Q2 2016 www.bmiresearch.com VIETNAM INFORMATION TECHNOLOGY REPORT INCLUDES 5-YEAR FORECASTS TO 2020 Published by:BMI Research Vietnam Information Technology Report Q2 2016 INCLUDES 5-YEAR FORECASTS TO 2020 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: March 2016 ISSN: 2044-9631 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2016 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Information Technology Report Q2 2016 INCLUDES 5-YEAR FORECASTS TO 2020 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: March 2016 ISSN: 2044-9631 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2016 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Information Technology Report Q2 2016 CONTENTS BMI Industry View SWOT IT SWOT Industry Forecast 11 Latest Updates 11 Structural Trends 11 Table: Enterprise Trends - GVA By Vertical (Vietnam 2015-2020) 16 Table: IT Industry - Historical Data And Forecasts (Vietnam 2013-2020) 17 Industry Risk Reward Index 18 Table: IT RRI Score Breakdown By Region 19 Table: Asia Pacific IT Risk/Reward Index - Q2 2016 21 Market Overview 22 Recent Developments Hardware Software Cloud Computing Services 22 22 28 34 38 Industry Trends And Developments 43 Regulatory Development 49 Table: Government Authority 49 Regulatory News 52 Competitive Landscape 54 International Companies 54 Table: Global CyberSoft 54 Table: Intel 55 Table: LG Electronics 56 Table: Samsung Electronics 57 Local Companies 58 Table: Sara Vietnam 58 Regional Overview 59 Demographic Forecast 63 Table: Population Headline Indicators (Vietnam 1990-2025) 64 Table: Key Population Ratios (Vietnam 1990-2025) 64 Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 65 Table: Population By Age Group (Vietnam 1990-2025) 65 © Business Monitor International Ltd Page Vietnam Information Technology Report Q2 2016 Table: Population By Age Group % (Vietnam 1990-2025) 66 Methodology 68 Industry Forecast Methodology 68 Sources 70 Risk/Reward Index Methodology 70 Table: IT Risk/Reward Index Indicators 71 Table: Weighting Of Components 72 © Business Monitor International Ltd Page Vietnam Information Technology Report Q2 2016 BMI Industry View BMI View: Vietnam is a rapidly developing IT market, with strong momentum across the hardware, software and services segments We expect this growth dynamic to be maintained over the medium term based on robust economic performance and a supportive policy framework that is both helping to grow the market and develop Vietnam's IT industry For the retail hardware market broad-based economic growth that will deepen the retail hardware market, as well as easing price sensitivity in the higher-value replacement market is a central component of our outlook For software and services economic modernisation and the development of higher productivity verticals in the economy present major opportunities to vendors We forecast an IT spending CAGR of 10.2% over 2016-2020 to total sales of VND103.4trn in 2020 Latest Updates And Industry Developments ■ Computer Hardware Sales: VND42.3trn in 2016 to VND55.3trn in 2020, a compound annual growth rate (CAGR) of +6.9% Outlook downgraded in Q216 due to expectation for greater cannibalisation of tablet purchases by smartphones, but overall outlook still positive due to income growth trends ■ Software Sales: VND10.8trn in 2016 to VND17.8trn in 2020, a CAGR of +13.3% Substantial opportunities exist in enterprise software market where there is low penetration ■ IT Services Sales: VND17.1trn in 2016 to VND30.3trn in 2020, a CAGR of +15.4% Potential for core solution spending growth, and a booming cloud computing and outsourcing markets expected to underpin IT services outperformance 2016-2020 © Business Monitor International Ltd Page Vietnam Information Technology Report Q2 2016 Bright Outlook For IT Spending Across All Three Segments IT Market Forecast By Segment 60,000,000 40,000,000 20,000,000 2014 2015e 2016f 2017f 2018f 2019f 2020f Vietnam - Computer hardware sales, VNDmn Vietnam - Software sales, VNDmn Vietnam - Services sales, VNDmn e/f = BMI estimate/forecast Source: BMI © Business Monitor International Ltd Page Vietnam Information Technology Report Q2 2016 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 the Association of Southeast Asian Nations 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 ■ Vietnam is a preeminent global outsourcing destination, with a particular strength in the software development industry Weaknesses ■ IT spend per capita is much lower than in neighbouring Thailand, reflecting a much lower GDP per capita ■ Highly price-sensitive market, putting pressure on