Vietnam information technology report q4 2014

Credit markets could cause short term disruption but our forecast for robust medium term growth in Vietnamese IT spending remains in place, with a forecast for a compound annual growth r

Q4 2014 www.businessmonitor.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

Report Q4 2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2014

Business Monitor International

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DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Wireline 11

Political 13

Economic 14

Business Environment 16

Industry Forecast 17

Table: IT Industry - Historical Data And Forecasts (Vietnam 2011-2018) 17

Macroeconomic Forecasts 24

Economic Analysis 24

Table: Economic Activity (Vietnam 2009-2018) 30

Industry Risk Reward Ratings 31

Table: APAC IT Risk/Reward Ratings - Q4 2014 34

Market Overview 35

Hardware 35

Software 42

Services 50

Industry Trends And Developments 57

Regulatory Development 62

Table: Government Authority 62

Regulatory News 65

Competitive Landscape 68

International Companies 68

Table: Samsung Electronics 68

Table: Intel 69

Table: LG Electronics 70

Table: Global CyberSoft 71

Local Companies 72

Table: Sara Vietnam 72

Company Profile 73

FPT Software 73

Table: FPT Group Financials By Segment (VNDbn) 76

Regional Overview 78

Asia Pacific Overview 78

Demographic Forecast 83

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 84

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 85

Table: Vietnam's Key Population Ratios, 1990-2020 86

Table: Vietnam's Rural And Urban Population, 1990-2020 86

Methodology 87

Industry Forecast Methodology 87

Sources 88

Risk/Reward Ratings Methodology 89

Table: It Risk/Reward Ratings Indicators 90

Table: Weighting Of Components 91

BMI Industry View

BMI View: We maintain a positive outlook for the Vietnamese IT market in the Q4 update, but we highlight

increased downside risk from a tightening of domestic credit conditions in H214 as a result of a build up of bad debt Credit markets could cause short term disruption but our forecast for robust medium term growth

in Vietnamese IT spending remains in place, with a forecast for a compound annual growth rate (CAGR) of 12.6% between 2014 and 2018 We expect growth will be driven by rising incomes, enterprise

modernisation and the policy environment put in place by the government We also highlight larger

opportunities in the retail market where penetration of devices and services remains below the level in neighbouring markets, which vendors will be able to tap as incomes rise Meanwhile, Vietnam's

development as an outsourcing destination is a significant medium term factor, with the services segment expected to expand rapidly There is also increasing momentum towards Vietnam becoming a global centre for electronics production as wages rise in China and manufacturers look to protect margins by moving to Vietnam, where wages are as little as a third of those in China.

Headline Expenditure Projections

■ Computer Hardware Sales: VND38.9trn in 2014 to VND58.3trn in 2018, CAGR of +11.3% in local

currency terms Rising incomes and declining device prices, along with PC subsidy schemes, will supportdemand growth across all three main device categories over the medium term

■ Software Sales: VND10.1trn in 2014 to VND17.9trn in 2018, CAGR of +16.1% in local currency terms.

There are considerable opportunities in business software and security solutions for vendors willing toaccept narrow margins in a price-sensitive market

■ IT Services Sales: VND14.2trn in 2013 to VND25.1trn in 2018, CAGR of +15.1% in local currency

terms Domestic demand for services remains weak, but we expect adoption to increase markedly asawareness levels increase, particularly with regard cloud computing and outsourcing services

Key Trends & Developments

BMI has repeatedly highlighted the drag on IT market development from Vietnam's exposure to cyber

security risks, including cyber crime and state backed attacks We therefore welcomed the September 2014opening of the Department of Network Security in Hanoi, with the remit of securing Vietnam's internettraffic The key focus is on comprehensively improving the standards of network security officials andofficers However the government has also bundled its own domestic security goals in with the remit for thenew department These elements have concerned political risk analysts, for instance the power to eraseviolated content on web portals and social networks under orders from the government, as well the use ofinformation filtering mechanisms The department will also be able to identify Vietnamese users on social

networks by linking the electronic databases to its own database of citizen identification cards Socialnetworks and web portals in Vietnam must store at least two years of their information activities and thesame time span for the information of the users' accounts, log-ins, log-outs and IP addresses on socialnetworks We believe the bundling of functions could ultimately disrupt the agencies work on tacklingcyber crime, with the danger that political objectives could take precedence.

