Vietnam information technology report q1 2013

Drivers including rising PC penetration, economic growth, a range of government ICT initiatives and a campaign to develop Vietnam's domestic IT industry will help to sustain continued ex

Q1 2013 www.businessmonitor.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q1 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2013

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BMI Industry View 7

SWOT 9

Political 11

Economic 12

Business Environment 13

Industry Forecast 14

Table: Vietnam IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated) 17

Broadband 17

Table: Telecoms Sector - Internet - Historical Data And Forecasts 17

Economic Analysis 20

Macroeconomic Forecast 20

Ratings Downgrade Failed To Surprise Investors 21

Early Signs Of A Recovery 23

Threat Of Slower Growth Yet To Undermine Efforts For Reforms 23

Expenditure Breakdown 23

Table: Vietnam - Economic Activity 24

Industry Risk Reward Ratings 25

Industry Risk/Reward Ratings 25

Table: Asia Pacific IT Risk/Reward Ratings, Q113 28

Market Overview 29

Asia Pacific Regional Market Overview 29

IT Penetration 29

IT Growth and Drivers 31

Sectors And Verticals 33

Vietnam 37

Table: Vietnam 37

Industry Trends And Developments 45

Regulatory Development 48

Competitive Landscape 50

Company Profile 57

FPT Software 57

Demographic Forecast 59

Vietnam Demographic Forecast 59

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 60

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 60

Table: Vietnam's Key Population Ratios, 1990-2020 61

Table: Vietnam's Rural And Urban Population, 1990-2020 62

Methodology 63

How We Generate Our Industry Forecasts 63

IT Industry 63

IT Ratings - Methodology 64

Table: IT Business Environment Indicators 65

Weighting 66

Table: Weighting Of Components 66

Sources 66

BMI Industry View

BMI View: Vietnamese IT spending is expected to reach US$2.9bn in 2013, up 15%, with BMI upwardly

revising its forecast due to macroeconomic factors Drivers including rising PC penetration, economic growth, a range of government ICT initiatives and a campaign to develop Vietnam's domestic IT industry will help to sustain continued expansion Vietnam's improving ICT infrastructure will also drive the

development of the nation's IT market in a country with 20% PC penetration Meanwhile, there is strong demand for ERP solutions and cloud computing revenues are expected to report at least 300% growth over the five-year forecast period to 2017.

Headline Expenditure Projections

Computer Hardware Sales: US$1.8bn in 2012 to US$2.1bn in 2013, +13% in US dollar terms Forecast in

US dollar terms unchanged; however, Windows 8 tablets and notebooks are expected to provide a growtharea in 2012

Software Sales: US$223mn in 2012 to US$264mn in 2013, +18% in US dollar terms Forecast in US dollar

terms upwardly revised due to analyst modification, but will depend on the success in bringing down illegalsoftware use

IT Services Sales: US$477mn in 2012 to US$569mn in 2013, +19% in US dollar terms Forecast in US

dollar terms upwardly revised due to analyst modification with growing demand for digital infrastructureprojects in various sectors, such as banking, telecoms, energy and government

Risk/Reward Ratings: Vietnam scores 33.2 out of 100 in our Asia Risk/Reward Ratings table This places

the country 11th, ahead of Sri Lanka The country ranks only 11th for its industry rewards score, with 36.9

Key Trends & Developments.

■ In 2012, vendors reported continued robust sales of ERP solutions, despite the uncertain economicsituation There is still a lot of potential for Vietnamese enterprises to increase spending on basicsolutions A number of Vietnamese companies embarked on large-scale ERP implementations, including

Hoang Anh Gia Lai Group (HAGL), which launched a VND100bn ERP system However, while the

ERP market is strong, it is estimated that only about 10% of Vietnamese businesses have used CRM

■ A number of government ministries and organisations, including the Ministry of Education and Training,have started to promote the rollout of cloud services Plans to modernise IT in government agencies andthe customs department, as well as the Tax Administration Modernization Plan for 2008-2013, representopportunities for vendors of IT products and services

■ An ambitious government IT plan for 2010-2020 should shape many segments of the Vietnamese ITmarket, with the government pledging to invest VND2.4tn (US4,115mn) from the State Budget in theICT sector over this period The government's increasing focus on encouraging ICT development andforeign investment in the technology sector will also create opportunities Many of the government's ICTdevelopment plans and programmes are still in a nascent stage and their ultimate effectiveness is yet to bedetermined.

