Vietnam information technology report q1 2015

SWOT Analysis - Continued■ Vietnam is a popular destination for software development and IT servicesoutsourcing, with particularly strong growth potential from Japanese enterprises thata

Q1 2015 www.businessmonitor.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q1 2015

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2014

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BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 13

Economic 14

Industry Forecast 16

Table: IT Industry - Historical Data & Forecasts (Vietnam 2011-2018) 16

Macroeconomic Forecasts 23

Expecting Sustained Growth Momentum In 2015 23

Table: Economic Activity (Vietnam 2009-2018) 27

Industry Risk Reward Ratings 28

Asia Pacific Risk/Reward Index 28

Table: Asia Pacific IT Risk/Reward Index - Q1 2015 31

Market Overview 32

Hardware 32

Software 39

Services 47

Industry Trends And Developments 54

Regulatory Development 60

Table: Government Authority 60

Regulatory News 63

Competitive Landscape 66

International Companies 66

Table: Samsung Electronics 66

Table: Intel 67

Table: LG Electronics 68

Table: Global CyberSoft 69

Local Companies 70

Table: Sara Vietnam 70

Company Profile 71

FPT Software 71

Table: FPT Group Financials By Segment (VNDbn) 75

Regional Overview 77

Demographic Forecast 81

Table: Population Headline Indicators (Vietnam 1990-2025) 82

Table: Key Population Ratios (Vietnam 1990-2025) 82

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 83

Table: Population By Age Group (Vietnam 1990-2025) 83

Table: Population By Age Group % (Vietnam 1990-2025) 84

Methodology 86

Industry Forecast Methodology 86

Sources 87

Risk/Reward Index Methodology 88

Table: It Risk/Reward Index Indicators 89

Table: Weighting Of Components 90

BMI Industry View

BMI View: We maintain a positive outlook for the Vietnamese IT market in the latest update, but we

highlight increased downside risk from a tightening of domestic credit conditions into 2015 as a result of a build up of bad debt Credit markets could cause short-term disruption but our forecast for robust medium- term growth in Vietnamese IT spending remains in place, with a forecast for a compound annual growth rate (CAGR) of 12.6% between 2014 and 2018 We expect growth will be driven by rising incomes,

enterprise modernisation and the policy environment put in place by the government We also highlight larger opportunities in the retail market where penetration of devices and services remains below the level

in neighbouring markets, which vendors will be able to tap as incomes rise Meanwhile, Vietnam's

development as an outsourcing destination is a significant medium-term factor, with the services segment expected to expand rapidly There is also increasing momentum towards Vietnam becoming a global centre for electronics production as wages rise in China and manufacturers look to protect margins by moving to Vietnam, where wages are as little as a third of those in China.

Headline Expenditure Projections

■ Computer Hardware Sales: VND38.9trn in 2014 and VND43.0trn in 2015, rising to VND58.3trn in

2018, CAGR of +11.3% in local currency terms Rising incomes and declining device prices, along with

PC subsidy schemes, will support demand growth across all three main device categories over themedium term

■ Software Sales: VND10.1trn in 2014 and VND11.7trn in 2015, rising to VND17.9trn in 2018, CAGR of

+16.1% in local currency terms There are considerable opportunities in business software and securitysolutions for vendors willing to accept narrow margins in a price-sensitive market

■ IT Services Sales: VND14.2trn in 2014 and VND16.4trn in 2015, rising to VND25.1trn in 2018, CAGR

of +15.1% in local currency terms Domestic demand for services remains weak, but we expect adoption

to increase markedly as awareness levels increase, particularly with regard cloud computing andoutsourcing services

Key Trends & Developments

BMI has repeatedly highlighted the drag on IT market development from Vietnam's exposure to cyber

security risks, including cyber crime and state-backed attacks We therefore welcomed the September 2014opening of the Department of Network Security in Hanoi, with the remit of securing Vietnam's internettraffic The key focus is on comprehensively improving the standards of network security officials andofficers However the government has also bundled its own domestic security goals in with the remit for the

violated content on web portals and social networks under orders from the government, as well the use ofinformation filtering mechanisms The department will also be able to identify Vietnamese users on socialnetworks by linking the electronic databases to its own database of citizen identification cards Socialnetworks and web portals in Vietnam must store at least two years of their information activities and thesame time span for the information of the users' accounts, log-ins, log-outs and IP addresses on socialnetworks We believe the bundling of functions could ultimately disrupt the agencies work on tacklingcyber crime, with the danger that political objectives could take precedence.

A more positive development related to the government came in July 2014 when the prime minister ofVietnam enabled state agencies to use outsourced IT providers for the first time It will enable IT firms to

provide software and technology systems as service packages, which BMI believes represents a significant

new area of growth for vendors There is considerable scope for growth in domestic outsourcing sales overthe medium term from the public and private sectors; however, confidence remains a major impediment toadoption Managers are unsure of the benefits of IT outsourcing, as well as having concerns about security

and a loss of control over key processes A report from Grant Thornton International stated that only 12% of enterprises in Vietnam are open to outsourcing BMI expects outsourcing adoption to accelerate once

awareness of the benefits is more widely spread, and vendors ease manager concerns

■ The domestic IT market is in a rapid growth phase, with trade liberalisation andgrowing affordability driving increased adoption among enterprises and consumers.

