Vietnam's IT industry sees high growth rates, although education and training challenges remain

With a population of approximately 95m, Vietnam is an important regional market both for global technology vendors and for home-grown entrepreneurs. The latter are getting more encouragement to innovate as the country modernises and adopts international standards in areas such as communications infrastructure and education technologies.

Rapid Growth

The country’s IT market is still young but has registered rapid growth. Indeed, Vietnam only connected to the internet in 1997, after six years of cautious experimentation with more basic forms of electronic communications. By the end of 2001 the number of subscribers was estimated at around 165,000 and a year later, after a cut in prices, users measured well over 1m.

According to estimates by Internet Live Stats, based on data by the International Telecommunication Union, World Bank and UN Population Division, as of mid-2016 active internet users via fixed and mobile connections logged in at around 49m – a 52% penetration rate. Although there is still a notable difference between rural and urban internet usage, penetration has started to increase in the countryside, with latest data showing penetration at 20% among those aged between 18 and 24.

Access

Under its strategic development plan for 2011-20, the government is aiming to ensure that at least 95% of residential areas will be covered by 3G/4G networks with an average downlink speed of over 4 Mbps in urban areas and 2 Mbps in rural areas. Infrastructure-wise, the internet speed in the country has improved greatly over the past few years. Vietnam’s internet connection speed was 3.3 Mbps in the first quarter of 2016, faster than in the Philippines (3.1 Mbps), India (2.4 Mbps) and Indonesia (2.4 Mbps), according to Akamai Technologies’ first-quarter 2015 “State of the Internet” report.

There remain structural concerns, however. The market comprises multiple internet providers that all utilise the same gateway, which means an issue at the source can cause major problems. Indeed, overall connectivity is mostly reliant on one submarine cable, the Asia-America Gateway, and if that cable goes – as it has many times since its installation in 2009 – the internet comes to a complete halt.

However, additional capacity via new cables is being built, which will improve the situation. A new $450m undersea cable connecting Vietnam with its neighbours went on-stream in the beginning of 2017. However, the new cable was affected by a number of issues only a few days after its opening, requiring operators to conduct repairs. Once these hiccups have been sorted, the cable promises internet speeds twice as fast as current rates.

Untapped Potential

The relative immaturity of the market is still evident. Standard programming and testing is currently taking place throughout the industry, but this is considered low down the value chain. “If someone wants something built from scratch, they must be careful, as the IT market is only 10-15 years old and has had a slow start, meaning there is a limited supply of talent,” Rick Yvanovich, CEO and founder of TRG, a technical solutions provider, told OBG. He noted that a continued focus on workforce training is still required, as universities cannot produce enough highly skilled graduates. In addition, universities only offer short internships of one to three months, which is not sufficient for prospective IT staff. Industry players say a focus on vocational training will help with the shortfall.

Workforce

According to a recent report by the Vietnam Software Association (Vinasa), the country will require approximately 400,000 IT workers for the 2016-20 period, while 290 universities and junior colleges in Vietnam and the other 150 training establishments can supply just 250,000 in that time.

The report showed that from 2011 to 2015 the labour force in the software and digital content industry rose by an annual 10%. Fresh blood is indeed welcomed, as the country has shown indications of potential in its burgeoning start-up culture as well as its hardware and software markets.

According to Le Xuan Hai, chairman of Vietsoftware International, training should begin from inside the company to be able to contribute to the market. “This is something that only a few companies understand,” he told OBG.

Firming Up

The country’s hardware output has seen a surge due to global demand, and Vietnam hosts manufacturing plants for some of the biggest global hardware producers such as Samsung, Nokia, Microsoft and Intel. Mobile phones are the biggest export item among hardware products, comprising around 60% of the total, according to the Ministry of Information and Communications (MIC). Samsung has been a driving force, investing up to $3bn to build a new smartphone factory in Vietnam alongside its existing $2bn plant. In 2015 Samsung’s total export turnover accounted for nearly 20% of Vietnam’s export turnover, according to media reports.

The Vietnamese software sector is still relatively modest. Local software vendors account for 75% of the market, which is dominated by low-cost software products, according to the EU-Vietnam Business Network (EVBN). Despite its small size, the sector has seen growth in recent years.

The global economic slowdown in 2011-15 has had an impact on the Vietnamese software industry. But the sector could keep up a 10-15% annual growth rate, according to a Vinasa report. Although this is down from 30-40% in 2006-10, it would be 2-3 times higher than overall economic growth. The association said revenue from software and IT services rose from $2bn in 2010 to $3bn in 2015.

Customer Base

Local software producers mostly provide their products to government and small and medium-sized enterprises, while larger Vietnamese companies generally look to multinationals for software. Sales are expected to spike as the banking and finance, oil and gas, aviation and telecoms industries gather steam. The government is a major software buyer in Vietnam, accounting for around 30% of total IT spending, according to the EVBN. This demand is set to rise as the government is seeking to improve tax collection as well as implement e-government on a wide scale.

As internet infrastructure starts to improve, more demand for areas such as software as a service (or, on-demand software) and other cloud-computing services should pick up. There is also big demand for business software such as enterprise resource planning, as well as a small market for big multimillion-dollar projects. Though most multinationals bring their own software, there is a niche for smaller vendors and customised solutions.