A more positive development related to the government came in July 2014 when the Prime Minister ofVietnam enabled state agencies to use outsourced information technology providers for the first time It will

enable IT firms to provide software and technology systems as service packages, which BMI believes

represents a significant new area of growth for vendors There is considerable scope for growth in domesticoutsourcing sales over the medium term from the public, and private, sectors - however confidence remains

a major impediment to adoption Managers are unsure of the benefits of IT outsourcing, as well as havingconcerns about security and a loss of control over key processes A report from Grant Thornton

International stated that only 12% of enterprises in Vietnam are open to outsourcing BMI expects

outsourcing adoption to accelerate once awareness of the benefits is more widely spread, and vendors easemanager concerns

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

■ Expanding local hardware production industry with major international players such

as Samsung, Nokia, LG and Intel making large investments

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

lower GDP per capita

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

■ High level of software piracy, with a stall in the reduction 2011 to 2013

■ Cyber security measures by the government have been pushed through with statesecurity measures, with potential human rights implications

Opportunities ■ Decision in July 2014 to enable state agencies to use outsourced information

technology providers for the first time opens a new growth channel for vendors

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

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

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

SWOT Analysis - Continued

■ Vietnam is a popular destination for software development and IT servicesoutsourcing, with particularly strong growth potential from Japanese enterprises thatare turning away from Chinese based providers

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

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

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

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

Threats ■ A domestic credit tightening in H214 could result in a growth slowdown, with negative

implications for IT market growth

■ 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

■ Yen depreciation has hit the software outsourcing market by making exports lesscompetitive and eroding Vietnam's cost advantages

SWOT

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

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

■ Competition exists in fixed-line and internet access markets; VNPT faces competitionfrom several other state-owned companies and privately owned operators

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

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

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

and the arrival of new skills

■ On a national level, broadband penetration rates remain low - this means that thesector has considerable growth potential

■ Significant opportunities exist to develop alternative broadband technologies,including WiMAX, LTE and fibre; WiMAX and LTE internet services have the potential

to raise the level of internet user penetration in rural parts of Vietnam

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

consequences for DSL growth

■ As the market for mobile data services grows, this could have potentially negativeconsequences for the growth of fixed broadband services

■ VTV's dominance in the pay-TV sector is holding back market development

SWOT Analysis

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

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

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

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

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

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

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party

system, and street demonstrations to protest economic conditions could develop into

a full-on challenge of undemocractic rule

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

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

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

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

SWOT Analysis

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

GDP growth averaging 7.1% annually between 2000 and 2012

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

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

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

Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam

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

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

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

Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam

on this front could result in a decline in investment

■ We see potential for political tensions with China could have a negative impact on theeconomy

SWOT Analysis - Continued

■ Any prolonged macroeconomic instability could prompt the authorities to put reforms

on hold 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 a corrupt country According to Transparency International's 2013Corruption Perceptions Index, Vietnam ranks 116 out 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

■ The dispute with China in Q214 in the South China Sea suggests the potential forrenewed political tensions going forward

sales,

VNDmn 20,893,673 24,084,521 28,108,166 31,273,917 34,602,471 38,395,935 42,495,119 46,891,972 Software

sales,

VNDmn 6,333,868 7,219,367 8,492,864 10,110,978 11,659,221 13,400,490 15,532,436 17,935,602 Services

sales,

VNDmn 8,581,370 10,354,092 12,459,925 14,218,562 16,422,439 19,097,705 21,944,081 25,130,109

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

BMI believes the Vietnamese IT market will be one of the outperforming IT markets in APAC over the

medium term as a result of a range of factors including supportive government policy, rising incomes,declining device prices, enterprise modernisation and investments in telecoms infrastructure However,demand in 2014 is expected to be dampened by the tighter domestic credit environment, and this alsopresents downside risk in 2014, with reports in September 2014 that enterprises in several sectors wereunable to obtain credit as banks reassess in light of the high levels of bad debt in Vietnam

Despite short-term downside, we highlight the strong medium term growth potential The IT market inVietnam is relatively undeveloped but the IT sector will account for a growing share of GDP over theduration of our five-year forecast to 2018 We also highlight the development of Vietnam's local IT

industry, with software development and outsourcing services firms developing rapidly and positioned to

benefit from large foreign enterprises seeking lower cost locations over the medium term.BMI forecast the

IT market in Vietnam will expand by 13.1% to a total of VND63.2trn in 2014, up from VND55.9trn in

2013 We expect strong growth to continue over the medium, term with a CAGR of 12.6% forecast for2014-2018, with the market expected to reach a value of VND101.3trn in 2018

