Vietnam information technology report q4 2013

mark-The government has moved to address some of the issues slowing the development of the IT market,particularly the outsourcing market which has the potential to be one of the fastest

Q4 2013 www.businessmonitor.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Report Q4 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2013

Business Monitor International

© 2013 Business Monitor International

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BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline SWOT 11

Political 13

Economic 14

Business Environment 15

Industry Forecast 16

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

Broadband 21

Table: Telecoms Sector - Broadband - Historical Data And Forecasts 21

Macroeconomic Forecasts 23

Macroeconomic Forecast 23

Table: Vietnam - Economic Activity 26

Industry Risk Reward Ratings 27

Asia Risk/Reward Ratings 27

Table: Asia Pacific IT Risk/Reward Ratings, Q413 30

Market Overview 31

Hardware 31

Software 38

Services 49

Industry Trends And Developments 55

Regulatory Development 59

Table: Government Authority 59

Regulatory News 62

Company Profile 64

FPT Software 64

Table: FPT Group Revenue By Segment (VNDbn) 66

Table: Profit Before Tax Margin By Segment (%) 67

Regional Overview 68

Demographic Forecast 73

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 74

Table: Vietnam's Rural And Urban Population, 1990-2020 76

Methodology 77

IT Industry Forecasts 77

IT Risk/Reward Ratings - Methodology 78

Table: IT Business Environment Indicators 79

Weighting 80

Table: Weighting Of Components 80

Sources 80

BMI Industry View

BMI View: Vietnam's IT market is forecast grow strongly for the duration of our forecast period to 2017.

We forecast IT spending will increase by 17.6% in 2013 to reach a total value of VND62,082bn (US

$2.97bn), and grow at a CAGR of 14.1% to 2017 Significant opportunities remain in the market due to relatively low penetration of devices and services, 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 A key policy is the promotion of Vietnam as an outsourcing destination, with the services segment expected to expand rapidly over the medium term as enterprises, particularly in Japan, switch business away from China in search of cost savings ERP and security solutions will experience fast growth in the enterprise market, as well as

medium-term opportunities in cloud computing services as telecoms infrastructure improves.

Headline Expenditure Projections

■ Computer Hardware Sales: VND44,389bn in 2013 to VND68,935bn in 2017, CAGR of +12.5% in

local currency terms PC sales growth picked up again from mid-2013 after a dip earlier in the year asretailers cut prices and partnered with banks to provide credit

■ Software Sales: VND5,610bn in 2013 to VND10,378nn in 2017, CAGR of +17.5% in local currency

terms Piracy continues to be a drag on the market, but with large opportunities in business software andsecurity solutions we expect growth will remain robust in the medium term

■ IT Services Sales: VND12,083bn in 2013 to VND22,812bn in 2017, CAGR of +18.2% in local currency

terms Services expected to be the outperforming segment of the IT market as demand grows in severalverticals, including banking, telecoms, energy and government Additionally, there is a potential boom inoutsourcing from Japanese enterprises to drive outperformance of services segment

Risk/Reward Ratings

Vietnam scores 41.1 out of 100 in our Asia Risk/Reward Ratings table This places the country 11th, ahead

of Sri Lanka and behind Philippines and Thailand

Key Trends & Developments

The PC market in Vietnam remains a target for vendors due to the low level of PC penetration, which in

2011 was less than half the level of China and around a quarter of the level in Malaysia As incomes risevendors are able to tap the first time buyer market and achieve rapid unit growth However, the

development of the market slowed slightly in H113 as a lack of credit restricted sales of what remain ticket purchases for the majority of Vietnamese The situation improved from mid-2013 as retailers such as

big-Vien Thong A, Dienmay.com, Phong Vu, Hoan Long and Nguyen Kim cut prices and partnered with banks including HSBC, VietinBank, ANZ and Sacombank to directly offer interest free instalment

payment plans Despite this boost for vendors, sales of notebooks continue to be squeezed by competition to

international vendors from low-price Chinese tablets such as Hipad, Ondan, Teclast and Ampe These

products are undercutting traditional notebooks on price, even after local dealers benefit from high ups The margins available mean they are being heavily promoted by local retailers

mark-The government has moved to address some of the issues slowing the development of the IT market,particularly the outsourcing market which has the potential to be one of the fastest growing segments of the

IT market Cyber security issues are prominent among client concerns dealing with outsourcing operations

in Vietnam, and in August 2013 the government announced it was investing US$42mn in the creation of theNational Centre for Network Security Technology, which followed an update of the Law on InformationSecurity, which closed for public comment in July 2013, as the government looks to strengthen cyber

security and improve the legal environment BMI considers these positive steps which will help Vietnam to

tap demand from Japanese, and other enterprises, that are considering switching from China or India toVietnam to capitalise on cost advantages

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

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

lower GDP and GDP per capita

■ Limited access to credit and budgets restrain spending by SMEs

■ 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

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

■ Vietnam is becoming a popular destination for outsourcing, with particularly stronggrowth potential from Japanese enterprises

