Vietnam information technology report q2 2016

BMI Industry ViewBMI View: Vietnam is a rapidly developing IT market, with strong momentum across the hardware, software and services segments.. We expect this growth dynamic to be maint

Q2 2016 www.bmiresearch.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2020

Q2 2016

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2016

© 2016 Business Monitor International Ltd

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

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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

Q2 2016

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2016

© 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: Enterprise Trends - GVA By Vertical (Vietnam 2015-2020) 16

Table: IT Industry - Historical Data And Forecasts (Vietnam 2013-2020) 17

Industry Risk Reward Index 18

Table: IT RRI Score Breakdown By Region 19

Table: Asia Pacific IT Risk/Reward Index - Q2 2016 21

Market Overview 22

Recent Developments 22

Hardware 22

Software 28

Cloud Computing 34

Services 38

Industry Trends And Developments 43

Regulatory Development 49

Table: Government Authority 49

Regulatory News 52

Competitive Landscape 54

International Companies 54

Table: Global CyberSoft 54

Table: Intel 55

Table: LG Electronics 56

Table: Samsung Electronics 57

Local Companies 58

Table: Sara Vietnam 58

Regional Overview 59

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: Vietnam is a rapidly developing IT market, with strong momentum across the hardware,

software and services segments We expect this growth dynamic to be maintained over the medium term based on robust economic performance and a supportive policy framework that is both helping to grow the market and develop Vietnam's IT industry For the retail hardware market broad-based economic growth that will deepen the retail hardware market, as well as easing price sensitivity in the higher-value

replacement market is a central component of our outlook For software and services economic

modernisation and the development of higher productivity verticals in the economy present major

opportunities to vendors We forecast an IT spending CAGR of 10.2% over 2016-2020 to total sales of VND103.4trn in 2020.

Latest Updates And Industry Developments

■ Computer Hardware Sales: VND42.3trn in 2016 to VND55.3trn in 2020, a compound annual growth

rate (CAGR) of +6.9% Outlook downgraded in Q216 due to expectation for greater cannibalisation oftablet purchases by smartphones, but overall outlook still positive due to income growth trends

■ Software Sales: VND10.8trn in 2016 to VND17.8trn in 2020, a CAGR of +13.3% Substantial

opportunities exist in enterprise software market where there is low penetration

■ IT Services Sales: VND17.1trn in 2016 to VND30.3trn in 2020, a CAGR of +15.4% Potential for core

solution spending growth, and a booming cloud computing and outsourcing markets expected to underpin

IT services outperformance 2016-2020

Bright Outlook For IT Spending Across All Three Segments

IT Market Forecast By Segment

Vietnam - Computer hardware sales, VNDmn Vietnam - Software sales, VNDmn Vietnam - Services sales, VNDmn

0 20,000,000 40,000,000 60,000,000

e/f = BMI estimate/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 2016-2020

■ 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

■ TPP a driver for regional integration of Vietnam's already successful softwaredevelopment and IT services outsourcing industry, allowing the industry to targetmore customers in high value markets such as Japan

■ 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

■ Notebooks, and hybrids, offer potential for continued growth in the PC market

■ 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 ■ Competition from smartphones, and intense price competition, dampen the retail PC

Industry Forecast

BMI View: Even after a small downgrade to the growth outlook in the Q216 update we have a bullish

outlook for IT market performance in Vietnam over 2016-2020, forecast a CAGR of 10.2% to VND103.4trn

in 2020 We moderated our IT hardware growth forecast this quarter to reflect a stronger dynamic of tablet volumes being cannibalised by smartphones, but based on low PC penetration and broad-based income growth the overall outlook is still bright We expect enterprise software and services spending to perform even better, through the shift towards higher productivity activities such as manufacturing and outsourcing,

a supportive policy environment and investments in network infrastructure all supplementing the economic

outlook

Latest Updates

■ Small downgrade to the hardware segment forecast where we now envisage a weaker growth dynamic fortablets, particularly for low-end small screen devices, as consumers show a stronger preference forsmartphone ownership