SWOT Analysis

Strengths ■ 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 Japanand China

■ The domestic IT market is in a rapid growth phase, with trade liberalisation andgrowing affordability driving projected double-digit growth of notebook computers

■ Expanding ICT infrastructure and internet penetration will continue to drive demandfor IT products and services

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

lower GDP and GDP per capita

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

■ Highly cost-sensitive market, with 75% of software provided by lower-cost localsoftware vendors

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

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

penetration rate of 15%

■ Vast and relatively under-penetrated rural market presents a significant growthopportunity as the government rolls out measures to boost rural connectivity andincomes

■ National IT Plan will drive spending on IT utilisation in areas such as government, taxation and education

e-■ SMEs have much potential to increase spending on basic solutions, includingcustomer relationship management and security

■ The banking and finance sector is a promising area for database software and onewhere foreign companies have done well

SWOT Analysis - Continued

■ Banking and finance, oil and gas, aviation and telecoms are projected to be some ofthe biggest opportunities for multinational vendors

■ Tax agencies at all levels of administration are looking to increase the efficiency of taxcollection

■ The government's drive to create a significant IT services industry over the next 15-20years is expected to be a significant factor shaping the IT market

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

on Vietnamese distributors of foreign IT goods

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

in 2009

■ The implementation of the China-ASEAN free trade agreement means thatestablished multinationals will face a growing challenge from low-cost Chinesevendors in the Vietnamese market

SWOT Analysis

Strengths ■ 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-■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

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

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

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

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

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

■ 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 beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive 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

SWOT Analysis

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

GDP growth averaging 7.1% annually between 2000 and 2011

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 14.0% in 2010

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

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high, contributing to inflationary pressures

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

while making Vietnamese enterprises stronger through increased competition

■ The government will in spite of the current macroeconomic woes, continue to moveforward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 29% of the population to more than 50% by the early2040s

Threats ■ 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 growthand fails to root out inflationary pressure, it risks prolonging macroeconomicinstability, which could lead to a potential crisis

■ Prolonged macroeconomic instability could prompt the authorities to put reforms onhold as they struggle to stabilise the economy

Business Environment

SWOT

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

attractive to foreign investors

■ 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 andbeyond

Weaknesses ■ 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

■ Vietnam remains one of the world's most corrupt countries According toTransparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123rdout of 176 countries

Opportunities ■ 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-techskills and know-how

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and theliberalisation of the banking sector This is likely to offer foreign investors new entrypoints

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

protectionism, which will remain a concern

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

Industry Forecast

The Vietnamese IT market is estimated to grow at a compound annual growth rate (CAGR) of 15% over the2013-2017 forecast period The addressable domestic market for IT products and services is projected by

BMI to reach US$2.9bn in 2013 and US$5.0bn by 2017.

The PC market should receive a boost in 2013 from the release of a new generation of Windows 8

notebooks and tablets Sales decelerated in Q112, with low single-digit growth compared with the sameperiod in the previous year, but picked up later in the year Government and business IT spending remainssubject to fiscal restraints and external economic headwinds, and the devaluation of the dong will alsoinhibit demand Despite the uncertain economic outlook, vendors have reported robust enterprise demandfor enterprise resource planning (ERP) solutions Factors such as growing PC penetration, economicgrowth, a range of government ICT initiatives and ambitious plans to grow Vietnam's IT industry will help

to underpin strong growth

2013 Outlook

The overall Vietnamese IT market outlook for 2013 is one of solid advance, but one which is vulnerable to

a slowdown in China, the US and Europe The Vietnam IT market is expected to grow around 15% in 2013,slightly below the level estimated in 20112, but still comfortably among the fastest growth rates in theregion The Vietnamese economy is expected to remain strong and drive growth in IT investments Thegovernment's increasing focus on encouraging foreign investment in the technology sector will also createopportunities

Retail PC sales should overall remain strong in 2013 as new vendors enter the market and others releasenew models, particularly of Windows 8 devices However, many businesses and individuals remain price-sensitive, with much demand being for lower-priced second computers Tablets reported strong growth in

2012 and, with falling prices, are expected to maintain this performance in 2013, while ultrabooks willprovide a new growth area

Government spending and PC subsidy programmes will support the PC market as the government continues

to roll out IT modernisation programmes In 2011 the government spent VND856bn on ICT in the first 11months of the year, with around 50% of this going to hardware Government support should also driveVietnam's emergence as an alternative and cheaper outsourcing destination to India and China Cloudcomputing is another growth area

Vietnam's improving ICT infrastructure will also drive the development of the nation's IT market In acountry with below 20% PC penetration, government digital divide programmes to boost internet and digitalutility in rural areas underpin addressable market growth and open PC ownership to a growing number ofrural inhabitants The government's 2008-2013 programme for developing the internet in rural communities

is one example, as are various policies to boost rural incomes

Meanwhile, broadband service providers will continue to expand penetration in rural and remote areas Thespread 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

