Vietnam information technology report q1 2016

Broad-based economic growth is expected to have a positive impact on the household income profile of Vietnam over the medium term, which will deepen the retail hardware market, as well a

Q1 2016 www.bmiresearch.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q1 2016

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: December 2015

© 2016 Business Monitor International Ltd

All rights reserved

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copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

Q1 2016

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: December 2015

© 2016 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

IT SWOT 9

Industry Forecast 11

Latest Updates 11

Structural Trends 11

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

Industry Risk Reward Index 19

Table: Asia Pacific IT Risk/Reward Index - Q1 2016 21

Market Overview 22

Recent Developments 22

Hardware 22

Software 28

Cloud Computing 35

Services 39

Industry Trends And Developments 46

Regulatory Development 50

Table: Government Authority 50

Regulatory News 53

Competitive Landscape 55

International Companies 55

Table: Global CyberSoft 55

Table: Intel 56

Table: LG Electronics 57

Table: Samsung Electronics 58

Local Companies 59

Table: Sara Vietnam 59

Regional Overview 60

Asia - Local Vendors Leverage Emerging Lower-End Device Market 60

Demographic Forecast 63

Table: Population Headline Indicators (Vietnam 1990-2025) 64

Table: Key Population Ratios (Vietnam 1990-2025) 64

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 65

Table: Population By Age Group (Vietnam 1990-2025) 65

Table: Population By Age Group % (Vietnam 1990-2025) 66

Methodology 68

Industry Forecast Methodology 68

Sources 70

Risk/Reward Index Methodology 70

Table: IT Risk/Reward Index Indicators 71

Table: Weighting Of Components 72

BMI Industry View

BMI View: We believe Vietnam's IT market will be a regional outperformer over 2016-2019 due to strong

growth dynamics for retail and enterprise market demand Broad-based economic growth is expected to have a positive impact on the household income profile of Vietnam over the medium term, which will deepen the retail hardware market, as well as easing price sensitivity in the higher-value replacement market Meanwhile, Vietnam's broader economic development including the expansion of higher

productivity verticals, and the modernisation of traditional sectors, will unlock demand for IT software and services solutions 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 low as a third of those in China We forecast a CAGR for the market of 13.5% over 2016-2019, with total spending expected to increase to VND99.1trn in 2019.

Latest Updates And Industry Developments

■ Computer Hardware Sales: VND42.7trn in 2016 to VND55.6trn in 2019, a compound annual growth

rate (CAGR) of +10.7% in local currency terms Significant growth potential exists due to low devicepenetration rates, which we expect to be unlocked due to the strength of potential income growth trends

in Vietnam over 2016-2019

■ Software Sales: VND10.9trn in 2016 to VND16.0trn in 2019, a CAGR of +15.7% in local currency

terms Low enterprise software penetration is a major opportunity as firms modernise and becomeintegrated into global supply chains, with lower cost cloud software also expected to deepen the market

■ IT Services Sales: VND17.2trn in 2016 to VND27.4trn in 2019, a CAGR of +18.9% in local currency

terms IT services are forecast to outperform over 2016-2019 due to increased domestic demand for cloudcomputing and outsourcing services from the private and public sectors

Rising Incomes And Enteprise Modernisation Support Bright Outlook For IT

Market

IT Market Growth Rate By Segment

Vietnam - Computer hardware sales, VNDmn, % y-o-y Vietnam - Software sales, VNDmn, % y-o-y

Vietnam - Services sales, VNDmn, % y-o-y

2013 2014 2015e 2016f 2017f 2018f 2019f 5

10 15 20 25

f = BMI forecast Source: BMI

as bilateral agreements with Japan and China.

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

■ Expanding local hardware production industry with major international players such

as Samsung, Nokia, LG and Intel making large investments.

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

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

lower GDP per capita

■ Highly price-sensitive market, putting pressure on vendor margins

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

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

Opportunities ■ Broad-based economic growth forecast to drive retail hardware market growth as

household incomes increase markedly 2016-2019

■ Decision in July 2014 to enable state agencies to use outsourced informationtechnology providers for the first time opens a new growth channel for vendors

SWOT Analysis - Continued

■ E-government adoption deepening, with opportunities in government administration,alongside sector-specific markets such as healthcare

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

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

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

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

■ Small- and medium-sized enterprises have much potential to increase spending onbasic solutions, including customer relationship management and security

■ The government's drive to create an IT services industry over the next 1520 years including the National Technology Innovation Fund - is expected to accelerate thedevelopment of local enterprises

-■ Cloud computing awareness has risen fast and adoption is expected to accelerate inthe short-to-medium term as network infrastructure improves and awareness levelsincrease

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

mid-range notebook vendors Falling prices may further undermine margins andprofitability after steep discounting

■ Cybersecurity 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

Industry Forecast

BMI View: We have a bullish outlook for IT market spending growth in Vietnam 2016-2019 based on

positive economic fundamentals that should result in broad-based income growth and enterprise investment

in modernisation We maintain our long-held view that the Vietnamese IT market holds the potential for medium-term outperformance, with a supportive government policy environment, declining device prices at the global and regional level, the shift towards higher productivity activities such as manufacturing and outsourcing, Vietnam's large and growing population, and finally investments in telecoms and retail

infrastructure all supplementing the economic outlook BMI forecasts the Vietnamese IT market expanding

at a compound annual growth rate (CAGR) of 13.5% over 2016-2019, and the market is expected to reach a value of almost VND99.07trn in 2019.

