BMI Vietnam Information Technology Report Q1 2014

Q1 2014www.businessmonitor.com

VIETNAMINFORMATION TECHNOLOGY REPORTINCLUDES 5-YEAR FORECASTS TO 2017

ISSN 2044-9631Published by:Business Monitor International

Vietnam Information TechnologyReport Q1 2014INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2013

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CONTENTS

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

SWOT .................................................................................................................................... 9IT SWOT .................................................................................................................................................. 9Wireline SWOT ....................................................................................................................................... 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 ............................................................................................... 23Economic Analysis ................................................................................................................................... 23

Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Industry Risk Reward Ratings .......................................................................................... 27Table: Asia Pacific IT Risk/Reward Ratings - Q1 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Market Overview ............................................................................................................... 31Hardware ............................................................................................................................................. 31Software ............................................................................................................................................... 38Services ................................................................................................................................................ 49

Industry Trends And Developments ................................................................................ 55

Regulatory Development .................................................................................................. 59Table: Government Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Regulatory News .................................................................................................................................... 62

Competitive Landscape .................................................................................................... 64International Companies ......................................................................................................................... 64

Table: Samsung Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Table: Global CyberSoft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Local Companies ................................................................................................................................... 67Table: Sara Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Company Profile ................................................................................................................ 68FPT Software .......................................................................................................................................... 68

Table: FPT Group Revenue By Segment (VNDbn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Table: Profit Before Tax Margin By Segment (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Vietnam Information Technology Report Q1 2014

Business Monitor International Page 4

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

Demographic Forecast ..................................................................................................... 76Demographic Outlook .............................................................................................................................. 76

Table: 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 Rating Methodology ............................................................................................................. 82

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



BMI Industry View

BMI View: Vietnam's IT market is a regional outperformer and we expect strong growth to continue overthe medium term. We forecast IT spending will grow at a compound annual growth rate (CAGR) of 14.1%to 2017, driven by rising incomes, enterprise modernisation and the policy environment put in place by the

government. Significant opportunities remain in the retail market due to relatively low penetration ofdevices and services, which vendors will be able to tap as incomes rise. The government is also a significantfactor underpinning our bright outlook as it pursues a range of ICT initiatives and allocates funding todevelop Vietnam's domestic IT industry. These policies include the promotion of Vietnam as an outsourcingdestination, with the services segment expected to expand rapidly. There is also increasing momentum

towards Vietnam becoming a global centre for electronics production as wages rise in China andmanufacturers look to protect margins by moving to Vietnam, where wages are as little as a third of thosein China.

Headline Expenditure Projections

Computer Hardware Sales: VND44,389bn in 2013 to VND68,935bn in 2017, CAGR of +12.5% inlocal currency terms. Low penetration of devices and rising incomes will support strong sales growth,although access to credit continues to be a bottleneck despite partnerships between some retailers andbanks.

Software Sales: VND5,610bn in 2013 to VND10,378bn in 2017, CAGR of +17.5% 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 VND22,812bn in 2017, CAGR of +18.2% in local currencyterms. Services expected to be the outperforming segment of the IT market as demand grows in severalverticals, including banking, telecoms, energy and government. Additionally, there is a potential boom inoutsourcing from Japanese enterprises to drive outperformance of services segment.

Key Trends & Developments

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 smartphone 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.

While Samsung and Intel's production facilities are primarily geared towards export, there is also significant

interest in the domestic retail hardware market where low PC penetration and forecasts for rising incomes

means there is a solid platform for growth over the medium term. However, a lack of credit has restricted

sales in the past as PCs remain big-ticket purchases for the majority of Vietnamese households. BMIbelieves this bottleneck will be less of a problem in the future 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 from

mid-2013.



SWOT

IT SWOT

SWOT Analysis

Strengths Government policies 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 and Intel making large investments.

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

lower GDP and GDP per capita.

Limited access to credit and budgets restrain spending by SMEs.

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

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

sales growth potential as incomes continue to rise.

Vietnam is becoming 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 The implementation of the China-ASEAN free trade agreement means that

established multinationals will face a growing challenge from low-cost Chinese

vendors in the Vietnamese market.

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.



Wireline SWOT

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)

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

IT Market Value 36,898 45,404 52,773 62,082 70,836 80,399 90,746 102,126

o/w Hardware 27,305 33,372 38,261 44,389 49,939 55,877 62,161 68,935

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

- Servers 2,457 3,003 3,443 3,995 4,495 5,029 5,594 6,204

o/w Software 3,051 3,868 4,630 5,610 6,593 7,708 8,961 10,378

o/w Services 6,542 8,165 9,882 12,083 14,303 16,814 19,624 22,812

IT Market, % ofGDP 1.86 1.79 1.79 1.87 1.90 1.92 1.93 1.93

f = BMI forecast. Source: BMI.

