BMI Vietnam Information Technology Report Q2 2014.pdf

Q2 2014www.businessmonitor.com

VIETNAMINFORMATION TECHNOLOGY REPORTINCLUDES 5-YEAR FORECASTS TO 2018

ISSN 2044-9631Published by:Business Monitor International

Vietnam Information TechnologyReport Q2 2014INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9IT SWOT .................................................................................................................................................. 9Wireline ................................................................................................................................................. 11Political ................................................................................................................................................. 13Economic ............................................................................................................................................... 14Business Environment .............................................................................................................................. 15

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

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

Macroeconomic Forecasts ............................................................................................... 23Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Industry Risk Reward Ratings .......................................................................................... 27Table: Asia Pacific IT Risk/Reward Ratings - Q2 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Market Overview ............................................................................................................... 30Hardware ............................................................................................................................................. 30Software ............................................................................................................................................... 36Services ................................................................................................................................................ 47

Industry Trends And Developments ................................................................................ 52

Regulatory Development .................................................................................................. 56Table: Government Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Regulatory News .................................................................................................................................... 59

Competitive Landscape .................................................................................................... 62International Companies ......................................................................................................................... 62

Table: Samsung Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Table: LG Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Table: Global CyberSoft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Local Companies ................................................................................................................................... 66Table: Sara Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Company Profile ................................................................................................................ 67FPT Software .......................................................................................................................................... 67

Table: FPT Group Revenue By Segment (VNDbn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Table: Profit Before Tax Margin By Segment (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Vietnam Information Technology Report Q2 2014

Business Monitor International Page 4

Regional Overview ............................................................................................................ 72Hardware Sales Opportunity Remains ........................................................................................................ 74

Demographic Forecast ..................................................................................................... 76Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Methodology ...................................................................................................................... 80Industry Forecast Methodology ................................................................................................................ 80Sources ................................................................................................................................................ 81Risk/Reward Ratings Methodology ............................................................................................................ 82

Table: It Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84



BMI Industry View

BMI View: Vietnam's IT market is set to maintain its position as a regional outperformer over the mediumterm. We forecast IT spending will grow at a compound annual growth rate (CAGR) of 12.6% between2014 and 2018, with expansion underpinned by rising incomes, enterprise modernisation and the policy

environment put in place by the government. We also highlight larger opportunities in the retail market

where penetration of devices and services remains below the level in neighbouring markets, which vendorswill be able to tap as incomes rise. The government is also a significant factor underpinning our brightoutlook as it pursues a range of ICT initiatives and allocates funding to develop Vietnam's domestic ITindustry. These policies include the promotion of Vietnam as an outsourcing destination, with the servicessegment expected to expand rapidly. There is also increasing momentum towards Vietnam becoming a

global centre for electronics production as wages rise in China and manufacturers look to protect marginsby moving to Vietnam, where wages are as little as a third of those in China.

Headline Expenditure Projections

Computer Hardware Sales: VND44,389bn in 2013 to VND74,872bn in 2018, CAGR of +11% in localcurrency terms. Strong sales growth forecast to continue as rising incomes, declining device prices andimproved credit provision underpin demand growth.

Software Sales: VND5,610bn in 2013 to VND11,766bn in 2018, CAGR of +16% in local currencyterms. Piracy continues to be a drag on the market, but there are large opportunities in business softwareand security solutions for vendors willing to accept narrow margins in a price-sensitive market.

IT Services Sales: VND12,083bn in 2013 to VND25,952bn in 2018, CAGR of +16.5% in local currencyterms. The services segment is forecast to outperform due to strong domestic demand, and a boom ininvestment for outsourcing provision to Japanese enterprises.

Key Trends & Developments

BMI forecasts another bumper year of hardware spending growth in the retail market in Vietnam during

2014, in contrast to more developed markets in the region where growth has slowed markedly as notebook

sales have been cannibalised by low-cost tablets. In Vietnam, penetration of desktops and notebooks is

below the APAC average, and we expect volume growth to continue in 2014 as households demand the

extra functionality provided by traditional form factors, particularly when purchasing a single device for the

household. Meanwhile, as is the case globally, tablet volumes will boom as demand from youth and young

adult segments is tapped by vendors with global presence, as well as low-cost brands from China. Another

positive for the market is the easing of the traditional bottleneck of credit access in mid-2013 as retailers

such as Vien Thong A, Dienmay.com, Phong Vu, Hoan Long and Nguyen Kim cut prices and partnered



with banks including HSBC, VietinBank, ANZ and Sacombank to directly offer interest-free instalment

payment plans.

Vietnam is rapidly emerging as an important location in global supply chains for both IT hardware and

services. The government has created an attractive policy environment, including targets for training skilled

employees from local universities and the use of tax incentives to persuade firms to locate offices in the

country. These policies, combined with low wages and proximity to large markets, means the trend of firms

investing is gathering momentum. The first major investment came from chip manufacturer Intel,announced in 2006, but other investments have followed from Samsung Electronics, which expects to

produce as much of 40% of its global smartphones and tablets in Vietnam by 2015. Vietnam is also an

emerging destination for outsourcing, with multinationals increasingly turning away from China in favour

of lower cost and higher security locations.



SWOT

IT SWOT

SWOT Analysis

Strengths Supportive policy framework and funding in place to promote the development of the

IT sector.

Vietnam's gradual integration into the global trade network via its accession into trade

organisations such as ASEAN and WTO, as well as bilateral agreements with Japan

and China.

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

growing affordability driving increased adoption among enterprises and consumers.

Expanding local hardware production industry with major international players such

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

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

lower GDP per capita.

Limited access to credit and budgets restrain spending by SMEs.

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

software vendors.

High level of software piracy, although some progress has been made in recent years.

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

as well as the upgrade/replacement market. Due to low penetration desktop and

notebook sales continue to increase despite competition from tablets.

Low-cost tablets are proving popular with consumers, with significant medium-term

sales growth potential as incomes continue to rise.

Vietnam is a popular destination for software development and IT services

outsourcing, with particularly strong growth potential from Japanese enterprises that

are turning away from Chinese based providers.



SWOT Analysis - Continued

National IT Plan will drive spending on IT utilisation in areas such as e-government, e-

taxation and education.

SMEs have much potential to increase spending on basic solutions, including

customer relationship management and security.

The government's drive to create a significant IT services industry over the next 15-20

years - through incentives to create IT clusters - is expected to be a significant factor

shaping the market.

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 and

profitability after steep discounting.

Cyber security issues could undermine confidence in IT solutions and services, with

big data and cloud computing vulnerable.

Yen depreciation has hit the software outsourcing market by making exports less

competitive and eroding Vietnam's cost advantages.



