Vietnam information technology report q3 2014

BMI Industry ViewBMI View: We forecast IT spending will grow at a compound annual growth rate CAGR of 12.6% between 2014 and 2018, with expansion underpinned by rising incomes, enterpris

Q3 2014 www.businessmonitor.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q3 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2014

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BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

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

Macroeconomic Forecasts 22

Economic Analysis 22

Table: Foreign Direct Investment By Country Of Origin (Top Five) 26

Table: Vietnam - Economic Activity 27

Industry Risk Reward Ratings 28

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014 30

Market Overview 31

Hardware 31

Software 36

Services 45

Industry Trends And Developments 51

Regulatory Development 56

Table: Government Authority 56

Regulatory News 59

Competitive Landscape 62

International Companies 62

Table: Samsung Electronics 62

Table: Intel 63

Table: LG Electronics 64

Table: Global CyberSoft 65

Local Companies 66

Table: Sara Vietnam 66

Company Profile 67

FPT Software 67

Table: FPT Group Revenue By Segment (VNDbn) 70

Regional Overview 72

Demographic Forecast 76

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 77

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 78

Table: Vietnam's Key Population Ratios, 1990-2020 79

Table: Vietnam's Rural And Urban Population, 1990-2020 79

Methodology 80

Industry Forecast Methodology 80

Sources 81

Risk/Reward Ratings Methodology 82

Table: It Risk/Reward Ratings Indicators 83

Table: Weighting Of Components 84

BMI Industry View

BMI View: We forecast IT spending will grow at a compound annual growth rate (CAGR) of 12.6%

between 2014 and 2018, with expansion underpinned 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 The government is also a significant factor underpinning our bright outlook as it pursues a range of ICT initiatives and allocates funding to develop Vietnam's domestic

IT industry These policies include the promotion of Vietnam as an outsourcing destination, with the services segment expected to expand rapidly There is also increasing momentum towards Vietnam

becoming a global centre for electronics production as wages rise in China and manufacturers look to protect margins by moving to Vietnam, where wages are as little as a third of those in China.

Headline Expenditure Projections

■ Computer Hardware Sales: VND38.2trn in 2014 to VND57.3trn in 2018, CAGR of +10.7% in local

currency terms Rising incomes, declining device prices and improved credit provision underpin demandgrowth across all three main device categories

■ Software Sales: VND8.4trn in 2014 to VND14.6trn in 2018, CAGR of +15.0% in local currency terms.

Piracy continues to be a drag on the market, but there are large opportunities in business software andsecurity solutions for vendors willing to accept narrow margins in a price-sensitive market

■ IT Services Sales: VND16.5trn in 2013 to VND29.4trn in 2018, CAGR of +15.7% in local currency

terms The services segment is forecast to outperform due to strong domestic demand for cloudcomputing, and a boom in investment for outsourcing provision to Japanese enterprises

Key Trends & Developments

One opportunity that stands out in Vietnam is for tailored solutions for the agricultural sector, whichcontinues to be a large part of the Vietnamese economy accounting for an estimate 19.5% share of GVA in

2013 - a figure BMI expects to only decrease marginally to 19.3% in 2018 - and its share of labour is

considerably higher The large agricultural sector, and the potential for productivity increases, has

understandably attracted the interest of ICT firms Mobile operator Viettel is a world leader in pioneering

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

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

Another area of emerging opportunity is the cloud computing market in Vietnam 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 cloudcomputing would have a major effect on business activities The large quantities of data generated by thesurge in featurephone and smartphone ownership have boosted demand for enterprise cloud solutions, whilethe growing tendency for remote working is also generating demand VMWare estimates that cloud

adoption is growing faster in Vietnam than the wider region as a result of an absence of legacy on-premisessystems due to Vietnam's late-developer status While the survey showed growing interest, information

security continues to be a barrier to adoption by enterprises VMWare and Symantec were both quoted

arguing that education levels must increase among enterprises so they realise the comparability of

information security risks for cloud and on-premises IT solutions

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

■ Expanding local hardware production industry with major international players such

as Samsung, Nokia, LG and Intel making large investments

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

lower GDP per capita

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

■ High level of software piracy, although some progress has been made in recent years