2014 Outlook

Although BMI highlights the downside from tightening credit conditions in Vietnam in H214, with

government attempts to resolve the bad debts held by local banks so far not proving effective, and the issuecould drag over into 2015 This could reassert a traditional area of weakness in Vietnam, which had become

a less significant factor as a result of partnerships between banks and retailers formed in 2013 However,with the wider Vietnamese economy still on track to record strong growth we expect the credit tightening isonly expected to cause short-term disruption We forecast real GDP growth of 5.7% in 2014 and real growth

of private final consumption of 6.5%, growth rates that will support a buoyant retail hardware market

We expect growth in desktop, notebook and tablet shipments as rising incomes and declining device pricespromote first-time buyer and upgrade sales The influx of low-priced Chinese own-brand tablets since 2012has deepened the market and vendors in the notebook category have been lowering prices to compete withthis influx, which has helped make devices more affordable and boosted sales There is evidence in H114that hybrid notebooks have carved out a significant niche and are beginning to challenge tablets by offeringmulti-use cases, a more important development in emerging markets where consumers are focused on valuefor money more than the fashion cache of tablets

Private demand could be negatively impacted by credit conditions, and under this scenario governmentdemand will become a more important source of sales The Ministry of Information and Communication'sreleased a proposal in August 2013 to allocate at least 2% of the state budget to boosting the IT sector eachyear The government is actively promoting IT market development in several areas including PC subsidyprogrammes, licensing software used by government agencies and enabling state agencies to use outsourcedinformation technology providers for the first time in 2014

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

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

will continue to expand

Industry Trends - IT Market

2011-2018

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

Positive economic fundamentals over the medium term and declining device prices will drive retail

hardware market growth Another supporting development is the investment taking place in the expansion

of both wireline and wireless broadband network infrastructure to rural areas, as well as upgrading capacity

of urban infrastructure and improving backbone networks Additionally, telecoms operators such as Viettel

are emerging as significant distribution channels for notebooks as vendors seek tie-ups In a country where

PC penetration remains low, particularly in rural areas, government digital divide programmes to boostinternet and digital utility in rural areas underpin addressable market growth and open PC ownership to agrowing number of rural inhabitants

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

computing market In June 2014 VMWare reported the results of its cloud adoption survey in Vietnam It

found that 80% of polled businesses considered cloud computing the number one priority for IT

applications; while 67% were confident cloud computing would have a major effect on business

activities VMWare estimates that cloud adoption is growing faster in Vietnam than the wider region as aresult of an absence of legacy on-premises systems due to Vietnam's late-developer status The existing drag

on the market, that is concerns about information security, should lessen as cloud education levels increase,and drive growth higher

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

outsourcing services

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

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

A specific IT development initiative is the government's drive to grow the IT services industry over the next15-20 years The cost of outsourcing in Vietnam was estimated in 2013 research to be as much as 30%lower than in China, a fact which Japanese firms were especially aware of The momentum that could begarnered from Japanese enterprises shifting business process and software development outsourcing toVietnam could see medium term increases from European and North American demand Meanwhile, with areport from Grant Thornton International stating that only 12% of enterprises in Vietnam are open tooutsourcing, there is also huge growth potential domestically - particularly after the Prime Minister ofVietnam enabled state agencies to use outsourced information technology providers for the first time in July2014

However, growth will depend on government progress on various business environment issues, includingcopyright protection and combating cyber security threats Further progress in combating software piracy,which is still reported to be at higher levels than in China, India and Thailand in 2013, and progress seems

to have stalled since 2011 It is also taking steps to increase the penetration of information security

certification by distributing funds to enterprises and in September 2014 the Department of Network Securitywas officially opened in Hanoi, with the remit of securing Vietnam's internet traffic The key focus is on

comprehensively improving the standards of network security officials and officers However there areelements of the remit that have concerned political risk analysts (see regulatory developments section).

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

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

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

As a developing market with a large agricultural sector BMI believes there to be considerable scope for

vendors to market productivity enhancing products and solutions The agricultural sector accounted for an

estimated 19.5% share of GVA in 2013 - a figure BMI expects to only decrease marginally to 19.3% in

2018 - and its share of labour is considerably higher Mobile operator Viettel is a world leader in pioneering

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

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

providers, for instance Hanel has stated its intention to develop smart agriculture products BMI expects the

agriculture vertical in Vietnam has medium term growth potential as vendors innovate real-time updates forproducers.