Wireline

SWOT

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

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

Competition exists in fixed-line and internet access markets; VNPT faces competition

from several other state-owned companies and privately owned operators.

High levels of literacy and other demographic factors bode well for strong and

continued demand for wireline services over the next few years.

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

operator VNPT.

Although alternative broadband infrastructures are currently being explored,

broadband growth continues to be highly dependent on DSL.

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

growth.

Although internet user growth is improving, rural Vietnam still has limited access to

internet infrastructure.

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

access.

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

and the arrival of new skills.

On a national level, broadband penetration rates remain low - this means that the

sector has considerable growth potential.

Significant opportunities exist to develop alternative broadband technologies,

including WiMAX, LTE and fibre; WiMAX and LTE internet services have the potential

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



SWOT - Continued

Draft Bill of Law on Telecommunication has been put forward for discussion at the

National Assembly Steering Committee. If passed, the bill will allow private

companies to build network infrastructure for the first time and will open up the

telecoms market to foreign investors.

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

consequences for DSL growth.

As the market for mobile data services grows, this could have potentially negative

consequences for the growth of fixed broadband services.

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



Political

SWOT Analysis

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

we do not expect major shifts in policy direction over the next five years. The one-

party system is generally conducive to short-term political stability.

Relations with the US have witnessed a marked improvement, and Washington sees

Hanoi as a potential geopolitical ally in South East Asia.

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

ruling Communist Party.

There is increasing (albeit still limited) public dissatisfaction with the leadership's tight

control over political dissent.

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

acted to clamp down on graft among party officials.

Vietnam has allowed legislators to become more vocal in criticising government

policies. This is opening up opportunities for more checks and balances within the

one-party system.

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

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

a full-on challenge of undemocractic rule.

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

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

unsustainable.

Relations with China have deteriorated over recent years due to Beijing's more

assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,

which could potentially cause wide-scale environmental damage.



Economic

SWOT Analysis

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

GDP growth averaging 7.1% annually between 2000 and 2012.

The economic boom has lifted many Vietnamese out of poverty, with the official

poverty rate in the country falling from 58% in 1993 to 20.7% in 2012.

Weaknesses Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy

vulnerable to global economic uncertainties. The fiscal deficit is dominated by

substantial spending on social subsidies that could be difficult to withdraw.

The heavily-managed and weak currency reduces incentives to improve quality of

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

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

greater access to both foreign markets and capital, while making Vietnamese

enterprises stronger through increased competition.

The government will in spite of the current macroeconomic woes, continue to move

forward with market reforms, including privatisation of state-owned enterprises, and

liberalising the banking sector.

Urbanisation will continue to be a long-term growth driver. The UN forecasts the

urban population rising from 29% of the population to more than 50% by the early

2040s.

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

upbeat view of Vietnam. If the government focuses too much on stimulating growth

and fails to root out inflationary pressure, it risks prolonging macroeconomic

instability, which could lead to a potential crisis.

Prolonged macroeconomic instability could prompt the authorities to put reforms on

hold as they struggle to stabilise the economy.



Business Environment

SWOT Analysis

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

attractive to foreign investors.

Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, and

beyond.

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

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

Vietnam remains one of the world's most corrupt countries. According to

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123

out of 176 countries.

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

Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech

skills and know-how.

Vietnam is pressing ahead with the privatisation of state-owned enterprises and the

liberalisation of the banking sector. This should offer foreign investors new entry

points.

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

protectionism, which will remain a concern.

Labour unrest remains a lingering threat. A failure by the authorities to boost skills

levels could leave Vietnam a second-rate economy for an indefinite period.



Industry Forecast

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

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

IT Market Value 45,404 52,773 62,082 70,215 78,992 89,158 100,339 112,590

o/w Hardware 33,372 38,261 44,389 49,502 54,899 61,073 67,729 74,872

- PC 27,098 31,374 36,754 40,987 45,567 50,691 56,215 62,144

- Servers 3,003 3,443 3,995 4,455 4,941 5,497 6,096 6,739

o/w Software 3,868 4,630 5,610 6,536 7,573 8,804 10,197 11,766

o/w Services 8,165 9,882 12,083 14,178 16,519 19,281 22,413 25,952

IT Market, % ofGDP 1.63 1.63 1.73 1.75 1.76 1.77 1.79 1.80

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

BMI expects Vietnam will be one of the outperforming IT markets in APAC over the medium term. The

market is relatively undeveloped but the IT sector will account for a growing share of GDP over the

duration of our five-year forecast to 2018. The major trends driving this strong growth include increases inPC penetration, driven by the supply of cheaper hardware from Chinese vendors and a new generation of

devices running Windows 8/8.1. Government spending and policy will also add to growth, through

procurement initiatives, investments in hi-tech industrial parks and policies designed to boost the sector

such as improvements to IT education and security certification schemes for firms. Vietnam's software

development and outsourcing services firms are positioned to benefit from large foreign enterprises seeking

lower cost locations over the medium term.

We expect the IT market in Vietnam will expand to VND70.2trn in 2014, an increase of 13.1% from

VND62.1trn in 2013. We expect strong growth to continue over the medium, term with a CAGR of 12.6%

2018, as the value of the market is set to reach VND112.6trn in 2018.



2014 Outlook

BMI forecasts another year of strong growth for

Vietnam's IT market in 2014, albeit a slight

slowdown from 2013. The main factor underpinning

this positive outlook is the strong macroeconomic

environment in Vietnam, as conditions remain

supportive of IT market expansion. We forecast real

GDP growth of 5.9% in 2014 and real growth of

private final consumption of 6.5%. Meanwhile,

traditional areas of weakness, such as access to

credit, have become a less significant factor as a

result of partnerships between banks and retailers

formed in 2013.

Meanwhile, government spending will continue to

be a major source of sales, with spending forecast toincrease by 6.2% in real terms in 2014, and we

expect IT spending growth to outpace overall

government spending due to the policy goal of developing the sector. This is evidenced by the Ministry of

Information and Communication's August 2013 proposal to allocate at least 2% of the state budget to

boosting the IT sector each year.

The retail PC market will continue to be a bright spot throughout 2014, with growth forecast for desktop,

notebook and tablet shipments. Despite the positive underlying consumption story there was a small dip in

sales in H113, but retailers moved to partner with banks and ensure credit is available for big ticket

purchases. The influx of low-priced Chinese own-brand tablets since 2012 has deepened the market and

vendors in the notebook category have been lowering prices to compete with this influx, which has helped

make devices more affordable and boosted sales. We expect rising incomes, credit availability, price

declines in the notebook and tablet categories and telecoms infrastructure investments will all contribute to

strong demand in 2014.

