Vietnam information technology report q4 2012

Opportunities ƒ High PC market growth potential particular in rural areas due to overall low PC penetration rate of 15%.. ƒ Vast and relatively under-penetrated rural market presents a

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TECHNOLOGY REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam IT Sector SWOT 7

Vietnam Telecoms SWOT 8

Vietnam Political SWOT 9

Vietnam Economic SWOT 10

Vietnam Business Environment SWOT 11

Asia Pacific IT Risk/Reward Ratings 12

Table: Asia Risk/Reward Ratings Q412 15

Asia IT Markets Overview 16

IT Penetration 16

IT Growth and Drivers 18

Sectors And Verticals 20

Market Overview 24

Hardware 25

Software 27

Services 31

Industry Developments 33

Industry Forecast 37

Table: Vietnam IT Industry – Historical Data And Forecasts (US$mn unless otherwise stated), 20092016 40

Industry Forecast Internet 41

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

Macroeconomic Forecast 43

Table: Vietnam – Economic Activity, 2011-2016 45

Competitive Landscape 46

Hardware 46

Software 48

IT Services 52

Company Profiles 54

FPT Software 54

Country Snapshot 55

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 56

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 57

Table: Vietnam's Key Population Ratios, 1990-2020 58

Table: Vietnam's Rural And Urban Population, 1990-2020 58

BMI Methodology 59

How We Generate Our Industry Forecasts 59

IT Ratings – Methodology 60

Table: IT Business Environment Indicators 61

Weighting 62

Table: Weighting Of Components 62

Sources 62

Executive Summary

BMI View: Vietnamese IT spending is expected to reach US$2.53bn in 2012, up 15%, with BMI

upwardly revising its forecast due to macroeconomic factors The PC market slowed in Q112, but

drivers including rising PC penetration, economic growth, a range of government ICT initiatives and a campaign to develop Vietnam's domestic IT industry will help to sustain continued expansion going forward Vietnam's improving ICT infrastructure will also drive the development of the nation's IT market

in a country with below 20% PC penetration Meanwhile, there is strong demand for ERP solutions in

2012 and cloud computing revenues are expected to report at least 300% growth over the five-year forecast period to 2016

Headline Expenditure Projections

Computer Hardware Sales: US$1.6bn in 2011 to US$1.8bn in 2012, +13% in US dollar terms Forecast

in US dollar terms unchanged; however, tablets are expected to provide a strong growth area in 2012 due

to lower prices

Software Sales: US$187mn in 2011 to US$222mn in 2012, +22% in US dollar terms Forecast in US dollar terms upwardly revised due to analyst modification, but will depend on the success in bringing

down illegal software use

IT Services Sales: US$395mn in 2011 to US$474mn in 2012, +20% in US dollar terms Forecast in US dollar terms upwardly revised due to analyst modification with growing demand for digital infrastructure

projects in various sectors, such as banking, telecoms, energy and government

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

the country 11th, ahead of Sri Lanka The country ranks only ninth for its IT market score, with 36.9

Key Trends & Developments

ƒ In H112, 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 A number of Vietnamese companies embarked on large-scale ERP implementations, including Hoang Anh Gia Lai Group (HAGL), which launched a VND100bn ERP system However, while the ERP market is strong, it is estimated that only about 10% of Vietnamese businesses have used CRM

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

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

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

SWOT Analysis

Vietnam IT Sector SWOT

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

growing affordability driving projected double-digit growth of notebook computers

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

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

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

much lower GDP and GDP per capita

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

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

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

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

penetration rate of 15%

ƒ Vast and relatively under-penetrated rural market presents a significant growth opportunity as the government rolls out measures to boost rural connectivity and incomes

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

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

ƒ One Teacher-One Computer programme aims to deliver 1mn computers to schools by 2011

ƒ The banking and finance sector is a promising area for database software and one where foreign companies have done well

ƒ Banking and finance, oil and gas, aviation and telecoms are projected to be some of the biggest opportunities for multinational vendors

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

of tax collection

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

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

pressure on Vietnamese distributors of foreign IT goods

ƒ Falling prices may further undermine margins and profitability after steep discounting in 2009