Latest Updates

■ IT market growth outlook for 2016-2019 upgraded slightly to reflect strong momentum across all three ITmarket segments

■ While Vietnam remains a low-income market in APAC, we identify broad-based economic growth trends

as a major positive factor for increases in IT hardware spending over the medium term

■ Vietnam also stands to benefit from its emergence as an important hardware production location, as well

as the strong growth of its outsourcing industry, most importantly the gains made in the global softwaredevelopment industry

Structural Trends

2016 Outlook

Although Vietnam was an outperformer in 2015 and was spared the worst impacts of regional economicuncertainty after fears of a China hard landing elevated in August 2015, there was nonetheless a dip in ITmarket growth to 8.4% An additional factor was the concentration of hardware replacement and upgrade

spending in 2014 due to the withdrawal of Microsoft support for XP, which was significant due to the

relatively high share of hardware spending in the IT market in Vietnam

As economic and product trends become more favourable in 2016, BMI forecasts an acceleration in IT

market spending growth to 9.3%, with a total value of VND70.75trn expected There is downside due to thepotential for credit tightening as a result of worsening sentiment on emerging market debt levels globallyand the start of rate rises in the US, but Vietnam has been relatively proactive in tackling bad debt; thereforeour core scenario is for there to be no major disruption in 2016 The official rate of non-performing loanswas down from 4.2% in December 2012 to 2.9% in September 2015, while State Bank of Vietnam is

leading banking industry consolidation to reduce the number of banks from 40 to 15, which will help toinsulate against shocks Furthermore, with access to credit a traditional drag on IT market development inVietnam, a number of partnerships were formed between banks and retailers in 2013, leaving the industry in

a stronger position

Under our core scenario of continued economic growth and a stable credit market, we forecast that the PCmarket will be strong in 2016, with growth forecast for desktop, notebook and tablet shipments as risingincomes and declining device prices promote first-time buyer and upgrade sales Tablets will again seestrong growth, extending the trend dating back to the influx of low-priced Chinese own-brand tablets in

2012 that deepened the market Meanwhile, notebook sales are recovering after the initial impact of thetablet boom, aided by lower prices and the increased popularity of hybrid notebooks that have carved out aniche in Vietnam since H214

The government's policy of promoting the development of the local IT industry in Vietnam is anothersupporting factor in 2016 An important component is the government's Hi-Tech Park policy, which wasextended in June 2015, with new parks set to be constructed between 2015 and 2030 through a combination

of central government direction, local government funds and private capital Investors in Vietnam's Hi-TechParks benefit from a corporate tax rate of 10% for the first 15 years, plus a complete exemption fromcorporate income tax in the first four years and a 50% reduction for the subsequent nine years In addition tocreating new parks, it also plans to further develop existing facilities including Hoa Lac Hi-Tech Park in

Hanoi City, Saigon Hi-Tech Park in Ho Chi Minh City and Danang Hi-Tech Park BMI expects the growth

of Hi-Tech Parks to generate demand for IT products and solutions directly, as well as contributing to thebroader dynamic of economic modernisation.these p

f = BMI forecast Source: BMI

Drivers

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

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

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

of urban infrastructure and improving backbone networks In a country where PC penetration remains low,particularly in rural areas, government digital divide programmes to boost internet and digital utility in ruralareas underpin addressable market growth and open PC ownership to a growing number of rural inhabitants

Our analysis of household income distribution and medium-term trends supports our bullish outlook forVietnam's IT market, particularly retail hardware sales The data clearly illustrate both the low-incomestatus of the Vietnamese economy in 2016 and the huge migration of households to the higher-income

levels envisaged by our in-house Country Risk team for 2016-2019 (see chart below) Despite progress in

Vietnam in recent years, BMI forecasts that 68.4% of Vietnamese households will earn USD5,000 or less

-the level at which we consider a household to be external to -the retail hardware market due to a lack of

purchasing power in global markets - in 2016 This gives Vietnam one of the highest percentages of income earners in the region.

low-We expect there to be far-reaching change over the medium term, with 4.29mn households forecast to riseabove USD5,000 annual income by 2019, reflecting the broad-based nature of economic growth in