■ Expanding local hardware production industry with major international players such

as Samsung, Nokia, LG and Intel making large investments

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

lower GDP per capita

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

■ High level of software piracy, with a stall in the reduction 2011 to 2013

■ Cyber security measures by the government have been pushed through with statesecurity measures, with potential human rights implications

Opportunities ■ Decision in July 2014 to enable state agencies to use outsourced information

technology providers for the first time opens a new growth channel for vendors

■ Low PC penetration means there is scope for vendors to tap first-time buyer market

as well as the upgrade/replacement market Due to low penetration desktop andnotebook sales continue to increase despite competition from tablets

■ Low-cost tablets are proving popular with consumers, with significant medium-term

SWOT Analysis - Continued

■ Vietnam is a popular destination for software development and IT servicesoutsourcing, with particularly strong growth potential from Japanese enterprises thatare turning away from Chinese based providers

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

e-■ Small- and medium-sized enterprises have much potential to increase spending onbasic solutions, including customer relationship management and security

■ The government's drive to create an IT services industry over the next 1520 years through incentives to create IT clusters - is expected to be a significant factor shapingthe market

-■ Cloud computing awareness has risen fast and adoption is expected to acceleratethrough 2014 and 2015

Threats ■ A domestic credit tightening in H214 could result in a growth slowdown, with negative

implications for IT market growth

■ Low-cost tablets from own-brand Chinese vendors a particular threat to low- andmid-range notebook vendors Falling prices may further undermine margins andprofitability after steep discounting

■ Cyber security issues could undermine confidence in IT solutions and services, withbig data and cloud computing vulnerable

■ Yen depreciation has hit the software outsourcing market by making exports lesscompetitive and eroding Vietnam's cost advantages

SWOT

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

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

■ Competition exists in fixed-line and internet access markets; VNPT faces competitionfrom several other state-owned companies and privately owned operators

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

Weaknesses ■ Vietnam's fixed-line and internet access markets are dominated by state-controlled

Opportunities ■ The privatisation of VNPT could help to bring about increased investment revenue

and the arrival of new skills

■ On a national level, broadband penetration rates remain low - this means that thesector has considerable growth potential

■ Significant opportunities exist to develop alternative broadband technologies,including WiMAX, LTE and fibre; WiMAX and LTE internet services have the potential

to raise the level of internet user penetration in rural parts of Vietnam

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

consequences for DSL growth

■ As the market for mobile data services grows, this could have potentially negativeconsequences for the growth of fixed broadband services

■ VTV's dominance in the pay-TV sector is holding back market development

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 ■ 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 6.6% annually between 2000 and 2013

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 17.2% in 2012

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

■ 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 and the upcoming ASEAN economic integration in 2015 should

give Vietnam greater access to both foreign markets and capital, while makingVietnamese enterprises stronger through increased foreign competition

■ The government has continued to move forward with market reforms, includingprivatisation of state-owned enterprises, addressing the high level of bad loans in thebanking sector as well as liberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 32% of the population in 2013 to more than 50% by theearly 2040s

Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam

on this front could result in a decline in investment

■ The potential for an escalation of political tensions with China over sovereign claims

to parts of the South China Sea could have a negative impact on the economy

SWOT Analysis - Continued

■ Market reforms could progress at a much slower pace as the government remainscautious about ceding ownership to foreign investors

f = BMI forecast Source: National sources, BMI

BMI believes the Vietnamese IT market will be one of the outperforming IT markets in APAC over the

medium-term as a result of a range of factors including supportive government policy, rising incomes,declining device prices, enterprise modernisation and investments in telecoms infrastructure However,demand in 2014 is expected to be dampened by the tighter domestic credit environment, and this alsopresents downside risk into 2015, with reports that enterprises in several sectors were unable to obtain credit

as banks reassess in light of the high levels of bad debt in Vietnam

Despite short-term downside, we highlight the strong medium-term growth potential The IT market inVietnam is relatively undeveloped but the IT sector will account for a growing share of GDP over theduration of our five-year forecast to 2018 We also highlight the development of Vietnam's local IT

industry, with software development and outsourcing services firms developing rapidly and positioned tobenefit from large foreign enterprises seeking lower cost locations over the medium-

term BMI forecasts the IT market in Vietnam will expand to a total of VND71.1trn in 2015, up from

VND63.2trn in 2014 We expect strong growth to continue over the medium-term, with a compound annual

growth rate (CAGR) of 12.6% forecast for 2014-2018 and the market expected to reach a value of

VND101.3trn in 2018

2015 Outlook

Although BMI highlights the downside from tightening credit conditions in Vietnam in H214, with

government attempts to resolve the bad debts held by local banks so far not proving effective, and the issuecould drag over into 2015 This could reassert a traditional area of weakness in Vietnam, which had become

a less significant factor as a result of partnerships between banks and retailers formed in 2013 However,with the wider Vietnamese economy still on track to record strong growth we expect the credit tightening isonly expected to cause short-term disruption We forecast real GDP growth of 5.7% in 2014 and real growth

of private final consumption of 6.5%, growth rates that will support a buoyant retail hardware market

We expect growth in desktop, notebook and tablet shipments as rising incomes and declining device pricespromote first-time buyer and upgrade sales The influx of low-priced Chinese own-brand tablets since 2012has deepened the market and vendors in the notebook category have been lowering prices to compete withthis influx, which has helped make devices more affordable and boosted sales There is evidence in H114that hybrid notebooks have carved out a significant niche and are beginning to challenge tablets by offeringmulti-use cases, a more important development in emerging markets where consumers are focused on valuefor money more than the fashion cache of tablets

Private demand could be negatively impacted by credit conditions, and under this scenario governmentdemand will become a more important source of sales The Ministry of Information and Communication'sreleased a proposal in August 2013 to allocate at least 2% of the state budget to boosting the IT sector eachyear The government is actively promoting IT market development in several areas including PC subsidyprogrammes, licensing software used by government agencies and enabling state agencies to use outsourcedinformation technology providers for the first time in 2014