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

Vietnam Telecoms SWOT

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

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

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

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

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

state-controlled operators, VNPT and Viettel

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

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

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

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

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

revenues and the arrival of new skills

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

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

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

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

ƒ Draft Bill of Law on Telecommunication has been put forward for discussion at the National Assembly Steering Committee If passed, the bill will allow private companies to build network infrastructure for the first time and will open up the telecoms market to foreign investors

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

consequences for ADSL growth

ƒ As the market for mobile data services grows, this could have potentially negative consequences for the growth of fixed broadband services

Vietnam Political SWOT

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

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

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

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

the ruling Communist Party

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

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

has acted to clamp down on graft among party officials

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

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

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

ƒ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage

Vietnam Economic SWOT

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

with GDP growth averaging 7.1% annually between 2000 and 2011

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

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

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

be difficult to withdraw

ƒ The heavily managed and weak currency reduces incentives to improve quality

of exports, and also keeps import costs high, contributing to inflationary pressures

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

capital, while making Vietnamese enterprises stronger through increased competition

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

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

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

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

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms

on hold as they struggle to stabilise the economy

Vietnam Business Environment SWOT

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

attractive to foreign investors

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

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

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

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

112 out of 183 countries

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

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

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

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

protectionism, which will remain a concern

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

Asia Pacific IT Risk/Reward Ratings

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

markets over our forecast period through to 2016 Our Q412 ratings reflect our consideration of the political and economic risks, as well as the risks associated specifically with IT intellectual property (IP) rights protection and the implementation of state spending projects

While there were slight changes to the countries' individual scores, their respective rankings were

unaffected Singapore remained the most attractive investment destination on a risk-reward basis among the 12 countries that were assessed with an IT Rating score of 74.1 Developed countries Australia, Hong Kong and South Korea occupied the second, third and fourth position respectively, which is mainly due to their more stable macroeconomic environment as well as factors such as the governments' receptiveness

to innovations and greater protection of IP On the opposite end of the spectrum are emerging markets such as Vietnam and Sri Lanka Besides weak Country Structure and Country Risk scores, their IT markets are still in the infancy stage, with significant barriers holding back growth in the near term

Although Singapore's IT market is significantly smaller than many of its regional peers, the country has other redeeming factors Besides a pool of skilled labour in a highly urbanised environment, the country

is strategically located in the heart of South East Asia amid emerging markets such as Indonesia and Thailand, which allows Singapore to form the hub for companies' regional expansion plans Its strong infrastructure, which includes access to major submarine cable networks and high-speed broadband connectivity, political stability and pro-business environment attract foreign investors and spur

Hong Kong's position as one of Asia's most important financial hubs presents significant IT services growth opportunities We expect enterprises to increasingly turn to IT solutions to reduce operating costs and facilitate cross-border transactions, in addition to affordable high-speed broadband connectivity – the territory has some of the world's lowest fibre broadband tariff rates Further, Hong Kong's geographical proximity and relationship with China makes it a good investment location for IT companies interested in tapping into the Chinese market

New offerings such as cloud computing, machine-to-machine (M2M) and telecare are some areas that are driving demand for IT solutions in South Korea Besides government-led initiatives, telecoms operators are playing their part by deploying the latest technologies to ensure networks are able to cope with

bandwidth-intensive services At present, South Korea has the most number of LTE subscribers in Asia Pacific, largely due to the fact that all three mobile operators have launched commercial services The market also has a growing pool of M2M subscribers, which grew by 9.6% from 1.429mn in November

2011 to 1.566mn in May 2012

Malaysia remained in fifth position in our Q412 regional ratings with an IT Rating score of 51.8 There are increasingly attractive opportunities in the IT services area as the government implements measures to make Malaysia a growing regional services and outsourcing hub Guiding the government and industry is the country's Economic Transformation Programme (ETP), which has earmarked areas such as cloud computing as one of its top 10 strategic technology priorities The roll-out of the High Speed Broadband network will also boost IT spending outside the Klang Valley and help the country achieve a household broadband penetration rate of 75% by 2015

China's HSBC manufacturing purchasing managers' index posted its eighth consecutive sub-50 print (at