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

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

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

SWOT Analysis - Continued

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

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

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

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

Threats ■ 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 ■ Macroeconomic instabilities continue 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

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

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

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

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

SWOT Analysis

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

GDP growth averaging 7.1% annually between 2000 and 2012

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 20.7% in 2012

Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy

vulnerable to global economic uncertainties The fiscal deficit is dominated bysubstantial spending on social 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 AEC in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnameseenterprises stronger through increased competition

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

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

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

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

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

Business Environment

SWOT Analysis

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

attractive to foreign investors

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, andbeyond

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

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

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

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

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

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

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

protectionism, which will remain a concern

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

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

BMI has a positive outlook for ongoing IT market expansion and we believe it will be one of the

outperforming IT markets in APAC over the medium term The market is relatively undeveloped but the ITsector will account for a growing share of GDP over the duration of our five-year forecast to 2018 as aresult of a range of factor including supportive government policy, rising incomes, declining device prices,enterprise modernisation and investments in telecoms infrastructure Meanwhile, Vietnam's softwaredevelopment and outsourcing services firms are positioned to benefit from large foreign enterprises seekinglower cost locations over the medium term

We forecast the IT market in Vietnam will expand by 13.1% to a total of VND63.2trn in 2014, up fromVND55.9trn in 2013 We expect strong growth to continue over the medium, term with a CAGR of 12.6%2014-2018, as the value of the market is set to reach VND101.3trn in 2018

2014 Outlook

Our outlook for 2014 is unchanged in the Q3 2014

update, as we continue to forecast another year of

strong growth for Vietnam's IT market in 2014

Growth is expected to slow slightly from 2013 as a

result of a slight cooling of the tablet market, but the

market is still expected to expand by 13.1%

The first feature of the market underpinning our

positive outlook is the strong macroeconomic

environment in Vietnam We forecast real GDP

growth of 5.9% in 2014 and real growth of private

final consumption of 6.5% Meanwhile, traditional

areas of weakness, such as access to credit, have

become a less significant factor as a result of

partnerships between banks and retailers formed in

2013 Meanwhile, government spending will

continue to be a major source of sales, with spending

forecast to increase by 6.2% in real terms in 2014, and we expect IT spending growth to outpace overallgovernment spending due to the policy goal of developing the sector This is evidenced by the Ministry ofInformation and Communication's August 2013 proposal to allocate at least 2% of the state budget toboosting the IT sector each year

In contrast to developed markets where the retail PC market is a drag on growth, in Vietnam it will continue

to be a bright spot throughout 2014 We expect growth in desktop, notebook and tablet shipments as risingincomes and declining device prices - as well as improved access to credit - 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 are beginning to challenge tablets by offering multi-use cases, a moreimportant development in emerging markets where consumers are focused on value for money more than

Industry Trends - IT Market

2011-2018

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

Meanwhile, government spending and PC subsidy programmes will continue to be supportive of the PCmarket in 2014 as the government continues to roll out IT modernisation programmes The government hasbeen spending heavily on IT, with around 50% of this going to hardware in recent years It has also spentheavily on licensing software used by government agencies, but in 2013 the Ho Chi Minh City governmentbegan a push to increase the utilisation of open-source software, which could be replicated elsewhere.However, in early 2014 it was reported that the government was abandoning part of its open source

implementation project due to a shortage of technical maintenance staff in the country

In terms of the enterprise sector in Vietnam, the outsourcing market continues to develop rapidly, althoughthe outlook for 2014 is weaker than previous years Vietnam has become the first choice for Japaneseenterprises looking to outsource functions in recent years, primarily based on the cost advantages offered.However, the depreciation of the yen against the US dollar has hit the competitiveness of Vietnameseproviders, and will be a drag on expansion This weakens the outlook, but with a well developed