Meanwhile, government spending and PC subsidy programmes will continue to be supportive of the PC

market in 2014 as the government continues to roll out IT modernisation programmes. The government has

been spending heavily on IT, with around 50% of this going to hardware in recent years. It has also spent

IT Market (VNDmn)

2011-2018

2011

2012

2013

e

2014

f

2015

f

2016

f

2017

f

2018

f0M

25M

50M

75M

100M

125M

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



heavily on licensing software used by government agencies, but in 2013 the Ho Chi Minh City government

began a push to increase the utilisation of open-source software, which could be replicated elsewhere.

However, in early 2014 it was reported that the government was abandoning part of its open source

implementation project due to a shortage of technical maintenance staff in the country.

In terms of the enterprise sector in Vietnam, the outsourcing market continues to develop rapidly, although

the outlook for 2014 is weaker than previous years. Vietnam has become the first choice for Japanese

enterprises looking to outsource functions in recent years, primarily based on the cost advantages offered.

However, the depreciation of the yen against the US dollar has hit the competitiveness of Vietnamese

providers, and will be a drag on expansion. This weakens the outlook, but with a well developed

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

will continue to expand.

Drivers

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 and

enterprises - as well as promoting the development of local industry, particularly in software and

outsourcing services.

For instance, in November 2014 the government announced it would spend USD400,000 on building its

own version of California's Silicon Valley for start-ups, with two accelerators set up in Hanoi and Ho Chi

Minh city. The government hopes the development will help mature emerging technology companies in the

country and link them with suitable venture capital. A number of government ministries and organisations,

including the Ministry of Education and Training, have also started to promote the roll-out of cloud

services. The government has also promoted the IT industry through policy and incentives to grow hi-tech

parks, both for the construction of IT hardware, but increasingly software and IT services.

A specific IT development initiative is the government's drive to grow the IT services industry over the next

15-20 years. The cost of outsourcing in Vietnam was estimated in 2013 research to be as much as 30%

lower than in China, a fact which Japanese firms were especially aware of. The momentum that could be

garnered from Japanese enterprises shifting business process and software development outsourcing to

Vietnam could see medium term increases from European and North American demand.

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

copyright protection and combating cyber security threats. Further progress in combating software piracy,



which is still reported to be at higher levels than in China, India and Thailand, despite some progress in

recent years, is required. It is also taking steps to increase the penetration of information security

certification by distributing funds to enterprises. In August 2013 it was reported that the government was

investing US$42mn in the creation of the National Centre for Network Security Technology. Thegovernment is also updating the Law on Information Security, which closed for public comment in July

2013, as it looks to improve the cyber security environment including combating attacks originating in

Vietnam.

Improvements to supporting infrastructure are also driving IT market development. Telecoms operators are

investing in the expansion of both wireline and wireless broadband network infrastructure to rural areas, as

well as upgrading capacity of urban infrastructure and improving backbone networks. Additionally,

telecoms operators such as Viettel are emerging as significant distribution channels for notebooks as

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

government digital divide programmes to boost internet and digital utility in rural areas underpin

addressable market growth and open PC ownership to a growing number of rural inhabitants.

Segments

The government is a major source of demand for IT vendors, across the hardware, software and servicessegments. In April 2013 the Ho-Chi Minh City authority announced plans to spend VND300bn (US$14.3mn) on developing e-government capacity. It will also focus on replacing out of date hardware andimproving network security in 2013. An additional feature is the authority's intention to work with local

small and medium IT enterprises where possible, rather than immediately turning to large IT vendors.

Spending in 2013 was a marked increase over the 2005-2012 period when the city authority carried out

1,012 projects with a total spend of VND665bn.

Large Vietnamese companies are the most likely to buy packaged software from multinationals, which have

only around 25% of the local software market. In the large corporate sector, growing demand for digital

infrastructure projects in segments such as banking, telecoms and energy has attracted global IT servicesleaders, 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.

Smaller enterprises have a lower penetration of enterprise software, including ERP and security software,

but due to price sensitivity favour local solutions. The SME market is an area of the market in which

vendors can achieve growth as SME awareness of the benefits of IT utilisation increase, encouraged by

government initiatives to modernise firms and improve international competitiveness. However, vendors



will have to face the challenge of enterprises that are constrained 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 solution areas with most demand currently include security software

and key applications such as CRM, ERP and HR management.

An increasing number of Vietnamese companies have shown an interest in and willingness to use cloud

services, although the market is only in the early stages of development. In the short term weaknesses in

telecoms infrastructure - in terms of reach and capacity - will limit cloud service adoption, but this barrier

will erode over the medium term. The government has also got involved in encouraging the development of

this business model in Vietnam and new cloud computing offerings and increased competition in this

segment should fuel further demand from end-users to utilise this technology.

Summary

Overall, the hardware market is anticipated to grow from VND44,389bn in 2013 to VND74,872bn in 2018,

with computer sales rising from VND36,754bn to VND62,144bn over the same period. Software spending

should rise from VND5,610bn to VND11,766bn and IT services from VND12,083bn to VND25,952bn over

the forecast period.



Broadband

Table: Telecoms Sector - Broadband - Historical Data And Forecasts

2011 2012 2013ef 2014f 2015f 2016f 2017f 2018f

No. of internet users ('000) 15,398 16,407 16,716 16,884 16,906 16,947 16,974 16,990

No. of internet users/100 inhabitants 17.1 18.1 18.2 18.2 18.1 18.0 17.9 17.8

No. of fixed broadband internet subscribers ('000) 4,085 4,447 4,624 4,763 4,858 4,956 5,045 5,126

No. of fixed broadband internet subscribers/100inhabitants 4.5 4.9 5.0 5.1 5.2 5.3 5.3 5.4

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

According to data provided by the Vietnam Internet

Network Information Centre (VNNIC), there were31.3mn internet users in Vietnam at the end of

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

internet sector continued to exhibit slower growth in

2012, continuing on from the trend seen in 2011.

The average monthly growth rate for 2011 was

1.1%, which was lower than the growth average in

2010 (1.4%). The first 11 months of 2012 saw evenweaker growth, with an average month-on-month

(m-o-m) growth rate of just 0.2%. Given that thenumber of 3G subscriptions has surged in the past

year, it is possible that the VNNIC does not take into

account mobile internet users in its definition.