48.2) in June 2012, meaning that the country's structural slowdown is becoming increasingly difficult to ignore The country's manufacturing sector, which accounts for roughly 40% of the economy, is clearly in

a prolonged contractionary phase, and we do not envisage a turnaround anytime soon Not only is the headline index on the decline, but new export orders also came in at their weakest level in seven months, and the employment reading contracted for a fourth month running A Chinese economic slowdown would negatively affect the IT market growth, albeit at a lesser extent than other industries such as infrastructure or automotives Factors such as the vast potential rural market and a commitment to

modernisation in sectors such as education, healthcare and manufacturing are among the expected drivers However, market risks such as poor IP rights protection and a lack of business transparency remain threats to IT development

In the Philippines, the IT market will be driven by the local IT and business process outsourcing (BPO) sector The BPO industry, which accounts for around 30% of IT spending, continues to grow, and it is in the midst of expanding operations outside Metro Manila In order to facilitate the expansion, network operators are extending fibre optic network throughout the country to provide high capacity connectivity

The number of internet users in Indonesia is projected to increase from the estimated 84.755mn in 2011 to 171.183mn in 2016, representing 68.9% penetration rate While the country's low personal computer ownership and fixed broadband penetration imply significant room for growth, we believe that

development is largely limited to richer areas such as Java We expect government-led initiatives to help narrow the digital divide and encourage small and medium enterprises to adopt IT solutions to lower cost

Like China, India's IT Market score was bolstered by the county's population size, which in turn attract

businesses According to Dimension Data, which partnered with Bharat Sanchar Nigam Limited in

April 2012 to provide data centre services such as video-as-a-service and infrastructure-on-demand, India's IT market is worth INR24bn Dimension Data expects the sector to grow a compound annual growth rate of 22% to INR65bn in 2016.However, India faces a host of challenges if it wishes to fulfil its potential For example, at present, India's business environment is clouded with regulatory uncertainties, which have caused ICT investments to grind to a halt

Thailand's IT sector is gradually recovering from the floods, partially due to the government's Smart Thailand project, which was unveiled in September 2011 Like Malaysia's ETP, the Smart Thailand project aims to boost the country's competitiveness through greater ICT development by integrating ICT

in the government sector At a cost of THB80bn, Thailand aims to increase broadband coverage to 95% of the population by 2020, up from 80% in 2015 and the current 33% At the same time, all 800 government services across the education, health, government service and agriculture sectors are to be migrated to an electronic platform, which should improve service quality and the communication between agencies

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

investments in the IT sector by 2015, according to Avaya Consequently, business communications

solutions provider Avaya opened a representative office in Ho Chi Minh in end-June with an eye on the country's enterprise telephony, internet protocol and contact centres sectors

There was a slight deterioration in Sri Lanka's IT Rating score of 28.3, which fell from 28.3 the previous quarter to 27.7 However, we maintain our view that the country holds long-term potential in light of the restoration of peace and improvements in the security situation, which will help to release pent-up

demand for IT solutions Computerisation has only started in government services Major public and private sector organisations remain largely underpenetrated in terms of basic enterprise software

Table: Asia Risk/Reward Ratings Q412

Market Risks

Country Risk Risks

IT Rating

proprietary Country Risk ratings The ratings structure is aligned across the 14 industries for which BMI provides

Risk/Reward methodology and is designed to enable clients to consider each rating individually or as a composite, depending on their exposure to the industry in each particular state For a list of the data/indicators used, please

consult the appendix at the back of the report Source: BMI

Asia IT Markets Overview

IT Penetration

Across Asia, government ICT initiatives

and growing affordability will help to

drive increases in PC penetration during

BMI's five-year forecast period While

some cities and regions stand out, there is

an unbalanced pattern of regional

development, with PC penetration in

countries such as Singapore above 50%,

while in other countries, such as

Indonesia, it is below 5%

The two Asian giants, China and India,

embody the region's growth potential, as

in both countries computer ownership

remains the preserve of a minority In China, PC penetration is only around 30% in 2012 – although it is far higher in cities such as Shanghai and Beijing and urban PC penetration is projected to pass 60% by

2016 In India, less than 5% of people own a computer However, some 45% of the population is under

25, which provides a promising demographic context for increased PC ownership PC penetration in

Vietnam is estimated by BMI at around 20% in 2012 Notebooks are owned by an estimated 10% of the

Vietnamese population, which points to significant growth potential for the local PC market