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

e-SWOT Analysis - Continued

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

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

to create IT clusters

Threats ■ The implementation of the China-ASEAN free trade agreement means that

established multinationals will face a growing challenge from low-cost Chinesevendors in the Vietnamese market

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

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

Wireline SWOT

Wireline 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

Wireline SWOT - Continued

■ Draft Bill of Law on Telecommunication has been put forward for discussion at theNational Assembly Steering Committee If passed, the bill will allow private

companies to build network infrastructure for the first time and will open up thetelecoms market to foreign investors

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 in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop 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 14.0% in 2010

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

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

■ 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 has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises 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

Industry Forecast

Table: Vietnam IT Industry - Historical Data And Forecasts (VNDbn)

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

IT Market Value 36,898 45,404 52,773 62,082 70,836 80,399 90,746 102,126 o/w Hardware 27,305 33,372 38,261 44,389 49,939 55,877 62,161 68,935

- PC 22,117 27,098 31,374 36,754 41,350 46,378 51,594 57,216

- Servers 2,457 3,003 3,443 3,995 4,495 5,029 5,594 6,204 o/w Software 3,051 3,868 4,630 5,610 6,593 7,708 8,961 10,378 o/w Services 6,542 8,165 9,882 12,083 14,303 16,814 19,624 22,812

IT Market, % of

f = BMI forecast Source: BMI.

BMI forecasts Vietnam will be one of the fastest growing IT markets in APAC over the medium term,

albeit from a low base, but the IT sector will account for a growing share of GDP over the duration of ourfive-year forecast to 2017 We expect the IT market in Vietnam will expand to VND62,082bn in 2013, anincrease of 17.6% from VND52,773bn in 2012 We expect strong growth to continue over the medium,term with a compound annual growth rate (CAGR) of 14.1% 2013 to 2017, with the value of the marketreaching VND102,126bn in 2017 There will be double digit CAGR for all three segments of the market.However, we expect software and services growth to outperform hardware and account for an increasingshare of the total market over the five years to 2017

The major trends driving this strong growth include increases in PC penetration - driven by the supply ofcheaper hardware from Chinese vendors and a new generation of devices running Windows 8 Supportingthis trend will be moves by retailers to partner with banks in credit provision for PC purchases,

improvements in network infrastructure and rising real incomes Government spending and policy will alsoadd to growth, through procurement initiatives, investments in hi-tech industrial parks and policies designed

to boost the sector such as improvements to IT education and security certification schemes for firms.Meanwhile, despite global economic headwinds presenting a risk, Vietnam's software development andoutsourcing services firms are positioned to benefit from large foreign enterprises seeking lower cost

2013 Outlook

Despite a small downward revision by BMI to its

macroeconomic outlook for Vietnam in 2013

conditions remain supportive of IT market

expansion We forecast real GDP growth will pick

up to 5.3% in 2013 from 5.2% in 2012, however it

should be noted that the forecast for 2013 has been

revised down from 7% since the Q2 2013 update

There was a small drag on retail spending in H113

due to limited access to credit, however partnerships

between banks and retailers have returned the market

to faster growth from mid-2013 Ggovernment

spending is expected to increase by 6.2% in real

terms, again up from 2012, and further, we expect IT

spending growth to outpace overall government

spending due to the policy goal of developing the

sector This is evidenced by the Ministry of

Information and Communication's August 2013

proposal to allocate at least 2% of the state budget to boosting the IT sector each year

BMI expects strong sales in the retail PC market to continue through 2013, following a small dip in H113,

as retailers have moved to partner with banks and ensure credit is available for big ticket purchases Themarket will gain additional momentum from the impact of new vendors entering the market and existing

vendors releasing new models, including Android tablets and Microsoft Windows 8 based tablets, hybrids/

convertibles and ultrabooks Most recently the influx of low-priced Chinese own-brand tablets that hasdeepened the market and vendors in the notebook category have been lowering prices to compete with thisinflux, which has helped make devices more affordable and boosted sales

Government spending and PC subsidy programmes will be supportive of the PC market in 2013 as thegovernment continues to roll-out IT modernisation programmes The government has been spending heavily

on IT, with around 50% of this going to hardware in recent years It has also spent heavily on licensingsoftware used by government agencies, but in 2013 the Ho Chi Minh City government is beginning a push

to increase the utilisation of open-source software, which could be replicated elsewhere

Industry Trends - IT Market

2010-2017

f = BMI forecast Source: BMI.