vendor margins ■ High level of software piracy, with a stall in the reduction 2011 to 2013 ■ Cybersecurity measures by the government have been pushed through with state security measures, with potential human rights implications Opportunities ■ Broad-based economic growth forecast to drive retail hardware market growth as household incomes increase markedly 2016-2020 ■ Decision in July 2014 to enable state agencies to use outsourced information technology providers for the first time opens a new growth channel for vendors © Business Monitor International Ltd Page Vietnam Information Technology Report Q2 2016 Local Companies Table: Sara Vietnam Address 182 Le Dai Hanh St, Ward 15, Dist 11, Ho Chi Minh City Company History Sara Vietnam was founded in 2002 as an information technology and foreign language skills training centre through the SARA Centre It has since expanded into new fields, but remains headquartered in Hanoi Sara Vietnam is a member of the Vietnam Software Association and the Vietnam Chamber of Commerce and Industry Sara Vietnam is also listed at the Hanoi Securities Trading Centre Sara Vietnam was the first recipient of Japanese investment in Vietnam, with 15% of its shares owned by Japanese CPR International Services And Products Sara Vietnam began as a training company but has expanded into a variety of information technology fields It offers IT research and software development services, particularly software development for data centres, e-commerce, e-portals, content management, online training software, accounting, procurement, human resources, customer service, industrial production technology and hospital management Sara also provides consultancy services for software systems It also has activities in non-IT related areas including television programming and real estate development and management, and is evaluating a move into the mobile marketing industry in Vietnam ■ Company Developments In October 2013, Sara Vietnam announced it was implementing the Japanese model 5s of managing operations to increase efficiency Sara stated that it does not expect significant expenditure in implementing the new work practices, but will generate efficiencies Source: BMI © Business Monitor International Ltd Page 58 Vietnam Information Technology Report Q2 2016 Regional Overview BMI View: Economic and financial market news from China unsettled global financial markets in January 2016, echoing the events following uncertainty generated by previous equity market declines in August 2015 We believe the effect on IT markets will be much less pronounced, though there will be some winners and losers as discussed below The heightened risk of a hard landing for China does not however undermine our core economic scenario under which the huge potential offered by an expanding middle class in China and APAC is the pre-eminent global economic opportunity over 2016-2020 Regional Risks Rise, But China Not The Only Factor Our China core scenario for a growth slowdown and mild depreciation will be negative for non-Chinese vendors operating in China, with lower profits when converted back into US dollars Apple stands out due to the importance of China to its financial performance at around 24% of revenue in Q4 FY2014/15, but other IT vendors with 10% or more of revenues from China include component (primarily semiconductor) firms Qualcomm, Xilinx, Altera, ON Semiconductor, Fairchild Semiconductor, Maxim Integrated Products, Micron Technology, AMD and Texas Instruments and software vendors Autodesk, Cadence Design Systems On the other side of this trend, Chinese hardware vendors and outsourcing providers will benefit from lower costs and more competitive exports This upside for China's IT industry must however be weighted against the fact high-value components continue to be imported The exchange rate is but one factor, and with electronics assembly concentrated in China and supply contracts predominantly priced in US dollars, there is not a straightforward transmission mechanism from depreciation to competitiveness China had net CPU and RAM imports of USD78.3bn and USD36.7bn in 2014, and one longer-term trend that could accelerate with faster than expected yuan depreciation is the relative position of China's CPU production industry, which the government hopes will become a global leader by 2030 Under our core scenario, the impact of economic uncertainty in China on the IT industry in APAC will not be transformative to competitive dynamics or industry development trends The depreciation of the yuan is expected to proceed at a relatively slow pace, and