Lower price will help to drive higher PC penetration in developing markets The average price of a PC in the Indian market has nearly halved over the past few years and rising incomes and greater credit

availability will continue to bring computers within the reach of lower-income demographics Even in more mature markets, there is room for development, however, with official data suggesting that as many

as 25% of Hong Kong households do not have a computer at home

Around the region, affordable computer programmes continue to find favour with governments In China,

a subsidised household electronics products initiative aimed at rural residents has helped to boost PC sales

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

In Indonesia, PC penetration of around 3% could double by 2016 if government initiatives are followed through The Indonesian government is also rolling out new e-learning initiatives, with a target of raising

Narrowband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

the current 1:3,200 ratio of PCs to students in public schools to 1:20 Meanwhile, the Vietnamese

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

A similarly broad range is found with respect to internet penetration The highest levels of internet penetration are found in South Korea, Hong Kong, Singapore, and Australia, with estimated 2012

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

in 2012

The fastest growth is expected in

Indonesia, where internet penetration is

projected to leap from 45.4% in 2012 to

68.9% in 2016, and the Philippines,

where penetration is forecast to reach

12.6% by 2016 India is still at only

11.8% internet penetration despite an

improvement in fixed-line infrastructure,

and penetration is forecast to reach only

16.2% by 2016 Steady growth is also

projected for Sri Lanka, where

penetration is projected to increase from

18.8% to 25.4% by 2016 Some 56.4% of

Malaysians have internet access in 2012

Dial-up technology is still the dominant access method in many states However, even in developing markets, the number of broadband subscribers continues to gain ground steadily Broadband penetration has been boosted by a growing number of mobile broadband users, as 3G mobile services are expanded across the region In China, broadband penetration is on course to reach 20.9% by 2016 In India,

penetration should increase more than double to reach 2.8% by 2016 from around 1.2% currently,

although this remains below government targets Sri Lanka will also see continued solid growth in

broadband penetration, which is projected to reach 21.7% by 2016

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

Broadband Penetration

Per 100 Population

f = BMI forecast Source: BMI, Regulators

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

IT Growth and Drivers

Across Asia in 2012, IT spending should

benefit from improved economic

circumstances and tenders previously

deferred as a result of the economic

situation, although a forecast slowdown

in China could act as a drag on some

markets Strong fundamental demand

drivers of IT spending meant that there

will be continued opportunities Key

factors common to most markets include

cheaper PCs and reform in sectors such

as telecommunications and finance, as

well as government initiatives

In some of the region's largest markets

largest markets, such as China, lower-tier cities and towns will be among the fastest growing segment of

the IT market BMI expects China's IT market growth to be driven by an expansion into western China

and rural areas as well as growing demand from small and medium-sized enterprises (SMEs)

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

2012 owing to government economic cooling measures and uncertainty about the global economic situation However, an expansion in consumer credit and a modernisation drive in sectors such as

education, healthcare and manufacturing will sustain market growth

The long-term IT market potential of another Asian giant, India, is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning particular potential in the lower-end product range Having postponed IT projects during the economic slowdown, many Indian private and public sector organisations are now investing again in upgrading their IT infrastructure

India's IT market appears to be positioned for strong growth thanks to an improving economy and

consumer sentiment as well as government support for modernisation in lagging sectors Meanwhile, India's business process outsourcing industry is growing at around 40% per annum and will continue to generate opportunities for vendors of IT products and services

2012 IT Market Sizes

US$mn, forecast

f = BMI forecast Source: BMI

In Thailand, demand will be bolstered by

market expansion in the relatively

underpenetrated rural areas SIS

estimates that market growth in

upcountry areas should be 30% in 2011,

double that it has forecast for the country

as a whole A similar situation pertains in

India where in 2012 there are expected to

be strong growth opportunities in smaller

cities

The Philippines is one of the countries

currently benefiting from low-priced PC

programmes (PC4ALL), which provide

opportunities for vendors to penetrate the

low-income segments Other regional computer sale drivers over the forecast period include education, lower prices, IP telephony and cheaper processors as well as notebook entertainment and wireless

networking features Meanwhile, in Indonesia, the basic demographics of rising computer penetration and growing affordability should drive growth SMEs represent a growth opportunity, as currently only around 20% of Indonesian SMEs are estimated to make use of IT Compliance with government and international regulations will be a driver in financial, manufacturing and other sectors

