Vietnam information technology report q2 2015

Key Trends & Developments A major recent development in the Vietnamese outsourcing market came in July 2014 when the PrimeMinister of Vietnam enabled state agencies to use outsourced inf

Q2 2015 www.bmiresearch.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q2 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

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BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 13

Economic 14

Operational Risk 16

Industry Forecast 18

Table: IT Industry - Historical Data And Forecasts (Vietnam 2012-2019) 18

Macroeconomic Forecasts 25

Economic Analysis 25

Table: Economic Activity (Vietnam 2010-2019) 29

Industry Risk Reward Ratings 30

Industry Risk Reward Index 30

Table: Asia Pacific Risk/Reward Index - Q2 2015 32

Market Overview 33

Hardware 33

Software 40

Services 48

Industry Trends And Developments 56

Regulatory Development 62

Table: Government Authority 62

Regulatory News 65

Competitive Landscape 68

International Companies 68

Table: Samsung Electronics 68

Table: Intel 69

Table: LG Electronics 70

Table: Global CyberSoft 71

Local Companies 72

Table: Sara Vietnam 72

Company Profile 73

FPT Software 73

Table: FPT Group Financials By Segment (VNDbn) 77

Regional Overview 79

Demographic Forecast 83

Table: Population Headline Indicators (Vietnam 1990-2025) 84

Table: Key Population Ratios (Vietnam 1990-2025) 84

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 85

Table: Population By Age Group (Vietnam 1990-2025) 85

Table: Population By Age Group % (Vietnam 1990-2025) 86

Methodology 88

Industry Forecast Methodology 88

Sources 89

Risk/Reward Index Methodology 90

Table: It Risk/Reward Index Indicators 91

Table: Weighting Of Components 92

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 11.2% 2015-2019 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: VND37.0trn in 2014 and VND39.6trn in 2015, rising to VND53.3trn in

2019, CAGR of +7.6% 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: VND9.0trn in 2014 and VND10.1trn in 2015, rising to VND19.0trn in 2019, CAGR of

+16.2% 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: VND13.7trn in 2014 and VND15.7trn in 2015, rising to VND29.2trn in 2018, CAGR

of +16.3% in local currency terms Increased domestic demand for cloud computing and outsourcingservices expected to drive outperformance

Key Trends & Developments

A major recent development in the Vietnamese outsourcing market came in July 2014 when the PrimeMinister of Vietnam enabled state agencies to use outsourced information technology providers for the firsttime, a ruling that came into effect in February 2015 It enables IT firms to provide software and technologysystems as service packages to the public sector FPT Information Systems CEO Do Cao Bao stated that themain IT services in Vietnam are system management, cloud software leasing and maintenance services asthe largest component at around VND4-5trn a year It is these areas that are expected to generate the most

demand in the public sector, which BMI believes represents a significant new area of growth for vendors.

However, confidence remains a major impediment to adoption Managers are unsure of the benefits of IToutsourcing, 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

BMI expects virtualisation to be another prominent trend in the Vietnamese IT market over the medium term as enterprises look to increase efficiency This view was underlined by the March 2015 VMWare

virtualisation survey that reported that 91% of Vietnamese enterprises expected to virtualise at least 30% oftheir IT infrastructure in the next two years Resource utilisation optimisation and operational efficiencywere cited as the primary drivers of the virtualisation trend in Vietnam, while cost, business culture and lack

of information were the main barriers to software-defined data centre adoption The survey revealed that thetop three IT priorities for Vietnamese enterprises in 2015 were disaster recovery and business continuity(25%), ensuring IT security and data protection (29%) and reduction in costs (24%)

■ 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

■ Vietnam is a preeminent global outsourcing destination, with a particular strength inthe software development industry

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

SWOT Analysis - Continued

■ Low-cost tablets are proving popular with consumers, with significant medium-termsales growth potential as incomes continue to rise

■ 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 including the NATIF fund - is expected to be accelerate the development of localenterprises

-■ Cloud computing awareness has risen fast and adoption is expected to acceleratethrough 2014 and 2015, with virtualisation expected to be a significant growth trend inthe short-to-medium term

