Vietnam information technology report q2 2012

Notebooks are owned by an estimated 7% of the Vietnamese population, which points to significant growth potential for the local PC market.. BMI expects China's IT market growth to be dr

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TECHNOLOGY REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam IT SWOT 7

Vietnam Telecoms SWOT 8

Vietnam Political SWOT 9

Vietnam Economic SWOT 10

Vietnam Business Environment SWOT 11

Risk/Reward Ratings 12

Table: Asia IT Risk/Reward Ratings Q212 17

Asia IT Markets Overview 18

IT Penetration 18

IT Growth And Drivers 20

Sectors And Verticals 21

Vietnam IT Markets Overview 25

Government Authority 25

Hardware 26

Software 28

Services 32

Industry Developments 33

Industry Forecast 37

Table: Vietnam IT Sector – Historical Data & Forecasts, 2009-2016 40

Industry Forecast Internet 41

Table: Telecoms Sector – Internet – Historical Data And Forecasts, 2009-2016 41

Macroeconomic Forecast 43

Table: Vietnam – Economic Activity 45

Competitive Landscape 46

Hardware 46

Software 47

IT Services 51

Company Profiles 55

FPT Software 55

Country Snapshot: Vietnam Demographic Data 56

Section 1: Population 56

Table: Demographic Indicators, 2005-2030 56

Table: Rural/Urban Breakdown, 2005-2030 57

Section 2: Education And Healthcare 57

Table: Education, 2002-2005 57

Table: Vital Statistics, 2005-2030 57

Section 3: Labour Market And Spending Power 58

Table: Employment Indicators, 1999-2004 58

Table: Consumer Expenditure, 2000-2012 (US$) 58

BMI Methodology 59

How We Generate Our Industry Forecasts 59

Transport Industry 59

Sources 60

Executive Summary

BMI View: Vietnamese IT spending is expected to reach US$2.5bn in 2012, up 14%, with BMI upwardly

revising its forecast after the PC market reported double-digit growth in H111 Factors such as rising

PC penetration, economic growth, a range of government ICT initiatives and a drive to develop

Vietnam's domestic IT industry will help to sustain continued expansion going forward Vietnam's

improving ICT infrastructure will also drive the development of the nation's IT market in a country with below 20% PC penetration

Headline Expenditure Projections

Computer hardware sales: US$1.6bn in 2011 to US$1.8bn in 2012, +12% in US dollar terms Forecast

in US dollar terms upwardly revised due to stronger than expected retail sales growth in 2011

Software sales: US$187mn in 2011 to US$220mn in 2012, +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 illegal software use

IT Services sales: US$396mn in 2011 to US$369mn in 2012, +19% in US dollar terms Forecast in US dollar terms upwardly revised due to analyst modification with growing demand for digital

infrastructure projects in segments such as banking, telecoms, energy and government

Risk/Reward Ratings: Vietnam's score was 33.2 out of 100.0 Vietnam ranks 11th in our latest Asia

RRR table, ahead of Sri Lanka The country ranked ninth for its IT market score of 36

Key Trends & Developments

ƒ The Vietnam IT market is expected to grow around 12% in 2012 Government and business IT spending remain subject to fiscal restraints and external economic headwinds, and the

devaluation of the dong will also inhibit demand However the Vietnamese economy is expected

to remain generally strong and drive growth in IT investments

ƒ In 2011, a number of government ministries and organisations, including the Ministry of Education and Training, started to promote the roll-out of cloud services Plans to modernise IT

in government agencies and the customs department, as well as the Tax Administration Modernization Plan for 2008-2013 represent opportunities for vendors of IT products and services

ƒ An ambitious government IT plan for 2010-2020 should shape many segments of the Vietnamese IT market.The government's increasing focus on encouraging ICT development and foreign investment in the tech sector will also create opportunities Many of the government's ICT development plans and programmes are still in a nascent stage and their ultimate effectiveness is yet to be determined

SWOT Analysis

Vietnam IT SWOT

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

affordability driving projected double-digit growth of notebook computers

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

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

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

GDP and GDP per capita

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

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

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

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

penetration rate of 15%

ƒ Vast and relatively under-penetrated rural market presents a significant growth

opportunity as the government rolls out measures to boost rural connectivity and incomes

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

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

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

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

Vietnamese distributors of foreign IT goods

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

2009

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

Vietnam Telecoms SWOT

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

as Ho Chi Minh City, Hanoi, Danang and Haiphong

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

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

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

operators, VNPT and Viettel

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

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

growth

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

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

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

the arrival of new skills

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

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

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

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

ƒ Draft Bill of Law on Telecommunication has been put forward for discussion at the