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

will continue to expand

Drivers

An emerging area in the Vietnam IT market that we

expect to make a significant contribution to medium

term growth is the cloud computing market In June

2014 VMWare reported the results of its cloud

adoption survey in Vietnam It found that 80% of

polled businesses considered cloud computing the

number one priority for IT applications; while 67%

were confident cloud computing would have a major

effect on business activities VMWare estimates that

cloud adoption is growing faster in Vietnam than the

wider region as a result of an absence of legacy

on-premises systems due to Vietnam's late-developer

status The existing drag on the market, that is

concerns about information security, should lessen

as cloud education levels increase, and drive growth

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0

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

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

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

outsourcing services

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

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

A specific IT development initiative is the government's drive to grow the IT services industry over the next15-20 years The cost of outsourcing in Vietnam was estimated in 2013 research to be as much as 30%lower than in China, a fact which Japanese firms were especially aware of The momentum that could begarnered from Japanese enterprises shifting business process and software development outsourcing toVietnam could see medium term increases from European and North American demand

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, despite some progress inrecent years, is required It is also taking steps to increase the penetration of information security

certification by distributing funds to enterprises In August 2013 it was reported that the government wasinvesting USD42mn in the creation of the National Centre for Network Security Technology The

government is also updating the Law on Information Security, which closed for public comment in July

2013, as it looks to improve the cyber security environment including combating attacks originating inVietnam

Improvements to supporting infrastructure are also driving IT market development Telecoms operators areinvesting in the expansion of both wireline and wireless broadband network infrastructure to rural areas, aswell 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

government digital divide programmes to boost internet and digital utility in rural areas underpin

addressable market growth and open PC ownership to a growing number of rural inhabitants

Segments

The agricultural sector continues to be a large part of

the Vietnamese economy accounting for an estimate

19.5% share of GVA in 2013 - a figure BMI expects

to only decrease marginally to 19.3% in 2018 - and

its share of labour is considerably higher The large

agricultural sector, and the potential for productivity

increases, has understandably attracted the interest of

ICT firms

Mobile operator Viettel is a world leader in

pioneering smart agricultural products, including IT

services such as information packages about produce

prices, disease warning, weather reports and analysis

of coffee and cashew nut markets These products

generated VND7bn 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-timeupdates for producers

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

Smaller enterprises have a lower penetration of enterprise software, including ERP and security software,but due to price sensitivity favour local solutions The SME market is an area of the market in whichvendors can achieve growth as SME awareness of the benefits of IT utilisation increase, encouraged by

GVA By Vertical (%)

2014f

f - BMI forecast Source: BMI, National Statistics, World Bank, UN

government initiatives to modernise firms and improve international competitiveness However, vendorswill have to face the challenge of enterprises that are constrained by low budgets and lack of access tocredit Promising SME verticals include discrete manufacturing and consumer packaged goods, as well ashotels and property management The solution areas with most demand currently include security softwareand key applications such as CRM, ERP and HR management.

Finally, the government is a major source of demand for IT vendors, across the hardware, software andservices segments In April 2013 the Ho-Chi Minh City authority announced plans to spend VND300bn(USD14.3mn) on developing e-government capacity It will also focus on replacing out of date hardwareand improving network security in 2013 An additional feature is the authority's intention to work with localsmall and medium IT enterprises where possible, rather than immediately turning to large IT vendors.Spending in 2013 was a marked increase over the 2005-2012 period when the city authority carried out1,012 projects with a total spend of VND665bn

Summary

Overall, the hardware market is anticipated to grow from VND38.2trn in 2014 to VND57.3trn in 2018, withcomputer sales rising from VND31.56trn to VND47.5trn over the same period Software spending shouldrise from VND8.trn to VND14.6trn and IT services from VND16.5trn to VND29.4trn over the forecastperiod

Macroeconomic Forecasts

Economic Analysis

BMI View: Latest GDP figures show that the Vietnamese economy grew by 5.0% y-o-y in Q114, and we

believe that our 2014 real GDP growth forecast of 5.9% remains in sight Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive.

Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by5.0% year-on-year (y-o-y) in Q114, slightly faster than the 4.9% print registered in the Q113 Although itshowed a deceleration from 6.0% recorded in Q413, we believe that the economy is still on track to hit our

2014 growth forecast of 5.9% in 2014 This would mark a slight acceleration from the 5.4% registered in

2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in

2014 We believe that the economy will be driven by a strengthening of private consumption, continuedforeign direct investment into key areas of the economy, a more robust external sector, and a rebound inmanufacturing activity over the coming quarters That said, trend growth for the Vietnamese economy willaverage a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years

Still-Strong Growth

Vietnam - Real GDP Growth, (% chg y-o-y)

Source: GSO, BMI

A breakdown of the data show that all sectors of the economy witnessed an acceleration in growth over thequarter: agriculture, forestry and fisheries, which accounts for approximately 13% of GDP grew by 2.4% y-o-y in Q114, while the industrial and construction sectors, which account for 40% of GDP expanded by4.7% y-o-y Importantly, the services sector which accounts for the lion's share of the economy at 47% ofGDP, accelerated by a stellar 6.0% in Q114, contributing a whopping 2.8 percentage points of the overallgrowth figure Going forward, we expect that the manufacturing, construction and service sectors willcontinue to do well on the back of policy driven efforts to stimulate growth

Services Taking The Lead

Vietnam - Breakdown of GDP By Component (% chg y-o-y) & Share % (RHS)

Source: GSO, BMI

Government Policy To Ensure Growth Remains Strong

We believe that government policies aimed at promoting balanced economic growth, improving the stability

of the banking system, diversifying exports, attracting foreign investment and attracting investment ininfrastructure bode well for the economic outlook In terms of promoting balanced growth, we note that theState Bank of Vietnam (SBV) has continued to rein in inflation, which, at 4.8% y-o-y in the first quarter,remains near record lows and well below the central bank's target of around 7.0% The slight deceleration ineconomic activity in Q114, combined with the weak inflation data over the period prompted the SBV to cut

its refinancing rate from 7.0% to 6.5% in March Although we do not expect further cuts this year (see:

Downside Risks To Interest Rate Forecast, March 21), the central bank has adopted a dovish tone, and

could step in again should it feel that the economy needs more stimulus With regard to banking sectorreform, the SBV continues to push forward with reforms aimed at improving the stability of the sector andincreasing credit to the economy Two key policies are the reduction in non-performing loans, which

according to Moody's, stands at approximately 15%, as well as offloading bad debt off of bank's balance

sheets and on to the newly created Vietnam Asset Management Company (VAMC) By the end of 2013 theVAMC had purchased approximately US$1.9bn worth of bad debt, and it aims to increase the pace ofpurchases over the coming months Combined, these policies should help stimulate credit growth over thecoming quarters, which will help underpin broader economic activity

External Sector To Boost Growth

Vietnam - Trade Balance (US$mn) & Three-Month Moving Average

Source: GSO, BMI

External Sector To Provide Tailwind

We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity inthe coming quarters From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, whichhelped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend toremain in place Indeed, the Vietnamese government has been making substantial efforts to promote tradeand investment ties with other countries, and we believe it will help underpin exports over the comingmonths A case in point was the fourth round of negotiations between Vietnam and South Korea for abilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations

by the end of 2014 Moreover, Vietnam has been forging very strong trade and investment ties with Japan inorder to attract funding and expertise to invest and develop the country's infrastructure and manufacturingsectors

Table: Foreign Direct Investment By Country Of Origin (Top Five)

South Korea 76 534 Singapore 20 2,247

Hong Kong 21 265 Japan 50 299

British Virgin 6 239 Taiwan 5 84

Risks To Outlook

Although we believe that the Vietnamese economy is on track to hit our 5.9% growth target, we see

downside risks to this view First, we still forecast an impending slowdown in China, which would weigh

on regional growth in general Second, public sector capital investment and spending was flat y-o-y in Q114and capital investment of the state budget actually contracted by 2.3% y-o-y over the period While we donot see this as a large risk, if public spending were to lag, it could act as a drag on headline growth Lastly,

we highlight that the pace of reforms will be crucial to sustaining economic growth in 2014 and beyond.Failure by the government to restructure SOE's and provide a framework for foreign investors to participate

in the equitisation of these companies in a timely manner could weigh on investment and growth

Table: Vietnam - Economic Activity

Nominal

GDP,

VNDbn 3 1,809,149 2,157,829 2,779,880 3,245,419 3,584,261 4,012,848 4,494,845 5,033,220 5,616,366 6,269,265 Nominal

GDP,

USDbn 3 101.6 112.9 134.6 155.5 170.4 195.1 221.1 249.0 280.8 316.6 Real GDP

growth, %

y-o-y 3 5.4 6.4 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4 GDP per

capita,

USD 3 1,152 1,267 1,497 1,712 1,859 2,108 2,368 2,643 2,957 3,309 Population

, mn 4 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95 95.7 Industrial

production

, % y-o-y,

ave 1,5 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemploy

ment, %

of labour

force, eop

Notes: e BMI estimates f BMI forecasts 1 at 1994 prices; 2 Urban Area Only Sources: 3 Asian Development Bank,

General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.