Large Vietnamese companies are the most likely to buy packaged software from multinationals, which haveonly around 25% of the local software market In the large corporate sector, growing demand for digitalinfrastructure projects in segments such as banking, telecoms and energy has attracted global IT services

leaders, such as IBM, to invest in Vietnam Foreign investment, particularly by Japanese companies, in call

centres and other areas will help to grow the market

Large state enterprises are also increasing spending on IT products and solutions, a trend that shouldcontinue over the medium term For instance, in August 2014 FPT won a major IT services contract for the

development of a new ticket distribution system for the Vietnam Railway Corporation FPT will build a

modern e-ticket distribution system, enabling customers to purchase tickets either online, via email orthrough sale agents The project is expected to take place over 7 years, with 3 development stages, and atotal cost of around VND200bn

Meanwhile, smaller enterprises have a lower penetration of enterprise software, including ERP and securitysoftware, but due to price sensitivity favour local solutions The SME market is an area of the market inwhich vendors can achieve growth as SME awareness of the benefits of IT utilisation increase, encouraged

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

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

Vietnam GVA By Vertical (%)

Macroeconomic Forecasts

Economic Analysis

BMI View: We have downgraded Vietnam's growth forecast from 5.9% to 5.7% in 2014 on the back of

weaker-than-expected H114 growth numbers, combined with the risk of an economic backlash from China That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue to believe that the economy will be driven by growth supportive government policies, as well as a strong outlook for foreign investment and exports.

Real GDP growth came in at 5.3% year-on-year (y-o-y) in Q214, according to the General Statistics Office(GSO), bringing growth for the first half of the year to 5.2% y-o-y This marks an acceleration whencompared to the 4.9% registered in the first half of 2013, and chimes with our view that the economy willcontinue to accelerate into 2014 and 2015 Growth was predominantly driven by strength in the servicessector as well as the industry and construction sectors, which contributed 2.6 and 2.1 percentage pointsrespectively to growth Although we see strong growth ahead, we have revised down our growth forecastfor 2014 from 5.9% to 5.7% on the back of a slightly weaker than expected first half of the year, combined

with the potential for an economic backlash from the ongoing political dispute with China (see 'Political Tensions Pose Downside Risks To Growth', June 10) That said, we have kept our 2015 real GDP growth

forecast unchanged at 6.4%

Slight Downgrade, But Powering AlongVietnam - Real GDP Growth, % chg y-o-y

Source: GSO, SBV

The Vietnamese government will continue to promote progrowth policies, by running a fiscal deficit albeit a declining one - maintaining a dovish stance with regard to monetary and exchange rate policy,restructuring many state owned enterprises (SOEs), promoting foreign direct investment and exports as well

-as attracting developmental-type aid For the first six months of the year, we estimate that the governmentposted a fiscal deficit of approximately 4.3% of GDP, with spending rising by 9.7% y-o-y At the sametime, the State Bank of Vietnam (SBV) has maintained a dovish bias since the beginning of the year, cuttingits refinancing rate by 50 basis points in March to 6.5% in an effort to spur lending Indeed, the SBVrecently also devalued the Vietnamese dong by 1% in June, in what we believe is a pre-emptive move toboost exports in the event of a slowdown driven by the ongoing political spat with China Given lowinflationary pressures, we would not be surprised to see either another cut to the refinancing rate, or anotheradjustment to the currency before year-end in the event of a slowdown in growth, although it is not our coreview Combined, both accommodative monetary and fiscal policy will continue to support growth over thecoming quarters

Services Powering AheadVietnam - Real GDP Growth By Category, % chg y-o-y & Share of GDP, %

Source: GSO

Manufacturing And Retailing To Help Support Growth

The industrial sector, which accounts for approximately 33% of the economy and includes manufacturing,mining, water management, and power generation accelerated by 6.1% y-o-y in June and 5.8% for the firsthalf of the year At 21% of GDP, manufacturing accounts for the lion's share, accelerating by a robust 7.8%y-o-y in H114, driven by textiles (21% y-o-y), leather goods (19.2%), and motored vehicles (22.9%), atrend we expect will remain in play given the continued strength in the country's domestic demand and

export markets Moreover, as we highlighted in previous articles (see Manufacturing To Remain Strong,

June 20), the manufacturing sector will continue to see strong growth, particularly as it moves up the valuechain into higher value sectors such as Information and Communications Technology (ICT) The retailsector expanded by 12.2% y-o-y in H114, with accommodation and catering services growing by 13.1% andtravel services by a whopping 20.5% over the period