Vietnam's gradual integration into global trade networks, such as ASEAN and the WTO, has helped to bringdown tariff barriers and prices, as well as increase opportunities for importers In January 2009, duty onCBU electronic products from ASEAN countries was reduced to 0-5% Meanwhile, the Vietnam-Japaneconomic partnership agreement, which also came into effect at the start of 2009, lowered import taxes onelectronics goods from Japan by 2.5-4.5%

Tariff reductions, particularly the ASEAN ones, have contributed to lower prices and a boost to PC sales.However, the new China-ASEAN free trade agreement offers both opportunities and challenges to vendors,given the growing presence of low-cost Chinese vendors in the Vietnamese market

Meanwhile, the government's drive to create a significant IT services industry over the next 15-20 years isexpected to be a significant factor shaping the IT services market as Vietnam leverages its competitiveprices to claim a larger share of the global outsourcing market Future growth will, however, depend ongovernment progress on various business environment issues, including copyright protection Furtherprogress in combating software piracy, which still accounts for around 83% of installed software comparedwith 76% in neighbour Thailand, would support the growth of the software market Although high, the

piracy rate has fallen from around 95% in the last few years as the government has implemented stricterregulations.

Segments

Government remains a key IT spending segment and accounts for around 30% of total Vietnamese ITspending In 2010 the prime minister ordered all cabinet ministers to use computers as part of a two-yearplan to increase IT use in government Such initiatives are driving IT spending by agencies at central,municipal and provincial government levels

The private sector comprises around 60% of IT spending Larger Vietnamese companies remain more likely

to buy higher-priced software from multinationals, which have only around 25% of the local softwaremarket In the large corporate sector, growing demand for digital infrastructure projects in segments such as

banking, telecoms and energy has attracted global IT services leaders, such as IBM, to invest in Vietnam.

Foreign investment, particularly by Japanese companies, in call centres and other areas will help to grow themarket

Smaller enterprises will be a vendor focus due to their growing awareness of the benefits of IT utilisation,but this segment is constrained by low budgets and lack of access to credit Companies are looking forsoftware that will help boost performance and operational efficiency Promising SME verticals includediscrete manufacturing and consumer packaged goods, as well as hotels and property management Thesolution areas with most demand currently include security software and key applications such as CRM,ERP and HR management

The banking and finance sector is a promising area for database software and one where foreign companieshave done well Spending opportunities in the finance segment will be driven by regulatory compliance, due

to regulations such as Basel II, HIPPA and the Sarbanes-Oxley Act, and quite likely by new regulationsintroduced in the wake of the global financial crisis

An increasing number of Vietnamese companies have shown an interest in and willingness to use cloudservices The government has also got involved in encouraging the development of this business model inVietnam and new cloud computing offerings and increased competition in this segment should fuel furtherdemand from end-users to utilise this technology

Overall, the hardware market is anticipated to grow from US$2.1bn in 2013 to US$3.5bn in 2017, withcomputer sales rising from US$1.7bn to US$2.9bn over the same period Software spending should risefrom US$264mn to US$498mn and IT services from US$569mn to US$1.1bn over the forecast period

Table: Vietnam IT Industry - Historical Data And Forecasts (US$mn unless otherwise stated)

2010 2011 2012f 2013f 2014f 2015f 2016f 2017f

IT market 1,928 2,198 2,547 2,925 3,400 3,897 4,426 5,039

IT market as % GDP 1.9 1.8 1.8 1.8 1.9 1.9 1.9 1.9 Hardware (computer

market sales) 1,427 1,616 1,847 2,091 2,397 2,708 3,032 3,451Services 342 395 477 569 687 815 957 1,090 Software 159 187 223 264 316 374 437 498 PCs (including

notebooks) 1,156 1,312 1,514 1,732 1,985 2,242 2,510 2,858Servers 128 145 166 188 216 244 273 311

f = BMI forecast Source: BMI, EITO, World Bank, ITU, EU, IDC, Gartner, Romania Ministry of Communications & IT, ISI

Broadband

Table: Telecoms Sector - Internet - Historical Data And Forecasts

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

No of internet users ('000) 26,905 31,159 31,782 32,418 33,066 33,727 34,402 35,090

No of internet users/100 inhabitants 30.6 35.1 35.4 35.8 36.1 36.5 36.9 37.3

No of fixed broadband internet subscribers ('000) 3,644 4,085 4,452 4,719 4,955 5,154 5,308 5,467