National Assembly Steering Committee If passed, the bill will allow private companies to build network infrastructure for the first time and will open up the telecoms market to foreign investors

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

for ADSL growth

ƒ As the market for mobile data services grows, this could have potentially negative

consequences for the growth of fixed broadband services

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

Vietnam Political SWOT

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

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

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

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

ruling Communist Party

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

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

acted to clamp down on graft among party officials

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

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

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

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

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

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

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

Vietnam Economic SWOT

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

GDP growth averaging 7.1% annually between 2000 and 2011

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 9.5% in 2010

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

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

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

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

while making Vietnamese enterprises stronger through increased competition

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

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

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

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

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

Vietnam Business Environment SWOT

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

attractive to foreign investors

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

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

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

ƒ Vietnam remains one of the world's most corrupt countries According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

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

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

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

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

which will remain a concern

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

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 2016 Our Q212 ratings reflect

our consideration of the political

and economic risks, as well as

the risks associated specifically

with IT intellectual property (IP)

rights protection and the

implementation of state spending

projects

There were several changes to

the country rankings as we

fine-tuned our methodology to better

reflect the market conditions In

this quarter's update, highly urbanised Singapore overtook Australia by outperforming the latter in three out of the four components Although Singapore's IT market is smaller than that of Australia, Singapore has other redeeming factors For one, Singapore is strategically placed at the heart of South East Asia amid emerging markets such as Indonesia and Thailand Its strong infrastructure, political stability and pro-business environment attract foreign investors and spur technological developments

Singapore's ambitions to emerge as a regional cloud computing hub will fuel vendor investment in service capabilities Moreover, ambitious projects such as the national healthcare register and the schools

standard operating environment will bolster the IT market Singapore benefits from high broadband penetration and initiatives such as the government's ambitious Intelligent Nation 2015 plan

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

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

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

Although Australia fell to second position, it still has a respectable IT Rating of 70.9, which was

significantly higher than the regional average of 50.2 Due to the sheer mass of the country, it is inevitable that certain regions suffer from a deficiency in IT services However, the government has been looking to

Developed Countries Have Their Heads Above

The Rest

Asia Pacific IT Risk/Reward Ratings Q212

Source: BMI

resolve the issue with its ambitious National Broadband Network (NBN), which aims to deliver

nationwide high-speed broadband connectivity with a combination of fibre, fixed-wireless and satellite technologies Furthermore, a number of leading Australian private and public sector organisations have launched cloud initiatives, including many of the country's leading banks, while the government has also unveiled a six-year cloud computing strategy

IT verticals such as the government, telecoms, healthcare and banking should continue to supply demand for implementation, consulting and managed services in the future Meanwhile, the NBN should drive the development of Australia's digital economy and feed demand for personal computers and mobile devices

There were no changes to Hong Kong's IT Rating score or position on the table Hong Kong has one of the lowest fibre broadband tariff rates in the world, and this provides the backbone for next generation IT services such as cloud computing and data centres While we expect robust IT market growth in Hong Kong due to the increasing investment opportunities arising from its growing links with the vast Chinese market, we also highlight that the outlook for 2012 is looking more uncertain as we envisage a hard landing in China

Similar to its developed peers in the region, South Korea is also encouraging the utilisation of cloud computing by small businesses New cloud computing offerings and increased competition in this

segment are expected to fuel growing demand to use this technology IT outsourcing is also expected to show a strong demand trajectory The government has also identified the potential and importance of software development, highlighted by the ascendency of mobile operating system (OS) Android, and has announced a plan to develop an open-source OS with domestic ICT firms Regardless of whether the project would succeed, it shows the forward-looking stance of the South Korean government and its commitment to drive IT developments in the sector

While the South Korean

consumers have exhibited strong

appetite for IT products, we

expect private consumption to be

subdued in the near term South

Korea's household debt quandary

leaves the economy in a

precarious position While lower

interest rates have reduced the

risks of an implosion in the

household debt market, high debt

levels still place a substantial

constraint on consumption

spending A deteriorating

economy is likely to place

considerable weight on

consumers' debt repayment

ability as incomes are likely to

get slashed while the jobless rate ticks up A combination of seasonal factors, as well as a worsening economy should keep downward pressure on consumer spending going into 2012