Another area of the market performing strongly in 2013 is the outsourcing services market Several pieces

of research have shown that Vietnam is now the first choice for Japanese enterprises looking to outsourcefunctions, primarily based on the cost advantages offered The majority of Japan's corporate outsourcing isstill directed to China in terms of value, but software and business process outsourcing has significant costadvantages in Vietnam, as well as a friendly business environment This could see rapid growth as firmsshift from China to Vietnam, and the potential for international demand from elsewhere could sustain theboom

Drivers

Government policies and funding are an important part of the sector's development in Vietnam Policiesinclude promoting the use of IT by government agencies, citizens and enterprises - as well as promoting thedevelopment of local industry, particularly in software and outsourcing services

Examples of policies include plans to modernise IT in government agencies and the customs department, aswell as the Tax Administration Modernisation Plan for 2008-2013 A number of government ministries andorganisations, including the Ministry of Education and Training, have also started to promote the roll-out ofcloud services The government has also promoted the IT industry through policy and incentives to grow hi-tech parks, 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 US$42mn 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 in

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

vendors seek tie-ups In a country where PC penetration remains low, particularly in rural areas,

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

Tariff reductions, particularly the ASEAN ones, have contributed to lower prices and are boosting PC sales.However, the new China-ASEAN free trade agreement offers both opportunities and challenges to vendors,given the growing presence of low-cost Chinese vendors in the Vietnamese market Reports from Q113indicate that international vendors have suffered in particular against the supply of cheap own-brandChinese tablets Local dealers are promoting the devices because of the margins available, but even withthis mark-up they are proving a big-hit and hurting sales of traditional notebooks

Segments

In Vietnam the government is a key IT spending vertical and accounts for around 30% of total Vietnamese

IT spending, with high levels of investment in hardware Spending has continued to grow both at centraland regional government level Most recently in April 2013 the Ho-Chi Minh City authority announcedplans to spend VND300bn (US$14.3mn) on developing e-government capacity It will also focus onreplacing out of date hardware and improving network security in 2013 An additional feature is the

authority's intention to work with local small and medium IT enterprises where possible, rather than

immediately turning to large IT vendors Spending in 2013 is a marked increase over the 2005-2012 periodwhen the city authority carried out 1,012 projects with a total spend of VND665bn

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 The banking and finance sector is a promising area fordatabase software and one where foreign companies have done well Spending opportunities in the financesegment will be driven by regulatory compliance, due to regulations such as Basel II, HIPPA and theSarbanes-Oxley Act, and quite likely by new regulations introduced in the wake of the global financialcrisis

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 bygovernment 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 Companies are looking for software that will help boost performance and operational efficiency.Promising SME verticals include discrete manufacturing and consumer packaged goods, as well as hotelsand property management The solution areas with most demand currently include security software andkey applications such as CRM, ERP and HR management.

An increasing number of Vietnamese companies have shown an interest in and willingness to use cloudservices, although the market is only in the early stages of development In the short term weaknesses intelecoms infrastructure - in terms of reach and capacity - will limit cloud service adoption, but this barrierwill erode over the medium term The government has also got involved in encouraging the development ofthis business model in Vietnam and new cloud computing offerings and increased competition in thissegment should fuel further demand from end-users to utilise this technology

Summary

Overall, the hardware market is anticipated to grow from VND44,389bn in 2013 to VND68,935bn in 2017,with computer sales rising from VND36,754bn to VND57,216bn over the same period Software spendingshould rise from VND5,610bn to VND10,378bn and IT services from VND12,083bn to VND22,812bn overthe forecast period

Table: Telecoms Sector - Broadband - Historical Data And Forecasts

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

No of internet users ('000) 26,905 31,159 31,470 32,100 32,742 33,397 34,064 34,746

No of internet users/100 inhabitants 30.6 35.1 35.1 35.4 35.8 36.1 36.5 36.9

No of fixed broadband internet subscribers ('000) 3,644 4,085 4,775 4,966 5,115 5,218 5,322 5,428

No of fixed broadband internet subscribers/100

e/f = BMI estimate/forecast Source: BMI, VNNIC

According to data provided by the Vietnam Internet

Network Information Centre (VNNIC), there were

31.3mn internet users in Vietnam at the end of

November 2012, up from 30.6mn in 2011 Vietnam's

internet sector continued to exhibit slower growth in

2012, continuing on from the trend seen in 2011

The average monthly growth rate for 2011 was

1.1%, which was lower than the growth average in

2010 (1.4%) The first 11 months of 2012 saw even

weaker growth with an average m-o-m growth rate

of just 0.2% Given that the number of 3G

subscriptions has surged in the past year, it is

possible that the VNNIC does not take into account

mobile internet users in its definition

Fixed internet services are experiencing muted

growth due to the higher cost of ownership as

consumers need to purchase personal computers,

namely desktops and notebooks There has been no explanation for the sudden decline in subscriber growth,but market saturation is likely to play a significant role We now expect 32.1mn internet subscribers inVietnam at the end of 2013, a penetration rate of 35.4% We expect this number to increase to 34.7mn byend-2017, a 36.9% penetration rate

Industry Trends - Broadband

Sector

2010-2017

e/f = BMI estimate/forecast Source: BMI, VNNIC

Although the internet user penetration rate is expected to be approaching saturation in major cities andtowns, rural Vietnam remains comparatively untapped as a result of consumers' lower purchasing power.However, expansion into these areas is costly and the return on investment is not as attractive Mobileinternet services are a more efficient way to capture customers in rural areas.