■ Overall PC market forecast is positive, based on our identification of broad-based economic growthtrends that we believe will extend through to 2020

■ Software and services growth potential is significant, with enterprise modernisation, migration to higherproductivity activities for the economy as a whole and supportive policy environment the central drivers.Structural Trends

2016 Outlook

Vietnam was an outperformer in 2015 and was spared the worst impacts of regional economic uncertaintyafter fears of a China hard landing elevated in August 2015, there was nonetheless a dip in IT marketgrowth to 8.2% An additional factor was the decline in tablet volumes after the sharp boom in 2014 whenlow-cost devices flooded the market, and the concentration of desktop and notebook replacement spending

in 2014 due to the withdrawal of Microsoft support for XP.

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

market spending growth to 8.6%, with a total value of VND70.2trn envisaged There is still downside dueregional economic uncertainty and domestically from potential credit tightening We do not howeverenvisage major disruption as Vietnam has been relatively proactive in tackling bad debt The official rate ofnon-performing loans was down from 4.2% in December 2012 to 2.9% in September 2015, while StateBank of Vietnam is leading banking industry consolidation to reduce the number of banks from 40 to 15,which will help to insulate against shocks Furthermore, with access to credit a traditional drag on IT market

development in Vietnam, a number of partnerships were formed between banks and retailers in 2013,leaving the industry in a stronger position than in previous credit tightening episodes.

We forecast that the PC market will be strong in 2016, with growth forecast for desktop, notebook andtablet shipments as rising incomes and declining device prices promote first-time buyer and upgrade sales.Notebooks (including hybrids) and tablets will register stronger growth than desktops based on the

preference for mobility and greater affordability of devices, while Windows 10 tailored devices are alsoexpected to trigger upgrades

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 In addition to creating newparks, 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 the broaderdynamic of economic modernisation

e/f = BMI estimate/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 2016-2020 (see chart below) Despite progress in

Vietnam in recent years, BMI forecasts that 83% of Vietnamese households will earn USD5,000 or less in

2016 - the level we consider a household to be external to the retail hardware market due to a lack of

purchasing power in global markets This gives Vietnam one of the highest percentages of low-incomeearners in the region.

We envisage substantial numbers of households will migrate to higher incomes over the medium term.More than 6.1mn additional households will sit above the USD5,000 annual income threshold by 2020 Thismigration reflects broad-based economic growth momentum in Vietnam and will directly benefit to retailhardware vendors as households acquire their first PCs and individuals 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 viewfor Vietnamese IT market outperformance over the medium term, while there is scope for further gainsbeyond the timeframe of our forecast An important policy factor behind broad based growth is the

promotion of higher-productivity economic activities such as electronics manufacturing and outsourcing,which will deliver opportunities for enterprise-focused IT vendors

Broad Based Growth To Create Retail PC Opportunities

Vietnam Household Income Breakdown (2016-2020)

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

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's virtualisation survey found

that 91% of Vietnamese enterprises expected to virtualise at least 30% of their IT infrastructure in the nexttwo years 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.

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

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

Verticals

In 2016 Vietnam's enterprise IT market is relatively low-value, with a predominance of low productivity

activity, as would be expected in a developing economy - but BMI's Country Risk team envisages

improvement over the medium term as Vietnamese industries moving up the value chain For instance, largeinvestments from global electronics devices vendors will help to drive adoption of SCM and ERP inVietnam as component and service providers integrate with global supply chains Meanwhile, the boom inthe outsourcing industry will also continue to see strong adoption for ICT devices and solutions

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 19.2% in 2020 - -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

Table: Enterprise Trends - GVA By Vertical (Vietnam 2015-2020)