Fixed internet services are experiencing muted

growth due to the higher cost of ownership as

consumers need to purchase personal computers,

namely desktops and notebooks. There has been no explanation for the sudden decline in subscriber growth,

but market saturation is likely to play a significant role. We now estimate 32.1mn internet subscribers in

Vietnam at the end of 2013, a penetration rate of 35.4%. We expect this number to increase to 34.7mn by

end-2018, a 36.9% penetration rate.

Industry Trends - BroadbandSector

2011-2018

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



Although the internet user penetration rate is expected to be approaching saturation in major cities andtowns, rural Vietnam remains comparatively untapped as a result of consumers' lower purchasing power.

However, expansion into these areas is costly and the return on investment is not as attractive. Mobile

internet services are a more efficient way to capture customers in rural areas.

Vietnam's fixed broadband subscriber market grew by 22.8% in 2010, which was a significant slowdown

from 44.8% in the preceding year. The market registered growth rates of 150.3% in 2007 and 58.3% in

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

Like the overall internet sector, Vietnam's broadband industry is experiencing a slowdown. There were

4.3mn broadband subscribers at the end of November 2012, up by 8.0% y-o-y. The average monthly growth

rate in the first 11 months of 2012 was 0.5%, down from the 1.0% in the whole of 2011. This was due to the

contractions in the months ended June 2012, September and November 2012. We have raised our

broadband forecasts this quarter, however, in light of strong growth reported in the ministry's subscriber

figures. According to MIC, there was a surge in broadband subscribers in end-2012, and, by end-March

2013, there were 4.8mn subscribers in the country.

Although Vietnamese telecoms companies continue to deploy broadband services such as fibre-to-the-x,

affordability and coverage remain key concerns in the emerging market. Furthermore, demand for

traditional fixed broadband services is increasingly under threat from mobile alternatives due to a lower cost

structure. While we believe there will be limited growth potential for the fixed broadband industry in

Vietnam in the near future, we retain an optimistic view in light of Vietnam's growing affluence and

expanding middle class. While next-generation mobile technologies LTE and WiMAX could cannibalise

demand for fixed broadband solutions, companies could generate consumer interest by introducing

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

solutions.

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

consumers opt for mobile alternatives. That said, declining prices of products and services should help the

sector to grow by an average of 2.0% between 2013 to 2018 to bring the total number of fixed broadband

subscribers in Vietnam to 5.4mn by 2018.



Macroeconomic Forecasts

BMI View: Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-on-

year (y-o-y) in Q413, has reaffirmed our conviction that the Vietnamese economy will begin 2014 on astrong note. Not only are we witnessing more evidence of a sustained pick-up in production activity andemployment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows toaccelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growthto come in at 5.9% in 2014, versus Bloomberg consensus of 5.5%.

In line with our view that the Vietnamese economy would accelerate forcefully into the final months of the

year (see 'Economy Picking Up Pace', October 4 2013), latest data released by the General Statistics Office(GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q413. This translates into full-year growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading, combinedwith the strong set of economic data we have seen in recent weeks (accelerating foreign direct investmentinflows, remittances, and merchandise trade exports), have reaffirmed our conviction that the Vietnameseeconomy will begin 2014 on a strong note.



Looking At A Strong Start For 2014

Vietnam - Real GDP Growth, % (LHS) & Contribution By GFCF & Private Consumption, pp (RHS)

Source: BMI, General Statistics Office. (e = estimates, f = BMI forecasts)

Signs Of Improvement

Despite the lack of progress with regards to banking sector reforms and efforts to ease lending conditions

(credit growth is estimated to have expanded by around 9% in 2013, well under the State Bank of Vietnam'sinitial target of 12%), the economy appears to be holding up well. Not only are we witnessing moreevidence of a sustained pick-up in production activity and employment in the manufacturing sector (see'Strong PMI Reading Reinforces Outlook On Growth', November 5 2013), but we also expect foreign directinvestment (FDI) inflows into the export sector to accelerate as the economic recovery gathers pace over thecoming quarters.

Private Sector Investment To Drive Recovery

According to figures published by GSO, FDI-related exports made up an estimated 67% of the country's

total exports for the first 11 months of the year. Thus, although increased FDI inflows could potentially

result in a temporary deterioration in the country's trade and current account dynamics due to a burst of



capital goods imports in the near term, we believe that this is a long-term positive for the economy.

Furthermore, we view FDI inflows as a crucial source of economic growth over the coming quarters given

that the Vietnamese government is struggling to unlock domestic lending. We forecast real gross fixed

capital formation (GFCF) growth to come in at around 10% in 2014, contributing around 2.7 percentagepoints (pp) to our real GDP growth forecast of 5.9%.

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively resilient pace of 6.5% in

2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to

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

Gross Fixed Capital Formation: We foresee a pickup in private sector investment growth in 2014, partly

led by increased foreign direct investment inflows. We believe lending rates will gradually ease over the

coming months as the effect of rate cuts in 2013 by the SBV begins to kick in. We are also seeing evidence

that credit conditions are improving. Accordingly, we expect gross fixed capital formation growth to

accelerate substantially from 4.1% in 2013 to 10.0% in 2014.

Public Spending: We expect total public spending to remain relatively resilient in 2014, expanding at a

respectable pace of 6.5%. However, there is limited room for the government to increase spending further

owing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks.

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

although we expect external demand to pick up in 2014. Vietnam's trade account has fallen back into

deficits in recent months, but we see the case for a substantial pickup in external demand on the back of a

rebound in regional growth over the coming quarters. Accordingly, we still expect exports to expand at a

moderate pace of 5.6% in 2014.



Table: Vietnam - Economic Activity

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

Nominal GDP,VNDbn 3 2,779,880.2 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3

Nominal GDP,US$bn 3 134.6 155.6 170.6 195.1 221.1 249 280.8 316.6

Real GDPgrowth, %y-o-y 3 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4

GDP per capita,US$ 3 1,497 1,713 1,860 2,108 2,368 2,643 2,957 3,309

Population, mn 4 89.9 90.8 91.7e 92.5 93.4 94.2 95 95.7

Industrialproduction, %y-o-y, ave 1,5 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5

Unemployment,% of labourforce, eop 2,6 3.6 3.2 3.7e 3.5 3.5 3.6 3.5 3.5

Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank,General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.



Industry Risk Reward Ratings

BMI's Asia Pacific IT Risk/Reward Ratings (RRR) compares the potential of a selection of the region'smarkets over our forecast period, which now extends to 2018. Our Q214 ratings reflect our analyses ofmacroeconomic and country risk factors that impact the IT market, as well as key market trends and

industry-specific risks such as intellectual property (IP) rights protection.