Malaysia remains in fifth position in our Q212 regional ratings Recent developments such as a slowdown

in production activity and falling commodity prices, which will exacerbate the slowdown in mining production, continue to support our view that Malaysia's economic growth will witness a significant slowdown in 2012 Consequently, government spending may become more constrained because of commitments to tackle the budget deficit, but there will be growth areas IT spending growth will be driven by the government's drive for greater household broadband penetration of 75% by 2015

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

There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme, which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities

Country Structure A Letdown

Asia Pacific IT Risk/Reward Ratings Q212

Source: Q212

One of BMI's key macro themes for Asia Pacific in 2012 is a growth slowdown across the board with

recession risks highest in countries such as Australia, Hong Kong and Singapore due to factors such as a slowdown in the US and Europe as well as a Chinese hard landing

2012 may be the year in which China's economy goes from – as the title of our China Special Report in October 2011 put it – 'Miracle To Meltdown' We have warned for years about the imbalances inherent in the Chinese economic growth model, which are characterised by a major overemphasis on investment at the expense of consumption, underpinned by unsustainable credit expansion Now, several indicators point to a Chinese hard landing While the definition of hard landing is up for debate, we generally consider it to include the following characteristics: a contraction in manufacturing output as reported by the purchasing manager index (PMI) surveys; a contraction in services sector PMI; a sustained fall in imports; double-digit house price declines; elevated banking sector stress; and growing expectations of currency weakness

A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers We expect growing interest in cloud computing will be stimulated by the establishment of government pilot programmes However, there are still market risks associated with IP rights protection in China as well as piracy and a lack of business transparency

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

Philippines has a low PC penetration, like many other developing Asian countries, and the IT market offers corresponding high growth potential over the forecast period The Philippines is also looking at cloud computing as the next growth driver, with the private sector leading the charge Domestic firms have partnered with foreign IT companies in order to provide the necessary infrastructure and technology

to expand their products portfolio, which should attract businesses including small and medium-sized enterprises (SMEs) as they look to cut costs amid an uncertain global economy

India's IT industry possesses significant growth potential as only a small portion of the country's massive population has access to a personal computer Significant opportunities will also be created by demand from Indian businesses and government agencies to help use more advanced IT solutions to improve efficiency and reduce costs Consequently, India had a relatively high IT Market score of 49.0 However, the country was significantly let down by its weak Country Structure score

India is in the midst of a significant cyclical slowdown Industrial production growth stalled to a month low of 3.3% year-on-year in July 2011, led by a downturn in both capital goods and consumer durables activity The latter is of particular concern from a GDP accounting perspective given that

21-households make up the lion's share of GDP (at an estimated 62% in FY2010/11), and in line with our view, the Indian consumer has started to tighten spending on 'big ticket' purchases Although many Indian private and public sector organisations have started to consider upgrading their IT infrastructure, further deterioration in the global economy could once again force them to scale back on investments

The global consumer electronics industry has been severely disrupted by the flooding in Thailand, as output of key components for hard disk drives by Thai plants has been dramatically cut Companies that were directly affected by the disaster have announced that they are looking to relocate some of their operations to alternative countries in order to diversify risk and minimise disruptions, which is a blow to the Thai IT sector

However, we retain an overall bullish stance due to the Thai government's flood rehabilitation and IT proliferation plans We expect the launch of more compatible products to leverage on the long-awaited

launch of 3G services Intel predicts that ultrabooks could account for as much as 40% of the notebooks

sold in Thailand in 2012, although BMI has a more conservative forecast as we foresee tablet computers

as a serious threat Meanwhile, the Thai government has earmarked the ICT industry as an important growth driver Besides a plan for 3G operators to provide broadband and Wi-Fi services freely available

in schools nationwide as part of a universal social obligation initiative, the government also has a One Tablet Per Child project, which intends to bridge the digital and education divide

With ICT penetration of only about 20% and development restricted to richer areas such as Java, the

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

fastest growing in the region over the five-year forecast period Spending in some key IT verticals, such

as financial services and banking should continue to be significant in 2012 Government IT spending is also expected to increase and could have accounted for as much as 25% of the IT market The SME sector will drive demand for basic hardware and applications as enterprises focus on enhanced productivity

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

However, initiatives such as network expansion projects by telecoms providers to increase internet penetration rates in Sri Lanka and free training tools for SMEs from the International Finance Corporation (a member of the World Bank Group) to boost adoption of IT services cloud help the country to close the gap with its regional peers