No of fixed broadband internet subscribers/100

inhabitants 4.1 4.6 5.0 5.2 5.4 5.6 5.7 5.8

e/f = BMI estimate/forecast Source: BMI, VNNIC

According to data provided by the Vietnam Internet

Network Information Centre (VNNIC), there were

31.2mn internet users in Vietnam at the end of

September 2012

Vietnam's internet sector continued to exhibit slower

growth in 2012, continuing on from the trend seen in

2011 The average monthly growth rate for 2011 was

1.1%, which was lower than the growth average in

2010 (1.4%) The first nine months of 2012 saw

even weaker growth with an average m-o-m growth

rate of just 0.2% Given that the number of 3G

subscriptions has surged in the past year, it is

possible that the VNNIC does not take into account

mobile internet users in its definition We retain our

previous forecasts, which were downgraded in the

previous quarter due to the lower-than-expected

growth trajectory Fixed internet services are experiencing muted growth due to the higher cost of

ownership as consumers need to purchase personal computers, namely desktops and notebooks We expect32.4mn internet subscribers in Vietnam at the end of 2013, a penetration rate of 35.8% We expect thisnumber to increase to 35.1mn by end-2017, a 37.3% penetration rate

Nevertheless, we believe that Vietnam's internet sector offers strong long-term growth potential On onehand, internet user growth to date has been largely confined to urban centres, but the internet user

penetration rate is expected to be approaching saturation in major cities and towns Rural Vietnam remainscomparatively untapped as a result of consumers' lower purchasing power This means that the ability toachieve higher growth rates in the future will depend on the pace of internet infrastructure development inrural parts of the country and the prices of consumer electronics and internet services

Vietnam's fixed broadband subscriber market grew by 22.8% in 2010, which was a significant slowdownfrom 44.8% in the preceding year The market registered growth rates of 150.3% in 2007 and 58.3% in

2008, but the higher growth momentum could be attributed to a low-base effect Vietnam's broadbandindustry hit a rocky patch in the first 10 months of 2011 The market contracted in three of the months, most

Industry Trends - Internet Sector

2010-2017

e/f = BMI estimate/forecast Source: BMI, VNNIC

notably 5.2% month-on-month in June 2011, but rebounded sharply in August 2011 by growing by 8.1% o-m By end-2011, there were 4.085mn fixed broadband subscribers, a 12.1% increase y-o-y.

m-Like the overall internet sector, Vietnam's broadband industry is experiencing a slowdown There were4.317mn broadband subscribers at the end of September 2012, up by 12.0% y-o-y The average monthlygrowth rate in the first nine months of 2012 was 0.6%, down from the 1.0% in the whole of 2011 This wasdue to the contractions in the months ended June 2012 and September 2012

Although Vietnamese telecoms companies continue to deploy broadband services such as fibre-to-the-x,affordability and coverage remain key concerns in the emerging market Furthermore, demand for

traditional fixed broadband services is increasingly under threat from mobile alternatives due to a lower coststructure While we believe there will be limited growth potential for the fixed broadband industry inVietnam in the near future, we retain an optimistic view in light of Vietnam's growing affluence andexpanding middle class While next-generation mobile technologies LTE and WiMAX could cannibalisedemand for fixed broadband solutions, companies could generate consumer interest by introducing

bandwidth-intensive services such as IPTV or target businesses by offering bundled packages such as cloudsolutions

We expect the growth rate of the Vietnamese broadband market to decline in the next few years as

consumers opt for mobile alternatives That said, declining prices of products and services should help thesector to grow by an average of 4.2% between 2013 to 2017 to bring the total number of fixed broadbandsubscribers in Vietnam to 5.5mn from 4.7mn

Economic Analysis

Macroeconomic Forecast

BMI View: Vietnam's economy remains on track for a robust recovery in 2013, and we view consensus

estimates on growth as being overly pessimistic The latest credit downgrade by rating agency Moody's

Investors Service has failed to surprise the bond markets and we believe that this is because concerns over

the build up of bad debt in the banking sector have long been priced by investors Furthermore, latest economic indicators also support our view that economic conditions in Vietnam are improving and we are maintaining our view that real GDP growth will come in strong at 7.0% in 2013

Latest data published by the General Statistics Office (GSO) showed that Vietnam's real GDP growthaccelerated from 4.7% year-on-year (y-o-y) in Q212 to 5.4% in Q312, reinforcing our view that the

economy is poised for a robust recovery as we head into 2013 It is worthwhile to note, however, that thegeneral consensus remain deeply cautious towards the country's economic outlook According to the latest

Bloomberg survey consisting of 11 economists, the median forecast for Vietnam's real GDP growth for

2013 currently stands at 5.8% while the mean forecast averaged slightly higher at 6.2% This, in comparison

to our forecast for the Vietnamese economy to grow by a heady 7.0% in 2013, highlights the degree ofpessimism that the consensus presently holds - and what we view as an extreme in bearish macro sentiment

Rebound In Sight

Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS)