Most of the 12 countries on our table saw changes to their scores in three categories - Industry Rewards,

Country Rewards and Country Risks - of our ratings. As a result, the regional average scores for these

categories also changed, along with their respective aggregate scores and the regional average aggregate

score. The increases in the Industry Rewards and Country Rewards scores were mainly due to IT market

value and GDP per capita figures following the extension of our forecast period to 2018 and the use of

YE13 as our base year data. Despite these changes, there were only two movements on the table in this

quarter's update. The Philippines moved up two places to eighth while Indonesia dropped two places to 10th.

The relative stability of our rankings is down to two factors - the large spread between the aggregate scores

of the countries and the fact that the increases in the aggregate scores were largely proportional.

Industry Rewards

The main factors in BMI's industry rewards rating are value of the addressable IT market, our five year

growth outlook, government initiatives and IT spending as well as market depth, which assesses the

proportion of hardware sales to other IT products and services sales. South Korea and China record the

highest score of 75 in this category. This reflects the depth of South Korea's IT market, with hardware sales

accounting for around 24% of the market, and the sheer size of China's IT market, which is forecast to reach

US$148.8bn in 2014. India has the third highest score in this category owing to the size of its market andstrong government ICT initiatives aimed at sustaining the country's global competitive advantage in

software development and business processes outsourcing (BPO).

Australia is the only other country with a score above the regional average in this category. The remaining

eight countries recorded scores that were below the regional average. Despite being high-tech countries,

Singapore and Hong Kong score below the regional average owing to their relatively small populations and,

consequently, IT market values. On the other hand, Indonesia, Malaysia and the Philippines are held back in

this category by a lack of depth in the IT market.



Country Rewards

BMI's country rewards ratings incorporates key factors that impact the sale of IT products and services in a

particularly market. These include the rate of urbanisation, GDP per capita and rate of unemployment.

There is a wide gap between the lowest score of 15 in this category and the highest score of 100. This

reflects the wide range in the figures in some of these indicators for the 12 countries in our table. For

example, China and India have populations of more than 1bn but Singapore and Honk Kong have

populations less than 10mn. Again, Australia has a GDP per capita of more than US$60,000 but this figureis less than US$2,000 in India and Vietnam.

Singapore and Hong Kong make up for their relatively weak industry rewards scores with the maximum

score of 100 in the country rewards category. In addition to high GDP per capita (US$40,000 in Hong Kongand US$56,000 in Singapore), both countries have 0% rural populations and high rates of IT literacy.Australia and South Korea are not too far behind, with country rewards scores of 95 and 80 respectively.

Australia and South Korea are the only other two countries with rural population of less than 20% of the

total population.

Unsurprisingly, countries with a high proportion of rural dwellers and relatively low GDP per capita

underperform in this category. Of these countries, India, Vietnam and Sri Lanka have the lowest score of

15, compared to the regional average of score of 50. Sri Lanka has the highest rural population of 84%,

followed by India at 68%. India and Vietnam's GDP per capita were just US$1,400 and US$1,800respectively. The other countries recorded scores around the regional average, as the high values of some

indicators were counterbalanced by scores in others.

Industry Risks

BMI's industry risk rating assesses the threat from piracy and counterfeiting of IT products as well as the

existence and level of implementation of laws to protect intellectual property (IP) rights. There is no changeto our ratings in this category this quarter, with South Korea and Singapore outperforming their regional

peers in this category with scores of 75 and 70 respectively. At the other end of our table, five countries -

Malaysia, Indonesia, Thailand, Sri Lanka and Vietnam - recorded the lowest score of 35. The risk of IP

right infringements is high in these countries, partly due to lax government regulation.



Country Risks

The country risk category assesses the impact of key macroeconomic factors on the IT market. Some of the

factors we consider in our analysis include short-term external and financial risks, trade bureaucracy and

legal framework. We also incorporate Transparency International's corruption index in our ratings. The

scores in the country risk category have the narrowest range and highest average score among the four

categories in our table. Hong Kong has the highest score of 77.7, followed by Singapore on 74.4. Hong

Kong's score is boosted by its strong legal framework, transparent and efficient trade policies and a strong

corruption score.

Table: Asia Pacific IT Risk/Reward Ratings - Q2 2014

CountryIndustryrewards

Countryrewards

Industryrisks

Countryrisks IT rating Rank

Previousrank

South Korea 75.0 80.0 75.0 65.4 74.5 1 1

Singapore 58.3 100.0 70.0 74.4 72.8 2 2

Hong Kong 55.0 100.0 45.0 77.7 68.9 3 3

Australia 60.0 95.0 45.0 66.9 68.0 4 4

China 75.0 35.0 45.0 55.1 58.0 5 5

Malaysia 56.7 55.0 35.0 67.7 55.6 6 6

India 71.7 15.0 45.0 50.9 50.8 7 7

Philippines 51.7 35.0 42.5 50.9 46.3 8 10

Thailand 55.0 20.0 35.0 62.9 45.5 9 9

Indonesia 50.0 35.0 35.0 51.4 44.8 10 8

Vietnam 50.0 15.0 35.0 53.7 40.3 11 11

Sri Lanka 46.7 15.0 35.0 50.9 38.3 12 12

Average 58.75 50.00 45.21 60.65 55.32 - -

Scores out of 100, with 100 highest. The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks'. Scoresare weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, ofwhich Industry Risks 40% and Country Risks 60%. The 'Rewards' rating evaluates the size and growth potential of an ITmarket in any given state, and country's broader economic/socio-demographic characteristics that impact the industry'sdevelopment; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns.Source: BMI



Market OverviewHardware

BMI maintains a bullish outlook for spending growth on IT hardware in 2014, as we forecast growth of

11.5% to VND49.5trn. The hardware market in Vietnam remains buoyant, with demand strengthening in

the retail sector since mid-2013, supplementing strong demand from the enterprise and public sectors.

Over the medium term BMI forecasts Vietnam's computer hardware market value will increase at a CAGR

of 11% in local currency terms 2014-2018 to reach a value of VND74.9trn. This fast rate of growth will be

driven by rising incomes, economic confidence and trends within the IT market, with the main growth

driver being the availability of affordable tablets and notebooks.

The continued run of strong economic performance

into 2014 will be supportive of increased spending

on hardware. Vendors are able to tap into demand

from first-time buyers as incomes rise, while greater

consumer confidence is a boon for the upgrade

market.

