a boost in August with back-to-school sales, and summer retail promotions Sales of PCs picked up as new vendors entered the market while others rolled out new models, allowing for double-digit growth for FY10

In 2012, sector procurements across a wide range of sectors, including education, healthcare and

transport, and growing demand from businesses in rural areas, will help maintain momentum In the first eleven months of 2011, procurements of PCs and other IT hardware comprised around 50% of total government ICT spending of VND856bn, although this total also included fibre optic cables However, a number of factors could potentially act as a check on the PC market, including government cutbacks and continued caution in the business segment, despite growing awareness of the strategic value of IT

investments

PC penetration in Vietnam was estimated by BMI at around 18% in 2011 Notebooks are owned by an

estimated 7% of the Vietnamese population, which points to significant growth potential for the local PC market, with the most potential being in rural areas Currently, Hanoi and Ho Chi Minh City are thought

to account for around 85% of notebook sales The spread of fixed and mobile broadband services will

spur purchases of mobile PCs as connectivity devices As elsewhere, telecoms operators such as Viettel

are emerging as significant distribution channels for notebooks as vendors seek tie-ups

Going forward, government programmes are expected to make a significant contribution to computer sales In August 2009, the Vietnamese government announced a national programme to supply 1mn

computers at favourable prices to Vietnamese schools by 2011 Multinational IT vendors such as Acer, Intel and Microsoft were all participating in the programme Desktops will retail under the programme at

around US$161, or about half the usual price The computers will come loaded with educational software and with broadband connections

The programme received reinforcement with the launch in Ho Chi Minh City in January 2010 of a

programme entitled One Teacher-One Computer The programme, which has support from the VNPT and

the Ministry of Education and Training, will provide laptops at a price that is VND800,000 below the market price Discounts of up to 80% for schools and 30% for teachers will also be offered on VNPT's broadband service packages

The main driver of sales is notebooks, for which the addressable market was estimated at around 1.2mn units in 2011 Notebooks were responsible for above 40% of PC sales and this share should pass 50% within the forecast period In particular, LCD-screen notebooks are forecast to grow at an almost triple-digit rate over the next year

Netbooks saw a steep decline in popularity in 2011, with a number of leading vendors, such as former netbook segment leader Sony, withdrawing models from the market Retailers such as home appliance chain Ideas reported that sales declined rapidly last year with the result that less shelf space was allocated

to the devices Other chains, such as Thien Hoa, said that netbook sales remained stable but this segment has faced strong competition from low-end notebooks with more features, as well as from smartphones, tablet notebooks, and specialist devices such as e-readers

Several Vietnamese enterprises has launched tablet PCs, with the first such product, from Hanel, being introduced on the market in October 2010 Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy Tablets are generally significantly more expensive than smartphones but, despite a previous mixed record with this form factor, are seen as a growth area in 2012

However, local products are expected to find it hard to compete in this segment with tablets from

multinational brands, like Apple's iPad, which enjoyed growing recognition in Vietnam in 2010 Other vendors, such as Samsung with its Galaxy Tab, are expected to follow Apple in releasing tablet devices, which have a form factor between the size of a smartphone and a netbook

Software

In 2012, Vietnam software sales are projected by BMI to grow to US$238mn, and software CAGR for

2012-2016 should be in the region of 19% Software spending comprises around 9% of total Vietnamese

IT spending currently The market is expected to reach a value of around US$380mn by 2016, with steady growth in demand for licensed software from government, enterprise and household segments

Vietnam's software market is developing, despite the problem of software piracy, which still accounts for around 83% of software, compared with around 76% in neighbouring Thailand While high, the 83% rate represented a drop in 2010 of 2% from 85% in 2009, and 95% as recently as 2007 The Vietnamese government has gradually taken a tougher stance, with the problem is more one of enforcement rather than a lack of legal provisions

In November 2011 the government provided a boost to legal software usage by signing an extension of a deal with Microsoft to purchase licensed software for government organisations The original 2007 agreement had covered all 63 provincial authorities, 24 ministries and enterprises where the state has a stake of more than 50%

In the past year, the government has moved to tighten enforcement of copyright regulations Decree 47.2007.NP-CP, which became effective in June 2009, allows for a penalty of up to VND500mn (around

US$28,000) for instances of software piracy In April 2010, it was announced that Bach Khoa Internet Security Centre (or BKIS) and Lac Viet Computer Joint Stock Co had become the first Vietnamese

firms to join the Business Software Alliance, a global software industry association that focuses on copyright issues

The Vietnamese software market remains highly cost-sensitive, with around 75% of the market served by lower-cost local software vendors Local software dominates the market for government and SME

segments However, larger Vietnamese companies are more likely to buy higher-priced software from multinationals, which have around 25% of the market Vietnamese customers are demanding a higher level of support for software compared with a few years before

Growing PC penetration, as well as new technologies and business models including 3G mobile and WiMAX, and industry trends such as software-as-a-service (SaaS) and open source will provide areas of Vietnamese software market growth going forward Most demand remains for on-premises subscription models, due to the greater perceived security and degree of control However, as internet infrastructure improves in Vietnam, there should be more demand for alternative models such as SaaS and other cloud computing services

In 2012, migrations to Microsoft's new Windows 7 operating system should continue to have a positive impact on software revenues, although much will depend on consumer and business confidence

Microsoft officially introduced Windows 7 in Vietnam in early November 2009, with the programme

being installed in PCs sold at leading electronics distributors such as Nguyen Kim, Tran Anh, Phong

Vu and Dang Khoa However a large portion of the installed computer base still uses the Windows XP

operating system Meanwhile Microsoft has introduced a Vietnamese version of Windows Live and has announced a list of Vietnamese software programmes that are compatible with Windows 7 including Vietnamese font programmes, dictionaries and accounts software There should also be a boost from systems upgrades previously delayed as a result of the economic situation However much will depend confidence in the economic situation

The global economic downturn may have added to the forces driving interest in open-source software due

to its perceived lower cost and access to codes The economic downturn has led businesses and customers

to look more closely at open-office-type open-source software, as well as free services such as Google Docs, which are funded by advertising Once again, a key issue and precondition for the more widespread adoption of open source will be the development of a support infrastructure

There is still a lot of potential for Vietnamese enterprises to increase spending on basic solutions,

including CRM and security According to estimates by the Ho Chi Minh Computer Association, the local market for ERP software was forecast to grow to VND700bn (US$46.3mn) in 2010, from

VND700bn (US$46.3mn) in 2010 Government support for ICT development should provide a

framework for growing utilisation of software in both public and private sectors

Over BMI's five-year forecast period to 2016, the Vietnamese enterprise software market should offer