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

albeit from a low base, but the IT sector will account for a growing share of GDP over the duration of our

five-year forecast to 2017. We expect the IT market in Vietnam will expand to VND62,082bn in 2013, an

increase of 17.6% from VND52,773bn in 2012. We expect strong growth to continue over the medium,

term with a CAGR of 14.1% from 2013 to 2017, with the value of the market reaching VND102,126bn in

2017. There will be a double-digit CAGR for all three segments of the market. However, we expect

software and services growth to outperform hardware and account for an increasing share of the total

market over the five years to 2017.

The major trends driving this strong growth include increases in PC penetration - driven by the supply ofcheaper hardware from Chinese vendors and a new generation of devices running Windows 8. Supporting

this trend will be moves by retailers to partner with banks in credit provision for PC purchases,

improvements in network infrastructure and rising real incomes. Government spending and policy will 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.

Despite global economic headwinds presenting a risk, Vietnam's software development and outsourcing

services firms are positioned to benefit from large foreign enterprises seeking lower cost locations over the

medium term.



2013 Outlook

Despite a small downward revision by BMI to its

macroeconomic outlook for Vietnam in 2013

conditions remain supportive of IT market

expansion. We forecast real GDP growth will pick

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

should be noted that the forecast for 2013 has been

revised down from 7% since the Q213 update. Therewas a small drag on retail spending in H113 due to

limited access to credit, however partnerships

between banks and retailers have returned the market

to faster growth from mid-2013. Government

spending is expected to increase by 6.2% in real

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

spending growth to outpace overall government

spending due to the policy goal of developing the

sector. This is evidenced by the Ministry of

Information and Communication's August 2013

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

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

as retailers moved to partner with banks and ensure credit is available for big ticket purchases. The market

will gain additional momentum from the impact of new vendors entering the market and existing vendors

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

convertibles and ultrabooks. Most recently, the influx of low-priced Chinese own-brand tablets 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.

Government spending and PC subsidy programmes will be supportive of the PC market in 2013 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 heavily on licensing

software used by government agencies, but in 2013 the Ho Chi Minh City government is beginning a push

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

Industry Trends - IT Market

2010-2017

f = BMI forecast. Source: BMI.



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

of research have shown that Vietnam is now the first choice for Japanese enterprises looking to outsource

functions, primarily based on the cost advantages offered. The majority of Japan's corporate outsourcing isstill directed to China in terms of value, but software and business process outsourcing has significant cost

advantages in Vietnam, as well as a friendly business environment. This could see rapid growth as firms

shift from China to Vietnam and the potential for international demand from elsewhere could sustain the

boom.

Drivers

Government policies and funding are an important part of the sector's development in Vietnam. 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.

Examples of policies include plans to modernise IT in government agencies and the customs department, as

well as the Tax Administration Modernisation Plan for 2008-2013. 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.

Tariff reductions, particularly the ASEAN ones, have contributed to lower prices and are boosting PC sales.

However, the new China-ASEAN free trade agreement offers both opportunities and challenges to vendors,

given the growing presence of low-cost Chinese vendors in the Vietnamese market. Reports from Q113indicate that international vendors have suffered in particular against the supply of cheap own-brand

Chinese tablets. Local dealers are promoting the devices because of the margins available, but even with

this mark-up they are proving a big-hit and hurting sales of traditional notebooks.

Segments

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

IT spending, with high levels of investment in hardware. Spending has continued to grow both at central

and regional government level. Most recently 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 onreplacing out of date hardware and improving network security in 2013. An additional feature is the

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

immediately turning to large IT vendors. Spending in 2013 is a marked increase over the 2005-2012 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. The banking and finance sector is a promising area for

database software and one where foreign companies have done well. 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, and quite likely by new regulations introduced in the wake of the global financial

crisis.



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. Companies are looking for software that will help boost performance and operational efficiency.

Promising SME verticals include discrete manufacturing and consumer packaged goods, as well as 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 VND68,935bn in 2017,

with computer sales rising from VND36,754bn to VND57,216bn over the same period. Software spending

should rise from VND5,610bn to VND10,378bn and IT services from VND12,083bn to VND22,812bn over

the forecast period.



