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Indonesia, Vietnam favorable investment hotspots

Growing domestic market, sustained government investments and opportunities in telecom sector help boost investment allure of both Southeast Asia economies, state analysts.
Written by Liau Yun Qing, Contributor

A growing domestic market for IT products, strong investment in infrastructure by the government and opportunities in telecoms make Indonesia and Vietnam attractive alternatives over other destinations, observers pointed out. However, there are still barriers for companies looking to set up base in these two countries to consider.

Pranabesh Nath, industry manager for ICT at Frost & Sullivan, said both Southeast Asian countries have common factors that draw foreign investors.

These include having inexpensive labor, a growing domestic market and continued investments by the governments to create infrastructure that will enable the adoption of new technologies by businesses and consumers such as cloud computing, he listed in his e-mail.

Strong spending, talent pool
Zooming in on Vietnam, Freddie Ng, senior analyst at Gartner, said the country's ICT spending has been boosted by the willingness of its relatively fast-growing middle-class population to fork out money for consumer goods.

"Demand for spending on all kinds of products and services, including ICT, is on the uptrend. Barring major socioeconomic upheavals, this growth will continue for at least 10 to 15 years before the market matures and growth tapers," he surmised.

He added that the government is also investing strongly to build up its infrastructure, helped considerably by the foreign aid, subsidies and loans from organizations such as the World Bank. This, in turn, has kept the momentum for ICT expenditure at a brisk pace and offers opportunities for vendors supporting the IT ecosystem value chain, he noted.

Adding on, Vu-Thanh Nguyen, senior research analyst at AMI-Partners, noted that the Vietnamese government has committed to developing ICT as a strategic economic sector with a target of 8 to 10 percent GDP (gross domestic product) contribution by 2020.

Vietnam also has a pool of IT talent skilled in areas such as software application development that will help support the entry of IT companies into the country, Mark Koh, senior industry analyst at Frost & Sullivan, chimed in.

Gartner's Ng added, "ICT professionals and software engineers in Vietnam are still relatively competitive in terms of cost, compared to more developed and expensive destinations in the region as well as globally."

Indonesia, too, is experiencing strong domestic spending on ICT products, particularly hardware, said Erica Gadjuli, principal analyst at Gartner. She said user spend on PCs grew double digits consistently between 2009 and 2011, while enterprise computing hardware such as servers and storage had similar growth trends.

The middle-class consumers, in particular, are very enthusiastic tech users and when they refresh their tech devices, this will drive the country's IT spend, she added.

Telecoms big market opportunity
It is in telecommunications, however, that presents huge potential for growth in both Indonesia and Vietnam, the analysts noted.

Koh said that while Indonesia has a relatively high mobile penetration rate, there's still a lot of potential growth to be had in the market. Elaborating, he said broadband penetration--both fixed and mobile--is still very low but is expected to grow over the next few years.

Furthermore, the government is currently working on establishing a fiber broadband backbone across the nation that will extend broadband accessibility, he added.

This is corroborated by Dani Ristandi, deputy director for customer solution and sales support division at Huawei Indonesia. He said the company is working with the Indonesian government to deploy its national broadband network as it recognizes ICT infrastructure as the foundation on which other industries such as healthcare, energy and transportation can grow on.

Mobile broadband uptake is also expected to spike as more consumers turn to smartphone devices due to the low PC penetration rate, the analyst stated.

Over in Vietnam, Koh pointed out that it is one of the fastest-growing mobile communications market in the Asia-Pacific region. Despite being one of the smaller markets in terms of population size, Vietnam is expected to grow at a rapid pace, spurred on by mobile services and, specifically, data services, he said.

The fixed line segment also presents some opportunities, given that services and fixed broadband penetration remains low, especially in the rural areas, the analyst stated. The industry will also be boosted by the government's plans to expand its rural infrastructure to drive growth in fixed broadband over the next few years, he said.

Hurdles still to cross
It's not all rosy doing business in these two countries, though.

Nath noted that the IT infrastructure outside the countries' major cities are still quite poor and this is the "biggest stumbling block" in providing new services to consumers and the government.

"Business-to-business (B2B) companies trying to sell high-bandwidth products such as videoconferencing and telepresence are finding it challenging to achieve good success due to these restraints," he explained.

He urged both governments to fast-track their infrastructure projects such as the deployment of national high-speed broadband services, similar to what Malaysia and Singapore had accomplished

AMI-Partner's Nguyen also pointed out that Vietnam's economy has a noticeably high inflation rate and its currency had devalued over the last few years. He noted that this will affect businesses in terms of pricing, payment and other financial activities but cheap currency also creates opportunities for export-oriented services like software outsourcing, hardware manufacturing.

Corruption is another concern, with Gadjuli saying that such practices still linger in Indonesia, particularly in the in government sector. Bureaucracy, too, often causes unnecessary costs and inefficiency to companies operating within the country, she added.

Koh pointed out that these are true of Vietnam as well, though the overall situation is improving.

That said, its "fluid and rapidly changing legal landscape" needs more transparency and clarity to improve investor and business confidence, he noted. The country's intellectual property (IP) rights regime exists, but lacks bite and can put off many companies that rely on IP for their business to thrive, the analyst said.

One company also shared its experiences in operating out of both economies. Damien Wong, general manager for Asean at Red Hat Asia-Pacific, said the company was drawn to both countries because of their high growth rates and rapidly growing IT spend.

In Vietnam, though, the use of English as its business language is lacking, and this required the hiring of more Vietnamese-speaking employees.

Language was less of a problem in Indonesia, he added, but the country has a fairly unique business culture that companies will need to navigate through.

"There is a large emphasis placed on relationships, and decision-makers [must be comfortable with each other] before business can be done," said Wong.

"Labor laws also tend to favor employees, and performance management becomes very tricky in cases where a mismatched hire has been made locally."

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