with the majority of the electronics trade taking place in US dollars, it could prove the case that US dollar appreciation in 2015 was the greater disruptor for the region as a whole © Business Monitor International Ltd Page 59 Vietnam Information Technology Report Q2 2016 US Dollar Appreciation Inflicted Pain, Yuan Depreciation Will Not Be Painful Major APAC Currencies Versus USD 20 10 -10 2015e 2016f China - CNY/USD, ave % y-o-y India - INR/USD, ave % y-o-y Indonesia - IDR/USD, ave % y-o-y Japan - JPY/USD, ave % y-o-y Thailand - THB/USD, ave % y-o-y Taiwan - TWD/USD, ave % y-o-y Vietnam - VND/USD, ave % y-o-y e/f = BMI estimate/forecast Source: BMI Looking at production across the region as a whole, mild yuan depreciation will not undermine investments by vendors in production facilities in South East Asian markets, as they target medium- and long-term income growth trends, with production to serve expanding domestic markets alongside export targets We not expect events in China in 2016 to prove disruptive to the underlying trend of rising incomes in the region over 2016-2020, and as such increased production in South East Asian markets still makes strategic sense The cost benefit balance would however change more significantly under the non-core scenario of a debt event based crisis in China that would impact the IT industry through a fracturing of the regional growth story Given the attention paid to Chinese economic events in early 2016, warranted due to the scale of potential downside from a debt-event crisis, it is important to also highlight other trends that could be underappreciated We believe there is potential for significant yen strengthening over the first few months of 2016 against the US dollar (see chart below) While there are clearly structural headwinds facing the currency as a result of the huge fiscal deficit and likelihood of increased debt monetisation, the bullish medium-term case is becoming increasingly visible This could hurt Japanese exporters of high value © Business Monitor International Ltd Page 60 Vietnam Information Technology Report Q2 2016 components such as CPUs where its trade balance has weakened over recent years as some its neighbours have captured share Meanwhile, it would go some way to offsetting a squeeze on Apple's financial performance in China as the iPhone has been phenomenally successful in Japan in recent years, while Yahoo! is another US vendor that would stand to benefit through its 35% stake in Yahoo! Japan Another depreciation trend in 2016 is expected to be that of the Indian rupee against the US dollar that will squeeze Indian hardware assemblers reliant on imported components and supplies contracts drawn up in dollars, extending the trend from 2014 where dollar appreciation resulted in small price rises for finished products For electronics as a whole, India imports approximately 70% of total goods (including finished products and components) Further depreciation is negative for vendors that already experienced margin pressures in 2015 that had to be passed onto consumers Additionally, in a highly competitive market the 'Make In India' initiative has added downside by potentially exacerbating margin pressures through overcapacity, though it is still considered a net positive for the economy as a whole by absorbing informal economic activity to higher productivity employment Emerging Middle Class Trumps Short-Term Concerns The short-term outlook for the IT market, and more broadly the electronics industry, is subject to considerable uncertainty in 2016 - with the impact asymmetric across countries, supply chain segments and vendors Despite uncertainty, we maintain the position that the sheer scale of the opportunity in APAC from longer term economic development trends means IT market vendors simply cannot afford to be absent BMI's household income forecast envisages APAC accounting for by far the largest migration trend in households up the income scale globally over 2016-2020 Therefore downside risks in 2016 are a bump in the road of the bigger picture of as huge transformation in consumer opportunities that means we are of the opinion no company with global ambitions can seriously consider retrenchment in strategy The regional figures are striking, with APAC as a whole where the pool of USD5,000-10,000 annual income households (the entry level for the retail PC market) is expected to increase by more than 123mn by 2020 The leading market in this regard is India, which will account for 56% of the net change in the global pool of USD5-10,000 income households as broader based economic