Vietnam's fixed broadband subscriber market grew by 22.8% in 2010, which was a significant slowdownfrom 44.8% in the preceding year The market registered growth rates of 150.3% in 2007 and 58.3% in

2008, but the higher growth momentum could be attributed to a low-base effect

Like the overall internet sector, Vietnam's broadband industry is experiencing a slowdown There were4.3mn broadband subscribers at the end of November 2012, up by 8.0% y-o-y The average monthly growthrate in the first 11 months of 2012 was 0.5%, down from the 1.0% in the whole of 2011 This was due to thecontractions in the months ended June 2012, September and November 2012 We have raised our

broadband forecasts this quarter, however, in light of strong growth reported in the ministry's subscriberfigures According to MIC, there was a surge in broadband subscribers in end-2012, and, by end-March

2013, there were 4.8mn subscribers in the country

Although Vietnamese telecoms companies continue to deploy broadband services such as fibre-to-the-x,affordability and coverage remain key concerns in the emerging market Furthermore, demand for

traditional fixed broadband services is increasingly under threat from mobile alternatives due to a lower coststructure While we believe there will be limited growth potential for the fixed broadband industry inVietnam in the near future, we retain an optimistic view in light of Vietnam's growing affluence andexpanding middle class While next-generation mobile technologies LTE and WiMAX could cannibalisedemand for fixed broadband solutions, companies could generate consumer interest by introducing

bandwidth-intensive services such as IPTV or target businesses by offering bundled packages such as cloudsolutions

We expect the growth rate of the Vietnamese broadband market to decline in the next few years as

consumers opt for mobile alternatives That said, declining prices of products and services should help thesector to grow by an average of 2.0% between 2013 to 2017 to bring the total number of fixed broadbandsubscribers in Vietnam to 5.4mn

Macroeconomic Forecasts

Macroeconomic Forecast

Vietnam's economic recovery is beginning to lose its momentum, with the country recording a relativelyweak real GDP growth figure of 5.0% year-on-year (y-o-y) in Q213, up only slightly from 4.9% in Q113.The latest GDP print also suggests to us that further efforts by the Vietnamese government to speed up therestructuring of debt-laden banks and restart lending to small and medium-sized enterprises (SMEs) may benecessary to support economic growth over the coming quarters Moreover, given that we have recentlybegun to see signs of a slowdown in economic activity across the region, 2013 looks increasingly precariousfor the Vietnamese economy

Not A Good Year

Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS)

Source: BMI, General Statistics Office

Hint Of A Weak PMI Release

The latest GDP print also suggests that the HSBC Vietnam manufacturing purchasing mangers' index (PMI)for June, which is scheduled for release later this week, is likely to come in relatively weak As the

accompanying chart shows, Vietnam's PMI initially exhibited signs of a sustained expansion in

manufacturing sector growth in March, before recent data indicated that the sector has fallen back intocontraction territory (PMI came in at 48.8 in May, compared to 50.8 and 51.0 in March and April,

respectively) On the whole, we maintain a cautious outlook on the manufacturing sector in H213, as thesector remains heavily dependent on external demand to drive growth

As we have highlighted in recent articles, the long-awaited establishment of the Vietnam Asset

Management Company (VAMC) to clean up the build-up of bad debt across the banking sector should help

to ease credit conditions for businesses over the coming months (see 'All Eyes On New Debt ManagementCompany', June 28 2013) However, we argue that the pace of the recovery will be highly dependent on thesmooth and timely implementation of banking sector reforms by the government Indeed, further delays inimplementing banking reforms and the lack of clarity over how the government will address the country'sdeteriorating fiscal position as a result of rescuing the banking sector over the longer term, could riskundermining investors' confidence in the economy

Stalled Lending A Major Drag On Economy

Vietnam - Purchasing Managers' Index

Source: BMI, Markit/HSBC

Surge In FDI Inflows A Sign Of Confidence

On a more positive note, we continue to see evidence that foreign direct investment (FDI) inflows into thecountry have remained resilient despite the lack of progress on banking reforms and the weak economicdata According to figures published by the Ministry of Planning and Investment (MPI), FDI inflows intoVietnam grew by 16.0% y-o-y to US$10.5bn in H113 FDI in new projects were worth US$5.8bn, anincrease of 3.7% over the same period This is in line with our view that Vietnam's long-term prospectremain bright and that the influx of FDI inflows will provide a significant boost to real gross fixed capitalformation (GFCF) growth over the coming quarters We forecast GFCF growth to come in at 4.4% thisyear, before accelerating towards 4.8% in 2014 Accordingly, we expect real GDP growth to come in at5.3% in 2013 before accelerating towards 6.0% in 2014

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively resilient pace of 4.6% in