In more developed markets, such as

Hong Kong and Singapore, robust retail

sales the led way in 2011, as evidenced

by the strong advance sales of Apple's

iPad2 In 2012 vendors hope that the iPad

3 and ultrabooks will provide new growth

areas Economic expansion and

improving business conditions are

underpinning stronger business sector

demand while a strong property market

and lower unemployment have boosted

confidence among consumers However,

a potential cooling of the Chinese

economy as a result of monetary

tightening would quickly spread to both markets

IT Market Sizes

As % Of National GDP

f = BMI forecast Source: BMI

IT Markets Compound Growth

2012f-2016f (%)

f = BMI forecast Source: BMI

The largest IT market in the region is, unsurprisingly, China, estimated at US$124.4bn in 2012, trailed distantly by Australia (US$22.0bn), India (US$20.7bn) and South Korea (US$18.5bn) Singapore's IT market (including communications) is the largest as a proportion of national GDP (2.4%), followed by Hong Kong (2.1%) Thailand's IT market has been affected by a number of exogenous events including floods, which in late 2011 disrupted its production of hard disk drives, but in 2012 it looks to be back on track

The fastest growing IT markets over the forecast period looks set to be India and Indonesia with

2012-2016 compound growth of 109% and 96% respectively, driven by increasing PC penetration Sri Lanka is

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

China's total growth is estimated at a still healthy 55%, slower than Vietnam at 69%

Sectors And Verticals

Regional IT markets remain hardware-centric, with hardware accounting for 43-73% of total spending in all markets in 2012 However, spending on software and services will grow faster Notebook sales are growing much faster than the PC market as a whole with growth driven by falling prices and more

features

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

a second household PC Around 30% of households have more than one PC

Tablet sales will provide a PC market growth area, with triple-digit growth projected in many markets In China it is estimated that tablets accounted for around 6-7% of computer sales in 2011 The tariff on an imported iPad was previously set at around CNY1,000 and has now been reduced to CNY500 In 2012, tablets should be a growth area in India as well, with sales surpassing 1mn units, although much will depend on greater affordability The arrival on the market of cheaper, locally produced tablets, retailing for as low as US$30, will help expand the market

However, partly thanks to the tablets surge, demand for netbooks has lost momentum in some markets Sales, although initially promising, have sometimes fallen short of perhaps unrealistic expectations Meanwhile, vendor expectations of a substantial boost from their promotion of high-tier ultrabooks may not be realised until prices come down closer to their US market level

In less developed markets, demand from under-penetrated rural areas, affordable computer programmes and growing broadband penetration should generally drive growth In China, as in much of emerging

Asia, demand from smaller towns and rural areas where PC penetration is relatively low will provide the main source of growth In India, 2011 saw a wave of computer procurements by local governments Another driver in emerging Asian markets will be replacement of desktops with notebooks SMEs will be one of the strong growth segments over the forecast period, with SME demand for servers and networking equipment a significant growth opportunity

Falling prices is another major driver, placing pressure on margins In India, the average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach of lower income demographics

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

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

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

Australia telecoms operators such as Telstra were competing to offer affordable tablets bundled with data

services

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

11-36% among countries covered by BMI Efforts are being made to tackle the issue of piracy, but, despite

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

Across the region there is a growing trend for smaller companies to seek greater efficiency by using IT to improve productivity and reduce costs (including labour costs) In 2012, growing numbers of SMEs are expected to invest in enterprise resource planning (ERP), while many of those that already have it will explore efficiencies through consolidation and virtualisation As Asian companies have become more integrated into the global supply chain, their multinational business partners often encourage them to install back-office systems to meet requirements of efficiency The growing global ambitions of many Asian companies, as well as often booming domestic markets, will fuel investments in software

In general, ERP and other e-business products still dominate the enterprise software market, but vendors are also looking to other areas such as customer relationship management (CRM) and business

intelligence, where faster growth is possible Although the market remains relatively small, more

companies are looking at computing solutions such as Software-as-a-Service (SaaS) Cloud computing business models such as SaaS offer smaller businesses a cost-effective way to deliver applications such as payroll, tax-return processing and recruitment