Source: BMI, General Statistics Office

Ratings Downgrade Failed To Surprise Investors

Interestingly, Vietnam's foreign and local currency debt ratings were downgraded on September 28 by

ratings agency Moody's Investors Service from B1 to B2, citing lower growth prospects and risks to the

state balance sheet from weakness in the banking system The latest downgrade places Vietnam's creditrating five notches below investment grade, on par with countries such as Egypt and Cambodia We see thedowngrade as coming somewhat behind the curve We have been warning of a surge in bankruptcies sincethe beginning of the year and the government has responded speedily by tightening supervision over thebanking sector and introducing reforms to merge ailing banks Furthermore, we believe that the worst casescenario of a banking crisis has already been contained

Muted Response To Credit Downgrade

Vietnam - Two-Year & 10-Year Government Bond Yields, % & Spread, bps

Source: BMI, Bloomberg

Indeed, judging from the muted response in the bond markets following the ratings downgrade, it appearsthat the risks of a potential bailout of ailing banks by the Vietnamese government have long been priced in

by investors As the accompanying chart shows, 10-year Vietnamese sovereign bond yields have remainedlargely stable within a narrow trading range of 10.25-10.50% in recent months Yields on two-year

sovereign bonds have begun to tick up in recent weeks, following a higher-than-expected reading on

inflation in September (headline consumer price inflation accelerated from 5.0% y-o-y in August to 6.5% inSeptember, after recording 13 consecutive monthly declines since August 2011) However, looking at thebroader trend for bond yields (where yields have fallen substantially from the peak of around 12.5-13.0% tocurrent levels of around 10.0%), we believe that the recent uptick in yields do not warrant cause for alarm.Early Signs Of A Recovery

Looking at more recent economic data, we point out that industrial production expanded by 9.7% y-o-y inSeptember, a significant increase from 4.4% in August and the fastest rate of expansion since February.Retail sales for the first nine months of the year also grew by a robust 17% y-o-y, suggesting to us thatdomestic demand is also starting to pick up These factors reinforce our view that economic conditions inVietnam are improving and the economy is on track for a swift recovery over the coming quarters

Accordingly, we are maintaining our view that real GDP growth will come in strong at 7.0% in 2013, and

we believe that signs of an improving economic outlook over the coming months will soon reignite bullishsentiment towards Vietnam's growth prospects

Threat Of Slower Growth Yet To Undermine Efforts For Reforms

Rapid credit growth and reckless lending practices among local banks have resulted in a build up of baddebt over the years, fuelling concerns among investors that reigniting economic growth will prove to be achallenging task in 2013 The economic slowdown in 2011 led by aggressive monetary tightening by theSBV, resulted in a surge in NPLs and prompted banks to aggressively cut down on lending to small-and-medium sized enterprises (SMEs) Growing evidence that real GDP growth could miss the government'starget of 6.0-6.5% in 2012 has so far failed to derail the SBV's efforts to push ahead reforms - an

encouraging sign that the government is willing to tolerate slower growth in return for macroeconomicstability

Over the longer term, we expect this restructuring of the banking sector alongside efforts to speed up theprivatisation of state-owned enterprises (SOE), to boost the quality of economic growth in Vietnam

Although these reforms are unlikely to witness a smooth process, we should nonetheless see a more

efficient banking system that would allow real GDP growth to average at a robust 7.1% over the nextdecade A more efficient credit system should also see consumer price inflation averaging a benign 5.3%over the same period

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively subdued pace of 4.9% in

2012 before accelerating towards 5.6% in 2013 However, we note that the risk of a sustained collapse in

exports and further bankruptcies among SMEs, could potentially lead to widespread job losses in driven sectors Uncertainties over the outlook for employment could in turn, prompt households to cut back

export-on spending

Gross Fixed Capital Formation: We foresee a significant pickup in private sector investment growth in

2013 We believe with lending rates will gradually ease over the coming months as the effect of recent ratecuts by the SBV begins to kick in Accordingly, we expect gross fixed capital formation growth to

accelerate from 4.3% in 2012 to 5.6% in 2013

Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a

respectable pace of 5.4% However, there is limited room for the government to increase spending furtherdue to concerns over the need to finance a potential bailout of ailing state-owned commercial banks

Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy

given that we expect external demand to remain sluggish as we head into H113 Despite recording anaverage monthly trade surplus of US$172mn since June 2012 (resulting in a year-to-date surplus of US

$77mn), we do not see the case for a substantial pickup in external demand in the near term Accordingly,

we expect exports to expand at a moderate pace of 6.5% in 2013

Table: Vietnam - Economic Activity

2010 2011 2012e 2013f 2014f 2015f 2016f

Nominal GDP,

VNDbn 2 1,980,914.00 2,535,008.00 2,913,940.20 3,314,445.00 3,776,223.10 4,265,863.00 4,807,544.50 Nominal GDP, US