Manufacturing To Remain StrongVietnam - Industrial Production, % chg y-o-y, 6mma

Source: Bloomberg

Exports Continue To Strengthen

Vietnam's export sector continues to be a driver of growth for the country, and we forecast this trend toremain in play over the coming months Exports for the first six months of the year expanded by a robust14.9% y-o-y, and saw the accumulated trade surplus rise to USD1.3bn in H114 Exports were primarilydriven by strong growth in textiles, telephones and footwear of 18.2%, 17.1% and 21.9%, respectively,which together account for approximately 35% of the total Moreover, we expect exports to continuedriving growth going forward given that the Vietnamese government has been making a concerted push tobuild diplomatic and trade ties with many countries and is negotiating several free trade agreements One ofthe most important ones is the Trans-Pacific Partnership (TPP), which could be signed by as early as 2015

Diversified & Picking UpVietnam - Exports By Category, % chg y-o-y & Share of Total

Source: GSO

Investment and Infrastructure Development To Drive Growth

The investment picture also remains very bullish in Vietnam as the country has been able to attract bothprivate investment as well as foreign aid, which will help underpin both short-and long-term growth Therewere a total of 656 investments in H114 with a total value of USD4.9bn, and although this figure marks a16.4% decline from last year, we do not believe that it highlights a lack of opportunities going forward Thelargest source of investment this year has been from South Korea at USD1.1bn, followed by Hong Kong(USD867mn), Singapore (USD559mn), Japan (USD438mn), and Indonesia (USD352mn).The Vietnamesegovernment continues to restructure many of their SOEs, and several companies, such as

Samsung, continue to be attracted to the country's lower labour costs, which suggests that foreign

investment will continue to flow to Vietnam Indeed, in July, Samsung received approval from the

government to build a USD1.0bn plant From a developmental perspective, the ASEAN Infrastructure Fund(AIF) approved a USD100mn loan for the power sector in May, and could provide another USD200mn inloans Moreover, the World Bank in June approved two credits worth USD500mn to support economicmanagement, reforms and infrastructure development in the northern region of the country

Investment To Remain A Driver of GrowthVietnam - Foreign Direct Investment By Source, USDmn

Source: GSO

Risks To Outlook: China, From Friend To Foe

Although we have already downgraded our growth forecast slightly for this year, we continue to monitorrisks from trade policy with China Although we do not believe that the political tensions between Hanoiand Beijing will result in military conflict, there are non-negligible risks of an economic backlash Indeed,the Chinese government has temporarily stopped Chinese state-owned companies from bidding for newcontracts in Vietnam, which could see investment flows decline substantially over the coming quarters,posing downside risks to Vietnam's growth outlook China accounted for 21.3% of foreign investment inVietnam in 2013, approximately 14.5% of Vietnam's exports, and about 27% of all visitors this year Assuch, a sustained economic backlash could have a more severe impact on Vietnam's growth outlook

Table: Economic Activity (Vietnam 2009-2018)

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP, USDbn 101.6 112.8 134.6 155.6 170.6 194.9 220.8 248.6 280.4 316.2 Real GDP growth, % y-o-y 5.4 6.4 6.2 5.2 5.4 5.7 6.4 6.6 6.4 6.4 GDP per capita, USD 1,152 1,266 1,496 1,713 1,860 2,105 2,364 2,639 2,952 3,303 Population, mn 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 Industrial production, % y-o-y, ave 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemployment, % of labour force, eop 4.6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5 3.5

National Sources/BMI, e = Estimate, f = BMI Forecast

Industry 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 medium term forecast period to 2018 The Q414 ratings reflect our analysis of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects

There was only one positional change in the Q414 ratings as Singapore returned to the top position

However, scores remain tight at the top of the table and there is scope for further positional changes in thecoming quarters Meanwhile, there was a 0.3pps decline in the regional average IT risk/reward rating to55.6 - with the decline primarily caused by a decline in South Korea's industry rewards score

Singapore now tops the Asia Pacific RRRs in Q414, after being overtaken by South Korea in Q114

Singapore moved up the table despite receiving an unchanged overall score of 72.8 Singapore has alwaysscored highly in our ratings, as one of only two countries with the maximum score of 100 in the countryrewards category The only area of weakness is that Singapore scores slightly below average in the industryrewards categories due to the relatively small size of its market However, this is offset by Singapore'sposition as a regional hub for cloud computing services and data centres, which is continuing to attractmajor inward investment by global and regional vendors

South Korea dropped to second position in the table in Q414 as its score in the industry rewards categorydeclined 5pps q-o-q The South Korean hardware market is one of the most valuable in the region in percapita terms - with high penetration of not only desktops and notebooks but also tablets and increasinglyhybrid notebooks However this maturity results in more limited growth prospects over the medium termcompared to emerging markets in the region The rapid growth of the tablet market, which we now believe

to be largely saturated in terms of first-time buyers, has resulted in a downgrade to the industry rewards

score as BMI expects a plateau in the hardware market over the medium term.