Broadband

Table: Telecoms Sector - Broadband - Historical Data And Forecasts

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

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

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

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

No. of fixed broadband internet subscribers/100inhabitants 4.1 4.6 5.3 5.5 5.6 5.6 5.7 5.8

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 m-o-m growth rate

of just 0.2%. Given that the number of 3Gsubscriptions has surged in the past year, it is

possible that the VNNIC does not take into account

mobile internet users in its definition.

Fixed internet services are experiencing muted

growth due to the higher cost of ownership as

consumers need to purchase personal computers,

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

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

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

end-2017, a 36.9% penetration rate.

Industry Trends - BroadbandSector

2010-2017

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



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

However, expansion into these areas is costly and the return on investment is not as attractive. 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 2017 to bring the total number of fixed broadband

subscribers in Vietnam to 5.8mn by 2017.



Macroeconomic Forecasts

Economic Analysis

BMI View: Although we expect the Vietnamese economy to record yet another quarter of sub-par growth inQ413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters.Recent data on foreign direct investment inflows, remittances, passenger car sales, and property marketlaunches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014growth.

The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth

mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely

in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in

Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks toour growth forecast of 6.0% is gradually tilting towards the upside.

Robust Remittances Could Boost Domestic Demand

Vietnam - Unrequited Transfers, US$mn

Source: BMI, Asian Development Bank



Remittances: According to estimates published by the World Bank, the Vietnamese economy is on track to

record a bumper year for remittance inflows. The country is expected to receive US$10.6bn in remittancesfrom Vietnamese citizens working abroad, a robust 6.5% increase from 2012. Crucially, we believe that

remittance inflows will remain strong over the coming quarters as macroeconomic conditions in Vietnam

continue to improve. Growing confidence in the stability of the Vietnamese dong should also help to

encourage Vietnamese workers abroad, to a certain extent, to remit a larger share of their earnings back

home. We believe that this will help to boost domestic demand while providing support for the currency.

Foreign Direct Investment: Total foreign direct investment (FDI) inflows are also set to surpass thegovernment's full-year target of US$13bn, after data released by the Ministry of Planning and Investmentshowed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year.The strong reading chimes with our view that the country's solid long-term growth story should continue to

attract foreign investors over the coming years.

Automobile Sales: We are witnessing signs of a robust recovery in automobile sales, a sign that pent-up

domestic demand is beginning to rebound. According to the Vietnam Automobile Manufacturers

Association (VAMA), September vehicle sales of its members surged by 20.6% year-on-year (y-o-y),exceeding our already bullish forecast of 12.5% for the year (see 'Bullish On CV Sales In The Medium ToLong Term', October 14 2013).



Developers Eyeing Property Market Rebound

Vietnam - Real Estate Index

Source: BMI, Blooomberg

Property Market: Meanwhile, we see increasing evidence that the Vietnamese property market may have

bottomed out (see 'Early Signs Of A Recovery, But No Property Market Boom In Sight', August 14 2013).According to a quarterly report published by real estate agency CBRE Vietnam, the number of new

launches surged by 12% y-o-y in Q313. Anecdotal evidence from the local media suggests to us thatdemand for real estate following the sharp decline in prices since 2011 may be recovering. To be sure, we

maintain our view that we are unlikely to see a property market boom given the healthy pipeline of new

units that will come online in 2014. Nonetheless, we acknowledge that consumer confidence is recovering

and we could potentially see some upside surprises to domestic demand in 2014.

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a relatively resilient pace of 5.0% 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 recent rate cuts 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 slightly from 4.1% in 2013 to 4.8% in 2014.

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

respectable pace of 6.1%. 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 5.9% in 2014.

Table: Vietnam - Economic Activity

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

Nominal GDP,VNDbn 3 2,157,829 2,779,880 3,245,419 3,657,621 4,117,487 4,631,499 5,203,774 5,841,949

Nominal GDP, US$bn 3 112.9 134.6 155.5 175 200.2 227.8 257.4 291.4

Real GDP growth,% change y-o-y 3 6.4 6.2 5.2 5.3 6 6.9 7 7

GDP per capita,US$ 3 1,267 1,497 1,712 1,909 2,163 2,439 2,733 3,068

Population, mn 4 89 89.9 90.8 91.7 92.5 93.4 94.2 95

Industrialproduction index,% y-o-y, ave 1,5 14.1 10.9 7 7.6 8.7 9.6 9.9 9.8

Unemployment,% of labour force,eop 2,6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5

Notes: f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General StatisticsOffice; 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 through to 2017. Our Q114 ratings reflect our consideration of the politicaland economic risks, as well as the risks associated specifically with IT intellectual property (IP) rightsprotection and the implementation of state spending projects.