Threats ■ Low-cost tablets from own-brand Chinese vendors a particular threat to low- and

mid-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

Operational Risk

SWOT Analysis

Strengths ■ Vietnam has a high number of university graduates with skilled degrees and a high

literacy rate for its income level

• In addition to a number of regional and international flight options, Vietnam has anextensive inland waterway system

■ Strong contract enforcement capabilities increase security

• Vietnam's rate of violent crime is generally low, and foreigners are unlikely to betargeted

Weaknesses ■ High labour costs increase overall operating costs, and difficulty in hiring foreigners

creates shortages of skilled labour

• Underdeveloped rail capacity overburdens the road network

• One of the worst tax administration systems in Asia

• The police force is under-equipped and under-resourced in many areas

Opportunities ■ Fairly high expenditures in secondary education by regional standards will help close

gaps in access to education

• Vietnam is easily accessible from the main shipping routes, and growth in the number

of port facilities will provide adequate capacity

• Declining trade barriers are making it easier to enter the market

• Increased foreign participation in the banking sector will increase the availability offunds for loans

Threats ■ Unequal access to secondary education will result in a lower-quality workforce in

poorer regions

• Vietnam's reliance on imported oil poses risks in the form of energy and fuelshortages

SWOT Analysis - Continued

• Corruption and inefficiency in the legal system

• Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider politicaland social unrest

sales,

VNDmn 23,544,073 27,479,159 29,793,961 31,827,175 34,107,560 36,752,075 39,799,479 42,914,934 Software

sales,

VNDmn 6,550,366 7,705,850 8,969,588 10,135,575 11,817,302 13,827,939 16,242,241 18,983,968 Services

sales,

VNDmn 10,263,161 12,344,533 13,723,111 15,693,793 18,269,693 21,348,398 25,043,902 29,237,341

e/f - BMI estimate/forecast Source: BMI Research

BMI considers the Vietnamese IT market to hold the potential for medium term outperformance, in APAC

and globally We base this view on several factors of factors including supportive government policy,forecasts for strong income growth, declining device prices, enterprise modernisation, Vietnam's large andgrowing population, and investments in telecoms and retail infrastructure

There is however short-term downside due to tightening credit conditions, but in our core scenario this willnot cause widespread disruption to market development The medium term outlook is bright, and with the

IT market in Vietnam relatively undeveloped, the IT sector will account for a growing share of GDP overthe duration of our five-year forecast to 2019 We also highlight the development of Vietnam's local ITindustry, with software development and outsourcing services firms developing rapidly and positioned to

benefit from large foreign enterprises seeking lower cost locations over the medium-term BMI forecasts

the IT market in Vietnam will expand at a compound annual growth rate (CAGR) of 11.2% forecast for2015-2019 and the market expected to reach a value of VND101.5trn in 2019

e/f - BMI estimate/forecast Source: BMI Research

expects the downside from tightening credit conditions in Vietnam in H214 will result in growth in 2015being slightly below the medium term trend Further a worsening of the crisis could reassert a traditionalarea of weakness in Vietnam, which had become a less significant factor as a result of partnerships betweenbanks and retailers formed in 2013 However, with the wider Vietnamese economy still on track to recordstrong growth we expect the credit tightening is only expected to cause minor short-term disruption Weforecast real GDP growth of 6.4% in 2015 and real growth of private final consumption of 6.5%, growthrates that will support a buoyant retail hardware market given the relatively broad based complexion ofeconomic growth in Vietnam

We forecast the PC market trend from 2014 will continue into 2015, with growth forecast for desktop,notebook and tablet shipments as rising incomes and declining device prices promote first-time buyer andupgrade sales The influx of low-priced Chinese own-brand tablets since 2012 has deepened the market andvendors in the notebook category have been lowering prices to compete with this influx, which has helpedmake devices more affordable and boosted sales There is evidence in H114 that hybrid notebooks havecarved out a significant niche and in H214 were beginning to challenge tablets by offering multi-use cases,

a potentially significant trend in emerging markets where consumers are focused on value for money morethan 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, anddomestic demand for outsourcing services should be boosted in 2015 by the government decision to allowpublic authorities to outsource IT functions from February 2015