growth takes hold and it accelerates down a path of economic development more in line with China's highly successful trajectory The figure for India stands out due to its huge population, but other markets at this level of development with significant progress forecast over the medium term include Bangladesh (+7.9mn USD5-10,000 households 2016-2020), China (+27mn), Indonesia (+4.7mn), Pakistan (+3.6mn), Philippines (+2.5mn), Thailand (+3.2mn) and Vietnam (+5.7mn) © Business Monitor International Ltd Page 61 Vietnam Information Technology Report Q2 2016 China's household income profile is significantly higher income than India, and the main development 2016-2020 is the migration of households to the USD10-25,000 annual income pool as the middle class expands We forecast an additional 28.2mn households in this income pool in China, accounting for almost 52% of the global net change 2016-2020 This income level is associated with lower price sensitivity, shorter replacement cycles, personal devices and wider margins for vendors - all of which underlines incentives for vendors to ride out any short-term crisis Other markets worth highlighting are Indonesia (+9.9mn USD10,000-25,000 households 2016-2020), Philippines (+3.4mn) and Thailand (+3.8mn) APAC Household Income Forecast (USD) Change By Income Level ('000), 2016-2020 Source: BMI The emerging lower-middle and middle classes in India and China respectively will be the main global consumer trends over the medium term, but premium PC vendors will also be able to look to APAC as a high-value opportunity We expect there to be an additional 23.2mn USD50,000+ households in APAC by 2020, up from 94mn in 2016, with China and India again important markets, but also Japan, South Korea, Indonesia and Australia © Business Monitor International Ltd Page 62 Vietnam Information Technology Report Q2 2016 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050 The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy Population (1990-2050) 150 100 50 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 Vietnam - Population, mn f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Ltd Page 63 Vietnam Information Technology Report Q2 2016 Vietnam Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 68,209 80,285 84,203 88,357 93,447 98,156 102,092 na 1.1 0.9 1.0 1.1 0.9 0.7 Population, total, male, '000 33,583 39,551 41,469 43,626 46,224 48,590 50,510 Population, total, female, '000 34,625 40,734 42,734 44,730 47,223 49,566 51,581 Population ratio, male/female 0.97 0.97 0.97 0.98 0.98 0.98 0.98 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast Source: World Bank, UN, BMI Table: Key Population Ratios (Vietnam 1990-2025) Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age © Business Monitor International Ltd 1990 2000 2005 2010 2015f 2020f 2025f 38,808 49,712 55,795 61,655 65,572 67,775 69,459 56.9 61.9 66.3 69.8 70.2 69.0 68.0 29,401 30,573 28,408 26,702 27,875 30,381 32,633 75.8 61.5 50.9 43.3 42.5 44.8 47.0 Page 64 Vietnam Information Technology Report Q2 2016 Key Population Ratios (Vietnam 1990-2025) - Continued Youth population, total, '000 1990 2000 2005 2010 2015f 2020f 2025f 25,494 25,416 22,866 20,919 21,576 22,487 22,335 65.7 51.1 41.0 33.9 32.9 33.2 32.2 3,907 5,157 5,542 5,783 6,298 7,893 10,298 10.1 10.4 9.9 9.4 9.6 11.6 14.8 Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age f = BMI forecast Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 1990 Urban population, '000 2020f 2025f 13,815.9 19,568.8 22,971.6 26,853.7 31,391.9 36,120.7 40,780.9 Urban population, % of total Rural population, '000 2000 20.3 24.4 2005 27.3 2010 30.4 2015f 33.6 36.8 39.9 54,393.7 60,716.8 61,232.2 61,504.1 62,055.7 62,036.0 61,311.7 Rural population, % of total 79.7 75.6 72.7 69.6 66.4 63.2 60.1 Life expectancy at birth, male, years 66.0 68.4 69.3 70.2 71.2 72.1 73.1 Life expectancy at birth, female, years 75.1 78.1 79.2 80.0 80.6 81.1 81.6 Life expectancy at birth, average, years 70.5 73.3 74.3 75.1 75.9 76.7 77.4 f = BMI forecast Source: World Bank, UN, BMI Table: Population By Age Group (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 9,211 7,244 6,751 7,265 7,740 7,601 7,108 Population, 5-9 yrs, total, '000 8,512 9,119 7,130 6,648 7,221 7,698 7,562 Population, 10-14 yrs, total, '000 7,769 9,052 8,983 7,005 6,614 7,187 7,664 Population, 15-19 yrs, total, '000 7,277 8,401 8,941 8,877 6,972 6,583 7,156 Population, 20-24 yrs, total, '000 6,570 7,610 8,242 8,764 8,803 6,908 6,522 Population, 25-29 yrs, total, '000 5,938 7,019 7,408 8,022 8,664 8,705 6,823 Population, 30-34 yrs, total, '000 5,079 