Meanwhile, there are signs that the market is adding some heft through consolidation. Indeed, IT companies have tended to grow organically but are now growing through acquisitions, and the market is aggregating. For example, outsourcing firm FPT Software Company, part of FPT Corporation, is planning to invest up to $200m in merger and acquisition deals over the next four years to raise its workforce to 30,000 by 2020, according to company statements. The firm has said that it will boost staff numbers through deals with domestic players while acquiring foreign companies will allow it to get better access to global markets. Other outsourcing firms in Vietnam include Digi-Texx, Harvey Nash, SPI Global and Swiss Post Solution/GHP Far East, which are all competing in this burgeoning business.

Outsourcing

IT outsourcing services generate around $3bn a year, according to Vinasa. However, Vietnam is still boutique market when it comes to outsourcing and lags behind its regional peers such as India and the Philippines, which earned $98bn and $21.3bn, respectively, from providing IT services in 2015. Nevertheless, outsourcing companies in Vietnam have over the years made inroads into the markets of the US, Japan and several European countries. Vietnam has recently overtaken India to become Japan’s second-largest software outsourcing partner after China, accounting for around 21% of the market, according to the Japan External Trade Organisation, while US and European markets have generated growth rates of 20-30% per year.

“Although Vietnam’s IT outsourcing sector has experienced double-digit growth in the past couple of years, the market is not yet saturated,” Nguyen Huu Le, chairman of IT outsourcing company TMA Solutions, told OBG. “While new companies entering the market might require a little bit more investment, there is still room for more players.”

Growth Drivers

Software outsourcing is set to grow faster in the next three to five years, as Vietnam has become better known as an outsourcing destination. Furthermore, there has been an increase in the IT workforce due to opening of new universities and colleges, including foreign universities as well as a new wave of economic growth due to global integration. This comes on top of an inflow of high-tech manufacturing operations moving to Vietnam for giants like Intel, Samsung and LG.

Nevertheless, it is still difficult for companies to take on large projects, as only a few sector players have more than 1000 workers, and there are many with fewer than 500. Therefore, though few Vietnamese vendors can provide end-to-end services and specialised skills, they are able to provide application development and testing, customisation, maintenance and support. The MIC has announced plans to assist the sector. This support is likely to include a range of investment promotion programmes as well as workshops on business matching between Vietnamese and foreign IT companies.

The government is also making moves to address the lack of high-level English skills, compared to countries such as the Philippines, which has hampered the growth of business process outsourcing and call centre development. The state has said it plans to spend some $450m between 2008 and 2020 on language learning, with 85% of that budget dedicated to teacher training.

Tech Parks

A growing network of technology parks with sophisticated infrastructure is also expected to aid the outsourcing business. This includes Quang Trung Software City (QTSC), located in Ho Chi Minh City and built in 2001, which was the original flagship project and is now home to some 120 ICT companies and 33 investors, including HP and IBM. QTSC is currently 100% state owned, but there have been recent calls to privatise the operations to spur further development.

Da Nang in central Vietnam is also now emerging as a major IT centre with its high-tech park. IT investors have been keen on the traditionally tourist-heavy city due to its strategic position half way between Hanoi and Ho Chi Minh City and at the end of East-West Economic Corridors linking Laos, Thailand, Myanmar and Vietnam. Friendly government policy towards investors and good infrastructure – it hosts an international airport and a deep-sea port – have also been a big draw for tech firms looking to develop. IBM has had a branch there since 2012.

In the north, there are plans to build a $1bn software park in Hanoi, which municipal authorities are hoping will create up to 40,000 jobs. The plan is to offer companies that set up shop in the park a four-year tax holiday and a 50% reduction in taxes for the following nine years. Such high-tech parks are expected to provide additional backbone for a rapidly developing start-up sector.

A Growing Community

The start-up community has become quite active in Vietnam and a number of investors have been arriving. Furthermore, the incubator culture is just starting, and there are a few accelerators such as Hatch, while co-working spaces are popping up, and non-Vietnamese are coming and hiring locals to develop their own start-up applications.

“Vietnam has in effect jumped on the start-up bandwagon,” Yvanovich told OBG. He noted that this was underscored when former US President Barack Obama met young entrepreneurs and members of the local business community at Dreamplex, a co-working space for start-ups in Ho Chi Minh City in May 2016, and Vu Duc Dam, deputy prime minister, attended the Tech Fest in Hanoi where he spoke of supporting start-ups. “Indeed, the government has started to throw some money at the sector. You are also seeing more and more meet-ups within the start-up community, as there are at least two start-up events a month,” Yvanovich said.

Three years after the release of the mobile game Flappy Bird, a mobile gaming application developed by a single Vietnamese programmer in Hanoi and a top product on the Apple App Store, Vietnam’s start-up ecosystem has only become more durable. According to Techlist.asia, the number of Vietnamese start-ups reached some 1400 in 2015, making the country the third-largest ecosystem in Southeast Asia, behind Singapore and Indonesia.