In terms of the enterprise sector in Vietnam, the outsourcing market continues to develop rapidly, althoughthe outlook for 2014 and 2015 is weaker than previous years Vietnam has become the first choice forJapanese enterprises looking to outsource functions in recent years, primarily based on the cost advantagesoffered However, the depreciation of the yen against the US dollar has hit the competitiveness of

Vietnamese providers, and will be a drag on expansion This weakens the outlook, but with a well

developed outsourcing industry in Vietnam and several clusters, and underlying cost advantages, BMI

Industry Trends - IT Market

2011-2018

e/f = BMI estimate/forecast Source: BMI

Positive economic fundamentals over the medium-term and declining device prices will drive retail

hardware market growth Another supporting development is the investment taking place in the expansion

of both wireline and wireless broadband network infrastructure to rural areas, as well as upgrading capacity

of urban infrastructure and improving backbone networks Additionally, telecoms operators such as Viettel

are emerging as significant distribution channels for notebooks as vendors seek tie-ups In a country where

PC penetration remains low, particularly in rural areas, government digital divide programmes to boostinternet and digital utility in rural areas underpin addressable market growth and open PC ownership to agrowing number of rural inhabitants

Another area of the IT market that will benefit from investment in networking infrastructure is the cloud

computing market In June 2014 VMWare reported the results of its cloud adoption survey in Vietnam It

found that 80% of polled businesses considered cloud computing the number one priority for IT

applications; while 67% were confident cloud computing would have a major effect on business

activities VMWare estimates that cloud adoption is growing faster in Vietnam than the wider region as aresult of an absence of legacy on-premises systems due to Vietnam's late-developer status The existing drag

on the market, that is concerns about information security, should lessen as cloud education levels increase,and drive growth higher

The government is a major supporter of the development of the IT market in Vietnam through policyinitiatives and financing Policies include promoting the use of IT by government agencies, citizens andenterprises - as well as promoting the development of local industry, particularly in software and

outsourcing services

For instance, in November 2014 the government announced it would spend USD400,000 on building itsown version of California's Silicon Valley for start-ups, with two accelerators set up in Hanoi and Ho ChiMinh city The government hopes the development will help mature emerging technology companies in thecountry and link them with suitable venture capital A number of government ministries and organisations,including the Ministry of Education and Training, have also started to promote the roll-out of cloud

services The government has also promoted the IT industry through policy and incentives to grow hi-techparks, both for the construction of IT hardware, but increasingly software and IT services

A specific IT development initiative is the government's drive to grow the IT services industry over the next15-20 years The cost of outsourcing in Vietnam was estimated in 2013 research to be as much as 30%lower than in China, a fact which Japanese firms were especially aware of The momentum that could begarnered from Japanese enterprises shifting business process and software development outsourcing toVietnam could see medium-term increases from European and North American demand Meanwhile, with areport from Grant Thornton International stating that only 12% of enterprises in Vietnam are open tooutsourcing, there is also huge growth potential domestically - particularly after the Prime Minister ofVietnam enabled state agencies to use outsourced information technology providers for the first time in July2014

However, growth will depend on government progress on various business environment issues, includingcopyright protection and combating cyber security threats Further progress in combating software piracy,which is still reported to be at higher levels than in China, India and Thailand in 2013, and progress seems

to have stalled since 2011 It is also taking steps to increase the penetration of information security

certification by distributing funds to enterprises and in September 2014 the Department of Network Security

comprehensively improving the standards of network security officials and officers However there are

elements of the remit that have concerned political risk analysts (see Regulatory Developments section).

2012 2013 2014f 2015f 2016f 2017f 2018f 2019f -25,000,000

0 25,000,000 50,000,000 75,000,000 100,000,000

f = BMI forecast Source: National sources, BMI

As a developing market with a large agricultural sector BMI believes there to be considerable scope for

vendors to market productivity enhancing products and solutions The agricultural sector accounted for an

estimated 19.5% share of GVA in 2013 - a figure BMI expects to only decrease marginally to 19.3% in

2018 - and its share of labour is considerably higher Mobile operator Viettel is a world leader in pioneering

smart agricultural products, including IT services such as information packages about produce prices,disease warning, weather reports and analysis of coffee and cashew nut markets These products generatedVND7bn a month in revenue - a far higher figure than that generated from the much hyped game

application development market The success of Viettel's model has attracted interest from IT services

providers, for instance Hanel has stated its intention to develop smart agriculture products BMI expects the

agriculture vertical in Vietnam has medium-term growth potential as vendors innovate real-time updates forproducers.

Large Vietnamese companies are the most likely to buy packaged software from multinationals, which haveonly around 25% of the local software market In the large corporate sector, growing demand for digitalinfrastructure 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 the market

Large state enterprises are also increasing spending on IT products and solutions, a trend that shouldcontinue over the medium-term For instance, in August 2014 FPT won a major IT services contract for the

development of a new ticket distribution system for the Vietnam Railway Corporation FPT will build a

modern e-ticket distribution system, enabling customers to purchase tickets either online, via email orthrough sale agents The project is expected to take place over seven years, with three development stages,and a total cost of around VND200bn

Meanwhile, smaller enterprises have a lower penetration of enterprise software, including ERP and securitysoftware, but due to price sensitivity favour local solutions The small- and medium-sized enterprise (SME)market is an area of the market in which vendors can achieve growth as SME awareness of the benefits of