Industry Risk Reward Ratings

The IT sector in Asia Pacific is one of the most dynamic globally owing to a combination of key growthfactors, including high levels of productivity across different industry verticals, large populations in manycountries in the region and rapid development of high-speed broadband networks The region is home to

leading global vendors, including Lenovo, Samsung, Huawei, Infosys, and Wipro, with strong

development of the entire ICT value chain

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

markets over our forecast period, ending 2018, based on macroeconomic and country risk factors thatimpact the IT market, as well as key market trends and industry-specific risks The combined real GDP ofthe 12 countries in our table is forecast to reach USD10.5 trillion in 2014

The average aggregate score for our ratings increased marginally this quarter from 55.3 to 55.9, mainly due

to improvements in the Industry Rewards and Industry Risks scores of some countries These were

sufficient to offset a slight decline in the average regional Country Rewards score The average regionalCountry Risk score is unchanged in this quarter's update In terms of ranking, there was only one change onour table; Indonesia moved up two places to eight, pushing down the Philippines and Thailand to ninth and

10th respectively

Industry Rewards

The main factors in BMI's industry rewards rating are value of the addressable IT market, our five year

growth outlook, government initiatives and IT spending as well as market depth, which assesses the

proportion of hardware sales to other IT products and services sales South Korea, China and India are theonly countries with a score of more than 70 in this category, although for different factors South Korea isone of the most matured markets in the region, with hardware sales accounting for less than 25% of total ITsales China's IT market is by far the biggest in the region, with the value projected to reach USD150bn in

2014 For its part, India's IT market is forecast to record double-digit growth over our forecast period, albeit

it from a low base

Australia is the only other country with an Industry Rewards score above the regional average, despitehaving the lowest five-year average growth rate at just 0.1% in US dollar terms The remaining countriesscore between 50 and 59, except Sri Lanka, the lowest ranked country on our table, which scores 46.7 The

country score in this category is held back by the small market size, forecast to reach USD530mn in 2014,and lack of depth in its IT market, with hardware sales accounting for more than 65% of total IT sales.

proportion of their populations live in rural areas and lack access to reliable broadband services

Industry Risks

We upgraded the Industry Risk scores of four countries - Australia, Malaysia, Indonesia and Sri Lanka - thisquarter to reflect notable improvements in the enactment or implementation of laws to protect intellectualproperty (IP) rights Despite these efforts, the region remains a hotbed for product counterfeiting andsoftware piracy as evidenced by the low regional average score in this category South Korea and Singaporeoutperform their regional peers in this category with scores of 75 and 70 respectively At the other end ofour table, Thailand and Vietnam recorded the lowest score of 35

Country Risk

The country risk category assesses the impact of key macroeconomic factors on the IT market Some of thefactors we consider in our analysis include short-term external and financial risks, trade bureaucracy andlegal framework We also incorporate Transparency International's corruption index in our ratings The

categories in our table Hong Kong has the highest score of 77.7, followed by Singapore on 74.4 HongKong's score is boosted by its strong legal framework, transparent and efficient trade policies and a strongcorruption score.

Table: Asia-Pacific Risk/Reward Ratings - Q3 2014

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

South Korea 75.0 80.0 75.0 65.4 74.5 1 1 Singapore 58.3 100.0 70.0 74.4 72.8 2 2 Hong Kong 58.3 100.0 45.0 77.7 70.4 3 3 Australia 60.0 95.0 57.5 66.9 69.5 4 4 China 75.0 35.0 45.0 55.1 58.0 5 5 Malaysia 56.7 55.0 37.5 67.7 55.9 6 6 India 71.7 15.0 45.0 50.9 50.8 7 7 Indonesia 53.3 35.0 42.5 51.4 47.2 8 10 Philippines 53.3 30.0 42.5 50.9 45.9 9 8 Thailand 55.0 20.0 35.0 62.9 45.5 10 9 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 46.7 15.0 37.5 50.9 38.6 12 12