This will extend the trend from 2013 when market

data from IDC show total sales of 500,000 units in

Q113, an increase of 13.1% y-o-y. Meanwhile, localretail chain Vien Thong A stated that demand

strengthened further in mid-2013, with back to

school purchases booming as purchasing power rises

in Vietnam. Other retailers such as Dienmay.com,

Phong Vu, Hoan Long and Nguyen Kim also

reported positive growth in PC sales. The segment

has also been boosted by retailers partnering with

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

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

as education and healthcare. It is also providing credit programs to raise household PC penetration in rural

areas, which is estimated to still be below 10%, compared with 50% in higher income urban areas. The most

potential being in rural areas where penetration is lower, however for the time-being Hanoi and Ho Chi

Minh City are thought to account for around 85% of notebook sales.

Hardware Market

2011-2018

PC sales, VNDmn Servers sales, VNDmn

2011

2012

2013

e

2014

f

2015

f

2016

f

2017

f

2018

f0M

25M

50M

75M

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



While improved access to credit is a short-term factor boosting sales, a longer-term trend 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.

Form Factors

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

ownership is still relatively limited. The latest data from the regulator, the MIC show a base of 5.5mn

installed PCs at the end of 2011, equal to individual penetration rate of 6.1%. Household PC penetration

data also reflects the low level of PC ownership in Vietnam, at 16% in 2011, and is estimated to be around

20% for the country as a whole by 2013.

Given these low penetration rates there is a sizeable opportunity for vendors in terms of the first-time buyer

market. However, with GDP per capita estimated at US$1,859 in 2013 and forecast to reach US$3,309 by2018, the mass market is geared towards the value end of the spectrum.

With a large number of first-time buyers, consumer choice in terms of form factors is uncertain. While

productivity devices such as desktops and notebooks will remain popular for education and enterprise

purchasers, the availability of cheap tablets from China could see large numbers of consumers move straight

to tablets, and have little or no experience with more traditional form factors. There is however an

opportunity for hybrid notebook devices to capture share by offering the mobility advantages of tablets

while also meeting the broader functionality required for a sole household device.

In 2013 sales in the retail market continued to increase in the desktop, notebook and tablet segments. Tablet

growth is to be expected, coming from a low base and considering the increased availability of low cost

devices from OEMs. However the desktop and notebook market is also faring well, with IDC data for

2013 showing 20% y-o-y unit growth in desktop shipments.

There could be a boost to the desktop market from Windows upgrades in 2014 and 2015 as Microsoft

support for Windows XP is withdrawn from 2014, however the extent to which consumers replace desktops

rather than shifting to notebooks and tablets is uncertain. Windows XP still accounted for 45.7% of

Vietnamese PC browsing traffic in February 2014 according to data from Statcounter, illustrating the size of

the potential upgrade market.



However, two factors limit the potential boost to desktop sales. First is the competition from mobile

computing, as consumers and enterprises will likely shift towards greater usage of notebooks and tablets

when upgrading. A second factor is the prevalence of pirated software in Vietnam, meaning the loss of

Microsoft support is less of a push factor.

Meanwhile, the latest data from retailers up to August 2013 indicates demand for notebooks remains strong,

with consumers opting for notebooks in the VND8-10mn range, particularly university students requiring

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

strong.

We believe low PC penetration is the key to continued growth momentum but migrations to Microsoft's

Windows 8 operating system are also boosting sales. In 2012 retailers claimed that many businesses and

consumers were waiting for the October release of the new OS before investing in an upgrade. The final

months of 2012 saw the release by of Windows 8 RT tablets from Acer, Asus and other vendors, priced at

around US$600. However these tablets proved unsuccessful in the face of stiff competition from low pricedChinese tablet imports, predominantly running Google's Android OS. Local press reports have stated that

the very low price tablets are selling well and being pushed by dealers who are able to secure high margins

on the devices and still undercut the international vendors.



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 of the population. However theproliferation of affordable tablets running Android

and the entry to the market of vendors producing

Windows 8 devices is already seeing tablet sales

increase rapidly. In early 2013, reports of an influx

of own-brand Chinese made tablets indicate growth

at the low value end, but we also expect price

competition between international vendors to boost

sales of mid-range tablets in Vietnam.

A victim of the surge in tablet sales will be the

notebook market - especially netbooks. Netbooks

saw a steep decline in popularity in 2011, with a

number of leading vendors, such as former netbook

segment leader Sony, withdrawing models from the

market. Netbooks initially suffered under competition from lower priced notebooks, however tablets are

now squeezing them further.

With tablets making gains at the low end of the market the notebook category is becoming a primarily mid-

range device category in Vietnam as vendors are unable to compete against own brand Chinese tablets on

price. Although notebook sales are being cannibalised by tablets, with PC penetration low in Vietnam, a

large number of first time buyers are still opting for the functionality of notebooks. This has helped sustain

unit growth, in contrast to developed markets where consumers are more likely to opt of tablets as

supplementary devices to their existing desktops and notebooks.

The release of Windows 8/8.1 has also spurred the creation of hybrid devices, which had little impact in

2013 in Vietnam as early examples are priced as premium products. However price competition will reduce

the cost to consumers and hybrids are set to be a growth area in 2014. 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.

APAC Household PC Penetration(%)

2011

Source: World Economic Forum Global Information

Technology Report 2013



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

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

features. Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Hewlett-Packard's Envy, Lenovo Miix 2 (8 inch), Lenovo IdeaPad Yoga 2 Pro, Nokia Lumia 2520, LenovoThinkPad Yoga and Dell Venue 11 Pro.

Although design innovation has some way to go and prices of hybrids will need to decline, the multi-use

device has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience. Such devices, along with ultra-slim notebooks are

already regaining share of sales from tablets in more developed Asia markets in H113, for instance in South

Korea, and we believe the same phenomenon could affect Vietnam as prices decline over the medium term.

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

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

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

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

success in terms of unit sales due to high prices. Local press have reported that prices of low end ultrabooks

have declined in early 2013, from around VND15mn in 2012 to VND10mn which could see unit sales

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

Mid-range ultrabooks are reported to be retailing for VND20-30mn while premium models are priced over

VND30mn. The cheaper models are using lower power Intel i3 chips rather than i5 and i7 chips. Even after

these price cuts ultrabooks will be significantly more expensive than low end tablets.



Vendor Performance

The Vietnamese PC market is surprisingly

competitive, with most of the major laptop vendorplayers having below a 10% local market share.

Other multinational vendors, including Dell,

Toshiba and Samsung, have enjoyed strong growthin the market. Samsung is considered a threat as it

aims to leverage its distribution network and strong

brand recognition from the smartphone and TV

market into a 10% share of the Vietnamese notebook

PC market.