IT utilisation increase, encouraged by government initiatives to modernise firms and improve internationalcompetitiveness However, vendors will have to face the challenge of enterprises that are constrained bylow budgets and lack of access to credit Promising SME verticals include discrete manufacturing andconsumer packaged goods, as well as hotels and property management The solution areas with mostdemand currently include security software and key applications such as customer relationship

management, enterprise resource planning and human resources management

Finally, the government is a major source of demand for IT vendors, across the hardware, software andservices segments In April 2013 the Ho-Chi Minh City authority announced plans to spend VND300bn(USD14.3mn) on developing e-government capacity It will also focus on replacing out of date hardwareand improving network security in 2013 An additional feature is the authority's intention to work with localsmall and medium IT enterprises where possible, rather than immediately turning to large IT vendors.Spending in 2013 was a marked increase over the 2005-2012 period when the city authority carried out

Vietnam GVA By Vertical (%)

Macroeconomic Forecasts

Expecting Sustained Growth Momentum In 2015

BMI View: We expect solid growth momentum in the Vietnamese economy to be carried over to 2015, on

the back of continued foreign direct investment (FDI) inflows, strong performance in the manufacturing and export sectors, and ongoing efforts by the government to address the high level of bad debts in the banking sector We maintain our forecast for real GDP to grow at 5.7% in 2014, ahead of an acceleration to 6.4%

in 2015.

In line with our positive outlook for the Vietnamese economy, Vietnam's real GDP growth accelerated to6.2% year-on-year (y-o-y) in Q314 from the revised 5.4% print in the previous quarter Notably, thismarked the fastest pace of expansion since Q411, bringing real GDP growth to 5.6% y-o-y in the first ninemonths of 2014, exceeding the Bloomberg consensus estimate of 5.4% for the same period

Fastest Economic Expansion Since Q411

Vietnam - Real GDP, % chg y-o-y

Source: BMI, GSO

The strong headline figure largely owes to a robust performance in the manufacturing and export sectors.Indeed, the manufacturing sector grew by 8.6% y-o-y in September, the fastest pace since February, whileexports rose by 14.1% y-o-y for the first nine months of 2014 versus the same period in 2013 Stronggrowth in these sectors has more than offset sluggish domestic demand in the country, owing to slowerlending by banks The slowdown in credit growth has largely been the result of the high level of bad debts

in Vietnam's banking sector, which has reduced the willingness of banks to lend

Picking Up Speed

Vietnam - Industrial Production, % chg y-o-y

Source: Bloomberg, BMI

While the large amount of non-performing loans continues to pose a risk to the Vietnamese economy, wenevertheless maintain a constructive growth outlook for the country, and are forecasting real GDP growth of5.7% in 2014, followed by a stronger expansion to 6.4% in 2015 Efforts by the government to tacklestructural issues in the banking sector, strong foreign direct investment (FDI) inflows to the country, and acontinued expansion in the manufacturing and export sectors should sustain solid growth momentum goinginto 2015

Taking Positive Steps To Reduce Banks' Non-Performing Loans

The Vietnamese government has already taken steps to address the high level of sour loans in the bankingsector, which constituted 4.2% of total loans as of end-June according to the State Bank of Vietnam While

we expect progress on this front to be gradual, strengthening of the banking sector is a step in the rightdirection by the government to secure the country's long-term growth prospects In July 2013, the

government established the Vietnam Asset Management Company (VAMC) to take bad debts off banks'books, allowing time for banks to undergo restructuring and strengthening of their credit assessmentmechanisms Meanwhile, the government has continued to reform its state-owned enterprises (SOEs),which accounted for more than half of the bad debts in the banking sector While SOE reform has

progressed at a very slow pace over recent years, it should gain some momentum over the coming quarters,

as the government plans to privatise 432 state companies by end-2015

Manufacturing Sector To Sustain Strong Growth

The Vietnamese economy will also ride on a stronger manufacturing performance over the coming quarters.The Purchasing Managers' Index (PMI), a leading health indicator of the manufacturing sector, points tohigher production activity The index came in at 50.3 in August, marking the 12th straight month of

expansion in the manufacturing sector Additionally, given that Vietnam remains a low-cost manufacturingbase for foreign firms, the country has continued to attract fervent foreign investment interest The

manufacturing sector received 68.4% of total registered capital, amounting to USD7.0bn in the first eightmonths of 2014

Exports To Ride On A Recovering US Economy

Continued strong export growth will also be another driver of strong economic growth Given the country'sexport orientation to the US, which received 17.3% of total Vietnamese outbound shipments in 2013, arecovering US economy will lend strength to Vietnam's exports

Robust Export Performance

Vietnam - Exports, % chg y-o-y (3mma)

Source: BMI, GSO

Risk To Outlook

The largest risk to our constructive outlook for the Vietnamese economy comes from the potential for anescalation of the country's ongoing maritime dispute with China in the South China Sea, which wouldfurther strain political relations between both countries This could spur an economic backlash by China,posing significant downside risks to our real GDP growth forecast Indeed, China contributed a significant21.3% of foreign investment to Vietnam in 2013, while accounting for 11.6% of Vietnamese exports

Table: Economic Activity (Vietnam 2009-2018)

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 101.6 112.9 134.6 155.5 170.4 185.5 210.2 240.6 275.9 311.0 Real GDP growth, % y-o-y 5.4 6.4 6.2 5.2 5.4 5.7 6.4 6.6 6.4 6.4 GDP per capita, USD 1,152 1,267 1,496 1,712 1,859 2,004 2,251 2,554 2,905 3,250 Population, mn 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 Industrial production, % y-o-y, ave 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemployment, % of labour force, eop 4.6 4.3 3.6 3.2 3.6 3.5 3.4 3.5 3.5 3.5

f = BMI forecast Source: National Sources/BMI

Industry Risk Reward Ratings

Asia Pacific Risk/Reward Index

BMI View: BMI's Asia Pacific IT Risk/Reward Index (RRI) compares the potential of a selection of the

region's markets over our medium-term forecast period to 2018 The Q115 index reflects our analysis of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of government initiatives to develop IT markets and local industry.