2013 However, we note that the risk of further bankruptcies among SMEs could potentially lead to

widespread job losses, especially in export-driven sectors Uncertainties over the outlook for employmentcould, in turn, prompt households to cut back on spending

Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2013, partly

led by increased foreign direct investment inflows We believe lending rates will gradually ease over thecoming months as the effect of recent rate cuts by the SBV begins to kick in We are also seeing evidencethat credit conditions are improving Accordingly, we expect gross fixed capital formation growth toaccelerate slightly from 4.3% in 2012 to 4.4% in 2013

Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a

respectable pace of 6.5% However, there is limited room for the government to increase spending furtherowing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks

Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy,

although we expect external demand to pick up through H213 Vietnam's trade account has fallen back intodeficits in recent months, but we see the case for a substantial pickup in external demand on the back of arebound in regional growth over the coming quarters Accordingly, we still expect exports to expand at amoderate pace of 5.5% in 2013

Table: Vietnam - Economic Activity

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

Nominal

GDP,VNDbn 3 1,658,389 1,980,914 2,536,631 2,950,684 3,309,880 3,711,413 4,175,199 4,689,021 5,267,161 Nominal GDP,US

$bn 3 93.2 103.5 122.8 141.4 158.4 180.5 205.4 233.3 263.4 Real GDP growth,

GDP per

capita,US$ 3 1,056 1,163 1,366 1,558 1,727 1,950 2,199 2,477 2,773 Popul-ation,mn 4 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 Industrialproductio

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

Asia Risk/Reward Ratings

There are several positional changes in BMI's Asia Pacific IT Risk/Reward Ratings (RRR) in the Q4 2013

update, as well as minor adjustment to country scores Our ratings compare the potential of a selection ofthe region's markets over our forecast period through to 2017 Key factors affecting the IT market ratingsinclude our growth forecasts and political and economic risks, as well as the risks associated specificallywith IT intellectual property (IP) rights protection and the implementation of state spending projects

Singapore has leapfrogged South Korea to take top spot in the Q4 2013 ratings Its overall rating increased

by 0.8pps q-o-q to 72.1, driven higher by a 1.7pps improvement to its industry rewards score The industryrewards score continues to be limited by the relatively small size of the market compared to other APACmarkets - however, it improved this quarter due to strong retail sales and Singapore's emerging position as aregional datacentre and cloud services hub The improvement in the industry risks category adds to a strongprofile across the other three categories Singapore's country rewards score of 100 reflects the favourablelogistics of operating in the country, while the high industry risks score reflects the proactive nature of theICT regulator Besides rolling out 4G and fibre broadband networks, the country encourages developmentssuch as creating smart districts and exportable enterprise mobility solutions

South Korea has been demoted to second position in Q4 2013 as its overall score has declined by 1.2pps o-q to 71.0 The decline is a result of a weaker country rewards score; however, its position is maintained byits strong score in the industry rewards category South Korea's score benefits from the advanced

q-development of its LTE market, which is one of the most mature in the world, and the fact the country

houses the two largest consumer electronics firms - Samsung Electronics and LG Electronics These

features of the domestic market ensure that it is at the forefront of developments, for instance South Korea

is one of the first markets globally in which hybrids/convertibles appear to be gaining traction and cloudservice providers are also taking advantage of the advanced network infrastructure

Hong Kong has received an unchanged score this quarter, remaining in third position with an IT rating score

of 68.9 Hong Kong has a large financial sector, which results in large opportunities for software and ITservices firms Most recently this has been in the provision of cloud services, with the financial servicesindustry an early adopter of new services This, along with Hong Kong's proximity to mainland China, ishelping it to challenge Singapore as a regional datacentre and cloud services hub as vendors expand into theAsia Pacific market

Australia sits in fourth position in the Asia Pacific IT ratings with a score of 68.0 Australia has an

ambitious National Broadband Network plan, which will vastly improve broadband coverage and speedsthroughout the country, and thereby provide a boost to the IT sector, for instance cloud computing

However, the project is facing an uncertain future with the federal elections approaching in September 2013

as the opposition government has announced that it will rely on less of fibre and more on the existingcopper networks to save costs and time An additional factor holding back the market is the high price ofretail devices and software in Australia as vendors sought to aggressively maximise profitability, resulting

in pushback from the government

China has received a stronger IT rating in Q4 2013, up 1.3pps to 58.8 However, it remains in fifth position

as its strong industry rewards score, the highest in the region, is offset by weakness in its country rewardsand risks scores The sheer size of the Chinese market supports a high industry rewards score, even thoughthe growth trajectory of the economy is becoming more uncertain While our view for a bounce in theChinese economy has played out, should the new leadership reduce support for loss-making state-

dominated industries, this would mean a much weaker H213 and 2014 We hold to our long-term view thatChina will shift its economy towards consumption, which will provide a boost to an already buoyant ITsector The introduction of next generation broadband technologies will also provide the necessary growthfoundation, making way for new IT services and consumer electronics