The other developed city-state in APAC with a maximum score of 100 in the country rewards category isHong Kong, which sits in third position in our table Despite the limitations of its small population HongKong could in fact be higher up the table without the drag of being under the China policy umbrella on theindustry risk category However, Hong Kong remains a prime financial hub, a high-spending vertical for ITsolutions, and is driving the development of the cloud computing market as banks demand advancedsolutions

Australia's score increased 0.4pps q-o-q but remained in fourth position in Q414 High incomes support alucrative retail hardware market, while the developed nature of the wider economy ensures strong demandfor enterprise solutions Meanwhile, investments in supporting infrastructure, particularly the NationalBroadband Network (NBN), present upside potential over the medium term Cloud computing is expected

to be a key trend, with strong demand from SMEs for cloud services evident in surveys in 2014

China is the largest market in the region owing to its huge population and relatively advanced IT marketconsidering income levels The outlook has been boosted by the latest round of economic reforms that willtake place through the forecast period and on to 2020 Major reforms include urbanisation development,strengthening institutions and reform of the one-child policy, all of which are expected to boost growth andincrease private sector confidence in the IT market Wider support for the service sector and modernisation

of state-owned enterprises, including finance, telecoms, healthcare, education and professional services (egcall centres) will be the most important reforms for boosting the IT sector, with software and services well

placed for faster growth BMI considers the intention of the reforms positively, and could present upside to

its overall score, however we have held-off changing our ratings until more detail about the reforms isreleased

Malaysia sits just below China in sixth position, with its far smaller market only partially offset by thehigher incomes and level of development Although trailing regional leaders such as Singapore and HongKong, Malaysia is home to a vibrant cloud computing market that should ensure medium term growth.Growth has been catalysed by government policy, with MSC Malaysia seeing it as a strategic priority andworking to develop a national cloud computing platform Cloud projects are not confined to the nationallevel, as state governments are also exploring this area

There is then a substantial gap in the ratings to India which scores 8.1pps below Malaysia Several of thecountries in the bottom section of the table have considerably larger populations than some countries ahead

of them in our table; they are held back by weak country rewards scores which reflect lower GDP per capitaand rate of urbanisation, as well as higher rates of unemployment

India is a market of great contradiction - on the one hand it is home some of the world's largest players in

the IT services segment such as Wipro, Tata Consultancy and Infosys However, on most metrics it falls

far behind its regional peers, for instance in PC penetration, broadband access, IP protection, adoption ofsolutions by enterprises and public authorities Ineffectual governance and weak institutions have been themain obstructions to faster development, and we do not see a short term improvement despite the positiverhetoric of reform from the incoming government That said, rising incomes and the sheer size of the Indian

market will ensure vendors continue to invest, and there is upside potential if Modi's reform agenda gathersmomentum.

Indonesia and the Philippines are unchanged in 8th and 9th positions respectively The Philippines is a established player in the business process outsourcing (BPO) industry but there are signs that the country istrying to move towards high-value services such as software development Meanwhile Indonesia is

well-emerging as a regional powerhouse but the depreciation of the rupiah - which has a knock on impact onprices in the hardware market - has meant it continues to score well down the regional ratings

Thailand remains in 10th place this quarter, but its position could be weakened further if the newly-installedmilitary junta were to extend its control over the telecoms sector to the broader IT market The military isgenerally distrustful of the ease with which dissenters could utilise telecoms services to organise protestsand has shown its willingness to clamp down on social media and broadband-delivered services It hasalready cancelled two upcoming spectrum auctions and has withheld financing for a long-awaited fibre-to-

the-home (FTTH) project run by incumbent telco TOT and is being lobbied by the state utility to ensure

that next-generation mobile licensees are forced to use the state operators' infrastructure Clearly, this hassignificant long-term implications for the IT sector, if these proposals are pushed through

Vietnam is becoming a more important manufacturing hub for the region The first major investment came

from chip manufacturer Intel, announced in 2006, but other investments have followed from Samsung Electronics, which expects to produce as much of 40% of its global smartphones and tablets in Vietnam by