There are several changes in the position of markets in our Q115 index, and a net improvement in theregional average score This was driven by stronger sales of PCs (including desktops, notebooks and tablets)

in several key markets, as well as large scale investments by international IT enterprise vendors looking totap into the region's growth story The average regional IT score increased 0.7 percentage points

(pps) quarter-on-quarter (q-o-q) to 56.3 out of 100, slightly behind the European average of 57.0, but withgreater upside potential as the region continues to develop

There was a change at the top of the table, as South Korea reclaimed top spot from Singapore South Korea

moved up with a 1.2pps q-o-q improvement in its overall score, as BMI's in-house Country Risk team

upgraded the country rewards score, reflecting the medium-term growth prospects for the economy as awhole South Korea continues to score highly in the industry rewards category, second only to China, with ascore of 70 out of 100, supported by high per capita spending and high penetration not only of desktops andnotebooks but also of tablets and increasingly hybrid notebooks There is scope for an uptick in enterprise

IT spending in the medium term as vendors focus on cloud computing and IT services opportunities.Adoption levels among South Korean firms remain low considering the country's advanced economy status,but we expect this to change as competition in a range of sectors in the wider region intensifies, drivinginvestments in cost saving products and solutions

Singapore dropped to second position in the rankings in Q115, although there was no change to its score of72.8 out of 100 Singapore has always scored highly in our index, as one of only two countries with themaximum score of 100 in the country rewards category However, it scores slightly below average in theindustry rewards categories due to the relatively small size of its population, and therefore its IT market.This is offset by Singapore's position as a regional hub for cloud computing services and data centres, which

is continuing to attract major inward investment by global and regional vendors

Hong Kong is in third position in the index, closing the gap with Singapore as a result of a 1.7pps

improvement in the industry rewards category BMI upgraded the outlook for medium-term IT spending

growth, a key input in the industry rewards category Like Singapore, Hong Kong receives the maximumscore of 100 in the country rewards category As an economically developed city-state, Hong Kong offersmany advantages to firms, and is a a regional financial services and cloud computing hub However, there isdownside risk to Hong Kong's continued status as an affluent regional city-state, with financial servicesvolumes under threat from the rapid rise of Shanghai, as well as political risks, as shown by protests inH214, that create some uncertainty regarding Hong Kong's future political development.

Australia's score is unchanged, and it remains in fourth place, 12.8pps clear of Malaysia in fifth The maindifferentiator is the high incomes enjoyed by Australians compared to emerging markets in Asia Pacific.This supports a lucrative retail hardware market with very high per capita spending The developed

economy ensures strong demand for enterprise solutions, while high labour costs make it a fertile market for

the development of a new generation of labour saving technologies such as IBM's Watson-as-a-Service,

which has already been trialled by local financial institutions Investments in supporting infrastructure,particularly the National Broadband Network (NBN), present medium-term upside potential

Malaysia has moved up one place to fifth, overtaking China, as the former's score increased by 0.8pps whilethe latter's fell by 0.7pps However, the drawback of Malaysia's far smaller market is only partly offset byhigher incomes and development levels There is a difference of just 0.2pps in the two countries'

overall scores, and in future quarters we expect China to move back up the table However, Malaysia alsohas strong growth prospects as incomes rise and as a result of a supportive government policy environment

For instance, MSC Malaysia has made cloud computing development a strategic priority and is working to

develop a national cloud computing platform State governments are also exploring cloud computing, whichshould fuel growth in on-premises deployment of enterprise solutions

China has dropped one place, but continues to be the market with the strongest medium-term potential,owing to its huge population and relatively advanced IT market in the context of income levels We have abroadly positive outlook, with the latest round of economic reforms, scheduled for implementation by 2020,considered to be a positive for IT market development Strengthening institutions and reform of the one-child policy are all expected to boost growth and increase private sector confidence in the IT market.Support for the service sector and modernisation of state-owned enterprises, including finance, telecoms,healthcare, education and professional services (eg call centres) will provide new avenues for revenuegrowth

Indonesia's IT score increased faster than any other market in the region q-o-q in Q115, as it overtook India

reflect the boom in consumer and enterprise spending on IT products and solutions in recent years BMI has

a bullish outlook for IT sector development over the medium term as a result of the strong growth story,enterprise modernisation initiatives and the large-scale investment by global and regional vendors toestablish and expand their presence in the country Indonesia will become an increasingly important engine

of the world's largest IT services players, such as Wipro, Tata Consultancy and

Infosys However, ineffectual governance and weak institutions obstruct faster development, and we do not

see a short-term improvement despite the new government's reform-focused rhetoric That said, shouldPrime Minister Narendra Modi's government succeed in generating economic reform and improvingstandards of governance, India could move to a higher growth trajectory

The Philippines' IT score improved by 0.7pps after we upgraded its spending growth outlook due to thecontinuation of large-scale investments in the business process outsourcing (BPO) industry We expect this

to generate demand for IT products and solutions, particularly as outsourcing firms move up the value chaintowards services such as software development