Drivers

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

BMI's income stratification forecast provides additional insight for vendors operating in Vietnam's retail

hardware market We expect economic growth in Vietnam to be relatively broad base, with all incomegroups forecast to record income growth at a CAGR of 12% or more 2015-2019 However, we caution that

as a frontier market, incomes are very low for the majority of the population We expect the middle 60% ofVietnamese will have average incomes of USD1,423 in 2019, up from USD869 This is strong growth butwill predominantly boost demand for low-end and mid-range computing devices

Potentially of more significance for retail hardware vendors is the income growth of the richest 20% inVietnamese society We forecast a CAGR for the richest 20% of 12.3% 2015-2019, with incomes expected

to rise from USD2,746 in 2015 to USD4,493 in 2019 This growth will unlock PC purchases for households

and individuals, and BMI identifies this as the primary opportunity in the PC market for profitable volume

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f 0

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

e/f - BMI estimate/forecast Source: BMI, National Statistics Office

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

computing market In March 2015 VMWare reported the results of its virtualisation survey found that 91%

of Vietnamese enterprises expected to virtualise at least 30% of their IT infrastructure in the next two years

Meanwhile, 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 VMWareestimates that cloud adoption is growing faster in Vietnam than the wider region as a result of an absence oflegacy on-premises systems due to Vietnam's late-developer status

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 Meanwhile, in early 2015 the Vietnamese government launched the National

Innovation Foundation (NATIF), with VND1trn (USD50mn) of registered capital The government has setNATIF the goal of fostering innovation and promoting commercialisation in the technology sector Theareas that will be provided funding include IT, new materials research, biotechnology and automation

A specific IT development initiative is the government's drive to grow the IT services industry over the next15-20 years The initiative is off to a strong start - in March 2015 Vietnam was awarded first position in theworld outsourcing location rankings in annual research from Cushman & Wakefield Vietnam moved ahead

of China based on growth of its software development industry, but India remains the world's largestbusiness process outsourcing (BPO) destination The momentum that could be garnered from Japaneseenterprises shifting business process and software development outsourcing to Vietnam could see medium-term increases from European and North American demand Meanwhile, with a report from Grant ThorntonInternational stating that only 12% of enterprises in Vietnam are open to outsourcing, there is also hugegrowth potential domestically - particularly after the Prime Minister of Vietnam enabled state agencies touse outsourced information technology providers for the first time in February 2015

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 Securitywas officially opened in Hanoi, with the remit of securing Vietnam's internet traffic The key focus is oncomprehensively 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).

Segments

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 2015 - a figure BMI expects to only decrease marginally to 19.3% in

2019 - and its share of labour is considerably higher Mobile operator Viettel is a world leader in pioneeringsmart 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

Vietnam GVA By Vertical (%)

2015f

f = BMI forecast Source: BMI, National statistics, World Bank, UN

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

Macroeconomic Forecasts

Economic Analysis

BMI View: We expect continued strong foreign direct investment (FDI), healthy export growth and ongoing

efforts by the government to improve macroeconomic fundamentals to keep the Vietnamese economy growing strongly in 2015 Consequently, we forecast Vietnam's real GDP growth to accelerate to 6.4% in

2015, from 6.0% in 2014.

In line with our bullish economic outlook for Vietnam, the country's real GDP growth accelerated to animpressive 7.0% in Q414 from the revised 6.1% in the previous quarter This in turn brought real GDPexpansion for the year to 6.0%, surpassing the Bloomberg consensus estimate of 5.7% and marking

Vietnam as one of the brightest growth spots in Asia We expect Vietnam's robust economic growth

momentum in 2014 to be carried over into 2015, largely on the back of greater foreign direct investment(FDI) inflows, continued healthy export growth as well as continual efforts by the Vietnamese government

to improve macroeconomic fundamentals As such, we forecast the Vietnamese economy to continuegrowing at a strong pace of 6.4% in real terms in 2015