There were three changes in the aggregate scores of countries in our ratings table as we have updated our

macroeconomic and industry data, although this resulted in only one change in our rankings compared to

the previous quarter. South Korea displaced Singapore at the top of our table to take first position this

quarter following an upgrade to its country rewards score. China's industry rewards rating was downgraded

this quarter but this was not sufficient to move the country from the fifth position on our table. Sri Lanka's

score in that category was upgraded this quarter but the country remained rooted to the bottom of our table.

There were no changes to the aggregate scores of the other nine countries on our table. Despite the changes

to South Korea, Sri Lanka and China's scores, the average regional score was unchanged at 54.9.

South Korea registered an aggregate score of 72.2, compared to 71.0 in the previous quarter, owing to a 5pt

increase to its country rewards score. Economic activity in the country picked up in H113, with real GDP

growth of 1.1% quarter-on-quarter (q-o-q) during Q213 from a revised 0.8% q-o-q in Q113. Private andgovernment consumption were the main drivers of growth, expanding 1.0% and 2.4%, up from a -0.4% and

1.2% in the previous quarter. This performance had a positive effect on our country rewards rating, which

incorporates key macro indicators such as GDP per capita and unemployment in assessing the attractiveness

of the IT market.

There was no change to Singapore's aggregate score, although it dropped to second position on our table on

the back of the upgrade to South Korea's score. Singapore is one of only two countries with the maximum

score of 100 in the country rewards category. The country's heavy reliance on technological innovations to

attract businesses and drive economic growth due to limited land capital and a lack of natural resources

makes it an attractive market for a wide range of IT solutions, including advanced corporate solutions and

consumer mobility solutions. Singapore scores slightly below average in the industry rewards categories

owing to the relatively small size of its market.

Hong Kong is the other country with a maximum score of 100 in the country rewards category, although

this could only earn it the third position on our table owing to weak industry rewards and industry risk

scores. Hong Kong, like Singapore, is held back by a small market size in the industry rewards category



while a strong Chinese influence on the country is a drag on its industry risk rating. However, Hong Kong

remains a prime financial hub, with strong demand for IT solutions that help companies to reduce operating

costs and improve operational efficiency when carrying out transactions, particularly cross-border trade.

Australia remains in fourth position with an aggregate score of 68.0. The continued delay to the proposed

National Broadband Network, which will vastly improve broadband coverage and speeds throughout the

country, thereby providing a boost to the IT sector, poses a downside risk to our outlook. BMI notes that the

project could see further disruption after the entire board of state-owned NBN Co reportedly offered toresign following the general elections in September 2013, which brought the Liberal-National coalition

(LNC) to power. The new Communications Minister Malcolm Turnbull is proposing an alternative NBNplan proposed to replace the previously proposed fibre-to-the-home (FTTH) technology with fibre-to-the-node (FTTN). The new government intends to rely on less of fibre and more on the existing coppernetworks to save costs and time. We believe that this is a short-term solution that could materially impact

developments in the IT industry.

China also remains in fifth position despite a 1.5pt decrease to its aggregate score. This further narrowed the

gap with Malaysia to just 0.1pt. Malaysia is in sixth position with a score of 57.2. We downgraded China'sindustry rewards score to 73.3 this quarter from 76.7 in our previous update to reflect the likely impact of a

slow down on economic growth on demand for IT services. However, the country's score in this category

remains the highest in the region owing to its large population and rising income levels. We retain the view

that China will shift its economy away from infrastructure investment and towards consumer services,

creating opportunities for the IT sector. There is no change to Malaysia score this quarter, although

continued investments in cloud technology poses an upside risk to our outlook.

There is a 10-15pts gap between Malaysia in sixth position and India, Indonesia, Thailand, Philippines and

Vietnam in that order from seventh to 11th. Although these countries have considerably larger populations

than some countries ahead of them on our table, they are held back by weak country rewards scores which

reflect lower GDP per capita and rate of urbanisation, as well as higher rates of unemployment. Among

these countries, Indonesia has the highest country rewards score of 35, compared to the regional average of

49.6, while India and Vietnam recorded joint the lowest score of 15.