The hosted application model may already account for between one-fifth and one-quarter of China software revenues and SaaS has also enjoyed steady growth in the Hong Kong market over the past few years Improved broadband infrastructure will assist the popularisation of the rented software model in markets such as Indonesia Meanwhile, around one-third of Australian organisations already use some cloud computing The cloud computing market in India is currently very small but is forecast to expand rapidly

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

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

The IT services segment accounts for 17-41% of spending in the Asian markets covered by BMI The

global economic slowdown and credit tightening had an impact on projects in some verticals, but in 2012

a brightening business climate should mean more opportunities in key IT spending verticals such as financial services, telecoms, government, healthcare and logistics

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

Market Structure (% of IT Market)

2012f (LHS) & 2016f (RHS)

f = BMI forecast Source: BMI

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

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

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

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

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

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

Meanwhile, growing interest in cloud computing will be further stimulated by government programmes

In China, government cloud pilots are under way in at least five cities The Hong Kong government announced plans in 2011 for an escalation of its cloud strategy over the next few years In 2012 more leading Australian private and public sector organisations are expected to launched cloud initiatives and the government has adopted a six-year cloud computing strategy

Market Overview

Government Authority Ministry of Information and Communications (MIC)

Government Authority

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

telecommunications, broadcasting and publishing

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

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

Background

The Vietnamese IT market for 2011, including computer hardware, packaged software and IT

services, has been valued at an estimated US$2.2bn Vietnam IT spend per capita, at around US$23 in

2011, was considerably lower than the US$225 estimated for ASEAN neighbour Thailand However, IT spend per capita is expected to almost double by 2016, to US$45

Computer hardware, including desktops, notebooks and accessories, is the largest IT market segment in Vietnam, accounting for an estimated 74% of spending in 2011 Packaged software has been valued at US$222mn for the year, equivalent to around 9% of spending IT services and outsourcing comprised 17% of spending

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

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

The household sector, which accounts for below 15% of the IT market, should increase its share by 2016 The country's vast, under-penetrated rural market offers the most PC market growth potential, with Hanoi and Ho Chi Minh City accounting for most sales, also presents a significant growth opportunity as the government rolls out measures to boost rural incomes

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

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

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

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

management (CRM) and security

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

ICT Sector

The ICT sector is a key growth priority for the Vietnamese government, with plans to expand it The value of the ICT sector was put by government figures at around VND330bn (US$16.5bn) in 2010, but around two-thirds of those revenues were telecoms related Hardware sales were estimated at around US$7bn, while revenues from software and digital media development were put at US$2bn The total of approximately US$9bn represented growth from around US$6.6bn in 2009 Electronics companies in Vietnam focus mainly on assembly, with value-added contributing only about 10% of revenues Vietnam has around 150 software companies, many of which are focused on export markets

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

Hardware

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

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

projects growth of around 13% in the Vietnam PC market for 2012, slightly below the growth rate

estimated in 2011, as well as that registered for 2010 when the market bounced back from the effects of the economic slowdown There is a sizeable grey market, but the government has tightened up on this,

In H112, PC sales stagnated, even as overall retail sales surged 17.9% over the same period of 2011, to VND1,517tn (US$72.3bn) according to the General Statistics Office (GSO) Sales in Q112 reported a sharp drop sequentially from the Q111 Both commercial and consumer segment sales were affected, with double-digit drops Meanwhile, the PC market managed only modest single-digit growth compared with the equivalent quarter of 2011

In H211, vendors had reported continued strong growth in PC sales, boosted by inventory restocking and back-to-school sales However, following a robust performance in the first three quarters of the year, a deceleration was reported in Q411 The Thai floods led to reports of shortages of HDD supplies,

while seasonal promotions placed further pressure on prices and margins

According to information from the Vietnam Government Statistics Office, in the first eight months of

2011, the country spent US$3.91bn on imports in the category of computers, electronics products and spare parts This represented a rise of 28% on the same period of 2010 Imports in the category reached US$600mn in August 2011, up from a revised figure of US$569mn in July

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

transport, as well as growing demand from businesses in rural areas, will help maintain momentum In the first 11 months of 2011, procurements of PCs and other IT hardware comprised around 50% of total government ICT spending of VND856bn, although this total also included fibre optic cables However, a number of factors could potentially act as a check on the PC market, including government cutbacks and continued caution in the business segment, despite growing awareness of the strategic value of IT

investments

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

estimated 7% of the Vietnamese population, which points to significant growth potential for the local PC market, with the most potential being in rural areas Hanoi and Ho Chi Minh City are thought to account for around 85% of notebook sales The spread of fixed and mobile broadband services will spur purchases

of mobile PCs as connectivity devices Like elsewhere, telecoms operators such as Viettel are emerging