Thailand and Vietnam are in 10th and 11th place, respectively, with unchanged scores However, the twomarkets have significantly different risk profiles, with Thailand's outlook weighted to the downside due tothe political crisis and the military's increasingly aggressive stance towards IT and telecoms services.Vietnam has considerable upside potential as it emerges as a hub for regional manufacturing, a trend thatcould accelerate with the development of the ASEAN Economic Community The first major investment

was announced in 2006 by chip manufacturer Intel, but other investments have followed from Samsung Electronics, which expects to produce as much of 40% of its global smartphones and tablets in Vietnam by

2015, as well as Nokia and LG The growth of manufacturing will have an impact on employment and

wages, and will provide an incentive for students to pursue ICT-related skills development

Sri Lanka remains at the bottom of the table, but its score has improved by 0.7pps as IT spending growth

momentum continues to gather This is reflected in recent product launches For instance, SAP announced the launch of its cloud portfolio in Sri Lanka in April 2014, following the launch of Amazon Web Services,

the leading global cloud hosting provider, in December 2013 A continuation of this trend could see SriLanka's score improve That said, the country scores poorly in all categories of the index, with incomes andinstitutions only just recovering from a lengthy civil conflict However, there are bright spots as confidencereturns and local and international firms invest.

Table: Asia Pacific IT Risk/Reward Index - Q1 2015

Country Industry rewards Country rewards Industry risks Country risks IT score Rank Previous rank

South Korea 70.0 85.0 75.0 65.4 73.4 1 2 Singapore 58.3 100.0 70.0 74.4 72.8 2 1 Hong Kong 60.0 100.0 45.0 77.7 71.2 3 3 Australia 61.7 95.0 57.5 66.9 70.3 4 4 Malaysia 60.0 55.0 37.5 67.7 57.5 5 6 China 73.3 35.0 45.0 55.1 57.3 6 5 Indonesia 65.0 35.0 42.5 51.4 52.5 7 8 India 66.7 15.0 45.0 50.9 48.6 8 7 Philippines 55.0 30.0 42.5 50.9 46.6 9 9 Thailand 53.3 20.0 35.0 62.9 44.7 10 10 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 48.3 15.0 37.5 50.9 39.3 12 12

Average 60.4 50.0 47.3 60.6 56.3 -

-Scores out of 100, with 100 the best -Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks' at 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

Market Overview

Hardware

The hardware market in Vietnam is forecast to stay on a strong growth trajectory over the medium term asrising incomes, declining device prices, enterprise modernisation and ongoing investments to upgradetelecoms networks However there is downside risk to our outlook for hardware spending growth in 2014 -and into 2015 - based on tightening domestic credit conditions in Vietnam as a result of a build up of baddebt over recent years This has the potential to dampen demand for PCs, which are big-ticket items for themajority of Vietnamese consumers

BMI forecasts growth of 11.3% to VND38.9trn in 2014 as demand is boosted by Microsoft's withdrawal of

official support for the XP operating system in April 2014, which is expected to trigger a cycle of upgrades

by enterprises and public offices Meanwhile, Microsoft's decision to slash operating system licensing fees

on low-cost notebooks (sub-USD250) will make notebooks more cost competitive versus Android tablets,

which is expected to translate into volume growth In 2015, BMI forecasts 10.7% growth in this segment, to VND43trn Over the remainder of our five year forecast period, BMI forecasts Vietnam's computer

hardware market value will increase at a compound annual growth rate of 10.8% in local currency terms2014-2018, with the market expected to reach a value of VND58.3trn in 2018

In 2013 the market grew rapidly in terms of both volumes and units Local retail chain Vien Thong A stated

that demand strengthened from in mid-2013, with back to school purchases booming as purchasing power

rises in Vietnam Other retailers such as Dienmay.com, Phong Vu, Hoan Long and Nguyen Kim also

reported positive growth in PC sales The segment has also been boosted by retailers partnering with

HSBC, VietinBank, ANZ and Sacombank to launch interest-free payment plans However, demand in

2014 and 2015 is expected to be dampened somewhat by the tighter domestic credit environment

A longer-term trend supportive of IT hardware market expansion is the spread of network infrastructure,including fixed and wireless broadband, which is boosting demand for devices for both productivity and

content consumption Telecoms operators such as Viettel are also emerging as significant distribution

channels for notebooks as vendors seek tie-ups

Government spending has remained supportive of the IT hardware market through initiatives in sectors such

as education and healthcare It is also providing credit programmes to raise household PC penetration inrural areas, which is estimated to still be below 10%, compared with 50% in higher income urban areas Themost potential being in rural areas where penetration is lower, however for the time-being Hanoi and HoChi Minh City are thought to account for around 85% of notebook sales

20,000,000 40,000,000 60,000,000

f = BMI forecast Source: BMI

BMI estimates total PC (desktop, notebook and tablet) unit sales increased 25.5% to 3.37mn in 2014, as on

the one hand sales are boosted by XP support withdrawal, but on the other curtailed by tighter creditconditions We forecast unit growth in all device categories, but it is tablets that are forecast to outperformwith 54.9% growth to 988,000 units One emerging opportunity is hybrid notebooks which are forecast togrow strongly in 2014 as prices decline, which will challenge traditional tablet vendors We expect thesemarket dynamics to continue into 2015, and this has informed our forecast for 18.4% growth in PC sales, to3.99mn units

The reason for the positive outlook in Vietnam, which is in stark contrast to developed markets, is the

combination of rising incomes and low device penetration rates BMI believes there is considerable

potential for vendors to tap into the first-time buyer market in Vietnam as PC ownership is still relativelylimited Data from the regulator, the Ministry of Information and Communications (MIC) show a base of

penetration data also reflects the low level of PC ownership in Vietnam, at 16% in 2011, and was estimated

to be around 20% for the country as a whole by the end of 2013 This is considerably lower than otheremerging markets in Southeast Asia, reflecting the medium term opportunity for vendors