That said, India's IT market houses some of the world's largest players - Wipro, Tata Consultancy and

Infosys - and we note that companies in the country are becoming more receptive to engaging the services

of professional IT firms to reduce cost and focus on their core competency. The Philippines is a well-

established player in the business process outsourcing (BPO) industry but there are signs that the country is



trying to move towards high-value services. Thailand's ICT industry is looking increasingly brighter with

the National Broadcasting and Telecommunications Commission able to implement changes, while

Vietnam has pledged to invest US$8.5bn in its ICT sector in the next 10 years. The government is alsolooking to attract US$5bn worth of foreign investments in the IT sector by 2015, according to Avaya. InApril 2013, construction for the Danang Hi-Tech Park, which costs US$278mn and follow the same modelas the US' Silicon Valley and Taiwan's Hsinchui Science Park, was started. The project is expected to houseabout 100 businesses, create 25,000 jobs and generate revenue of US$3bn.

Sri Lanka remained in 12th position with an aggregate score of 35.0 compared to 35.2 in the previous

quarter. We upgraded the country's industry rewards score to reflect improvements in fixed and wireless

broadband networks and investments cloud services. However, the country continues to lag behind its peers

on all for categories of our ratings table. On a positive note, recently-released GDP figures for Q213 showedheadline economic growth surging to 6.8% year-on-year (y-o-y), up from the 6.0% rate witnessed in thefirst quarter, and beating consensus expectations for a 6.1% expansion (according to the Bloombergsurvey). Overall, Sri Lanka's economy grew by 6.3% y-o-y in H113, which is approximately in line withour full-year real GDP growth forecast of 6.4%. This development bodes well for the IT sector, which

should see sustained demand for corporate and consumer IT solutions throughout 2014.



Table: Asia Pacific IT Risk/Reward Ratings - Q1 2014

Rewards Risks

Country Industry rewards Country rewards Industry risks Country risks IT rating Rank Previous rank

South Korea 70.0 80.0 75.0 65.4 72.2 1 2

Singapore 56.7 100.0 70.0 74.4 72.1 2 1

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 73.3 35.0 45.0 55.1 57.3 5 5

Malaysia 60.0 55.0 35.0 67.7 57.2 6 6

India 66.7 15.0 45.0 50.9 48.6 7 7

Indonesia 53.3 35.0 35.0 51.4 46.3 8 8

Thailand 56.7 20.0 35.0 62.9 46.2 9 9

Philippines 51.7 30.0 42.5 50.9 45.1 10 10

Vietnam 51.7 15.0 35.0 53.7 41.1 11 11

Sri Lanka 41.7 15.0 35.0 50.9 36.0 12 12

Average 58.1 49.6 45.2 60.7 54.9 - -

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 Overview

Hardware

The hardware market in Vietnam remained buoyant as demand strengthened in the retail sector in

mid-2013, supplementing strong demand from the enterprise and public sectors. BMI forecasts Vietnam's

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

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

affordable tablets and notebooks.

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

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

confidence. Research firm IDC estimated that PC shipments reached 638,000 in Q412, up 20.5% quarter-on-quarter (q-o-q) and 3.4% year-on-year (y-o-y). This represents slower growth compared to that reportedby Vietnam's General Statistics Office (GSO) for retail sales as across economic sectors. According to theGSO, the value of retail sales rose by 16% in 2012 to VND 2.324trn (US$110.7bn). Economic uncertaintyand income distribution means that big ticket PC purchases are not growing as fast as other areas of

spending in Vietnam.

Strong economic performance in Vietnam in 2013 will be supportive of an expanding first-time buyer

market and upgrade momentum in the retail market. This is supported by the latest market data with IDC

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

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 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 is still low in Vietnam, at 16% in 2011, and is estimated

to be around 20% for the country as a whole by H113. This creates a sizeable opportunity for vendors in

terms of the first-time buyer market. However, with GDP per capita expected to be US$1,909 in 2013 andforecast to reach US$3,068 by 2017, the mass market is geared towards the value end of the spectrum.Furthermore, with a large number of first-time buyers, consumer choice in terms of form factors is

uncertain. While productivity devices such as desktops and notebooks will remain popular for education 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.

In 2013 sales in the retail market are continuing 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

Q113 showing 13.1% y-o-y unit growth to 500,000 shipments. The latest data from retailers up to August2013 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 are facing stiff competition from low priced Chinese tablet imports,predominantly running Google's Android OS. Local press reports have stated that the very low price tablets

are selling well and being pushed by dealers who are able to secure high margins on the devices and still

undercut the international vendors.