Strong Economic Expansion On The Cards

Vietnam - Real GDP Growth, %

Source: BMI, GSO

FDI And Exports To Continue Driving Growth

From an expenditure approach, the strong showing in 2014 owes largely to high foreign investor interesttowards the country and the robust performance in the export sector Latest data published by the GeneralStatistics Office showed that total foreign registered capital rose 9.6% to USD15.6bn in 2014, with themanufacturing sector receiving the bulk of it (71.6%) While there is the potential for volatility in emergingand frontier markets as the US looks to tighten its monetary policy over the coming quarters, we

nevertheless expect a continuation of strong FDI inflows to Vietnam This is corroborated by our view thatVietnam can continue to attract foreign investors, particularly manufacturing firms, as it offers themattractively low wages, strong demographics that will ensure a continual supply of workers as well asgenerous tax incentives

Meanwhile, exports grew by 13.6% to approximately USD150.0bn over the course of 2014 Given thecountry's export orientation to the US, which received about 19% of total Vietnamese outbound shipments

in 2014, a recovering US economy will bode well for the export sector going forward

Manufacturing And Services Sectors To Remain Strong

From a production perspective, broad-based growth was witnessed in 2014 Notably, the manufacturingsector rose by 8.5%, while construction grew by 7.1% The service industry also posted robust growth of6.0% Over the coming quarters, we expect the Vietnamese economy to continue riding on strong

manufacturing performances The Purchasing Managers' Index (PMI), a leading measure of manufacturingperformance, points to higher production activity Indeed, the index came in at 52.7 in December 2014,marking the 16th consecutive month of expansion In addition, continued FDI inflows to the sector will alsohelp to keep factories running at high capacity utilisation

In addition to the manufacturing sector, we are also optimistic about the prospects of Vietnam's real estateand construction sectors The easing of foreign property ownership rules, which will take effect in July

2015, should act as a catalyst to attract more foreign demand for domestic properties (see 'Easing Of

Foreign Property Ownership Rules A Positive Step Forward', December 2, 2014) Since the construction

sector is strongly correlated with the property market, we expect the former to continue putting in a strongperformance over the coming quarters as well That said, we note that business environment weakness couldweigh on foreign participation in realty investment in the near term

Improving Macroeconomic Fundamentals Bode Well For Growth

Ongoing efforts by the Vietnamese government to strengthen macroeconomic fundamentals and to forgefinancial stability following several economic missteps should also bode well for the economy The

economy has witnessed a rapid decline in inflation, which is further aided by the slump in global oil prices

in H214 Consumer price inflation came in at a modest 1.8% year-on-year (y-o-y) in December 2014, downfrom 2.6% y-o-y in the previous month and marking a long way down from its peak of 23.0% recorded inAugust 2011 We expect price pressures to remain subdued over the coming months, owing in part to lowercommodity prices As such, we forecast average inflation to come in at 2.1% in 2015, down from our initialestimate of 5.3% The government has also sought to address the high level of bad debt in the bankingsystem via the Vietnam Asset Management Company (VAMC) The VAMC, established in July 2013, willpurchase sour assets from local banks and sell them thereafter in a bid to allow these institutions to undergomuch needed restructuring

Price Pressures To Remain Subdued

Vietnam - Headline Inflation, % chg y-o-y

Source: BMI, GSO

Key Challenges

While we see positive developments in the economy, there are nevertheless some downside risks to our

2015 real GDP growth forecast Chiefly, we note that the ongoing maritime dispute with China oversovereign claims to the South China Sea could lead to an economic backlash by China Likewise, thecountry's fiscal woes and banking frailties are also key risks to the economy

Table: Economic Activity (Vietnam 2010-2019)

2010 2011 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f

Nominal GDP, USDbn 112.9 134.6 155.5 170.4 185.8 199.3 220.6 248.4 280.0 314.9

GDP per capita, USD 1,267 1,496 1,712 1,859 2,007 2,133 2,341 2,616 2,925 3,266

Industry Risk Reward Ratings

Industry Risk Reward Index

The extension of our forecasts and inputs to 2019 has led to a change in the outlook for many markets inAsia Pacific Previous regional leader South Korea fell three places, returning Singapore to the top spot Theindex remains largely unchanged in the latest update, with forecasts to 2019 having little impact on themarkets offering the greatest or fewest rewards High-spend markets that are home to large internationalcompanies tend to fare best, relying on established connectivity to support ongoing growth