Vietnam This will be of huge benefit to retail hardware vendors as households acquire their first PCs andindividuals begin to acquire personal devices The outlook is one of the strongest globally for a deepening

of the mass market, and is key to our view for Vietnamese IT market outperformance over the mediumterm It should additionally be noted that broad-based economic growth is derived from the government-promoted development of higher-productivity economic activities such as electronics manufacturing andoutsourcing, which will deliver opportunities for enterprise-focused IT vendors

Broad Based Growth Behind Retail Boom

Vietnam Household Income Breakdown (USD) (2015-2019)

Households '000 Net Income USD50,000+

Households '000 Net Income USD25,000-50,000 Households '000 Net Income USD10,000-25,000 Households '000 Net Income USD5,000-10,000 Households '000 Net Income USD1,000-5,000 Households '000 Net Income less than USD1,000

2015f 2016f 2017f 2018f 2019f 0

20,000 40,000

f = BMI forecast Source: BMI, National Sources

Investment in networking infrastructure, including international connectivity, will catalyse faster adoption

of cloud computing services over the medium term In March 2015, VMWare reported the results of its

virtualisation survey, which found that 91% of Vietnamese enterprises expected to virtualise at least 30% of

their IT infrastructure in the next two years VMWare estimates that cloud adoption is growing faster inVietnam than the wider region as a result of an absence of legacy on-premises systems due to Vietnam'slate-developer status Meanwhile, in May 2015 Malaysia-based high-speed broadband and datacentre

operator TIME dotCom has agreed to acquire 25% of Vietnamese telecommunications infrastructure company CMC Telecom for USD12mn TIME dotCom owns and operates high-capacity cable systems linking Malaysia with numerous neighbouring countries and the global Internet, while its Global Transit subsidiaries offer international bandwidth services across the Asian region BMI believes the acquisition

will help to accelerate improvements in Vietnam's international connectivity, which will be a boon toVietnam's emerging broadband and cloud computing services markets

In terms of the enterprise sector in Vietnam, the outsourcing market continues to develop rapidly, anddomestic demand for outsourcing services should be boosted in 2015 by the government decision to allowpublic authorities to outsource IT functions from February 2015 Meanwhile, a report from Grant ThorntonInternational stated that only 12% of enterprises in Vietnam are open to outsourcing, showing the potentialfrom the private sector as well

We are also optimistic regarding enterprise spending on software applications due to modernisation pressure

as market barriers a cut across the region and Vietnamese firms modernise and expand There is greatpotential, with the latest data for 2014 showing relatively low adoption rates for ERP, SCM and CRM inVietnam in 2014 that are far below developed markets, at around 25-40% of the levels observed in theEuropean Union The low-cost and flexible models becoming available from cloud software vendors inVietnam as network infrastructure improves could be a catalyst for a deepening of the enterprise applicationmarket in this low penetration environment

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

However, growth will also depend on government progress on various business environment issues,

including copyright protection and combating cyber security threats Further progress in combating softwarepiracy, which is still reported to be at higher levels than in China, India and Thailand in 2013, and progressseems to have stalled since 2011 It is also taking steps to increase the penetration of information securitycertification by distributing funds to enterprises, and in September 2014 the Department of NetworkSecurity was 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

are elements of the remit that have concerned political risk analysts (see Regulatory Developments section).

Even low-productivity traditional verticals offer some opportunity for IT vendors, and are significant due to

a high share of economic activity in Vietnam The agricultural sector is forecast at 18.8% of GVA in 2016

-a figure BMI expects to incre-ase m-argin-ally to 19.1% in 2019 - -and its sh-are of l-abour is consider-ably 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 generated VND7bn a month in revenue - a far higherfigure 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 for producers

Meanwhile, in the large corporate sector, growing demand for digital infrastructure 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

Vietnam GVA By Vertical (%)

2016f

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

The government is another important source of demand - and will continue to be so over the medium termafter announcing a new impetus for e-government implementation in August 2015 as part of its efforts tostrengthen the business environment and enhance national competitiveness The government adopted aresolution to boost e-government programmes in Vietnam, with the aim of reaching a top four position inAssociation of Southeast Asian Nations (ASEAN) in the UN e-government Readiness Index in 2016 - andreach the top three in 2017 In the 2014 index Vietnam was fifth in ASEAN and 99th out of the global index

of 193 countries Potential applications include the one-door customs mechanism, which aims to reducecustoms clearance for exports from 21 to 14 days, reducing costs by 10-20% There is also a focus on ITapplications for the healthcare sector including the piloting of electronic medical files and hospital

management systems and plans to introduce electronic health insurance cards by 2018