Given these low penetration rates there is a sizeable opportunity for vendors in terms of the first-time buyermarket However, with GDP per capita estimated at USD1,860 in 2013 and forecast to reach

USD3,304 in 2018, the mass market is geared towards the value end of the spectrum and will remain soover the medium term

With a large number of first-time buyers, consumer choice in terms of form factors is uncertain Whileproductivity devices such as desktops and notebooks will remain popular for education and enterprisepurchasers, the availability of cheap tablets from China could see large numbers of consumers move straight

to tablets, and have little or no experience with more traditional form factors

There is however an opportunity for hybrid notebook devices to capture share by offering the mobilityadvantages of tablets while also meeting the broader functionality required for a sole household device.Press reports from Vietnam in 2014 indicate there was a surge in demand for lower-priced hybrid

notebooks, as price sensitive consumers are aware of the productivity trade-off from owning tablets as asole device The notebook segment received an additional boost in H114 when Microsoft announced it wasslashing OS licensing costs on sub-USD250 devices, enabling partner vendors to compete more equallywith Android tablet vendors

In 2013 sales in the retail market continued to increase in the desktop, notebook and tablet segments Tabletgrowth is to be expected, coming from a low base and considering the increased availability of low costdevices from OEMs However the desktop and notebook market is also faring well, with IDC data for

2013 showing 20% year-on-year (y-o-y) unit growth in desktop shipments

There could be a boost to the desktop market from Windows upgrades in 2014 and 2015 as Microsoftsupport for Windows XP is withdrawn from 2014, however the extent to which consumers replace desktopsrather than shifting to notebooks and tablets is uncertain Windows XP still accounted for 31.7% of

Vietnamese PC browsing traffic in August 2014 according to data from Statcounter, illustrating the size ofthe potential upgrade market There appears to be some upgrade momentum, with the share of Vietnamesebrowsing traffic attributable to XP down 12.6pps y-o-y, however many smaller Vietnamese enterprises areconstrained by cash and access to credit, meaning the boost from upgrades is likely to be limited relative todeveloped markets

Looking ahead over the medium term, two factors limit the potential boost to desktop sales First is thecompetition from mobile computing, as consumers and enterprises will likely shift towards greater usage ofnotebooks and tablets when upgrading A second factor is the prevalence of pirated software in Vietnam,meaning the loss of Microsoft support for XP is less of a push factor to upgrade than in most other APACmarkets.

Meanwhile, the data from retailers indicates demand for notebooks remains strong, with consumers optingfor notebooks in the VND8-10mn range, particularly university students requiring more advanced

functionality However they also reported that demand for low cost VND3-5mn tablets was strong

Vietnam PC Installed Base

2008-2011

Source: MIC

Despite being a global leader in the tablet market, Apple - unsurprisingly given its premium price

orientation - has had limited success in Vietnam where its devices are not affordable for the vast majority ofthe population That said, it has still been able to concentrate on a large number of high-income consumersgiven Vietnam's large population, meaning it has become an important market However the proliferation of

already seeing tablet sales increase rapidly In early 2013, reports of an influx of own-brand Chinese madetablets indicate growth at the low value end, but we also expect price competition between internationalvendors to boost sales of mid-range tablets in Vietnam.

A victim of the surge in tablet sales will be the notebook market - especially netbooks Netbooks saw asteep decline in popularity in 2011, with a number of leading vendors, such as former netbook segment

leader Sony, withdrawing models from the market Netbooks initially suffered under competition from

lower priced notebooks, however tablets are now squeezing them further

With tablets making gains at the low end of the market the notebook category is becoming a primarily range device category in Vietnam as vendors are unable to compete against own brand Chinese tablets onprice Although notebook sales are being cannibalised by tablets, with PC penetration low in Vietnam, alarge number of first time buyers are still opting for the functionality of notebooks This has helped sustainunit growth, in contrast to developed markets where consumers are more likely to opt of tablets as

mid-supplementary devices to their existing desktops and notebooks

The release of Windows 8/8.1 has also spurred the creation of hybrid devices, which had little impact in

2013 in Vietnam as early examples are priced as premium products However price competition will reducethe cost to consumers and hybrids have emerged as a growth area in 2014, and we expect this to continueinto 2015 Windows has a traditional strength in productivity use cases and software, with the OS beingcentral to the enterprise market and Microsoft's Office Suite ubiquitous

There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices

by designing tablets with strong productivity functionality alongside the passive media consumption

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Packard's Envy, Lenovo Miix 2 (8 inch), Lenovo IdeaPad Yoga 2 Pro, Lenovo ThinkPad Yoga and Dell

PC Forecast By Device ('000)

2011-2018

e/f = BMI estimate/forecast Source: BMI

Vendor Developments

The Vietnamese PC market is surprisingly competitive, with most of the major laptop vendor players

having below a 10% local market share Other multinational vendors, including Dell, Toshiba and

Samsung, have enjoyed strong growth in the market Samsung is considered a threat as it aims to leverage

its distribution network and strong brand recognition from the smartphone and TV market into a 10% share

of the Vietnamese notebook PC market

Volumes have benefited from retailers cutting prices and cooperating with banks to offer credit to boost

sales in mid-2013 For instance Dienmay.com cut prices for notebooks from Dell, Sony and HP, as well as

enabling consumers to test and return or exchange products within 10 days Meanwhile Nguyen Kim cutprices on HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free accessories worth up toVND2mn The most important strategy for boosting sales of products from international vendors has been

available However, demand in 2014 is expected to be dampened by the tighter domestic credit environment

as banks reassess in light of the high levels of bad debt in Vietnam

As already noted, Asus has benefited from efforts to strengthen its distribution channel In 2011 Asus

launched a new partnership with local company FPT Distribution, a member of FPT Trading