Average 59.7 49.6 47.3 60.7 55.9 -

-Scores out of 100, with 100 highest The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks' -Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/

economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

Market Overview

Hardware

The hardware market in Vietnam is forecast to stay on a strong growth trajectory over the medium term asrising incomes, declining device prices, enterprise modernisation and ongoing investments to upgrade

telecoms networks BMI forecasts growth of 11.3% to VND38.2trn in 2014 Over the medium term BMI

forecasts Vietnam's computer hardware market value will increase at a CAGR of 10.7% in local currencyterms 2014-2018 to reach a value of VND57.3trn

A key factor underpinning hardware market

expansion is supportive economic environment Real

GDP growth is forecast to average 6.1% annually

2014-2018, while private final consumption is

forecast to increase at an average of 5.9% in real

terms Meanwhile, vendors will be able to tap into

demand from first-time buyers as incomes

rise, while greater consumer confidence is a boon for

the upgrade/replacement market

Strong growth forecast for 2014 is an extension of

the trend from 2013 when the market grew rapidly in

terms of both volumes and units Local retail chain

Vien Thong A stated that demand strengthened from

in mid-2013, with back to school purchases booming

as purchasing power rises in Vietnam Other retailers

such as Dienmay.com, Phong Vu, Hoan Long and

Nguyen Kim also reported positive growth in PC sales The segment has also been boosted by retailers partnering with HSBC, VietinBank, ANZ and Sacombank to launch interest-free payment plans.

While improved access to credit is a short-term factor boosting sales, a longer-term trend is the spread ofnetwork 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

BMI estimates total PC unit sales increased 25.5% to 3.4mn in 2014, and we forecast growth of 20.4% in

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

e/f - BMI estimate/forecast Source: BMI

over 50% growth to 988,000 units However, hybrid notebooks are forecast to grow strongly in 2014 asprices decline, which will challenge traditional tablet vendors Meanwhile, desktop shipments will continue

to increase as a result of enterprise modernisation and the push factor of the withdrawal of Microsoft

support for Windows XP in April 2014

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

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

Form Factors

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

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

potential for vendors to tap into the first-time buyer market in Vietnam as PC ownership is still relativelylimited The latest data from the regulator, the 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 PCownership in Vietnam, at 16% in 2011, and is estimated to be around 20% for the country as a whole by

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 USD1,860 in 2013 and forecast to reach

USD3,309 in 2018, the mass market is geared towards the value end of the spectrum

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 H114 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

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

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

There could be a boost to the desktop market from Windows upgrades in 2014 and 2015 as Microsoftsupport for Windows XP is withdrawn from 2014, however the extent to which consumers replace desktopsrather than shifting to notebooks and tablets is uncertain Windows XP still accounted for 36.5% of

Vietnamese PC browsing traffic in May 2014 according to data from Statcounter, illustrating the size of thepotential upgrade market There appears to be some upgrade momentum, with the share of Vietnamesebrowsing traffic attributable to XP down 8.1pps y-o-y, however many smaller Vietnamese enterprises areconstrained by cash and access to credit, meaning the boost from upgrades is likely to be limited relative todeveloped markets

However, two factors limit the potential boost to desktop sales First is the competition from mobile

computing, as consumers and enterprises will likely shift towards greater usage of notebooks and tabletswhen upgrading A second factor is the prevalence of pirated software in Vietnam, meaning the loss ofMicrosoft support is less of a push factor

Meanwhile, the latest data from retailers up to August 2013 indicates demand for notebooks remains strong,with consumers opting for notebooks in the VND8-10mn range, particularly university students requiringmore advanced functionality However they also reported that demand for low cost VND3-5mn tablets wasstrong

We believe low PC penetration is the key to continued growth momentum but migrations to Microsoft'sWindows 8 operating system are also boosting sales In 2012 retailers claimed that many businesses andconsumers were waiting for the October release of the new OS before investing in an upgrade The final

months of 2012 saw the release by of Windows 8 RT tablets from Acer, Asus and other vendors, priced at

around USD600 However these tablets proved unsuccessful in the face of stiff competition from low priced