Funding

The sector continues to attract outside funding. Goldman Sachs and Standard Chartered upped their investment in e-wallet operator MoMo by $28m in March 2016, while the same month saw Silicon Valley-based venture capitalist 500 Start-ups announce a $10m Vietnam-focused fund. In November 2015 the fund said that it has backed eight Vietnamese start-ups, including e-commerce, messaging and online ticketing businesses, such as beauty start-up Ipsy, social photography app Light-box and social intelligence platform DataRank.

Some 67 tech start-ups in Vietnam attracted angel and venture capital funding in 2015, a 130% increase on 2014, according to Topica Edtech Group, an e-learning group in South-east Asia. Despite the uptick in numbers, local start-ups still face difficulties in securing funding. Investment funds in Vietnam are currently managed under laws governing security investment funds, meaning that they must have minimum capital of $2.2m or a total of 100 investors. According to the Agency for Enterprise Development, many investors that are seeking to establish venture funds cannot fulfil these requirements, given limited budgets. The Ministry of Planning and Investment has moved to address this issue by drafting new regulations under which Vietnamese and foreign venture capital funds can acquire licences within three days after application, and there are no limits on their size.

Yvanovich also noted that one of the challenges is weak intellectual property (IP) protection, and due to this many start-ups are registering overseas – usually in Singapore. The government has drafted a new Criminal Code, which is expected to help crack down on IP infringements. The new code includes more concrete provisions and will give agencies improved tools to impose controls. There are still, however, no specialised IP courts in Vietnam. In addition to insufficient IP protection, internet users have also faced security breaches.

Cybersecurity

Indeed, Vietnam’s computer systems have in the past been vulnerable to attack, in particular by Chinese hackers. One of the most notable cases in 2016 was an alleged Chinese hacker group, 137CN, carrying out a number of cyberattacks on Vietnam’s airports as well as the official website of the national flag carrier Vietnam Airlines in which the airline’s customer database was stolen and made public on the internet.

In 2015 there were a total of 31,500 security incidents in the country, according to the Vietnam Computer Emergency Response Team. In the first half of 2016 alone the number of incidents were 4.4 times higher compared with a year earlier.

Security concerns prompted the government to pass Vietnam’s 2015 Cyber Information Security Law, which was enacted on July 1, 2016. The law establishes a system to classify digital information and specify the steps public organisations have to follow to protect such data. It mandates the MIC and the Vietnam Computer Emergency Response Team to lead the fight against cybercrime.

The European Chamber of Commerce in Vietnam, in its 2016 Whitebook, acknowledged the efforts made in recent legislation. However, it pointed out, “The industry is still worried about the lack of binding implementation circulars as well as governing institutions and authorities to execute the introduced procedures until now.” Establishing decrees to guide the implementation of the law is on the agenda in 2017. This is especially crucial in light of the government’s steps for implementing e-governance projects, which as shown in other cases, can be vulnerable without adequate cybersecurity.

Developing E-Governance

E-government in Vietnam has been less developed than in other regional countries. Vietnam ranked 102nd out of 167 countries in terms of e-government development in 2015, down eight slots from 2014, according to a survey by the International Telecommunication Union. However, improvements were noted in 2016 when the country moved up 10 places in the UN’s E-Government Survey, which reviews the level of development of e-governance among its member states. The country moved out of a bracket of countries with “medium development” in 2014 to a group with “high development” in 2016. The UN survey qualifies high-development countries as standing out, among other reasons, for adopting innovative approaches to transform the public sector and the delivery of government services.

This came after improvements were registered in 2015 with the ratio of companies filing for taxes online rising from 65% to 98% and tax payment time falling from 537 to 167 hours a year, according to the MIC. E-government was further buttressed by the government-issued Resolution 36a calling for greater application of IT in state management activities and e-public services in a bid to reduce the time and cost of completing administrative procedures.

The MIC has also tabled a plan to spend some $358m on a national programme to develop the IT sector, with a good chunk of the funding directed toward e-governance. The MIC’s overarching goal is to put all ministries, ministerial-level agencies, provinces and top-tier cities on a shared platform that will connect over half of their information systems by 2020. Also by that date the MIC wants to see a range of administrative procedures handled online via the one-stop-shop window.

Outlook

Vietnam’s IT industries have been moving up the value chain and offering more value-added work. However, the industry is still in its fledgling development stage, given the country’s relatively late adoption of the internet. Furthermore, the lack of education and training for IT staff is still an obstacle to scale. The European Chamber of Commerce in Vietnam noted in its Whitebook that addressing the lack of practical application and soft skills is still necessary to help Vietnam grow to be the regional IT powerhouse it aspires to be.

Despite this, the IT industry has seen promising annual growth rates on the back of growing demand from other industries, higher disposable incomes and rapidly growing internet penetration rates.

Meanwhile, major multinational companies such as Samsung, Nokia and LG continue to expand their operations in Vietnam thanks to reasonable labour costs and favourable tax policies. The software export market is also expected to continue to enjoy high growth due to stability of the political situation and the country’s rapid economic development.

 

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The Report: Vietnam 2017

Telecoms & IT chapter from The Report: Vietnam 2017

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