2015e 2016f 2017f 2018f 2019f 2020f

Agriculture nominal GVA, % total GVA 18.64 18.76 18.91 19.03 19.14 19.24 Construction nominal GVA, % total GVA 5.44 5.49 5.47 5.43 5.41 5.38 Finance nominal GVA, % total GVA 5.85 5.88 5.89 5.91 5.93 5.95 Manufacturing nominal GVA, % total GVA 17.38 17.34 17.28 17.23 17.18 17.14 Mining nominal GVA, % total GVA 9.22 8.93 8.89 8.71 8.55 8.40 Public sector nominal GVA, % total GVA 6.99 7.03 7.04 7.08 7.11 7.14 Real estate nominal GVA, % total GVA 5.82 5.81 5.76 5.74 5.72 5.70 Trade & tourism nominal GVA, % total GVA 18.39 18.51 18.56 18.67 18.76 18.84 Transport & communications nominal GVA, % total GVA 3.99 3.99 3.97 3.97 3.96 3.96 Utilities nominal GVA, % total GVA 3.96 3.95 3.93 3.91 3.90 3.89 Other services nominal GVA, % total GVA 4.31 4.33 4.32 4.33 4.34 4.35

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

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 reduce

customs 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 improveinternational 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 2013-2020)

Industry Risk Reward Index

BMI View: The IT Risk/Rewards Index (RRI) for Asia Pacific in Q216 remained broadly stable, with only

two positional changes this quarter as Hong Kong slipped two places down the table and China dropped one position This reflects the uncertainty surrounding the economic outlook for China after a further sharp fall in equity markets in early January 2016 and some concerning output data, which could translate to a decline in confidence and cuts in spending Our core scenario continues to be for a deceleration, rather than hard landing in China, but downside risk is significant - and if a hard landing does occur, the impact will be felt right across the region, with implications for the whole APAC RRI.

Regional Context

The Asia Pacific (APAC) region is both a major source of demand for IT products and solutions and themain production centre for computer hardware and components, and home to the preeminent outsourcinglocations There are ties across the region from the global hardware brands in South Korea and Japan to themajor production centres of China and Taiwan - and rapidly expanding electronics industries in Vietnam,the Philippines, Indonesia and India The region as a whole benefitted in the Q216 Risk/Reward Index(RRI) from an extension of our forecast period to 2020, pushing our forecast period out to include a greaterportion of expected appreciation against the US dollar after depreciation in 2014 and 2015 - which saw a 2.2point increase in the APAC Industry Rewards category score this quarter and 1.0 point increase in theAPAC IT RRI score

While the region as a whole is of global significance and linkages are extensive, it remains the case thatdeveloped and emerging APAC countries are very different when it comes to domestic IT markets This is

reflected in the wide range of IT scores in BMI's RRI for Q216 (see table below) Developed APAC scores

are closer to Western Europe and North America - and are primarily differentiated from the leading regions

by the low Industry Rewards category score, in part derived from the presence of the city states of HongKong and Singapore with small populations and, therefore, domestic markets

Emerging APAC is a different story, with a relatively high Industry Rewards category score consideringlow incomes, largely as a result of huge populations and potential for growth over the medium term acrossthe region It is not however best understood as one homogenous block, with nearly 20 points separating the

IT score of China and Sri Lanka in Q216 China is an emerging market, but developing fast and with coastalChina by many measures not far from developed market status, while Sri Lanka (as well as Vietnam, thePhilippines, India and Indonesia) still frontier markets

Table: IT RRI Score Breakdown By Region

Industry Rewards Rewards Country Industry Risks Country Risks IT Rating

Western Europe 72.9 90.0 87.5 77.8 79.7 North America 74.2 90.0 82.5 66.8 77.7 Developed APAC 63.0 94.0 65.5 70.2 72.2 Middle East 43.5 85.6 50.6 58.1 57.3 Latin America 56.7 62.2 45.4 51.2 55.7 Central And Eastern Europe 44.0 53.0 49.3 59.8 49.7 Emerging APAC 57.5 28.8 40.0 55.4 48.0 Africa 45.0 29.0 46.0 48.6 41.9