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

The main driver of sales is notebooks, for which the addressable market was estimated at around 1.5mn units in 2011 Notebooks' share of the total PC market has grown very rapidly over the past few years and

in 2012 is forecast at around 70% Further double-digit growth in netbook sales is anticipated over the five-year forecast period In particular, LCD-screen notebooks are forecast to grow at an almost triple-digit rate

Meanwhile, desktops have seen a corresponding rapid decline in their PC market share, and are expected

to account for fewer than 30% of units sold in 2012, down from above 70% five years previously

Netbooks saw a steep decline in popularity in 2011, with a number of leading vendors, such as former

netbook segment leader Sony, withdrawing models from the market Retailers such as home appliance chain Ideas reported that sales declined rapidly in 2011, with the result that less shelf space was allocated

to the devices Other chains, such as Thien Hoa, said that netbook sales remained stable but this segment

has faced strong competition from low-end notebooks with more features, as well as from smartphones, tablet notebooks and specialist devices such as e-readers

Tablet sales are expected to report another year of near triple-digit growth in 2012 Several Vietnamese

enterprises has launched tablet PCs, with the first such product, from Hanel, being introduced on the

market in October 2010 Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy Tablets are generally significantly more expensive than smartphones, but are seen as strong growth areas due to falling prices and a growing preference for mobility

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

multinational brands, such as Apple's iPad, having enjoyed growing recognition in Vietnam since

undertaking to release 6mn low-cost versions Other vendors, such as Samsung with its Galaxy Tab, have

followed Apple in releasing tablet devices, which have a form factor between the size of a smartphone and a netbook

In 2012, vendors are pinning their hopes on the much-hyped new product category of Ultrabooks as a growth area Ultrabooks are fully featured portable computers whose functionality compares favourably with the scaled-down netbooks and tablets that have dominated PC sales in the past However, the high prices of Ultrabooks are likely to limit demand in the short term to below 10% of sales

Software

In 2012, Vietnam software sales are projected by BMI to grow to US$222mn, and software CAGR for

2012-2016 shois anticipated to be 16% Software spending comprised an estimated 9% of total

Vietnamese IT spending in 2011 The market is expected to reach a value of US$407mn by 2016, with steady growth in demand for licensed software from government, enterprise and household segments

Vietnam's software market is developing, despite the problem of software piracy, which still accounts for around 83% of software, compared with around 76% in neighbouring Thailand While high, the piracy rate of 83% in 2011 did represent a drop of 2% compared with the 85% seen in 2010 and 95% as recently

as 2007 This has at least enabled Vietnam to escape the list of the top 10 countries for software copyright infringement The Vietnamese government has gradually taken a tougher stance, with the problem is more one of enforcement rather than a lack of legal provisions In 2012, inspectors discovered 10

computer sales agents of leading brands such as HP, Dell, Lenovo and Acer installing pirated software

products According to estimates, the value of the seized software products was around VND1bn

In November 2011, the government provided a boost to legal software usage by signing an extension of a

deal with Microsoft to purchase licensed software for government organisations The original 2007

agreement had covered all 63 provincial authorities, 24 ministries and enterprises where the state has a stake of more than 50%

The government has moved to tighten enforcement of copyright regulations Decree 47.2007.NP-CP, which became effective in June 2009, allows for a penalty of up to VND500mn (around US$28,000) for

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

Business Software Alliance, a global software industry association that focuses on copyright issues

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

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

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

In 2012, migrations to Microsoft's new Windows 7 operating system should continue to have a positive impact on software revenues, even as vendors anticipate the launch of Windows 8 later in the year Microsoft officially introduced Windows 7 in Vietnam in early November 2009, with the programme

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

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

operating system Microsoft has introduced a Vietnamese version of Windows Live and has announced a list of Vietnamese software programmes that are compatible with Windows 7, including Vietnamese font programmes, dictionaries and accounts software There should also be a boost from systems upgrades previously delayed as a result of the economic situation However, much will depend confidence in the economic situation