6,300 6,863 7,223 7,932 8,572 8,616 Population, 35-39 yrs, total, '000 3,842 5,746 6,190 6,718 7,146 7,850 8,488 Population, 40-44 yrs, total, '000 2,447 4,938 5,663 6,096 6,640 7,065 7,766 Population, 45-49 yrs, total, '000 2,003 3,710 4,880 5,592 6,004 6,543 6,968 © Business Monitor International Ltd Page 65 Vietnam Information Technology Report Q2 2016 Population By Age Group (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 50-54 yrs, total, '000 1,956 2,331 3,658 4,801 5,467 5,875 6,410 Population, 55-59 yrs, total, '000 2,033 1,873 2,223 3,501 4,625 5,275 5,681 Population, 60-64 yrs, total, '000 1,658 1,779 1,723 2,055 3,314 4,392 5,023 Population, 65-69 yrs, total, '000 1,402 1,759 1,599 1,551 1,894 3,066 4,081 Population, 70-74 yrs, total, '000 1,021 1,313 1,520 1,390 1,369 1,682 2,739 Population, 75-79 yrs, total, '000 747 977 1,073 1,254 1,158 1,150 1,424 Population, 80-84 yrs, total, '000 426 593 726 809 957 893 895 Population, 85-89 yrs, total, '000 221 334 382 479 541 649 613 Population, 90-94 yrs, total, '000 70 131 176 208 265 305 370 Population, 95-99 yrs, total, '000 15 40 52 73 88 114 133 Population, 100+ yrs, total, '000 11 16 23 30 39 f = BMI forecast Source: World Bank, UN, BMI Table: Population By Age Group % (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 13.50 9.02 8.02 8.22 8.28 7.74 6.96 Population, 5-9 yrs, % total 12.48 11.36 8.47 7.52 7.73 7.84 7.41 Population, 10-14 yrs, % total 11.39 11.28 10.67 7.93 7.08 7.32 7.51 Population, 15-19 yrs, % total 10.67 10.46 10.62 10.05 7.46 6.71 7.01 Population, 20-24 yrs, % total 9.63 9.48 9.79 9.92 9.42 7.04 6.39 Population, 25-29 yrs, % total 8.71 8.74 8.80 9.08 9.27 8.87 6.68 Population, 30-34 yrs, % total 7.45 7.85 8.15 8.18 8.49 8.73 8.44 Population, 35-39 yrs, % total 5.63 7.16 7.35 7.60 7.65 8.00 8.31 Population, 40-44 yrs, % total 3.59 6.15 6.73 6.90 7.11 7.20 7.61 Population, 45-49 yrs, % total 2.94 4.62 5.80 6.33 6.43 6.67 6.83 Population, 50-54 yrs, % total 2.87 2.90 4.34 5.43 5.85 5.99 6.28 Population, 55-59 yrs, % total 2.98 2.33 2.64 3.96 4.95 5.37 5.57 Population, 60-64 yrs, % total 2.43 2.22 2.05 2.33 3.55 4.47 4.92 Population, 65-69 yrs, % total 2.06 2.19 1.90 1.76 2.03 3.12 4.00 Population, 70-74 yrs, % total 1.50 1.64 1.81 1.57 1.47 1.71 2.68 Population, 75-79 yrs, % total 1.10 1.22 1.27 1.42 1.24 1.17 1.40 Population, 80-84 yrs, % total 0.63 0.74 0.86 0.92 1.02 0.91 0.88 © Business Monitor International Ltd Page 66 Vietnam Information Technology Report Q2 2016 Population By Age Group % (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 85-89 yrs, % total 0.33 0.42 0.45 0.54 0.58 0.66 0.60 Population, 90-94 yrs, % total 0.10 0.16 0.21 0.24 0.28 0.31 0.36 Population, 95-99 yrs, % total 0.02 0.05 0.06 0.08 0.09 0.12 0.13 Population, 100+ yrs, % total 0.00 0.01 0.01 0.02 0.03 0.03 0.04 f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Ltd Page 67 Vietnam Information Technology Report Q2 2016 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined Common to our analysis of every industry is the use of vector autoregressions They allow us to forecast a variable using more than its own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting We mainly use OLS estimators, and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary During periods of 'industry shock' (for example, poor weather conditions impeding agricultural output), dummy variables are used to determine the level of impact Effective forecasting depends on appropriately selected regression models BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity © Business Monitor International Ltd Page 68 Vietnam Information Technology Report Q2 2016 BMI uses the selected best model to perform forecasting Human intervention plays a necessary and desirable role in all of BMI's industry forecasting Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector-Specific Methodology A number of criteria drive our forecasts for each IT variable IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology In addition, forecasts are affected by consideration of a variety of internal and external political and economic factors Within best-practice techniques of time-series modelling, our quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market Individual variables taken into account in creating each forecast include: ■ Overall economic context, and GDP and demographic trends ■ Underlying 'information society' trends ■ Projected GDP share of industry ■ Maturity of market structure ■ Regulatory developments and government policies ■ Developments in key client sectors such as telecommunications, banking