Meanwhile, smaller enterprises have a lower penetration of enterprise software, including ERP and securitysoftware, but due to price sensitivity these favour local solutions The small- and medium-sized enterprise(SME) market is an area of the market in which vendors can achieve growth as SME awareness of thebenefits of IT utilisation increase, encouraged by government initiatives to modernise firms and improve

international competitiveness However, vendors will have to face the challenge of enterprises that areconstrained by low budgets and lack of access to credit Promising SME verticals include discrete

manufacturing and consumer packaged goods, as well as hotels and property management The solutionareas with most demand currently include security software and key applications such as customer

relationship management, enterprise resource planning and human resources management

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

sales,

VNDmn 10,263,161 12,344,533 13,723,111 15,344,767 17,227,088 19,964,758 23,553,570 27,441,467

f = BMI forecast Source: BMI

Industry Risk Reward Index

BMI View: The IT Risk/Rewards Index (RRI) for Asia Pacific (APAC) in Q116 reflects a downturn in

economic performance and sentiment across the region following steep declines in Chinese equity markets

in H215 that highlighted challenges to the growth model over the short-to-medium term There were no positional changes in Q116, but as a result of the weakening regional economic outlook the APAC average

IT Rating declined 1.1 points q-o-q in Q116, with nine markets receiving score downgrades and no markets receiving higher scores q-o-q

Japan was again the highest scoring market in the APAC RRI in Q116, with its high score reflecting thelarge size of the population, high incomes and the demand for the latest products and services in both theenterprise and retail markets The primary factor separating Japan from the high-income city states ofSingapore and Hong Kong in second and third positions is its larger population, though it is also worthnoting the medium-to-long term drag on economic and IT market growth in Japan from unfavourabledemographics with a rapidly ageing population This drag will however be partially offset by the fact that

Japan is likely to be a leader in emerging technology adoption in APAC as local vendors including Fujitsu and Toshiba target the internet of things (IoT) opportunity, which will have applicability in areas such as

telemedicine where Japan's ageing population presents an opportunity for vendors

Singapore and Hong Kong's IT RRI scores are more than five points behind Japan in Q116, but they areseparated by just 0.1 point The highly-developed city states lead the region in the country rewards category

as the urban centric markets provide few logistical and operational challenges to vendors, and both marketshave emerged as regional hubs for multinationals Both Singapore and Hong Kong are home to largefinancial services sectors, which is a traditionally overweight IT spending vertical and is expected tocontinue to be lucrative for vendors - although in the short-term there could be a scaling back of somefinancial sector investments depending on wider economic and financial market performance

South Korea sits in fourth position in Q116, despite a 2.0 point decline in its score as a result of weakeroutlook for PC sales The South Korean IT market is characterised by lower per capita spending on ITproducts and solutions than the three markets above it in the RRI, and Australia which sits below it in fifth.South Korea continues to score above Australia as a result of its relatively affluent status being

supplemented by a deep ecosystem of local IT vendors - particularly in the hardware segment There is

however diversification underway and BMI believes the emerging IoT opportunity could prove a catalyst

for South Korea to take a leading position in software and services Despite there being many positives, we

continue to stress the elevated downside risk for South Korea due to relations with North Korea and thelatter's sophisticated cyberattack capabilities.

Australia is the lowest scoring developed market in the Q116 RRI in large part due to Australia's weakerdomestic IT ecosystem and a lack of innovation capacity, with economic activity focused elsewhere, mostnotably its huge mining industry Although it sits away from the technological frontier in APAC, there arelucrative opportunities for software and services vendors, for instance in labour saving automation oroutsourcing services that local enterprises adopt to manage the high cost of labour in Australia

China is again the top emerging market in the Q116 APAC RRI, but after a downgrade to its score it is now13.0 points behind Australia We downgraded the industry rewards score this quarter to reflect the

weakening economic outlook including sharp declines in equity markets in August 2015 The revisionprimarily affected the industry rewards category, but while short term downside is heightened in Q116,

BMI stresses that China has one of the strongest medium term household income growth forecasts globally,

which in combination with its huge population supports its position as the second highest scoring market forindustry rewards Another positive for medium term performance is the coordination between governmentinstitutions and large enterprises in the development of a Chinese cloud computing ecosystem and otherareas of emerging technology

Malaysia and Indonesia separate China and fellow giant India in the Q116 RRI in seventh and eighthpositions Malaysia received a lower score this quarter due to the potential for spill over from China, but ourbullish assessment of the Indonesian market remains in place We anticipate Indonesia will continue toregister broad based economic growth, a positive signal for household income growth and retail IT

hardware demand, and make it an outperforming APAC emerging market in the short and medium term