$bn 2 103.5 122.7 138.5 159.3 183.6 209.8 239.2 Real GDP growth, %

change y-o-y 2 6.8 5.9 5.3 7 7.2 7.3 7.3 GDP per capita, US$

2 1,178 1,382 1,544 1,758 2,005 2,270 2,564 Population, mn 3 87.8 88.8e 89.7 90.7 91.6 92.4 93.3 Industrial production

index, % y-o-y, ave

1,4 14.1 10.9 8 12 14 13 12 Unemployment, % of

labour force, eop 4 4.3 4.5 5 4.8 4.7 4.6 4.5

Notes: e BMI estimates f BMI forecasts 1 at 1994 prices Sources: 2 Asian Development Bank, General Statistics Office; 3

World Bank/UN/BMI; 4 General Statistics Office.

Industry Risk Reward Ratings

Industry Risk/Reward Ratings

BMI's Asia Pacific IT Risk/Reward Ratings (RRR) compares the potential of a selection of the region's

markets over our forecast period through to 2017 Our Q113 ratings reflect our consideration of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects

While there are some changes to the countries' IT ratings, their respective rankings in our table wereunaffected Singapore continued to head up the region with an IT rating score of 74.1, unchanged from theprevious quarter Although Singapore's IT market is significantly smaller than many of its regional peers,the country has other redeeming factors The government has been aggressively encouraging the integration

of ICT services in key economic sectors and fosters a well-connected society The InfoComm DevelopmentAuthority of Singapore has also laid out a 10-year masterplan to coordinate developments within the publicand private sector Providing the foundation for growth is a strong and robust fixed and mobile networkinfrastructure, which has deployed next generation technologies in order to spur the adoption of moresophisticated IT solutions

Hong Kong moved up one position to second place after its IT rating score improved to 73.4 from 72.6 theprevious quarter The positive change was spurred by an upgrade in Hong Kong's industry rewards scorefrom 53.3 to 55.0 The territory has a well-established financial hub, and IT solutions present an opportunityfor companies to reduce operating costs and improve operational efficiency when carrying out transactions,particularly cross-border trade In addition to affordable fibre broadband services, Hong Kong's relationshipwith China provides companies access to a high-growth market

Australia fell to third position even though there were no changes to its IT rating score of 73.3 A significantportion of the Australian IT market outlook depends on the successful implementation of the NationalBroadband Network, which would provide high-speed broadband connectivity to businesses and consumers.The project involves the use of fibre-to-the-home technology While costly, it is reasonably future-proof.However, the opposition Coalition party, which could assume power in the next federal election, is looking

to undo the progress made and deploy a fibre-to-the-cabinet network, which would rely on old coppernetworks for the last mile

South Korea's IT rating score improved to 64.6 as its country rewards score increased to 75.0 from 70.0 theprevious quarter, which was partially offset by a slight downgrade in its industry rewards score The South

Korean IT market is fairly developed, largely due to the presence of major global manufacturers such as

Samsung Electronics and LG Electronics There is growing interest from the public and private sectors in

cloud computing models such as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS)

The Malaysian government plays an important role providing growth impetus to the IT market with itsEconomic Transformation Programme, which has earmarked areas such as cloud computing as one of itstop 10 strategic technology priorities The government aims to propel the country into a regional servicesand outsourcing hub, and has provided initiatives to attract the participation of the private sector

The sheer size of the Chinese market is reflected in its third-highest industry rewards score in the region In

September 2012, Microsoft revealed plans to recruit more than 1,000 new employees in China and boost

R&D spending by around 15% as part of its strategy to leverage growing demand for converged personaland enterprise software-driven services and applications managed through cloud computing platforms.However, the biggest downside risk remains a Chinese hard landing, although we foresee economic

rebalancing taking place, resulting in a more sustainable consumer-driven economy This, in turn, paves theway for development of more IT services geared towards the consumer market

In the Philippines, the IT market will continue to 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, and it

is in the midst of expanding operations outside Metro Manila In order to facilitate the expansion, networkoperators are extending the fibre-optic network throughout the country to provide high capacity

Indonesia's IT rating score fell to 41.0 from 42.7 the previous quarter after its industry rewards score wasdowngraded At present, IT developments are largely limited to richer areas such as Java, where networkinfrastructure is more established However, urbanisation is spreading, with medium-sized cities becominginvestment hotspots Additionally, the government is spearheading initiatives to narrow the digital divide

and encourage small and medium enterprises to adopt IT solutions to lower cost and enhance productivity.Coupled with a sizeable population and improving literacy rates, consumer-facing IT services shouldexperience strong growth opportunities.