Source: BMI

Latest Developments

Japan is by some distance the largest of the developed APAC markets and remained in first position inQ216 Japan's high IT score reflects a combination of the advanced composition of the economy, its largepopulation, high incomes and the demand for the latest products and services in both the enterprise andretail markets It is however the large population that is the key differentiator with second placed Singapore,

as the latter also has high incomes, domestic technological sophistication and a lucrative enterprise market

The biggest gain in the Q216 APAC IT RRI was for Australia, which climbed two positions to third as aresult of a 3.8 point increase in the IT score The Australian economy has suffered as a result of a drop off

in Chinese demand for commodities exports that depressed global prices, with negative implications for the

Australian dollar and purchasing power in global markets BMI's Country Risk team does not expect a rapid

recovery in commodity prices, but nonetheless the extension of our forecast period to 2020 shifted thetimeframe for the RRI to what we expect to be a brighter period for the Australian economy and IT market

It should also be noted that the commodity price fall has upside for IT vendors in Australia as it is a catalystfor cost efficiency generating 'smart mining' solutions as miners strive to avoid being the high-cost

producers forced to exit the market before a new supply equilibrium is reached

South Korea is unchanged in fourth position, with only a small bump in the Industry Rewards category due

to the extension of our forecast, but Hong Kong slipped two positions to fifth Hong Kong's exposure to theChinese economic growth story has been largely beneficial, but we consider there to be heightened

downside over the medium term A hard landing would be severely disruptive, but even under a scenariowhere China continues to grow there are threats to the IT market Chinese IT vendors will rely on HongKong less as a conduit to global markets as the mainland economy liberalises, while we also highlight thepotential for financial services volumes to shift further towards Shanghai, potentially undermining a

lucrative source of enterprise IT spending in Hong Kong While there are significant risks we do not believeHong Kong's position as an advanced and lucrative regional IT market is under threat in the medium term

Malaysia leapfrogged China to sixth position in Q216, with the former a commodity exporter that was hithard in 2014 and 2015, and as such received a market boost from our forecast extension alongside Australia

It is China that is the more pertinent market regionally, as due to its scale and centrality to the technologyindustry as a producer - and increasingly home of world leading brands - developments there have farreaching implications Under our core scenario the migration of Chinese households to higher income bandswill be the preeminent global consumption story, but amidst greater economic uncertainty after furtherequity market declines in January 2016 the downside risk of a hard landing is of increasing concern goingforwards

Indonesia and India in eighth and ninth position both received minor upgrades to the IT Rating in Q216 and are both markets of considerably medium term potential - despite being very low income in the short-to-medium term Both compare unfavourably with China in terms of income profile, enterprise demand,government policy and electronics industry development, but there is positive momentum, particularly so inIndia where Prime Minister Narendra Modi's 'Make In India' initiative is taking hold and potentially layingthe foundation for the broad based income growth through absorption of the informal economy that hasbeen behind the Chinese IT market boom of the past decade

-The Philippines and Thailand follow India in Q216 RRI, with both scores revised up slightly this quarter as

a result of the extension of our forecast Both markets are regionally and globally integrated, with Thailand

a major production centre for storage devices while the Philippines is a leading outsourcing destination.This interconnectedness is a strength in many respects and reflects improvements in political and economicinstitutions over the past decade, however it also means both markets will face economic headwinds shouldthe 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, but their respective outlooks vary

considerably Sri Lanka is developing economically, and there is potential for positive spill over for ITindustry development from neighbouring India However we consider Vietnam to have much greaterpotential to move up the RRIs over the medium term due to a robust economic outlook, and in the IT market

specifically, due to its rapid development as a destination for electronics manufacturing and outsourcedservice provision with particularly strong links to Japanese enterprises These trends have been enabled bycost advantages that are exploited by government policy to move Vietnam up the value chain and createhigher productivity (and thus higher wage) employment opportunities.