and e-government ■ Technological developments and diffusion rates ■ Exogenous events Estimates are calculated using our own macroeconomic and demographic forecasts © Business Monitor International Ltd Page 69 Vietnam Information Technology Report Q2 2016 Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication Union (ITU), officially released company results and figures, and international and national industry news agencies Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provides a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market The RRI system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development This is further broken down into two sub-categories: ■ Industry Rewards (an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors) • Country Rewards (a country-specific category, factoring in favourable political and economic conditions for the industry) Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period This is broken down into two sub categories: ■ Industry Risks (an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry and the relative maturity of a market) • Country Risks (a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score) We take a weighted average, combining industry and country risks, or industry and country rewards These two results in turn provide an overall Risk/Reward Score, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Score a weighted average of the total score As most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly basis This ensures the © Business Monitor International Ltd Page 70 Vietnam Information Technology Report Q2 2016 score draws on the latest information and data across our broad range of sources, and the expertise of our analysts Sector-Specific Methodology In constructing these indices, the following indicators have been used Almost all indicators are objectively based Table: IT Risk/Reward Index Indicators Rationale Rewards Industry IT market value, USDbn Denotes breadth of IT market Large markets score higher than smaller ones Sector value growth, % y-o-y Denotes sector dynamism Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market A high proportion of hardware sales, compared to services/ software, indicates that the overall IT market is immature Country Urban-rural split Urbanisation is used as a proxy for development Mainly rural states score lower GDP per capita, USD A high GDP per capita supports long-term industry prospects Overall score for Country Rewards is also affected by the coverage of the power transmission network across the state Risks Industry Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country Short-term external risk Score from BMI's Country Risk Index (CRI) It evaluates the vulnerability to external shock, which is the principal cause of economic crises Such a crisis would cut investment Short-term financial risk Score from CRI, to denote risk of currency crisis and stability of banking sector The former would hit revenues in hard currency, while the latter would curtail investment funding Trade bureaucracy Score from CRI to denote ease of trading with the state Legal framework Score from CRI denotes the strength of legal institutions in each state - security of investment can be a key risk in some emerging markets Bureaucracy Score from CRI denotes ease of conducting business in the state © Business Monitor International Ltd Page 71 Vietnam Information Technology Report Q2 2016 IT Risk/Reward Index Indicators - Continued Rationale Corruption Score from CRI denotes the risk of additional illegal costs/possibility of opacity in tendering/ business operations affecting companies' ability to compete Source: BMI Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components equal weight The following weighting has been adopted: Table: Weighting Of Components Component Rewards Weighting, % 70, of which - Industry 65 - Country 35 Risks 30, of which - Industry 40 - Country 60 Source: BMI © Business Monitor International Ltd Page 72 ... Ltd Page 45 Vietnam Information Technology Report Q2 2016 Vietnam Is Asia''s New Tech Manufacturing Hub The Ministry of Information and Communications (MIC) reported in June 2014 that Vietnam'' s... International Ltd Page 26 Vietnam Information Technology Report Q2 2016 PC Volume Forecast (2013-2020) 2,000 1,500 1,000 500 2013 2014 2015e 2016f Vietnam - Desktop sales, ''000 Vietnam - Notebook sales,... Page 12 Vietnam Information Technology Report Q2 2016 IT Market Growth (2013-2020) 125,000,000 100,000,000 75,000,000 50,000,000 25,000,000 2013 2014 2015e 2016f 2017f 2018f 2019f 2020f Vietnam