Table: Asia IT Risk/Reward Ratings Q212

Limits Of Potential Returns Risks To Realisation Of Potential Returns

Country IT Market

Country Structure Limits

Market Risks

Country Risk Risks IT Rating

Regional Rank Singapore 57.0 100.0 72.1 70.0 85.1 79.0 74.1 1 Australia 55.5 95.0 69.3 80.0 71.2 74.7 70.9 2 Hong Kong 48.3 95.0 64.7 70.0 87.4 80.4 69.4 3 South Korea 53.3 75.0 60.9 75.0 71.4 72.8 64.5 4 Malaysia 41.3 55.0 46.1 35.0 76.7 60.0 50.3 5

Philippines 39.3 45.0 41.3 42.5 52.2 48.3 43.4 7

Thailand 37.5 20.0 31.4 35.0 72.6 57.6 39.2 9 Indonesia 37.5 35.0 36.6 35.0 51.6 45.0 39.1 10

realisation of anticipated returns Source: BMI

Asia IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives and

growing affordability will help to drive increases

in PC penetration during BMI's five-year forecast

period While some cities and regions stand out,

there is an unbalanced pattern of regional

development, with PC penetration in countries

such as Singapore above 50%, while in other

countries, such as Indonesia, it is below 5%

The two Asian leaders, China and India, embody

the region's growth potential, as in both countries

computer ownership remains the preserve of a

minority In China, PC penetration was only

around 25% in 2010 – although it was far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by 2015 In India, less than 5% of people own a computer However, some 45% of the population is under 25, which provides a promising demographic context for increased

PC ownership PC penetration in Vietnam was estimated by BMI at around 15% in 2010 Notebooks are

owned by an estimated 7% of the Vietnamese population, which points to significant growth potential for the local PC market

Lower prices will help to drive higher PC

penetration in developing markets The average

price of a PC in the Indian market has nearly

halved over the past few years, and rising incomes

and greater credit availability will continue to

bring computers within the reach of lower-income

demographics Even in more mature markets, there

is room for development, however, with official

data suggesting that as many as 25% of Hong

Kong households do not have a computer at home

Around the region, affordable computer

programmes continue to find favour with

governments In China, a subsidised household electronics products initiative aimed at rural residents has

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

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

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

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

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

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

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

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

penetration, which is projected to reach 186% by 2015

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

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

IT Growth And Drivers

Across the region in 2011, IT spending should

benefit from improved economic circumstances

and tenders, previously deferred as a result of the

economic situation, although much will depend on

business confidence Strong fundamental demand

drivers of IT spending mean that there will be

continued opportunities Key factors common to

most markets include cheaper PCs and reform in

sectors such as telecommunications and finance,

as well as government initiatives

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

China, lower-tier cities and towns will be among

the fastest growing segment of the IT market BMI expects China's IT market growth to be driven by an

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

such as laptops

In Thailand in 2011, demand will be bolstered

by market expansion in the relatively

underpenetrated rural areas SIS forecasts that

market growth in upcountry areas will be 30%

in 2011, double that forecast for the country as

a whole A similar situation pertains to India

where in 2011 there are expected to be strong

growth opportunities in smaller cities

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

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

computer (about one-fifth of the level in

China), meaning particular potential in the lower-end product range India's IT market appears to be positioned for strong growth thanks to an improving economy and consumer sentiment, and government support for modernisation in lagging sectors Meanwhile, India's business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

2011e IT Market Sizes

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional computer sale

drivers over the forecast period include

education, lower prices, IP telephony, cheaper

processors as well as notebook entertainment

and wireless networking features Meanwhile,

in Indonesia, the basic demographics of rising

computer penetration and growing affordability

should drive growth SMEs represent a growth

opportunity, as currently only around 20% of

Indonesian SMEs are estimated to make use of

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

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

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

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

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

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

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

to be back on track

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

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

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

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 25-74% of total spending in all markets in 2010 However, spending on software and services will grow faster Notebook sales are

IT Markets Compound Growth

2011e-2015f (%)

e/f = estimate/forecast Source: BMI

growing much faster than the PC market as a whole with growth driven by falling prices and more

features

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

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

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

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

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

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

of lower income demographics

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

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

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

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

tablets bundled with data services

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

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

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

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

iPad,

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

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

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

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

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

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

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

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

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

applications such as payroll, tax-return processing and recruitment

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

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

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

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

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

a brightening business climate should mean more opportunities in key IT-spending verticals such as Financial Services, Telecoms, Government, Healthcare and Logistics