Hardware Market (VNDbn)

2010-2017

f = BMI forecast. Source: BMI

Although sales of desktops are still increasing in Vietnam, with only slow growth, they account for a

declining share of the PC market. We estimate desktops accounted for fewer than 30% of units sold in 2012,

down from above 70% five years previously. There could be a boost to the desktop market from Windows

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

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

Windows XP still accounted for 44.3% of Vietnamese PC browsing traffic in August 2013 according to data

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.

Although sales of desktops will only see minor effects from the launch of Windows 8, the impact on the

wider market will be more significant. The release of the new OS introduced touch functionality to a wide



range of vendors, deepening the tablet market by providing competition for Apple and vendors producing

Android devices.

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. However the proliferation 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 has also spurred the creation of hybrid devices, which will have little impact in

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

the cost to consumers and hybrids could be an interesting growth area over the medium term. 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 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 and Lenovo's Yoga and Helix.

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.

APAC Household PC Penetration (%)

2011

Source: World Economic Forum Global Information Technology Report 2013

Vendor Performance

The latest data from IDC show that multinational brands dominated the Vietnamese PC market in Q412.Asus was reported to be the top vendor by unit market share, with 17.8% of sales, with its position boosted



by aggressive promotions and strong channel support. Fellow Taiwanese vendor Acer was estimated to be

second with a share of 10.2%, ahead of HP on 9.1% and Lenovo with 6.2%. However these vendors have

differing strategies. For instance, Lenovo is expanding its range of low-end notebooks to better compete

with Asus and Acer in the mass market, while HP has been successful in the enterprise market but is seeing

its consumer share of sales decline.

The Vietnamese PC market is surprisingly competitive, with most of the major laptop vendor playershaving below a 10% local market share. Other multinational vendors, including Dell, Toshiba and

Samsung, have enjoyed strong growth in the market. Samsung is considered a threat as it aims to leverageits distribution network and strong brand recognition from the smartphone and TV market into a 10% share

of the Vietnamese notebook PC market.

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

system will spur a new cycle of procurements. The final quarter of 2012 saw the release of a number 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 ofother 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.

Vietnamese vendors have sought to compensate for declining desktop sales by an expansion into the laptop

and tablet segments. However, the tablet market remains controlled by major foreign brands, such as Apple,Samsung and Acer. Tablets made by domestic vendors, such as FTP and CMS, have not proven a hit with

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

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

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

HP's Vietnam market sales have been boosted by government and education sector projects. HP was rankedby market research firm AC Nielsen as the leading laptop and PC market brand in Vietnam in 2010,

however its performance has declined as a result of underperformance in the consumer market. HP was also

the leader in the printer segment. Vendors continued to roll-out new models during the economic slowdown,

with the popularity of the small form factor netbooks a significant focus.

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

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

announced that it was starting to sell its VAIO notebook in Vietnam, as it started to shift to importing for

domestic sales. Sony already has 180 distributors nationwide. Working with its partner DigiWorld Corp,



Dell launched a campaign to target the local consumer segment, which is fuelling much of the current

growth.

Vietnam PC Installed Base

2008-2011

Source: MIC

Software

BMI expects software sales to continue to grow rapidly in Vietnam and increase to VND5,610bn in 2013,

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

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

2012, a figure which will increase to 10.2% by 2017 - when total sales will reach VND10,378bn. 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.



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 economic slowdown and the fall in demand for manufactured goods represented a challenge for

vendors as enterprises were tempted to focus more on the bottom line. Many companies, particularly trading

companies, cut back on non-essential systems upgrades in the face of cash-flow shortages. Smaller

enterprises will be a growth opportunity due to growing awareness. Companies are looking for software that

will help boost performance and operational efficiency. Promising segments include discrete manufacturing,

consumer packaged goods and hotels and property management.

The government is a significant software-purchasing segment in Vietnam and accounts for about 30% 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 VND100bn ERPsystem 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 in Dong Thap, two factories in DongThap and Binh Duong, as well as a distribution centre and sales branch in Ho Chi Minh City. Other

Vietnamese enterprises spending big on ERP solutions in 2012 have included Binh Minh Plastics, which

invested VND10bn in ERP, while Licogi 16 Co. has spent US$800,000 on an SAP 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.

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 2017, 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.



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.

The mid-sized Asia Commercial Bank was among those to implement a new core-banking solution in

H110, having designated technology as a core pillar of its growth strategy.

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.

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

c

Documents

BMI Vietnam Information Technology Report Q1 2014