Chinese tablet imports, predominantly running Google's Android OS Local press reports have stated that

the very low price tablets are selling well and being pushed by dealers who are able to secure high margins

on the devices and still undercut the international vendors

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 of the population However the

proliferation of affordable tablets running Android

and the entry to the market of vendors producing

Windows 8 devices is already seeing tablet sales

increase rapidly 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-range tablets in Vietnam

A victim of the surge in tablet sales will be the

notebook market - especially netbooks 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 Netbooks initially suffered under competition from lower priced notebooks, however tablets arenow 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 Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous

PC Forecast By Device

2011-2018

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

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, Nokia Lumia 2520, Lenovo ThinkPad Yoga and Dell Venue 11 Pro.

Hewlett-Although design innovation has some way to go and prices of hybrids will need to decline, the multi-usedevice has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience Such devices, along with ultra-slim notebooks arealready regaining share of sales from tablets in more developed Asia markets in H113, for instance in SouthKorea, and we believe the same phenomenon could affect Vietnam as prices decline over the medium term

Vendor Developments

The Vietnamese PC market is surprisingly

competitive, with most of the major laptop vendor

players having below a 10% local market share

Other multinational vendors, including Dell,

Toshiba and Samsung, have enjoyed strong growth

in the market Samsung is considered a threat as it

aims to leverage its distribution network and strong

brand recognition from the smartphone and TV

market into a 10% share of the Vietnamese notebook

PC market

Volumes have benefited from retailers cutting prices

and cooperating with banks to offer credit to boost

sales in mid-2013 For instance Dienmay.com cut

prices for notebooks from Dell, Sony and HP, as

well as enabling consumers to test and return or

exchange products within 10 days Meanwhile

Nguyen Kim cut prices on HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free

accessories worth up to VND2mn 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

Vietnam PC Installed Base

2008-2011

Source: MIC

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, which has a nationwide network of 400 dealers FPT, a member of FPT Trading Group, will distribute Asus products, with Asus planning to

introduce the full range of its new products in Vietnam during Q211 FTP also distributes a portfolio ofother leading PC brands, including Dell, Lenovo and Acer Asus, which first entered the Vietnamese marketonly three years ago, is also focusing on service as a competitive differentiator FTP will provide warrantyservices for Asus laptops at its four new service centres in Hanoi, Ho Chi Minh City, Danang and Can Tho.Asus opened service centres across Vietnam in 2011

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

Software

BMI expects growth of software sales will outperform the hardware market, and growth will only narrowly

underperform the services segment We forecast software sales in Vietnam will increase 15.5% to

VND8.4trn in 2014 We expect strong growth will be maintained over the medium term with CAGR of 15%2014-2018 We expect steady growth in demand for licensed software from government, enterprise andhousehold segments

The Vietnamese software market is cost-sensitive, with around 75% of the market served by lower-costlocal software vendors, as well as there being a high level of pirated software Local software dominates the

market for government and SME segments However, larger Vietnamese companies are more likely to buyhigher-priced software from multinationals, which have around 25% of the market Vietnamese customersare demanding a higher level of support for software compared with a few years previously.

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

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

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

Spending opportunities in the finance segment will be driven by regulatory compliance, due to regulationssuch as Basel II, HIPPA and the Sarbanes-Oxley Act, as well as potential new regulations introduced in thewake of the global financial crisis Mobile operators are investing in new OSS (operating support systems)

to reduce costs and support delivery of new services

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

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

Business Software

In 2012 and the first half of 2013 vendors reported

continued robust sales of ERP solutions, despite the

uncertain economic situation There is still a lot of

potential for Vietnamese enterprises to increase

spending on basic solutions, including CRM and

security

A number of Vietnamese companies embarked on

large-scale ERP implementations as part of their

long-term growth strategy In August 2012, Hoang

Anh Gia Lai Group (HAGL) launched a

VND100bn ERP system as it sought to unify

corporate governance The solution was adopted for

the company's four business sectors of minerals,

energy, forestry and real estate, with over 400 staff

members HAGL said it would also consider applying the ERP solution at 20 affiliates Imexpharm

