Software Industry in Vietnam

Software Industry in Vietnam – still small but with a bright future

- By Chris Runckel and Ly Tran, Runckel & Associates

Although the software industry in Vietnam is a young sector whose turnover does not appear impressive, the software industry (SI) might make other industries in Vietnam envy them for the level of attention it receives from the government. For at least a decade, Vietnamese officials have expressed a strong belief in information technology as a key to successful economic development, and acted accordingly.

Source: IT Industry Department, Ministry of Posts and Telematics of Vietnam

According to many sources, particularly (Carmel – 2003) who provided a highly useful taxonomy for classifying and comparing exporting nations, India, Israel and Ireland are in the top tier for software outsourcing, while Vietnam is classified as being in the fourth tier. Tier One countries, have numerous firms – in the 100s or thousands in clusters- actively producing software for export with export valued over $1 billion and have been in this industry for 15 or more years. Tier four countries by comparison have been exporting for five years or less, have companies in the tens of companies and have export revenues of less than $25 million a year.

Source: IT Industry Department, Ministry of Posts and Telematics of Vietnam

With a population of over 80 million, Vietnam has strong potential in both market supply and demand. Although the SI’s revenue in 2005 of $200 million was far from expectations, the steady growth rate in the last five years of 25%, which is forecasted to continue through 2010, certainly unveils the Vietnamese government’s ambition and aspiration for technology advance in this heavily government supported industry.

According to Vietnam Economics News Online (issued on November 09, 2005), SI is currently the most subsidized economic sector in Vietnam. It currently enjoys many incomparable privileges including tax and investment incentives, such as low corporate tax rates, exemption from value added tax, exemption on tariff for imported materials that are directly used for the production of software, etc

By way of example, businesses involved in software production and services, both local and foreign invested, are exempt from corporate income tax (28%) for four years from the date they generate their first taxable income. Software products will receive a 0% Value Added Tax (VAT) and be free from export tax. Further incentives have been recently offered to assist with training support for significant software projects.

Currently, most software companies in Vietnam are small-sized, with exception of a few mid-sized enterprises (see graphs). Despite this, Vietnam has been quite successful in attracting numerous major big corporate and government names to outsource software projects to Vietnam. Among the names that have done so are Anheuser Busch, Bayer, BMG, BP, Cisco, Critical Path, Daiwa, Fuji, IBM, Merrill Lynch, Nortel Networks, NTT, the State of Oklahoma and Sony. All have outsourced software projects to Vietnam either directly or through third-party subcontracts.

Source: IT Industry Department, Ministry of Posts and Telematics of Vietnam

In order to advance and attract more foreign investors and customers, Vietnamese software companies have strived to earn international certifications such as the ISO-9000 and Capability Maturity Model (CMM) of all 5 levels. In addition, Vietnamese authorities and agencies have been building and operating software parks, which often house not only Vietnamese software companies and joint ventures, but 100% foreign-owned companies as well.

Currently, Vietnam has 8 dedicated operational software parks . Three of these are in HCMC and the rest are in Hanoi, Haiphong, Dan Nang, Hue and Can Tho. Saigon Software Park (SSP) was the first software park in Vietnam started in 2001 and with technical support from CISCO is one of the countries most advanced. Quang Trung Software City, which was first approved in 2004 but opened in the same year as SSP – 2005 – is the other main software park. Quang Trung Software Park occupies an area of over 430.000m² with an additional 10 hectares available for expansion. The area includes lots of green spaces and an attractive environment. It is reachable from the Tan Son Nhat International Airport in 15 minutes and from the downtown area of the City in 30 minutes. With the exception of Quang Trung Software Park and SSP, the majority of the other dedicated software parks are running at way under capacity and generally not at the highest level of efficiency as none of them are located in areas that to date have attracted considerable offshore investment. To this point, Ho Chi Minh City and Hanoi continue to be the focus of most software development and advanced education for the country as a whole.

Pictures: (right) One of the factories in Saigon High Tech Industrial Park (SHTP)

and (left) another factory under construction

According to Mr. Nguyen Trong Duong, Officer of the IT Industry Department, Ministry of Posts and Telematics, all universities and other institutions graduate about 3,000 to 4,000 IT students every year, which accumulated to about 40,000 IT graduates by the end of 2005. Of this number, about half are software programmers. Known for their skills and diligence, Vietnamese IT students underline the potential of the future SI in Vietnam.

Source: IT Industry Department, Ministry of Posts and Telematics of Vietnam

As mentioned above, the large population and burgeoning SI in Vietnam also indicate an underdeveloped yet probable market. Moreover, low production costs (Vietnamese software professionals are about half the cost of Indian equivalent software professionals and have much higher retention rates), coupled with the government’s obvious support and favorable incentives make Vietnam one of the most competitive markets for IT investors. Nevertheless, the Vietnam Investment Review (issued on June 26, 2006) also points out that increasing transparency on the software companies’ part, and more effective policies on the government’s part will help boost Vietnamese investing environment’s rating from foreign investors’ perspective, and hence, enhance the development of the industry.

Small U.S. and other software companies were the first to notice this potential and to actively reach out to Vietnam. Now major U.S. companies like Intel which has major operations in California, Hillsboro, Oregon and Arizona have also realized the potential and have chosen Ho Chi Minh City’s Saigon High Tech Park (SHTP - http://www.shtp.hochiminhcity.gov.vn/) as the location for their chip first chip fabrication facility in Vietnam are also taking note. Vietnam has rightly realized that to get this sort of notice and to continue to build a dedicated core of IT professionals that more need to be done to support IT education in the Ho Chi Minh City region. As such, the National University of Ho Chi Minh City and Portland State University in Portland, Oregon (www.pdx.edu) are currently exploring collaboration in advanced IT training for National University Master and PhD students and also an innovative mixed education program leading to a joint degree or with substantial teaching instruction based on international education models.

The software industry in Vietnam is thus still in an early stage of development but the potential is already apparent. Further, government support for this sector and well thought out policies like the recent tie-up of the National University of Ho Chi Minh City in respect to improving IT education at the University and advanced degree level all bode well for the future. This industry is therefore one that bears continued attention and selective investment where conditions warrant.

Runckel & Associates has worked on projects in this sector and continues to follow development of the software industry nationwide in Vietnam. Please contact us for assistance

Copyright, 2006 © Runckel & Associates

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