Malaysia's IT rating has increased 0.8pps to 57.2 in Q4 2013, but it remains in sixth position just behindChina, while some distance ahead of India Malaysia's IT market has benefited from the government'sEconomic Transformation Programme, which has earmarked areas such as cloud computing as one of itstop 10 strategic technology priorities Meanwhile, the country has also identified business opportunities inareas such as fixed and mobile services as well as semiconductors and industrial electronics In the retailsegment, we expect rising incomes to support higher spending, particularly as a greater choice of lowerpriced devices hit the market, particularly tablets from OEMs in China

India's score has slipped 3pps q-o-q in Q113 to 48.6; however, it maintains seventh position in our Risk/Reward Ratings table A lower industry rewards score is behind the drop in IT market score as we

downgraded our forecast for medium-term growth Although initiatives such as the Akash tablet are

widening access to devices by making them more affordable, we caution that widespread poverty, weakeducation, poor infrastructure and corruption are all barriers to the development of the market Once theseissues are tackled, and some progress is being made for instance in telecoms infrastructure, India haspotential to move rapidly up the ratings tablet due to size of its population and the fact it is home to some of

Indonesia jumped one position to eighth in Q4 despite a 1.2pps decline in its score to 46.3 Often theIndonesian market is highlighted for its size and underlying economic growth story, views we share;however, we also point to advanced technological developments such as progress made in machine-to-

machine communications In February 2013, telecoms operator XL Axiata partnered with Ericsson in an

M2M deal to use its Device Connection Platform, which will give the former the ability to develop M2Mproducts for enterprises on the latter's platform in the first such deal in South East Asia

Thailand also has moved up a position to ninth despite a decline in its IT market score to 46.2 The

government is taking policy measures to promote the IT market including the distribution of tablets toschoolchildren - a process that is well under way with almost 900,000 tablets distributed by January 2013.There have also been improvements in supporting infrastructure such as data networking including thelaunch of 3G services, which will satisfy pent-up demand from consumers and businesses These initiaitives

have in turn attracted investments into the country's IT sector In April 2013, NetApp announced that it is

tripling its investment in the country to capitalise on the rapidly growing datacentre market

The Philippines has dropped two positions this quarter due to a significant downgrade of its score to 45.1.Challenging geography and low incomes limit the IT market's potential, but there are many positive features

of the market It is a well-established player in the business process outsourcing (BPO) industry and thereare signs that the country is trying to move towards high-value services There have also been reports ofincreased interest from Japanese corporate customers that are looking to relocate outsourcing from Chinaand India

At the bottom of the table, Vietnam and Sri Lanka occupy 11th and 12th positions with unchanged scores inQ4 2013 Both countries have strong growth potential, but we favour Vietnam The government there haspledged to invest US$8.5bn in its ICT sector in the next 10 years and is also working to attract US$5bnworth of foreign investments in the IT sector by 2015 Meanwhile, Sri Lanka lags behind its peers, in partdue to the detrimental impact of the country's recent civil war Progress is being made though, with somegrowth momentum building as enterprises invest in ERP and adopt cloud services, while there is also anascent outsourcing industry

Table: Asia Pacific IT Risk/Reward Ratings, Q413

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 remains buoyant as demand strengthened in the retail sector in mid-2013,

supplementing strong demand from the enterprise and public sectors BMI forecasts Vietnam's computer

hardware market value will increase by 16% in local currency terms in 2013 to reach a value of

VND44,389bn (US$2.124bn) This fast rate of growth will be driven by trends rising incomes, economicconfidence and trends within the IT market - with the main growth driver being the availability of

affordable tablets and notebooks

The Vietnamese hardware market continued to grow in 2012 despite tighter credit conditions

constraining consumer purchases of big ticket items, and economic uncertainty dampening business

confidence Research firm IDC estimated that PC shipments reached 638,000 in Q412, up 20.5% q-o-q and

3.4% y-o-y This was represents slower growth compared to that reported by Vietnam's General StatisticsOffice (GSO) for retail sales as across economic sectors According to the GSO, the value of retail salesrose by 16 percent in 2012 to VND 2.324trn (110.7 billion USD) Economic uncertainty and incomedistribution means that big ticket PC purchases are not growing as fast as other areas of spending in

Vietnam

Strong economic performance in Vietnam in 2013 will be supportive of an expanding first time buyermarket and upgrade momentum in the retail market This is supported by the latest market data with IDC

estimating total sales of 500,000 units in Q113, an increase of 13.1% y-o-y Local retail chain Vien Thong

A stated that demand strengthened further 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 been boosted by retailers

partnering with HSBC, VietinBank, ANZ and Sacombank to launch interest-free payment plans.