India also received a lower industry rewards score in Q116, but the downgrade was relatively small

compared to the more severely impacted markets from the increased risk of a hard landing in China Thehuge population holds great potential in India, while it is also a leading global centre for outsourced serviceprovision Widespread poverty and ineffective governance do however continue to hold back progress in thebroader IT market with swathes of the population external to the market due to lack of purchasing powerand only remote prospects for entering the market over the medium term That said, policy has progressedunder Prime Minister Narendra Modi's government, for instance through the 'Made In India' initiative thataims to increase Indian manufacturing capacity and output, as well as the wider Modi reform agenda

The Philippines and Thailand follow India in Q116 RRI, with both scores revised downwards this quarter inresponse to raised regional economic uncertainty Both markets are regionally and globally integrated, with

Thailand a major production centre for storage devices while the Philippines is a leading outsourcingdestination This interconnectedness is a strength in many respects, and reflects improvements in politicaland economic institutions over the past decade, however it also means both markets will face economicheadwinds should the bearish scenario of a hard landing in China materialise in the short-to-medium term.

Vietnam and Sri Lanka sit in twelfth and thirteenth positions respectively, with both RRI scores down 0.8

points in Q116 Despite being near the bottom of the ratings BMI considers Vietnam to have the potential to

move up the RRIs over the medium term due to a robust economic outlook, and in the IT market the rapiddevelopment as a destination for electronics manufacturing and outsourced service provision with

particularly strong links to Japanese enterprises These trends have been enabled by cost advantages that areexploited by government policy to move Vietnam up the value chain and create higher productivity (andthus higher wage) employment opportunities

Table: Asia Pacific IT Risk/Reward Index - Q1 2016

Market Overview

Recent Developments

■ In contrast to many global emerging markets, Vietnam's computer hardware market continued to expand

in 2015, underpinned by larger volumes of tablets and notebooks

■ Windows 10 adoption increased markedly in the months after launch; however, owing to growth beinglinked to migrations from Windows 8/8.1 devices, and Vietnam's relatively low PC penetration, adoptiontrails developed market rates by a significant margin

■ Forecasts for Vietnam's cloud market have been revised down in the Q116 update based on a

reassessment of adoption rates in the enterprise segment in 2015, but we maintain a bullish forecast formedium-term growth

Hardware

Vietnam's IT hardware market slowed slightly in 2015 as a result of a combination of regional economicuncertainty and the fact that some upgrade demand was brought forward to 2014 by Microsoft supportwithdrawal for XP The country was nonetheless a regional outperformer as broad-based wage growth andenterprise modernisation drove investment in computer hardware We expect growth to accelerate from

2016 and maintain Vietnam's position as an outperforming IT hardware market over the medium term Acombination of low penetration rates across all PC device categories, with strong broad-based economicgrowth forecast that will increase disposable income for households to spend on PCs, underpins our bullishoutlook The hardware market is forecast to stay on a strong growth trajectory over the medium term, with acompound annual growth rate (CAGR) of 10.7% forecast for 2016-2019 in local currency terms, with thecorresponding figure for US dollar growth forecast at 9.1%

Market Drivers

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

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

channels for notebooks as vendors seek tie-ups

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

as education and healthcare It is also providing credit programmes to raise household PC penetration inrural areas, which is estimated to still be below 10%, compared with 50% in higher income urban areas Themost potential being in rural areas where penetration is lower; however, for the time being Hanoi and HoChi Minh City are thought to account for around 85% of notebook sales

Hardware Market

(2012-2019)

Personal computer sales, VNDmn Servers sales, VNDmn

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

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

f = BMI forecast Source: BMI

PC Market

PC (desktop, notebook and tablet) unit sales increased 5.8% in 2015 to a total of 3.78mn, a decelerationfrom 2014 as a result of a maturing tablet market, and the fact desktop and notebook upgrade demand wasbrought forward from 2015 by the withdrawal of Microsoft support for the legacy XP operating system inApril 2014 Tablet volume growth outperformed again in 2015 with volumes up 12.6% to 1.34mn as thelower-cost tablets that flooded the market in 2014 at price points accessible for a far larger pool of

Vietnamese households continued to prove popular even after dramatic increases in penetration in recentyears

We forecast that volume growth will be robust in Vietnam over the medium term, with a unit growth CAGR

of 6.7% forecast for PC sales 2016-2019, and the total expected to reach to 4.63mn units in 2019 Thedesktop market will underperform due to the popularity of notebooks and tablets in the retail market Tabletvolume growth will however decelerate over the medium term under our core scenario due to a diminishedpool of consumers Meanwhile notebooks will account for a larger share of total sales after OS licensing

fee cuts by Microsoft on low-end devices in 2014 and the growing popularity of hybrid notebook designs at

mass market price points

The core reason for the positive medium-term outlook for PC sales in Vietnam, which is in stark contrast to

developed markets, is the combination of rising incomes and low device penetration rates BMI believes

there is considerable potential for vendors to tap into the first-time buyer market in Vietnam as PC

ownership is still relatively limited Household PC penetration data also reflect the low level of PC

ownership in Vietnam, at 19% in 2013, and was estimated to be around 21% for the country as a whole bythe end of 2014 This is considerably lower than other emerging markets in South East 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 USD2,038 in 2015 and forecast to reach just