Many of the emerging economies in our indices suffer from weaker telecommunications infrastructure,which underpin the growth of IT services in particular Consumers and companies may own hardwarewithout the requirement of internet access, but it is data usage that supports much of the ongoing growth ofthe IT market

It is therefore no coincidence that Sri Lanka remains at the bottom of our indices, below Vietnam Whileboth have vibrant mobile markets, it is the broadband sectors in both that lag Mobile broadband servicesoffer some opportunities but the markets' growth will be towards the end of our forecast period Both arestarting from a low base of PC penetration, and weak consumer spending capability compared with regionalpeers also limit prospects These markets still require hardware growth to take off in order to encourage thegrowth in IT services and software that denote more developed IT sectors

India, the Philippines and Thailand hold similar scores; their positions in the index were unchanged thisquarter India and the Philippines in particular have generated strong revenues from business processoutsourcing (BPO) Although the spending on these services largely takes place in other markets, thedevelopment of BPO sites requires spending on hardware and software in the local market to support thedevelopment of these platforms India's IT market has boomed, but largely as it has sold services overseas

Thailand has benefited from investment in data centres by several international companies and local usershave turned to cloud computing quickly Although the segment remains comparatively small, it will drivemuch of the overall market growth, as it starts from such a low base Thailand pulled ahead of its lowerranked peers with a brightening economic outlook and greater political stability combining to improve thecountry's IT growth prospects Thailand has closed the gap on the Philippines and India, which rank justabove

India saw no change to its score with the country remaining one of the key global business process

outsourcing (BPO) destinations However, IT spending among local companies remains low and thecountry's limited reach of PCs means hardware does not exist in many regions to support the growth of ITservices The trend is similar in the Philippines, which has built a strong BPO presence also, but lacksIndia's scale The internal market for IT services is weak in both countries although companies present inthe markets have increased spending on technology

As seen in the emerging market economies of our Asia Pacific Risk Reward Indices there is growingdemand for cloud computing among SMEs in order to cut costs and introduce technology in a cost effectivemanner Indonesia in particular has encouraged the growth in data centres to serve international companiesand drive more investment into IT services In all cases, a lack of hardware in smaller companies limits thereach of these products As desktops and notebooks are made increasingly affordable, enterprises will spendmore on IT service products

In the centre of the table Malaysia is separated from Indonesia by almost six points, marking a considerabledifference in outlook Only China joins Malaysia in the top half of the table with China's sheer scale the keydetermining factor in its high position China shares the characteristics of its emerging market peers - low

PC penetration, limited spending on IT services - but the large government sector and growing interest indeveloping businesses in the country encourage greater spending

The large gap between the top four markets and China, the highest ranked emerging market, reflects thematurity of IT development in Singapore, Hong Kong, South Korea and Australia These countries havehigh PC penetration rates with growth over 2011-2014 focused on tablets sales as additional devices ratherthan alternatives to notebooks IT services and software comprise the bulk of enterprise spending, pushingthe markets' growth rates Services such as enterprise resource planning and customer relationship

management are gaining ground as companies seek to automate processes and learn from data generatedinternally

The relative position of the markets is based principally on the size of the economies, and the ease ofreaching businesses City states Singapore and Hong Kong have a number of advantages in this, allowingthem to place highest in our Index

Table: Asia Pacific Risk/Reward Index - Q2 2015

Rewards Risks Country Rewards Industry Rewards Country Industry Risks Country Risks IT Score Rank Previous Rank

Market Overview

Hardware

BMI believes the Vietnamese hardware market will be a regional outperformer as a combination of low

penetration rates and strong economic performance combine to drive development The market is forecast tostay on a strong growth trajectory over the medium term, with a host of favourable trends including risingincomes, declining device prices, enterprise modernisation and ongoing investments to upgrade telecomsand retail networks However there is downside risk to our outlook for hardware spending growth in 2015 -based on tightening domestic credit conditions in Vietnam as a result of a build up of bad debt over recentyears This has the potential to dampen demand for PCs, which are big-ticket items for the majority ofVietnamese consumers, although not our core scenario