Table: Asia Pacific IT Risk/Reward Index - Q2 2016

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Score Rank Previous Rank Japan 71.7 95.0 80.0 66.6 77.5 1 1 Singapore 58.3 100.0 70.0 74.4 72.8 2 2 Australia 65.0 95.0 57.5 66.9 71.8 3 5 South Korea 66.7 80.0 75.0 65.4 70.7 4 4 Hong Kong 53.3 100.0 45.0 77.7 68.2 5 3 Malaysia 58.3 55.0 37.5 67.7 56.7 6 7 China 71.7 35.0 45.0 55.1 56.5 7 6 Indonesia 65.0 35.0 42.5 51.4 52.5 8 8 India 65.0 15.0 45.0 50.9 47.8 9 9 Philippines 53.3 30.0 42.5 50.9 45.9 10 10 Thailand 48.3 30.0 35.0 62.9 44.9 11 11 Vietnam 51.7 15.0 35.0 53.7 41.1 12 12 Sri Lanka 46.7 15.0 37.5 50.9 38.6 13 13 Average 59.6 53.8 49.8 61.1 57.3 - -

Scores out of 100, with 100 the best Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks' at 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' score evaluates the size and growth potential of the IT market in any given state, and broader economic/socio-demographic characteristics that affect the industry's development The 'Risks' score evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Indices Source: BMI

Market Overview

Recent Developments

■ PC market contracted in volume terms in 2015, after a sharp boom in tablet sales in 2014 and

concentration of desktop upgrades due to XP support withdrawal, but underlying conditions are positiveand we expect a return to growth from 2016

■ Windows 10 adoption increased markedly in Vietnam, linked to migrations from Windows 8/8.1 devices,but during 2016 adoption will increasingly rely on device sales

■ Services segment, particularly cloud computing, has a bright outlook due to low adoption rates for coresolutions and emerging technologies that should change as network infrastructure improves andVietnamese enterprises modernise

there is a relatively small legacy of PCs in households Despite this downside BMI has a positive

assessment of medium term IT hardware spending growth Broad-based wage growth and enterprisemodernisation should drive investment in computer hardware, and we expect Vietnam to be a regionaloutperformer over the medium term We forecast a compound annual growth rate (CAGR) of 6.9% forecastover 2016-2020 in local currency terms to VND55.3trn

Hardware Market

(2013-2020)

Personal computer sales, VNDmn Servers sales, VNDmn

2013 2014 2015e 2016f 2017f 2018f 2019f 2020f 0

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

e/f = BMI estimate/forecast Source: BMI

PC Market

PC (desktop, notebook and tablet) unit sales decreased 5.1% in 2015 to a total of 3.2mn, with spending ondesktop and notebooks squeezed by a concentration of upgrade demand in 2014 by the withdrawal of

Microsoft support for the legacy XP operating system A bigger drag in volume terms was the negative turn

in the tablet market, with volumes estimated at 1.0mn in 2015, a decline of 12.6% There was a boom in

2014 as the lower-cost tablets flooded the market, and subsequently there was diminished first-time buyerpotential in 2015 and a cooling of the market, a development that was exacerbated by regional economicuncertainty

We forecast that volume growth will return in Vietnam's PC market over the medium term, with a unitgrowth of 5.1% forecast for 2016-2020, and the total expected to reach to 4.1mn units in 2020 The desktopmarket will underperform due to the popularity of notebooks and tablets in the retail market, but there isscope for very modest growth due to relatively low penetration in enterprises

Mobile form factors will outperform, and it is notebooks that we expect to see the strongest growth, withtablet volumes expected to grow at a moderate pace over the medium term under our core scenario due to adiminished pool of first-time buyers Notebooks, including hybrids, are expected to far relatively wellamong Vietnamese consumers due to the greater functionality offered compared to low-cost tablets, whichwill be a strong selling point in a low PC penetration market where tablets are not just used in combinationwith desktops or notebooks, as is most often the case in developed markets An additional factor is the

increase in the cost competitiveness of notebooks after OS licensing fee cuts by Microsoft on low-end

devices in 2014

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 USD2,065 in 2015 and forecast to reach just