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

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

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

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

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

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

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

Market Structure (% Of Total IT Market)

e/f = estimate/forecast Source: BMI

Vietnam IT Markets Overview

Government Authority Ministry of Information and Communications (MIC)

Government Authority

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

telecommunications, broadcasting and publishing

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

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

Background

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

at US$2.2bn in 2011 Vietnam IT spend per capita, at around US$27 in 2011, is considerably lower than the US$225 estimated for ASEAN neighbour Thailand However, IT spend per capita is expected to more than double to US$45 by 2016

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

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

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

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

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

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

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

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

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

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

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

ICT Sector

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

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

Hardware

BMI projects that sales in Vietnam's computer hardware market will be worth around US$1.8bn in 2012,

up from an estimated US$1.6bn in 2011 The main growth driver will be affordable notebooks BMI

projects growth of around 12% in the Vietnam PC market this year, slightly below the growth rate

estimated in 2011, and 2010 when the market bounced back from the effects of the economic slowdown

In Q311, vendors reported continued strong growth in PC sales, boosted by inventory restocking and back-to-school sales However, following a robust performance in the first three quarters of the year, a deceleration was expected in Q412 The Thai floods led to reports of shortages of HDD supplies,

while seasonal promotions placed further pressure on prices and margins According to information from the Vietnam Government Statistics Office, in the first eight months of 2011, the country spent US$3.91bn

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

In 2010, overall PC sales were similarly reported to have achieved double-digit growth, compared with

2009 The growth was driven mainly by imported laptops, with shipments up by around one-third in H110, both sequentially and y-o-y Desktop sales, however, remained in negative growth territory The depreciation of the dong restrained demand by leading to higher prices for imported laptops Vendors reported the number of first-time buyers in the market was relatively limited, with most sales coming from purchases of typically lower-priced second computers Going into H210, growth received a boost in August with back-to-school sales, and summer retail promotions Sales of PCs picked up as new vendors entered the market while others rolled out new models, allowing for double-digit growth for FY10

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

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

investments

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

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

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

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

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

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

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

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

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

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

the Ministry of Education and Training, will provide laptops at a price that is VND800,000 below the

market price Discounts of up to 80% for schools and 30% for teachers will also be offered on VNPT's broadband service packages

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

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

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

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

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

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

Meanwhile in 2012, vendors are pinning their hopes on the much-hyped new product category of

Ultrabooks as a growth area Ultrabooks are fully featured portable computers whose functionality compares favourably with the scaled-down netbooks and tablets that have dominated PC sales in the recent past However the current high prices of Ultrabooks are likely to limit demand in the short term to below 10% of sales

Software

In 2012, Vietnam software sales are projected by BMI to grow to US$220mn, and software CAGR for

2012-2016 should be in the region of 17% Software spending comprises around 9% of total Vietnamese

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

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

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

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

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

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

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

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

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

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

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

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

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

operating system Meanwhile Microsoft has introduced a Vietnamese version of Windows Live and has announced a list of Vietnamese software programmes that are compatible with Windows 7 including Vietnamese font programmes, dictionaries and accounts software There should also be a boost from

systems upgrades previously delayed as a result of the economic situation However much will depend confidence in the economic situation

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

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

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

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

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

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

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

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

opportunities in many sectors While management software remains at less than 10% of the total software market, basic applications such as enterprise resource planning (ERP) and accounting are finding

increasing popularity with the business market There is a growing emphasis on cost efficiency as

enterprises look to enhance productivity through automating these and other functions

Cloud services adoption is expected to accelerate over the next few years, after recent pilots scheme were deemed to have been successful An increasing number of Vietnamese companies have shown an interest

in and willingness to use cloud services The government has also got involved in encouraging the

development of this business model in Vietnam, and in 2010 reached an agreement with Microsoft to cooperate on research Given the current focus on many businesses of controlling costs, the pay-on-demand SaaS model should grow in popularity and spread beyond the initial core application area of CRM

Meanwhile, new cloud computing offerings and increased competition in this segment should fuel further demand from end-users to utilise this technology In addition to cost savings, businesses will look to boost efficiency and realise cost savings and increase flexibility of response to customer needs Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise

The economic slowdown, and fall in demand for manufactured goods, represented a challenge for

vendors as enterprises were tempted to focus more on the bottom line Many companies, particularly trading companies, cut back on non-essential systems upgrades in the face of cash-flow shortages