USD2,940 in 2019, vendors will need to be aware of consumer patterns in Vietnam With a large number offirst-time buyers, consumer choice in terms of form factors is uncertain While productivity devices such asdesktops and notebooks will remain popular for education and enterprise purchasers, the availability ofcheap tablets from China could see large numbers of consumers move straight to tablets, and have little or

no experience with more traditional form factors

There is, however, an opportunity for hybrid notebook devices to capture share by offering the mobilityadvantages of tablets while also meeting the broader functionality required for a sole household device.Press reports from Vietnam in 2014 indicate there was a surge in demand for lower-priced hybrid

notebooks, as price-sensitive consumers were 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 operating system licensing costs on sub-USD250 devices, enabling partner vendors to competemore equally with Android tablet vendors

APAC Household PC Penetration (%)

2013

Source: National sources, WEF, BMI

Form Factor Evolution

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

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

There is, however, significant uncertainty in a low-income and low penetration market such as Vietnamover the adoption pattern of consumers more familiar with smartphones, while vendor innovation with low

cost PCs is another unknown quantity We believe there is potential for a medium-term blending of formfactors through vendor innovation that will make the Apple defined smartphone-tablet-notebook distinctionmore fluid device categories in terms of functionality and usage.

In the Android ecosystem (as well as with Apple's move to phablets) there is competition for tablets,particularly small screen devices, from phablets that is significant in Vietnam where smartphone penetration

is much higher than for PCs Meanwhile, Microsoft partner vendors are using Windows and new CPUtechnologies to innovate with hybrid notebook designs that threaten vendors at the premium end of thetablet market - evident in Apple's iPad Pro announcement, that is an attempt to replicate Microsoft's successwith its Surface range Windows has a traditional strength in productivity-use cases and software, with the

OS being central to the enterprise market and Microsoft's Office Suite ubiquitous There is therefore anopportunity for vendors to leverage this strength over rival iOS and Android devices by designing tabletswith strong productivity functionality alongside the passive media consumption features

More speculatively, but an insight into innovation trends, is Microsoft Continuum, which enables WindowsPhone users to connect their smartphone through a dock or wirelessly to use their phone as a PC withmonitor and accessories Due to the small footprint of the Windows Phone, the short-term impact will belimited, but is an indication of the potential for a further squeezes on traditional PC sales, and even tabletsover the medium term This development would gain additional momentum if Google offers a similarproduct, the potential for which will increase with the expected unification of Android and Chrome by 2017(mirroring Microsoft's device unifying Windows 10 OS)

Meanwhile, in terms of hardware-led innovation, there are an increasing number of vendors releasing 'PC

on a stick' devices that use a portable HDMI device that can turn a monitor (or TV) into a PC runningWindows 10 They are primarily low cost devices, which are necessarily vastly underpowered compared to

a traditional desktop or notebook, but again show the potential for further blending of form factors over themedium term, as well as being very low cost so having applicability in emerging markets These includeIntel's Compute Stick (around USD150), Lenovo's Ideacentre Stick 300 (USD150) or Taiwan based globalnotebook ODM leader Quanta Computer's white-label NH2 that comes with up to 64GB of storage, Intel'sCherry Trail T3 Atom CPU (1.44GHz), 2GB of RAM and microSD expansion and could undercut the brandvendors on price and specifications

500 1,000 1,500 2,000 2,500

f = BMI forecast Source: BMI

Vendor Developments

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

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

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

As already noted, ASUS has benefited from efforts to strengthen its distribution channel In 2011, ASUS

launched a new partnership with local company FPT Distribution, a member of FPT Trading

Group, which has a nationwide network of 400 dealers FTP also distributes a portfolio of other leading PC brands, including Dell, Lenovo and Acer ASUS, which first entered the Vietnamese market only three

years ago, is also focusing on service as a competitive differentiator

In August 2015 Apple selected FPT Shop and The gioi di dong (Mobile World) as its retail partners forVietnam, enabling them to directly import iPhones, iPads and Macs from Apple Singapore, rather than

through FPT Trading Vietnam was also moved to the third tier of markets, meaning it will still wait afterlaunch, but less than under previous arrangements.