Group, which has a nationwide network of 400 dealers FTP also distributes a portfolio of other leading PC brands, including Dell, Lenovo and Acer Asus, which first entered the Vietnamese market only three years

ago, is also focusing on service as a competitive differentiator

In July 2014 FPT was forced to refute rumours it was subject of an acquisition attempt by Apple It was

reported that Apple was considering acquisition to expand its local presence and gain a stronger foothold in

a fast growing market FPT is already a premium reseller for Apple in Vietnam, and in 2012 FPT builtF.Studio stores modelled on Apple reseller designs in developed markets

While foreign vendors dominate sales of notebook, local manufacturers have a strong position in the, albeitdeclining, desktop market Vietnam's top five computer companies, as selected by the Ho Chi Minh City

Computer Association in 2011, were FTP, CMS, Robo, Viettronics Tan Binh and the Khai Tri

Technology Trading Co The total turnover of these top five companies was around VND1tn in 2011

(USD48.1mn), down 25% from the previous year

In November 2012 local press reported dealers were pushing cheap tablets from China as a result of themargins they could generate on the devices It has been reported that wholesale dealers are able to sell thetablets for double the market price in China in Vietnam Examples include the Hipad Mid A13 and OndanV971, as well as other own-brand Chinese manufacturers such as Teclast and Ampe - as well as counterfeits

of foreign products

As in many other markets, telecoms carriers have also emerged as a significant channel option for PCvendors Dell has launched a partnership with Viettel, which will distribute Dell PCs Viettel has a

substantial presence in rural areas, which have big PC market growth potential, as PC penetration is

currently low Dell has also partnered with local retail leader The Gioi Di Dong to sell both online and

through the company's 40 retail outlets

Meanwhile, in July 2014 leading global chipset vendor Intel announced the launch of its first central

processing unit (CPU) manufactured at its factory at the Saigon Hi-tech Park The CPU is from the fourth'Haswell' generation of CPUs By the end of 2014 Intel stated it expects 80% of its CPU for desktops

globally will be produced in Vietnam Intel has been producing notebook and mobile chipsets in Vietnamsince 2010, and in 2013 the company contributed around USD2bn to Vietnam's export turnover.

Vietnam PC Browsing Traffic By OS (%) And Y-o-Y Change

August 2014

Source: Statcounter

Software

BMI expects growth of software sales will outperform the hardware market, and be the outperforming

market segment in 2014 and 2015 as OS upgrade momentum boosts overall spending after the withdrawal

of Microsoft support for the XP operating system in April 2014 Even over the medium term growth willonly narrowly underperform the services segment

We forecast software sales in Vietnam will increase 19.1% to VND10.1trn in 2014 despite the tightening ofdomestic credit conditions in H214 We forecast growth of 15.3% in software sales in 2015, to VND11.7trn.Moreover, we expect strong growth will be maintained over the medium term with compound annualgrowth rate (CAGR) of 16.1% 2014-2018, with total software spending expected to reach VND17.9trn in

The Vietnamese software market is cost-sensitive, with around 75% of the market served by lower-costlocal software vendors, as well as there being a high level of pirated software Local software dominates themarket for government and small- and medium-sized enterprise (SME) segments However, larger

Vietnamese companies are more likely to buy higher-priced software from multinationals, which havearound 25% of the market Vietnamese customers are demanding a higher level of support for softwarecompared with a few years previously

Banking and finance, oil and gas, aviation and telecoms are forecast to be some of the biggest spending

software segments over BMI's five-year forecast period and are among the best opportunities for foreign

vendors These segments offer the most potential for customised solutions, as well as off-the-shelf packagedsoftware Banks are looking to take their services to the next level in response to the demands of a rapidlygrowing economy and are investing in more advanced and flexible platforms for core banking processes

The government is a significant software-purchasing segment in Vietnam and accounts for about 30% oftotal IT spending The 7,000 government agencies offer considerable opportunities at national provincialand municipal levels A particular area of opportunity is tax agencies of all administrative tiers as

governments look to increase the efficiency of tax collection The Vietnamese government's drive toimplement e-government will be another driver in this segment

Business Software

In 2012 and the first half of 2013 vendors reported continued robust sales of enterprise resource planning(ERP) solutions, despite the uncertain economic situation There is still a lot of potential for Vietnameseenterprises to increase spending on basic solutions, including customer relationship management (CRM)and security However, demand in 2014 and 2015 is expected to be dampened somewhat by the tighterdomestic credit environment, with reports in September 2014 that enterprises in several sectors were unable

to obtain credit as banks reassess in light of the high levels of bad debt in Vietnam

A number of Vietnamese companies embarked on large-scale ERP implementations as part of their

long-term growth strategy In August 2012, Hoang Anh Gia Lai Group (HAGL) launched a VND100bn ERP

system as it sought to unify corporate governance The solution was adopted for the company's four

business sectors of minerals, energy, forestry and real estate, with over 400 staff members HAGL said it

would also consider applying the ERP solution at 20 affiliates Imexpharm Pharmaceuticals Co spent

USD41mn in August 2012 in installing an ERP system at its headquarters in Dong Thap, two factories inDong Thap and Binh Duong, as well as a distribution centre and sales branch in Ho Chi Minh City Other