Pharmaceuticals Co spent USD41mn in August 2012 in installing an ERP system at its headquarters in

Dong Thap, two factories in Dong Thap and Binh Duong, as well as a distribution centre and sales branch in

Ho Chi Minh City Other Vietnamese enterprises spending big on ERP solutions in 2012 have includedBinh Minh Plastics, which invested VND10bn in ERP, while Licogi 16 Co has spent USD800,000 on anSAP ERP solution

In July 2013 FPT signed a contract to upgrade the Oracle ERP system, deploying additional Oracle

Business Intelligence Applications, for Vietnam Dairy Products (Vinamilk) The project is reported to beworth VND15bn and includes software licences, hardware infrastructure, consultation and implementationservices

Vendors should also look to areas such as CRM and business intelligence, where faster growth is possible,due to untapped potential in key segments such as CRM, ERP and human resource management Dataanalytics and database software is likely to be a growing area and account for a larger portion of softwarebudgets The banking and finance sector is a promising area for database software and one where foreigncompanies have done well

Software Market

(2011-2018)

Software sales, VNDmn

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0

5,000,000 10,000,000 15,000,000 20,000,000

e/f - BMI estimate/forecast Source: BMI

Government support for ICT development should provide a framework for growing utilisation of software

in both public and private sectors However, while the ERP market is strong, the market for CRM softwareremains small, largely due to a lack of awareness about it among Vietnamese businesses It is estimated thatonly 10% of Vietnamese businesses have used CRM, which is far fewer than in other countries

SaaS

In terms of the threat from Software-as-a-Service (SaaS) most demand remains for on-premises subscriptionmodels, due to the greater perceived security and degree of control However, as internet infrastructureimproves in Vietnam, there should be more demand for alternative models such as SaaS and other cloudcomputing services

The government has become 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 focus on manybusinesses of controlling costs, the pay-on-demand SaaS model should grow in popularity and spreadbeyond the initial core application area of CRM

New cloud computing offerings and increased competition in this segment should fuel further demand fromend-users to utilise this technology In addition to cost savings, businesses will look to boost efficiency andimprove their response to customers in order to satisfy their needs Large businesses are most likely to put

IT applications such as mail, phone systems and document management into the cloud However, enterpriseapplications that require a high level of customisation, or those that are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise

Security Software

Cyber security issues are becoming more prevalent in Vietnam as a result of greater threats and increasedawareness from enterprises, government and consumers The government is taking steps to address theproblem, which should boost spending In August 2013 the government announced it was investing

USD42mn in the creation of the National Centre for Network Security Technology The centre will bemanaged by the Ministry of Public Security, the Government Secrecy Committee and the Ministry ofIndustry and Trade The government also update the Law on Information Security, which closed for publiccomment in July 2013, as it looks to improve the cyber security environment including combating attacks

In March 2013 the Vietnamese government's draft law on digital information security stated that therewould be stronger support for domestic firms producing information security products The VietnamComputer Emergency Response Team (VNCERT) stated that in order to ensure information security andprotect national digital sovereignty domestic products should achieve a 50% share of the market VNCERTcalled for tax incentives for domestic firms to assist them in a competitive global marketplace against

vendors such as Symnatec, Kaspesky, McAfee, Trend Micro, Bit Defender and Aviram.

A survey by internet security company Bkav in April 2013 estimated that the losses incurred by viruses ran

to VND8trn annually in 2012 This was calculated by the disruption to work caused by the presence ofviruses The survey also highlighted an increase in attacks of company websites in Vietnam, with 425 inMarch 2013, nine originating from Vietnam and 416 from foreign countries This level of disruption isgenerating renewed interest in security software and solutions, however vendors will face the same

challenges of price sensitivity and piracy as elsewhere in the software market

BKAV, along with CMC, the most prominent domestic cyber security firm in Vietnam, reported that less

than 50% of computers in Vietnam have anti-virus installed in H113 Despite the scale of the opportunityfrom low penetration BKAV stated that the market is less dynamic than 3-4 years previously when a largenumber of international vendors moved into the market This was attributed to the reluctance of localenterprises and consumers to spend on copyrighted software, preferring free software or no protection