Meanwhile, government spending has remained supportive of the IT hardware market through initiatives insectors such as education and healthcare It is also providing credit programs to raise household PC

penetration in rural areas, which is estimated to still be below 10%, compared to 50% in higher incomeurban areas The most potential being in rural areas where penetration is lower, however for the time-beingHanoi and Ho Chi Minh City are thought to account for around 85% of notebook sales

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, is also helping to boost demand for devices

both as productivity and content consumption devices Telecoms operators such as Viettel are also

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

2013, and only reach US$3,068 by 2017, the mass market is geared towards the value end of the spectrum.Furthermore, with a large number of first time buyers, consumer choice in terms of form factors is

uncertain While productivity devices such as desktops and notebooks will remain popular for education andenterprise purchasers, the availability of cheap tablets from China could see large numbers of consumersmove straight to tablets and have little or no experience with more traditional form factors

In 2013 sales in the retail market are continuing to increase in the desktop, notebook and tablet markets.Tablet growth is to be expected, coming from a low base and considering the increased availability of lowcost devices from OEMs However the desktop and notebook market is also faring well, with IDC data forQ113 showing 13.1% y-o-y unit growth to 500,000 shipments 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 requiring more advanced functionality However theyalso reported that demand for low cost VND3-5mn tablets was strong

We believe that low PC penetration is the key to continued growth momentum but migrations to

Microsoft's Windows 8 operating system are also boosting sales In 2012 retailers claimed that many

businesses and consumers were waiting for the October 2012 release 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 US$600 However these tablets are facing 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

Hardware Market (VNDbn)

2010-2017

f = BMI forecast Source: BMI.

Although sales of desktops are still increasing in Vietnam, with only slow growth, they account for adeclining share of the PC market We estimate desktops accounted for fewer than 30% of units sold in 2012,down from above 70% five years previously There could be a boost to the desktop market from Windows

upgrades 2013 to 2015 as Microsoft support for Windows XP is withdrawn from 2014, however the extent

to which consumers replace desktops rather than shifting to notebooks and tablets is uncertain Windows

XP still accounted for 44.3% of Vietnamese PC browsing traffic in August 2013 according to data fromStatcounter, illustrating the size of the potential upgrade market However, two factors limit the potentialboost to desktop sales First is the competition from mobile computing, as consumers and enterprises willlikely shift towards greater usage of notebooks and tablets when upgrading A second factor is the

prevalence of pirated software in Vietnam, meaning the loss of Microsoft support is less of a push factor

Although sales of desktops will only see small impact from Windows 8, the impact on the wider market will

be more significant The release of the Windows 8 OS introduced touch functionality to a wide range ofvendors, deepening the tablet market by providing competition for Apple and vendors producing Androiddevices

While a global leader in the tablet market, Apple, unsurprisingly given its premium price orientation, has

had limited impact in Vietnam where 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 vendorsproducing Windows 8 devices is already seeing tablet sales increase rapidly in Vietnam In early 2013reports of an influx of own-brand Chinese made tablets indicate growth at the low value end, but we alsoexpect 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 asteep decline in popularity in 2011, with a number of leading vendors, such as former netbook segment

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

lower priced notebooks, however tablets are now squeezing them further

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

mid-supplementary devices to their existing desktops and notebooks

The release of Windows 8 has also spurred the creation of hybrid devices, which will have little impact in

2013 in Vietnam as early examples are priced as premium products However price competition will reduceprices and hybrids could be an interesting growth area over the medium term Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous There is therefore an opportunity for vendors to leverage this strengthover rival iOS and Android devices by designing tablets with strong productivity functionality alongside thepassive media consumption features Early examples have been hybrid devices such as Microsoft's own

Surface (RT & Pro), Hewlett-Packard's Envy and Lenovo's Yoga and Helix.

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 impact in Vietnam as prices decline over the medium

Another device category that is evolving is the ultrabook - a category of slim-line, high-spec devices with

long battery life that use Intel processors Initial uptake after launch in 2012 was slow due to the high price

of devices, meaning limited applicability in a low income market such as Vietnam In 2012 brands such as

HP, Asus, Acer, Sony, Lenovo and Samsung launched ultrabooks in Vietnam However they failed to see

success in terms of unit sales due to high prices Local press have reported that prices of low end ultrabookshave declined in early 2013, from around VND15mn in 2012 to VND10mn which could see unit sales

grow Local producer CMC has moved into the ultrabook market in November 2012 with low-end models.

Meanwhile mid-range ultrabooks are reported to be retailing for VND20-30mn while premium models arepriced over VND30mn The cheaper models are using lower power Intel i3 chips rather than i5 and i7 chips.Even after these price cuts ultrabooks will be significantly more expensive than low end tablets

APAC Household PC Penetration (%)

2011

Source: World Economic Forum Global Information Technology Report 2013

Vendor Performance

The latest data from IDC show that multinational brands dominated the Vietnamese PC market in Q412

Asus was reported to be the top vendor by unit market share, with 17.8% of sales, with its position boosted

by aggressive promotions and strong channel support Fellow Taiwanese vendor Acer was estimated to besecond with a share of 10.2%, ahead of HP on 9.1% and Lenovo with 6.2% However these vendors havediffering strategies For instance, Lenovo is expanding its range of low-end notebooks to better competewith Asus and Acer in the mass market, while HP has been successful in the enterprise market but is seeingits consumer share of sales decline.