Software

Software spending growth in Vietnam slowed slightly to 9.7% in 2015 as a result of greater uncertainty inthe context of regional economic instability, which saw some deferred investments in the enterprise market,but in a regional and global context growth was strong There was also a drag due to the fact that operatingsystem (OS) replacement sales were boosted by the withdrawal of official support by Microsoft for

Windows XP in April 2014, which brought forward demand from 2015 We expect the market will move to

a slightly faster growth trajectory over the medium term, and forecast a compound annual growth rate(CAGR) of 15.7% 2016-2019, with total software spending expected to reach VND16.05trn in 2019

Market Trends

The Vietnamese software market is cost-sensitive, with around 75% of the market served by lower-costlocal software vendors Local software is particularly dominant in the market for government and small-and medium-sized enterprise (SME) segments However, larger Vietnamese companies are more likely tobuy higher-priced software from multinationals, which have around 25% of the market Vietnamese

customers are demanding a higher level of support for software compared with a few years previously.Another reflection of the price sensitivity of end-users is the fact Vietnam is home to a high level of piratedsoftware use by households and enterprises

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

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

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

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

f = BMI forecast Source: BMI

Enterprise Software

BMI believes there is still great potential for Vietnamese enterprises to increase spending on basic

solutions, including enterprise resource management (ERP), supply chain management (SCM), customerrelationship management (CRM) and security This potential is reflected in the relatively low adoption rates

for ERP, SCM and CRM in Vietnam in 2014 (see chart below), which are far below those of more

developed markets, at around 25-40% of the levels observed in the European Union As Vietnameseenterprises modernise, expand and integrate into global production networks we expect to see substantialspending on ERP and SCM

There was, however, a slight slowdown in demand growth in 2015 as the market was dampened somewhat

by the tighter domestic credit environment This dates back to September 2014 when there were reports thatenterprises in several sectors were unable to obtain credit as banks reassess in light of the high levels of baddebt in Vietnam Emerging market debt levels present downside risk in 2016, particularly in the context of

the US beginning to raise interest rates, but our core scenario for Vietnam is for a return to faster spendinggrowth in 2016.

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 the growing utilisation ofsoftware in both the public and the private sector However, while the ERP market is strong, the market forCRM software remains small, largely due to a lack of awareness about it among Vietnamese businesses It

is estimated that only 10% of Vietnamese businesses have used CRM, which is far fewer than in othercountries

Another area of growth is datacentre software, as evident form VMWare's latest survey In March 2015

VMWare reported the results of its virtualisation survey, which found that 91% of Vietnamese enterprises

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

Vietnam Enterprise Software Penetration By Application (%)

comprehensively improving the standards of network security officials and officers However there areelements of the remit that have concerned political risk analysts (for more discussion of downside seeregulatory developments section) Meanwhile, the government also update the Law on Information Security

as it looks to improve the cybersecurity environment including combating attacks originating in Vietnam

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

called for tax incentives for domestic firms to assist them in a competitive global marketplace against

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

Operating Systems

As a result of relatively slow adoption of Windows 8/8.1 OS in Vietnam due to the price-sensitivity ofconsumers and cheaper options in the tablet market, as well as low-cost desktops and notebooks runningunlicensed software or older version of Windows, the migration momentum towards Windows 10 wassmaller than in more developed markets Nonetheless, by November 2015 it was already the fourth largest

OS by browsing traffic share in Vietnam at 6.6% of the total BMI believes the offer of a free upgrade in the

first year for Windows 7, 8 and 8.1 users is behind the migration momentum, and means Windows 8/8.1peaked as an OS in 2015

The fact the new OS will be a single platform across PCs, tablets, smartphones and the Xbox and is beinggiven away for free for the first year is also significant and reflects Microsoft's decreased focus on

monetising its Windows OS product, moving it closer to the strategies of Google (Android, Chrome) andApple (iOS and MacOSX) that use their operating systems to respectively generate revenue from

advertising and hardware sales We believe Microsoft will continue to charge of Windows, but increasinglyuse the OS as a means of maximising Microsoft's device penetration, with additional sales generated fromadditional products and solutions

Another feature worthy of note is the fact Windows 10 is a device unifying OS - ie, it works across PCs,tablets, smartphones and Xbox - which appears to be an emerging trend, with Google announcing in H215that its Chrome OS would be rolled into Android in 2016

Another factor that should drive upgrades is the fact that a large portion of the installed computer base inVietnam still uses the Windows XP operating system Microsoft withdrew official support for Windows XP

in April 2014, and BMI expects this to result in a trend of continued upgrade momentum in 2014 and 2015

as enterprises and public institutions move to new OSs The latest Statcounter data show that XP stillaccounted for 19.8% of PC browsing traffic in Vietnam in November 2015, but there was a marked decline

of 12.5 pp y-o-y, from which we infer that the withdrawal of support has had an impact

Vietnam PC Browsing Traffic By OS (%) And y-o-y chg

In March 2013, the development of open source software for the public sector received a blow when VuDuy Loi, Director of the Communist Party Central Committee Office's Informatics Center, stated that thegovernment was freezing the adoption of open source software He cited the lack of available technicalmaintenance staff for making the deployment of services impractical for the time being However, thegovernment has not permanently abandoned open source software deployments and is looking at means toincrease the number of staff