There were no changes to Thailand's IT rating score of 39.9 In spite of the floods in late 2011, companiesremain committed to IT investments in the country, especially after the government has implementedseveral measures to prevent a repeat of the damages caused Like several of its peers, the Thai governmenthas an IT masterplan called the Smart Thailand project, which aims to boost the country's competitivenessthrough greater ICT development, by integrating IT services in the government sector At a cost of

THB80bn, Thailand aims to increase broadband coverage to 95% of the population by 2020, up from 80%

in 2015 and the current 33% At the same time, all 800 government services across the education, health,government service and agriculture sectors are to be migrated to an electronic platform, which shouldimprove service quality and the communication between agencies

Vietnam is trying to catch up with regional peers, with the government pledging to invest US$8.5bn in theICT sector in the next 10 years The government is also looking to attract US$5bn worth of foreign

investments in the IT sector by 2015, according to Avaya Vietnam, along with Thailand, Indonesia and thePhilippines, is also expected to benefit from a new ICT training programme for small and medium

enterprises, which is implemented by the ASEAN Foundation and funded by a US$300,000 grant fromMicrosoft The supply of IT solutions is on the rise, with increasing investments from the private sector For

example, IBM Vietnam and Prism Information Technology Service Company have signed an agreement

to deploy management services, targeting all Vietnamese enterprises, based on the former's cloud

computing environment

Sri Lanka remained firmly rooted to the bottom of the table with an IT rating score of 27.7 We maintainour view that the country holds long-term potential in light of the restoration of peace and improvements inthe security situation, which will help release pent-up demand for IT solutions Computerisation has onlystarted in government services Major public and private sector organisations remain largely

underpenetrated in terms of basic enterprise software Sri Lanka's Information and Communications

Technology Agency soft launched the Lanka Government Cloud facility in August 2012, which has the goal

of creating an enabling environment for better products and services by leveraging on ICT The government

is paving the way by using ICT to improve its efficiency and productivity This, in turn, should encouragegreater adoption of ICT solutions in various government organisations and the private sector, which

presents business opportunities for solution providers

Table: Asia Pacific IT Risk/Reward Ratings, Q113

Rewards Risks

Country Rewards Industry Rewards Country Industry Risks Country Risks IT Rating Rank Previous Rank

Singapore 57.0 100.0 70.0 85.1 74.1 1 1 Hong Kong 55.0 100.0 70.0 85.7 73.4 2 3 Australia 60.0 95.0 80.0 72.9 73.3 3 2 South Korea 52.0 75.0 75.0 75.4 64.6 4 4 Malaysia 42.7 55.0 35.0 78.3 51.2 5 5 China 55.6 30.0 35.0 65.1 48.6 6 6 Philippines 39.3 45.0 42.5 53.6 43.7 7 7 India 52.5 15.0 45.0 50.9 42.1 8 9 Indonesia 37.5 40.0 35.0 55.1 41.0 9 8 Thailand 40.0 20.0 35.0 70.3 39.9 10 10 Vietnam 36.9 15.0 35.0 47.2 33.2 11 11 Sri Lanka 28.8 10.0 35.0 44.2 27.7 12 12

Market Overview

Asia Pacific Regional 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 above50%, while in other countries, such as Indonesia, it is below 5%

The two Asian giants, 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 is only around

30% in 2012 - although it is far higher in cities such

as Shanghai and Beijing and urban PC penetration is

projected to pass 60% by 2016 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 is estimated

by BMI at around 20% in 2012 Notebooks are

owned by an estimated 10% of the Vietnamese

population, which points to significant growth

potential for the local PC market

Lower price 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 fewyears and rising incomes and greater credit availability will continue to bring computers within the reach oflower-income demographics Even in more mature markets, there is room for development, however, withofficial 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, asubsidised household electronics products initiative aimed at rural residents has helped to boost PC sales inareas where penetration was low In Australia, national and state governments continue to roll out newinitiatives, with the Victoria government investing more than US$150mn in IT in schools

Narrowband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

In Indonesia, PC penetration of around 3% could double by 2016 if government initiatives are followedthrough The Indonesian government is also rolling out new e-learning initiatives, with a target of raisingthe current 1:3,200 ratio of PCs to students in public schools to 1:20 Meanwhile, the Vietnamese

government has launched a programme entitled 'One Teacher-One Computer', which offers discounts onPCs for teachers and students

A similarly broad range is found with respect to internet penetration The highest levels of internet

penetration are found in South Korea, Hong Kong, Singapore, and Australia, with estimated 2012

penetration rates of 76.9%, 74.0%, 73.3% and 71.0%, respectively Singapore has by far the highest rate ofbroadband penetration, which was estimated at 189.5% in 2012 Meanwhile, the Philippines has the lowestlevels of internet usage, with just 8.3% narrowband and 7.4% broadband penetration estimated in 2012