In 2013, vendors are hoping that upgrades to PC

devices based on Microsoft's new Windows 8

operating system will spur a new cycle of

procurements. The final quarter of 2012 saw the

release of a number of tablets based on Windows 8

on the Vietnamese market. Acer released two

Windows 8 tablets, the Inconia Tab W700 and W511, while fellow Taiwanese leader Asus introduced its

Asus Vivo Tab. The devices were not cheap, with prices for the products being set at more than US$600.

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

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

enabling consumers to test and return or exchange products within 10 days. Meanwhile Nguyen Kim cut

prices on HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free accessories worth up to

VND2mn. The most important strategy for boosting sales of products from international vendors has been

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

available.

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

launched a new partnership with local company FPT Distribution, which has a nationwide network of 400

dealers. FPT, a member of FPT Trading Group, will distribute Asus products, with Asus planning to

introduce the full range of its new products in Vietnam during Q211. FTP also distributes a portfolio of

Vietnam PC Installed Base

2008-2011

Source: MIC



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. FTP will provide warranty

services for Asus laptops at its four new service centres in Hanoi, Ho Chi Minh City, Danang and Can Tho.

Asus opened service centres across Vietnam in 2011.

While foreign vendors dominate sales of notebook, local manufacturers have a strong position in the, albeit

declining, desktop market. Vietnam's top five computer companies, as selected by the Ho Chi Minh City

Computer Association in 2011, were FTP, CMS, Robo, Viettronics Tan Binh and the Khai Tri

Technology Trading Co. The total turnover of these top five companies was around VND1tn in 2011 (US$48.1mn), down 25% from the previous year.

In November 2012 local press reported dealers were pushing cheap tablets from China as a result of the

margins they could generate on the devices. It has been reported that wholesale dealers are able to sell the

tablets for double the market price in China in Vietnam. Examples include the Hipad Mid A13 and Ondan

V971, as well as other own-brand Chinese manufacturers such as Teclast and Ampe - as well as counterfeits

of foreign products.

As in many other markets, telecoms carriers have also emerged as a significant channel option for PC

vendors. Dell has launched a partnership with Viettel, which will distribute Dell PCs. Viettel has a

substantial presence in rural areas, which have big PC market growth potential, as PC penetration is

currently low. Dell has also partnered with local retail leader The Gioi Di Dong to sell both online and

through the company's 40 retail outlets.

Software

BMI expects software sales to continue to grow rapidly in Vietnam and increase to VND6.5trn in 2014, up

16.5% from 2013. We expect strong growth will be maintained over the medium term with CAGR of 16%

2014-2018. We expect steady growth in demand for licensed software from government, enterprise and

household segments.

The Vietnamese software market is cost-sensitive, with around 75% of the market served by lower-cost

local software vendors, as well as there being a high level of pirated software. Local software dominates the

market for government and SME segments. However, larger Vietnamese companies are more likely to buy

higher-priced software from multinationals, which have around 25% of the market. Vietnamese customers

are demanding a higher level of support for software compared with a few years previously.



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

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

vendors. These segments offer the most potential for customised solutions, as well as off-the-shelf packaged

software. Banks are looking to take their services to the next level in response to the demands of a rapidly

growing economy and are investing in more advanced and flexible platforms for core banking processes.

Spending opportunities in the finance segment will be driven by regulatory compliance, due to regulations

such as Basel II, HIPPA and the Sarbanes-Oxley Act, as well as potential new regulations introduced in the

wake of the global financial crisis. Mobile operators are investing in new OSS (operating support systems)to reduce costs and support delivery of new services.

Growing PC penetration, as well as new technologies and business models, including 3G mobile and

WiMAX, and industry trends such as software-as-a-service (SaaS) and open source will provide areas ofVietnamese software market growth going forward. Most demand remains for on-premises subscription

models, due to the greater perceived security and degree of control. However, as internet infrastructure

improves in Vietnam, there should be more demand for alternative models such as SaaS and other cloud

computing services.

The government is a significant software-purchasing segment in Vietnam and accounts for about 30% of

total IT spending. The 7,000 government agencies offer considerable opportunities at national provincial

and municipal levels. A particular area of opportunity is tax agencies of all administrative tiers as

governments look to increase the efficiency of tax collection. The Vietnamese government's drive to

implement e-government will be another driver in this segment.



Business Software

In 2012 and the first half of 2013 vendors reported

continued robust sales of ERP solutions, despite the

uncertain economic situation. There is still a lot of

potential for Vietnamese enterprises to increase

spending on basic solutions, including CRM and

security.

A number of Vietnamese companies embarked on

large-scale ERP implementations as part of their

long-term growth strategy. In August 2012, Hoang

Anh Gia Lai Group (HAGL) launched a VND100bnERP system as it sought to unify corporate

governance. The solution was adopted for the

company's four business sectors of minerals, energy,

forestry and real estate, with over 400 staff

members. HAGL said it would also consider applying the ERP solution at 20 affiliates. Imexpharm

Pharmaceuticals Co. spent US$41mn in August 2012 in installing an ERP system at its headquarters inDong Thap, two factories in Dong Thap and Binh Duong, as well as a distribution centre and sales branch in

Ho Chi Minh City. Other Vietnamese enterprises spending big on ERP solutions in 2012 have included

Binh Minh Plastics, which invested VND10bn in ERP, while Licogi 16 Co. has spent US$800,000 on anSAP ERP solution.

In July 2013 FPT signed a contract to upgrade the Oracle ERP system, deploying additional Oracle

Business Intelligence Applications, for Vietnam Dairy Products (Vinamilk). The project is reported to beworth VND15bn and includes software licences, hardware infrastructure, consultation and implementation

services.

Vendors should also look to areas such as CRM and business intelligence, where faster growth is possible,

due to untapped potential in key segments such as CRM, ERP and human resource management. Data

analytics and database software is likely to be a growing area and account for a larger portion of software

budgets. The banking and finance sector is a promising area for database software and one where foreign

companies have done well.

Software Market (VNDmn)

2011-2018

2011

2012

2013

e

2014

f

2015

f

2016

f

2017

f

2018

f0

2,500,000

5,000,000

7,500,000

10,000,000

12,500,000

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



Government support for ICT development should provide a framework for growing utilisation of software

in both public and private sectors. However, while the ERP market is strong, the market for CRM software

remains small, largely due to a lack of awareness about it among Vietnamese businesses. It is estimated that

only 10% of Vietnamese businesses have used CRM, which is far fewer than in other countries.

Over BMI's five-year forecast period to 2018, the Vietnamese enterprise software market will offer

opportunities in many sectors. While management software remains at less than 10% of the total software

market, basic applications such as enterprise resource planning (ERP) and accounting are finding increasingpopularity with the business market. There is a growing emphasis on cost efficiency as enterprises look to

enhance productivity through automating these and other functions.