BMI estimates growth of 8.5% to VND37.0trn in 2014 as volumes of desktops, notebook and tablets all increased from 2013 Demand for traditional form factors was boosted by Microsoft's withdrawal of

official support for the XP operating system in April 2014, which triggered a cycle of upgrades by

enterprises and public offices Meanwhile, Microsoft's decision to slash operating system licensing fees onlow-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 6.9% growth for the hardware segment, to VND39.6trn 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 7.6% in local currency terms 2015-2019, with the market expected toreach a value of VND53.3trn in 2019

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

Hardware Market

(2012-2019)

Personal computer sales, VNDmn Servers sales, VNDmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

10,000,000 20,000,000 30,000,000 40,000,000 50,000,000

e/f - BMI estimate/forecast Source: BMI Research.

PC Market

BMI estimates total PC (desktop, notebook and tablet) unit sales increased 27.5% to 3.57mn in 2014 Sales

of desktops and notebooks continued to grow, with volumes boosted by rising incomes and the low

penetration rates, as well as by XP support withdrawal We estimate unit growth in all device categories, but

it is tablets that are forecast to outperform with 86.2% growth to 1.19mn units Another emerging

opportunity is hybrid notebooks which we estimate grew strongly in 2014 as prices declined,based onreports from retailers

We expect these market dynamics to continue into 2015, and this has informed our forecast for 11.8%growth in PC sales, to 3.99mn units The main shift in 2015 will be markedly slower growth in the tabletmarket due to saturation in the core market, while notebooks will account for a larger share of total sales

after OS licensing fee cuts by Microsoft on low-end devices in 2014 and the growing popularity of hybrid

notebook designs

The core reason for the positive medium term outlook for PC sales 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 relatively limited Data from the regulator, the Ministry of Information and

Communications (MIC) show a base of 5.5mn installed PCs at the end of 2011, equal to individual

penetration rate of 6.1% Household PC penetration data also reflects the low level of PC ownership inVietnam, 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 other emerging markets in Southeast Asia, reflecting the mediumterm 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 USD2,007 in 2014 and forecast to reach just

USD3,266 in 2019, vendors will need to be aware of the consumer patterns in Vietnam The poorest 20%will offer little prospect to vendors, with annual incomes forecast at around USD300 in 2015, and USD486

in 2019 There will however be growing demand from the richest 20% of Vietnamese, whose incomes weforecast to increase from USD2,750 in 2015 to USD4,493 in 2019

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

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

Tablets

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 it was the proliferation of affordable tablets running Android and the entry to the market ofvendors producing Windows 8 devices that allowed the tablet market to enter a much faster phase ofgrowth In early 2013, reports of an influx of own-brand Chinese made tablets indicate growth at the low

value end, but we also expect price competition between international vendors to boost sales of mid-rangetablets 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

1,000 2,000 3,000

e/f - BMI estimate/forecast Source: BMI Research

Vendor Developments

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

having below a 10% local market share In 2014 IDC reported that Dell maintained its leadership of the Vietnamese PC market, ahead of a strong challenge from ASUS Meanwhile, Lenovo and Acer are the third

and fourth largest vendors, but some distance behind Dell and ASUS

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

cooperation with banks such as HSBC, VietinBank, ANZ and Sacombank to make interest-free credit

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 desktopsglobally 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

February 2015

Source: Statcounter

Software

BMI forecasts software sales in Vietnam will increase 13.0% to VND10.1trn in 2015, a small deceleration

from 2014 when software sales were boosted by the withdrawal of official support by Microsoft for

Windows XP We expect strong growth will be maintained over the medium term with compound annualgrowth rate (CAGR) of 16.2% 2015-2019, with total software spending expected to reach VND18.98trn in2019

Market Trends

The Vietnamese software market is cost-sensitive, with around 75% of the market served by lower-costlocal software vendors Local software is particularly dominant in the market for government and small-and medium-sized enterprise (SME) segments However, larger Vietnamese companies are more likely tobuy 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 previously.Another reflection of the price sensitivity of end-users is the fact Vietnam is home to a high level of piratedsoftware use by households and enterprises