The fastest growth is expected in Indonesia, where

internet penetration is projected to leap from 45.4%

in 2012 to 68.9% in 2016, and the Philippines, where

penetration is forecast to reach 12.6% by 2016 India

is still at only 11.8% internet penetration despite an

improvement in fixed-line infrastructure, and

penetration is forecast to reach only 16.2% by 2016

Steady growth is also projected for Sri Lanka, where

penetration is projected to increase from 18.8% to

25.4% by 2016 Some 56.4% of Malaysians have

internet access in 2012

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 a growing number

of mobile broadband users, as 3G mobile services are expanded across the region In China, broadbandpenetration is on course to reach 20.9% by 2016 In India, penetration should increase more than double toreach 2.8% by 2016 from around 1.2% currently, although this remains below government targets SriLanka will also see continued solid growth in broadband penetration, which is projected to reach 21.7% by2016

Broadband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

Across the region, government programmes are an important driver of ICT penetration The Chinesegovernment has a five-year plan to make the internet available in every administrative village in central andeastern China and every township in the west In Australia, the government's commitment to develop theNational 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 HongKong, where the government has committed another HKD200mn to the deployment of a Wi-Fi networkcovering more than 200 public venues

IT Growth and Drivers

Across Asia in 2012, IT spending should benefit

from improved economic circumstances and tenders

previously deferred as a result of the economic

situation, although a forecast slowdown in China

could act as a drag on some markets Strong

fundamental demand drivers of IT spending meant

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 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 as well as growing demand from small andmedium-sized enterprises (SMEs)

Despite these drivers, BMI expects a moderation in Chinese consumer and business IT investment in 2012

owing to government economic cooling measures and uncertainty about the global economic situation.However, an expansion in consumer credit and a modernisation drive in sectors such as education,

healthcare and manufacturing will sustain market growth

The long-term IT market potential of another Asian giant, India, is plain: less than 3% of people in Indiaown a computer (about one-fifth of the level in China), meaning particular potential in the lower-end

2012 IT Market Sizes

US$mn, forecast

f = BMI forecast Source: BMI

product range Having postponed IT projects during the economic slowdown, many Indian private andpublic sector organisations are now investing again in upgrading their IT infrastructure

India's IT market appears to be positioned for strong

growth thanks to an improving economy and

consumer sentiment as well as 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

In Thailand, demand will be bolstered by market

expansion in the relatively underpenetrated rural

areas SIS estimates that market growth in upcountry

areas should be 30% in 2011, double that it has

forecast for the country as a whole A similar

situation pertains in India where in 2012 there are

expected to be strong growth opportunities in

smaller cities

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 computersale drivers over the forecast period include education, lower prices, IP telephony and cheaper processors aswell as notebook entertainment and wireless networking features Meanwhile, in Indonesia, the basicdemographics 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 makeuse of IT Compliance with government and international regulations will be a driver in financial,

manufacturing and other sectors

IT Market Sizes

As % Of National GDP

f = BMI forecast Source: BMI

In more developed markets, such as Hong Kong and

Singapore, robust retail sales the led way in 2011, as

evidenced by the strong advance sales of Apple's

iPad2 In 2012 vendors hope that the iPad 3 and

ultrabooks will provide new growth areas Economic

expansion and improving business conditions are

underpinning stronger business sector demand while

a strong property market and lower unemployment

have boosted confidence among consumers

However, a potential cooling of the Chinese

economy as a result of monetary tightening would

quickly spread to both markets

The largest IT market in the region is,

unsurprisingly, China, estimated at US$124.4bn in

2012, trailed distantly by Australia (US$22.0bn),

India (US$20.7bn) and South Korea (US$18.5bn)

Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.4%),followed by Hong Kong (2.1%) Thailand's IT market has been affected by a number of exogenous eventsincluding floods, which in late 2011 disrupted its production of hard disk drives, but in 2012 it looks to beback on track

The fastest growing IT markets over the forecast period looks set to be India and Indonesia with 2012-2016compound growth of 109% and 96% respectively, driven by increasing PC penetration Sri Lanka is third

with the IT market growing by an estimated 83% over BMI's five-year forecast period, while China's total

growth is estimated at a still healthy 55%, slower than Vietnam at 69%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 43-73% of total spending in allmarkets in 2012 However, spending on software and services will grow faster Notebook sales are growingmuch 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 InAustralia, upgrades are estimated to account for at least 80% of business purchases and over 50% in thecase of households Over 90% of Australian households now have a PC, but consumers have appeared

IT Markets Compound Growth

2012f-2016f (%)

f = BMI forecast Source: BMI