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

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

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

In H112, 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 corproate 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 US$41mn 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 included Binh Minh Plastics, which invested VND10bn in ERP, while Licogi 16

Co has spent US$800,000 on a SAP ERP solution

According to estimates by the Ho Chi Minh Computer Association, the local market for ERP software grew to VND700bn (US$46.3mn) in 2011, from VND700bn (US$46.3mn) in 2010 Government support for ICT development should provide a framework for growing utilisation of software in both public and private sectors However, while the ERP market is strong, the market for CRM software remains small, largely due to a lack of awareness about it among Vietnamese businesses It is estimated that only 10% of Vietnamese businesses have used CRM, which is far fewer than in other countries

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

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

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

enterprises look to enhance productivity through automating these and other functions

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

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

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

New cloud computing offerings and increased competition in this segment should fuel further demand from end-users to utilise this technology In addition to cost savings, businesses will look to boost

efficiency and improve 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, enterprise applications 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

The economic slowdown, and the fall in demand for manufactured goods, represented a challenge for vendors as enterprises were tempted to focus more on the bottom line Many companies, particularly trading companies, cut back on non-essential systems upgrades in the face of cash-flow shortages

Smaller enterprises will be a growth opportunity due to growing awareness Companies are looking for software that will help boost performance and operational efficiency Promising segments include discrete manufacturing, consumer packaged goods and hotels and property management

Security software such as anti-virus and internet security applications is one segment that should grow in line with increased awareness among Vietnamese organisations of the benefits 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 Data analytics and database software is likely to be a growing area and account for a larger portion of software budgets The banking and finance sector is a promising area for database software and one where foreign companies have done well

The internet service provider (ISP) sector is a promising segment for software and services vendors, as a government campaign to boost internet usage is set to cause an increase in the number of ISPs To date, only 17 ISPs have been licensed ISPs are also expected to move towards offering more IT services and hosted software themselves Web analytics is one promising area, as firms look to assess the effectiveness

of their online presence and advertising in more detail

The government is a significant software-purchasing segment in Vietnam and accounts for about 30% of total IT spending The 7,000 government agencies offer considerable opportunities at national provincial and 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 to implement e-government will be another driver in this segment

Banking and finance, oil & 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

packaged software Banks are looking to take their services to the next level in response to the demands

of a rapidly growing economy and are investing in more advanced and flexible platforms for core banking

processes The mid-sized Vietnam Asia Commercial Bank was among those to implement a new banking solution in H110, having designated technology as a core pillar of its growth strategy

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

Services

Vietnamese IT services spending is forecast to reach around US$474mn in 2012, up from an estimated US395mn in 2011 The market has recovered after the economic crisis had an impact in 2009, with projects being put on hold Sectoral CAGR is projected at 17% over the forecast period, as the market reaches US$891mn by 2016

IT services account for around 17% of total Vietnamese IT spending, and is forecast to be the fastest growing IT market segment Over the past few years, the size of IT services deals has increased in key IT spending verticals The government has launched a number of major projects in cities like Ho Chi-Minh City, Hanoi and Danang, which will boost public sector spending Growing broadband penetration in rural and remote areas will also fuel the market's development

Growing demand for digital infrastructure projects in segments such as banking, telecoms, energy and

government has attracted global IT services giants such as IBM to invest more in Vietnam Large local organisations such as the Corporation for Financing and Promoting Technology (FPT) have also

targeted this opportunity and announced plans to compete with established multinational vendors and offer high-quality outsourcing services

Vietnam suffers from a shortage of trained IT workers, with some estimating that Vietnam would need an additional 1mn IT engineers in order to achieve the government's ambitious targets for the domestic software and IT services sector Lack of language skills and patchy ICT infrastructure are other barriers, and this situation represent an opportunity for external service providers and trainers

In 2010, the MIC issued a decree to regulate operational requirements and procedures for firms providing

IT services, after the government authority pointed to a lack of regulations for businesses providing IT services, consulting or security services The draft decree is to focus on mapping out policies to help the

IT industry grow in the future Significantly for vendors, however, the decree also suggested measures to boost the usage of IT services in state-owned bodies Measures to gradually eliminate firms that had been previously licensed to provide IT services but were not actually doing so were included in the decree,