Cloud enterprise SaaS adoption is expected to accelerate over the next few years, after pilots scheme were

deemed to have been successful. An increasing number of Vietnamese companies have shown an interest in

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

development of this business model in Vietnam, and in 2010 reached an agreement with Microsoft to

cooperate on research. Given the focus on many businesses of controlling costs, the pay-on-demand SaaS

model should grow in popularity and spread beyond the initial core application area of CRM.

New cloud computing offerings and increased competition in this segment should fuel further demand from

end-users to utilise this technology. In addition to cost savings, businesses will look to boost efficiency and

improve their response to customers in order to satisfy their needs. Large businesses are most likely to put

IT applications such as mail, phone systems and document management into the cloud. However, enterprise

applications that require a high level of customisation, or those that are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise.

Security Software

Cyber security issues are becoming more prevalent in Vietnam as a result of greater threats and increased

awareness from enterprises, government and consumers. The government is taking steps to address the

problem, which should boost spending. In August 2013 the government announced it was investing US

$42mn in the creation of the National Centre for Network Security Technology. The centre will be managedby the Ministry of Public Security, the Government Secrecy Committee and the Ministry of Industry and

Trade. The government also update the Law on Information Security, which closed for public comment in

July 2013, as it looks to improve the cyber security environment including combating attacks originating in

Vietnam.



In March 2013 the Vietnamese government's draft law on digital information security stated that there

would be stronger support for domestic firms producing information security products. The Vietnam

Computer 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.

A survey by internet security company Bkav in April 2013 estimated that the losses incurred by viruses ran

to VND8trn annually in 2012. This was calculated by the disruption to work caused by the presence of

viruses. The survey also highlighted an increase in attacks of company websites in Vietnam, with 425 in

March 2013, nine originating from Vietnam and 416 from foreign countries. This level of disruption is

generating renewed interest in security software and solutions, however vendors will face the same

challenges of price sensitivity and piracy as elsewhere in the software market.

BKAV, along with CMC, the most prominent domestic cyber security firm in Vietnam, reported that less

than 50% of computers in Vietnam have anti-virus installed in H113. Despite the scale of the opportunity

from low penetration BKAV stated that the market is less dynamic than 3-4 years previously when a large

number of international vendors moved into the market. This was attributed to the reluctance of local

enterprises and consumers to spend on copyrighted software, preferring free software or no protection.



Migrations to the Windows 8/8.1 operating system

were sluggish in Vietnam in 2013, unsurprising

given the price sensitivity of consumers. However

there are signs the OS began to gain traction

throughout the year as a wider array of touch

enabled hybrid notebooks hit the market. By

February 2014 Windows 8/8.1 accounted for 7.2%

of PC browsing traffic in Vietnam, up 4.6pps y-o-y.

This was the single largest increase of any OS and

made it the third largest by browsing traffic share.

While the outlook is improving, an drag on uptake is

the greater longevity of hardware in recent years,

and the strength of Windows 7 meaning the push

factor for upgrades in the short term is limited.

However, there will be a medium term impact

through a deepening of the tablet market and

innovation in form factors as Microsoft introduced

touchscreen capabilities to Windows 8.

Another medium term factor that should drive upgrades is the fact that a large portion of the installed

computer base in Vietnam that still uses the Windows XP operating system. As support for Windows XP

will be withdrawn in 2014, this should provide an impetus to upgrade. The latest Statcounter data show that

XP still accounted for 45.7% of PC browsing traffic in Vietnam in February 2014, narrowly ahead of

Windows 7 on 38.9%. Microsoft will still offer reduced support for XP until 2015, but hardware

manufacturers started to wind down their support in 2013. This will be a key factor that should drive

business upgrade.

In spring 2012, Microsoft targeted the consumer segment with a major 'Buying Microsoft computers'campaign, which offered various gifts to customers purchasing computers with legitimate Windows 7

versions installed. The promotion ran from February through April in big cities across Vietnam, including

Hanoi, Ho Chi Minh City, Danang, Hailphong and Can Tho.

Microsoft is dominant in the operating system segment but faces a challenge from Chinese vendor

KingSoft. The economic downturn may have added to the forces driving interest in open source software.

Vietnam PC Browsing Traffic ByOS (%) And Y-o-Y Change

February 2014

Source: Statcounter



The economic downturn has led businesses and customers to look more closely at open office-type open

source software, due to its perceived lower cost and access to codes, as well as free services, such as Google

Docs, which are funded by advertising. However, a key issue and precondition for the more widespread

adoption of open source will be the development of a support infrastructure. Given the current economic

climate, IT directors will need to justify any upgrade in terms of cost savings.

Open Source

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

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

look more closely at open-office-type open-source software, as well as free services such as Google Docs,

which are funded by advertising. Once again, a key issue and precondition for the more widespread

adoption of open source will be the development of a support infrastructure.

Ho-Chi Minh City (HCMC) plans to spend VND31bn to use open source software in 2013, primarily for thecity's state agencies. To put this figure in perspective HCMC will spend VND240bn on software licenses

for state agencies and VND800bn on licences for business and social organisations in 2013. However

HCMC plans to continue shifting spending towards cheaper open source alternatives. In order to rival majorinternational software firms, open source implementers in Vietnam are creating alliances to be able to

compete on scale in terms of finance and labour.

In March 2013 the development of open source software for the public sector received a blow when Vu Duy

Loi, Director of the Communist Party Central Committee Office's Informatics Center, stated that the

government was freezing the adoption of open source software. He cited the lack of available technical

maintenance staff for making the deployment of services impractical for the time being. However, the

government has not permanently abandoned open source software deployments and is looking at means to

increase the number of staff.

Piracy

Vietnam's software market is developing but piracy remains a drag on the market at 80% in 2012, according

to a press release from the BSA. While high, the piracy rate of 81% in 2011 did represent a drop of 4pps

compared with the 85% seen in 2010 and 95% as recently as 2007. This has at least enabled Vietnam to

escape the list of the top 10 countries for software copyright infringement. However the piracy rate remains

above that of neighbouring markets such as India, Thailand and China.



In March 2013 the Copyright Office of Vietnam reported that software piracy was continuing to decline, but

remains a serious issue. The software piracy rate has declined from 90% to 80% from 2004 to 2011, with a

4pps decline from 2010 to 2011 alone. The government states that it has signed copyright agreements with a

range of software firms, but private enterprises remain copyright infringers, particularly computer trading

firms. In 2012, inspectors discovered 10 computer sales agents of leading brands such as HP, Dell, Lenovo

and Acer installing pirated software products. According to estimates, the value of the seized software

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