2015 Vietnam is also an emerging destination for outsourcing, with multinationals increasingly turningaway from China in favour of lower cost and higher security locations

Sri Lanka continues to be at the bottom of the APAC RRRs in 12th position with an aggregate score of38.6 Sri Lanka scores poorly in all categories of the ratings, with incomes and institutions only just

recovering from a lengthy civil conflict However, there are bright spots and confidence returns and localand international firms invest This can be gauged from recent launches, for instance, SAP announced the

launch of its cloud portfolio in Sri Lanka in April 2014, following the launch of Amazon Web Services

-the leading global cloud hosting provider - in December 2013 A continuation of this trend could see SriLanka's score improve over the medium term

Table: APAC IT Risk/Reward Ratings - Q4 2014

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating Rank Previous Rank

Singapore 58.3 100.0 70.0 74.4 72.8 1 2 South Korea 70.0 80.0 75.0 65.4 72.2 2 1 Hong Kong 58.3 100.0 45.0 77.7 70.4 3 3 Australia 61.7 95.0 57.5 66.9 70.3 4 4 China 75.0 35.0 45.0 55.1 58.0 5 5 Malaysia 58.3 55.0 37.5 67.7 56.7 6 6 India 66.7 15.0 45.0 50.9 48.6 7 7 Indonesia 53.3 35.0 42.5 51.4 47.2 8 8 Philippines 53.3 30.0 42.5 50.9 45.9 9 9 Thailand 53.3 20.0 35.0 62.9 44.7 10 10 Vietnam 53.3 15.0 35.0 53.7 41.8 11 11 Sri Lanka 46.7 15.0 37.5 50.9 38.6 12 12

Average 59.0 49.6 47.3 60.6 55.6

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

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

Market Overview

Hardware

The hardware market in Vietnam is forecast to stay on a strong growth trajectory over the medium term asrising incomes, declining device prices, enterprise modernisation and ongoing investments to upgradetelecoms networks However there is downside risk to our outlook for hardware spending growth in 2014 -and into 2015 - based on tightening domestic credit conditions in Vietnam as a result of a build up of baddebt over recent years This has the potential to dampen demand for PCs, which are big-ticket items for themajority of Vietnamese consumers

BMI forecasts growth of 11.3% to VND38.9trn in 2014 as demand is boosted by Microsoft's withdrawal of

official support for the XP OS in April 2014, which is expected to trigger a cycle of upgrades by enterprisesand public offices Meanwhile, Microsoft's decision to slash OS licensing fees on low-cost notebooks (sub-USD250) will make notebooks more cost competitive versus Android tablets, which is expected to translate

into volume growth Over the medium term BMI forecasts Vietnam's computer hardware market value will

increase at a CAGR of 10.8% in local currency terms 2014-2018, with the market expected to reach a value

of VND58.3trn in 2018

In 2013 the market grew rapidly in terms of both volumes and units Local retail chain Vien Thong A stated

that demand strengthened from in mid-2013, with back to school purchases booming as purchasing power

rises in Vietnam Other retailers such as Dienmay.com, Phong Vu, Hoan Long and Nguyen Kim also

reported positive growth in PC sales The segment has also been boosted by retailers partnering with

HSBC, VietinBank, ANZ and Sacombank to launch interest-free payment plans However, demand in

2014 is expected to be dampened by the tighter domestic credit environment

A longer-term trend supportive of IT hardware market expansion is the spread of network infrastructure,including fixed and wireless broadband, which is boosting demand for devices for both productivity and

content consumption Telecoms operators such as Viettel are also emerging as significant distribution

channels for notebooks as vendors seek tie-ups

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

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

Form Factors

Hardware Market(2011-2018)

Personal computer sales, VNDmn Servers sales, VNDmn

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

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

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

BMI estimates total PC (desktop, notebook and tablet) unit sales increased 25.5% to 3.37mn in 2013, and

we forecast growth of 20.4% in 2014 as on the one hand sales are boosted by XP support withdrawal, but onthe other curtailed by tighter credit conditions We forecast unit growth in all device categories, but it istablets that are forecast to outperform with 54.9% growth to 988,000 units One emerging opportunity ishybrid notebooks which are forecast to grow strongly in 2014 as prices decline, which will challengetraditional tablet vendors