USD3,116 in 2020, 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

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

There is significant uncertainty in a low-income and low penetration market such as Vietnam over theadoption 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 form factorsthrough vendor innovation that will make the Apple defined smartphone-tablet-notebook distinction morefluid 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 squeeze 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

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 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

BMI forecasts Vietnamese software spending will increase at a CAGR of 13.3% over 2016-2020, with total

software spending expected to reach VND17.8trn in 2020 This represents an acceleration from growth of9.5% in 2015 when uncertainty from regional economic instability resulted in some deferred investments inthe enterprise market and there was also a drag due to the fact that operating system (OS) replacement saleswere boosted by the withdrawal of official support by Microsoft for Windows XP in April 2014, whichbrought forward demand from 2015

e/f = BMI estimate/forecast Source: BMI

Enterprise Software

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

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 ofthe 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, in February 2016 it was the fourth largest OS by

browsing traffic share in Vietnam at 9.2% of the total BMI believes the offer of a free upgrade in the first

year for Windows 7, 8 and 8.1 users was behind the migration momentum, and means Windows 8/8.1peaked as an OS in 2015, and Windows 10 adoption will rely to a much greater extent on new device sales

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 18.5% of PC browsing traffic in Vietnam in February 2016, but there was a marked decline of17.0 pp y-o-y, from which we infer that the withdrawal of support is continuing to have 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) provides a longer term perspective,with a piracy rate of 81% in 2013 - unchanged from 2011 Vietnam had been making progress, with theincidence of piracy down 4pp 2009-2011 - enabling Vietnam to escape the list of the top 10 countries forsoftware copyright infringement However stalled progress means it has among the highest piracy rates inAsia Pacific in 2013, behind markets such as Thailand and China, and only Sri Lanka and Indonesia hadhigher 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 programmes 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

Reflecting Vietnam's low income status and an enterprise mix weighted more towards low-value added

activities compared to developed APAC, the cloud computing market in Vietnam trails most Asia Pacificmarkets Another drag is the fact Vietnam's network infrastructure trails the most advanced Asia Pacificmarkets, 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 estimate the cloud marketreached a value of VND1.0trn in 2015, and forecast robust growth at a CAGR of 24% 2016-2020 to

VND3.4trn The strong economic development momentum in Vietnam, including rising incomes and thegrowth of higher productivity verticals such as electronics manufacturing and outsourcing, will result ingrowing enterprise demand for cloud computing solutions

Cloud Computing Spending

(2013-2020)

Vietnam - Cloud computing spending, VNDmn

0 1,000,000 2,000,000 3,000,000 4,000,000

e/f = BMI estimate/forecast Source: BMI

The underlying demand drivers for cloud computing services in Vietnam are the same as globally - a morefavourable cost profile (lower total cost of ownership and an operational expense without upfront

investment), and the greater flexibility offered by cloud solutions compared to on-premises deployments.These will have an asymmetric impact on the enterprise market, for instance the cost advantages are crucialfor the development of the cloud SME market, especially in emerging markets where SME IT product andsolution penetration is very low Meanwhile, the flexibility or new capabilities introduced through cloudadoption are more of a push factor in the large enterprise market

In March 2015, VMWare reported the results of its virtualisation survey found that 91% of Vietnamese

enterprises expected to virtualise at least 30% of their IT infrastructure in the next two years Resourceutilisation optimisation and operational efficiency were cited as the primary drivers of the virtualisationtrend in Vietnam, while cost, business culture and lack of information were the main barriers to software-defined data centre adoption The survey revealed that the top three IT priorities for Vietnamese enterprises

in 2015 were disaster recovery and business continuity (25%), ensuring IT security and data protection(29%) and reduction in costs (24%)