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

of the Vietnamese notebook PC market

In 2013, vendors are hoping that upgrades to PC devices based on Microsoft's new Windows 8 operating

system will spur a new cycle of procurements The final quarter of 2012 saw the release of a number oftablets based on Windows 8 on the Vietnamese market Acer released two Windows 8 tablets, the InconiaTab W700 and W511, while fellow Taiwanese leader Asus introduced its Asus Vivo Tab The devices werenot cheap, with prices for the products being set at more than US$600

Volumes have benefitted from retailers cutting prices and cooperating with banks to offer credit to boostsales in mid-2013 For instance Dienmay.com cut prices for notebooks from Dell, Sony and HP, as well asenabling consumers to test and return or exchange products within 10 days Meanwhile Nguyen Kim cutprices on HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free accessories worth up toVND2mn The most important strategy for boosting sales of products from international vendors has beenthe cooperation with banks such as HSBC, VietinBank, ANZ and Sacombank to make interest-free creditavailable

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

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 (US

$48.1mn), down 25% from the previous year

Vietnamese vendors have sought to compensate for declining desktop sales by an expansion into the laptopand tablet segments However, the tablet market remains controlled by major foreign brands, such as Apple,Samsung and Acer Tablets made by domestic vendors, such as FTP and CMS, have not proven a hit with

local distributors and have claimed less than 1% of the market However, Viettel Group has announced that

it plans to enter the tablet market with a device expected to retail at around US$190

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 Meanwhile, Dell has also partnered with local retail leader The Gioi Di Dong to sell both

online and through the company's 40 retail outlets

HP's Vietnam market sales have been boosted by government and education sector projects HP was ranked

by market research firm AC Nielsen as the leading laptop and PC market brand in Vietnam in 2010,

however its performance has declined as a result of underperformance in the consumer market HP was alsothe leader in the printer segment Vendors continued to roll-out new models during the economic slowdown,with the popularity of the small form factor netbooks a significant focus

The reduction of import tariffs from January 2009 was a key moment in the evolution of the Vietnamese

market that encouraged multinational vendors to focus on more imports of high-end devices Sony

announced that it was starting to sell its VAIO notebook in Vietnam, as it started to shift to importing fordomestic sales Sony already has 180 distributors nationwide Meanwhile, working with its partner

DigiWorld Corp, Dell launched a campaign to target the local consumer segment, which is fuelling much

of the current growth

Vietnam PC Installed Base

2008-2011

Source: MIC

Software

Software sales will continue to grow rapidly in Vietnam, BMI believes, and increase to VND5,610bn in

2013, up 21.2% from 2012 We expect strong growth will be maintained over the medium term with CAGR

of 17.5% for 2013-2017 We estimate software spending comprised 8.8% of total Vietnamese IT spending

in 2012, a figure which will increase to 10.2% by 2017 - when total sales will reach VND10,378bn Weexpect steady growth in demand for licensed software from government, enterprise and household

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 themarket 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 customers

Growing PC penetration, as well as new technologies and business models, including 3G mobile andWiMAX, and industry trends such as software-as-a-service (SaaS) and open source will provide areas ofVietnamese software market growth going forward 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 economic slowdown, and the fall in demand for manufactured goods, represented a challenge forvendors as enterprises were tempted to focus more on the bottom line Many companies, particularly tradingcompanies, 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 thatwill help boost performance and operational efficiency Promising segments include discrete manufacturing,consumer packaged goods and hotels and property management

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 theuncertain 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 term growth strategy In August 2012, Hoang Anh Gia Lai Group (HAGL) launched a VND100bn ERPsystem as it sought to unify corporate governance The solution was adopted for the company's four

long-business sectors of minerals, energy, forestry and real estate, with over 400 staff members HAGL said itwould 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 DongThap 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, whichinvested VND10bn in ERP, while Licogi 16 Co has spent US$800,000 on an SAP ERP solution

Meanwhile, in July 2013 FPT signed a contract to upgrade the Oracle ERP system, deploying additionalOracle Business Intelligence Applications, for Vietnam Dairy Products (Vinamilk) The project is reported

to be worth VND15bn and includes software licenses, hardware infrastructure, consultation and

implementation services

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

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

Over BMI's five-year forecast period to 2017, the Vietnamese enterprise software market will offer

opportunities in many sectors While management software remains at less than 10% of the total softwaremarket, basic applications such as enterprise resource planning (ERP) and accounting are finding increasingpopularity with the business market There is a growing emphasis on cost efficiency as enterprises look toenhance productivity through automating these and other functions

Cloud enterprise SaaS adoption is expected to accelerate over the next few years, after pilots scheme weredeemed to have been successful An increasing number of Vietnamese companies have shown an interest inand 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 tocooperate on research Given the focus on many businesses of controlling costs, the pay-on-demand SaaSmodel 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 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-