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

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

potential for vendors to tap into the first-time buyer market in Vietnam as PC ownership is still relativelylimited Data from the regulator, the MIC show a base of 5.5mn installed PCs at the end of 2011, equal toindividual penetration rate of 6.1% Household PC penetration data also reflects the low level of PC

ownership in Vietnam, at 16% in 2011, and was estimated to be around 20% for the country as a whole by

the end of 2013 This is considerably lower than other emerging markets in Southeast Asia, reflecting themedium term opportunity for vendors

Given these low penetration rates there is a sizeable opportunity for vendors in terms of the first-time buyermarket However, with GDP per capita estimated at USD1,860 in 2013 and forecast to reach

USD3,304 in 2018, the mass market is geared towards the value end of the spectrum and will remain soover the medium term

With a large number of first-time buyers, consumer choice in terms of form factors is uncertain Whileproductivity devices such as desktops and notebooks will remain popular for education and enterprisepurchasers, the availability of cheap tablets from China could see large numbers of consumers move straight

to tablets, and have little or no experience with more traditional form factors

There is however an opportunity for hybrid notebook devices to capture share by offering the mobilityadvantages of tablets while also meeting the broader functionality required for a sole household device.Press reports from Vietnam in H114 indicate there was a surge in demand for lower-priced hybrid

notebooks, as price sensitive consumers are aware of the productivity trade-off from owning tablets as asole device The notebook segment received an additional boost in H114 when Microsoft announced it wasslashing OS licensing costs on sub-USD250 devices, enabling partner vendors to compete more equallywith Android tablet vendors

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

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

There could be a boost to the desktop market from Windows upgrades in 2014 and 2015 as Microsoftsupport for Windows XP is withdrawn from 2014, however the extent to which consumers replace desktopsrather than shifting to notebooks and tablets is uncertain Windows XP still accounted for 31.7% of

Vietnamese PC browsing traffic in August 2014 according to data from Statcounter, illustrating the size ofthe potential upgrade market There appears to be some upgrade momentum, with the share of Vietnamesebrowsing traffic attributable to XP down 12.6pps y-o-y, however many smaller Vietnamese enterprises areconstrained by cash and access to credit, meaning the boost from upgrades is likely to be limited relative todeveloped markets

Looking ahead over the medium term, two factors limit the potential boost to desktop sales First is thecompetition from mobile computing, as consumers and enterprises will likely shift towards greater usage ofnotebooks and tablets when upgrading A second factor is the prevalence of pirated software in Vietnam,meaning the loss of Microsoft support for XP is less of a push factor to upgrade than in most other APACmarkets.

Meanwhile, the data from retailers indicates demand for notebooks remains strong, with consumers optingfor notebooks in the VND8-10mn range, particularly university students requiring more advanced

functionality However they also reported that demand for low cost VND3-5mn tablets was strong

Vietnam PC Installed Base

2008-2011

Source: MIC

Despite being a global leader in the tablet market, Apple - unsurprisingly given its premium price

orientation - has had limited success in Vietnam where its devices are not affordable for the vast majority ofthe population That said, it has still been able to concentrate on a large number of high-income consumersgiven Vietnam's large population, meaning it has become an important market However the proliferation ofaffordable tablets running Android and the entry to the market of vendors producing Windows 8 devices is

already seeing tablet sales increase rapidly In early 2013, reports of an influx of own-brand Chinese madetablets indicate growth at the low value end, but we also expect price competition between internationalvendors 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 8/8.1 has also spurred the creation of hybrid devices, which had little impact in

2013 in Vietnam as early examples are priced as premium products However price competition will reducethe cost to consumers and hybrids have emerged as a growth area in 2014 Windows has a traditionalstrength in productivity use cases and software, with the OS being central to the enterprise market andMicrosoft's Office Suite ubiquitous

There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices

by designing tablets with strong productivity functionality alongside the passive media consumption

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Packard's Envy, Lenovo Miix 2 (8 inch), Lenovo IdeaPad Yoga 2 Pro, Lenovo ThinkPad Yoga and Dell

PC Forecast By Device ('000)

2011-2018

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

Vendor Developments

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

having below a 10% local market share Other multinational vendors, including Dell, Toshiba and

Samsung, have enjoyed strong growth in the market Samsung is considered a threat as it aims to leverage

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

of the Vietnamese notebook PC market

Volumes have benefited from retailers cutting prices and cooperating with banks to offer credit to boost

sales in mid-2013 For instance Dienmay.com cut prices for notebooks from Dell, Sony and HP, as well as

enabling consumers to test and return or exchange products within 10 days Meanwhile Nguyen Kim cutprices on HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free accessories worth up toVND2mn The most important strategy for boosting sales of products from international vendors has been

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