In May 2015, an official for Vietnam's Ministry of Culture, Sports and Tourism stated that the governmentwas aiming to reduce the piracy rate to 75% in 2015, down from 81% in 2014 In order to achieve the target

the government increased inspections in March and April 2015, resulting in fines for non-compliance Data

from anti-piracy lobby group the Business Software Alliance (BSA) shows that piracy continued to be amajor drag on the market in 2013, with a piracy rate of 81% - unchanged from 2011 Vietnam had beenmaking good progress, with the incidence of piracy down 4pp 2009-2011 - enabling Vietnam to escape thelist of the top 10 countries for software copyright infringement However stalled progress means it hasamong the highest piracy rates in Asia Pacific in 2013, behind markets such as Thailand and China, andonly Sri Lanka and Indonesia had higher piracy rates in 2013

In addition to government efforts, large software vendors are also pursuing infringements directly For

instance, Microsoft took legal action against South Korean owned Trimmers Vietnam in May 2015,

seeking compensation of VND748mn for the unlicensed use of software from Microsoft, Adobe, Autodeskand Lac Viet

Vendor Developments

The Vietnamese enterprise software market is competitive with local companies, having a significant share

of the market Major global players such as SAP, Oracle, IBM and Microsoft have a local presence but face competition from cheaper local rivals such as CMC, MISA, FAST and Exact Software, as well as from Chinese rivals Similarly in the security software segment, US suppliers Symantec and McAfee have

had successes, but face competition from popular Vietnamese anti-virus programs such as BKIS

SAP has formed a strategic partnership with leading Vietnamese software venture CMC The two partnersaim to develop the major enterprise market together with CMC becoming SAP's strategic partner forconsulting and implementing SAP solutions The main target will be large companies, including in thefinance sector CMC is one of Vietnam's largest software companies and is active in the IT, telecoms and e-business segments with an annual growth averaging at least 30%

SAP's biggest global rival, US vendor Oracle, has performed strongly in the Asia Pacific (excluding Japan)region during the recent financial crisis According to the company, it managed to increase its market share

in the region In Vietnam, the company has made strong inroads into the banking sector, where it claims to

have more than 15 customers, including banks such as Dong A Bank, Hubu Bank, Ocean Bank, Nam A Bank and Tien Phong Bank Mid-sized bank Vietnam Asia Commercial (VietA) Bank, which is based in

HCMC and has 15 main branches and 47 sub-branches, announced that it was migrating to an OracleFLEXCUBE solution to cover all of its operations.

Other multinational vendors are also targeting promising enterprise sectors For instance, French software

vendor Dassult Systemes has already entered into a strategy cooperation agreement with domestic sector

player FPT The two will develop products to target Vietnam's telecoms and banking sectors Real Estate isanother growth area, and Microsoft's wins in this sector have included a VDN3bn contract for its Dynamics

CRM solution from Sacombank Real Estate, an affiliate of Saigon Thuong Tin Commercial Bank.

While many foreign vendors have found richest pickings in the corporate sector, some are increasingly

targeting Vietnamese SMEs Epicor Software Corporation, a leading provider of ERP solutions in Asia, has set up a strategic alliance with the Vietnamese subsidiary of US-based DiCentral Group to expand its

presence in Vietnam Epicor provides DiCentral with technical and marketing assistance as the companypromotes its ERP solutions to local firms, with a focus on solutions for plastics manufacturing and

consumer packaged goods, as well as the hotel and property management segment

Cloud Computing

BMI revised down data for Vietnam's cloud computing market based on a reassessment of adoption rates

among enterprises, with the slightly smaller market size in our new outlook better reflecting Vietnam'sstatus as a low income emerging market The development of the cloud computing market in Vietnam trailsthe majority of Asia Pacific markets due to the relatively undeveloped nature of the enterprise market fortraditional software and services solutions Furthermore, the composition of the Vietnamese economy, with

a high weighting for low productivity verticals such as agriculture, and a lack of supply of cloud computingsolutions has impeded the growth of the cloud computing market relative to more advanced economies.Additionally, network infrastructure trails far behind the most advanced Asia Pacific markets, both in terms

of domestic broadband networks and international connectivity, which erodes some of the cost advantages

of cloud solutions against on premises deployments

We now believe the cloud market reached a value of VND1.01trn in 2015, but still forecast robust growth at

a CAGR of 42.4% 2016-2019 to VND2.88trn The strong economic development momentum in Vietnam,including rising incomes and the growth of higher productivity verticals such as electronics manufacturingand outsourcing, will result in growing enterprise demand for cloud computing solutions