Our portfolio company FPT Corporation (FPT) is Vietnam's largest listed technology group, and its global information technology (IT) services business develops and maintains software for corporate clients in Japan, the United States (US), Europe, and Asia Pacific (APAC). Growth in that business slowed to around 13% year-over-year (YoY) in the first half of 2026 (H1/2026), roughly half the pace of the previous three years, while Japanese revenue accelerated to around 25% YoY in the second quarter of 2026 (Q2/2026). We met with management recently to understand that divergence, and we came away with the view that FPT is selling into a backlog of aging systems that Japan does not have the engineers to clear on its own, which should support continued growth in Japan even as demand in its US and Korean markets recovers.
FPT forecasts that its global IT revenue excluding the AI Factory business will accelerate from 9–10% growth in USD terms in H1/2026 to 13–15% in the second half, with almost all of the improvement coming from the US market moving from 5–6% to around 9% while other regions hold at first-half levels. Management regards the slowdown of the past two years as temporary, caused by macroeconomic and geopolitical uncertainty and partly by clients' own artificial intelligence (AI) productivity gains, and expects 20–25% growth to return over the next few years.
Signed software outsourcing revenue in APAC grew only 1–2% YoY in the first seven months of 2026. The recent weakness is concentrated in two markets, South Korea and Malaysia, with Korean technology budgets under pressure from export and geopolitical concerns among automakers, a client group where FPT has notable exposure. It’s worth noting, however, that the company has shifted in H1/2026 toward contracts of two to four years from one year or less previously, and slower ramp-up from longer contracts is expected to cause gaps between signed and reported growth over the coming year. From an investment perspective, FPT securing longer contract terms means clearer earnings visibility even in a market impacted by AI-driven uncertainty.
FPT has roughly tripled its Japanese revenue since 2021 and has grown it above 20% YoY in all but a few quarters over that period, a consistency the company has not matched in any other region. Growth picked up to around 25% in Q2/2026 from around 19% in Q1/2026, at a time when the global IT business as a whole was running at half its historical rate. Management attributes the Japanese demand to two things, a long backlog of legacy system replacement and a growing layer of digital transformation (DX) and cybersecurity work built on top of it.
(Chart: Kenno; Data: FPT)
Japan is also the market where FPT converts signed work into reported revenue with the fewest surprises, since clients there continue to prefer time-and-materials arrangements, where billing is linked to resources used, for the control they provide, while outcome-based contracts grow elsewhere. Management put time-and-materials work at more than 65% of global IT revenue, down from more than 70%, with broadly similar margins on both contract types.
Japanese corporates run an unusually large base of heavily customized systems that have grown complex and expensive to maintain, and the engineers who built them are now retiring. The Ministry of Economy, Trade and Industry (METI) set out this problem in its 2018 report on digital transformation (revisited in May 2025), projecting that 60% of Japan's mission-critical systems would be more than 20 years old by 2025, and that failing to modernize them could cost the economy up to JPY 12 trillion a year, around USD 75 billion at current exchange rates. This backlog could take years to clear, and possibly decades, since replacing undocumented systems that sit at the center of a company's operations is slow work that spending more money does not speed up. For FPT, we expect this to become a profitable source of demand with a visible but distant end point, supporting the company’s long-term earnings if it continues with the current growth strategy.
Japan also lacks the people to do the work itself. A 2019 survey by Japan’s METI on IT personnel supply and demand projects a shortfall of up to 790,000 IT professionals by 2030, with causes that sit in demographics and education and therefore outside the reach of a business cycle. The working-age population is shrinking, and while Japanese students rank among the strongest in the world in mathematics and science, the share moving into information and communications technology (ICT) careers sits below the OECD average. Neither condition should change within an investment horizon, which is why we treat FPT's offshore delivery model as a structural requirement for Japanese modernization rather than a way for its clients to save money.
So, why can’t Japanese companies put off replacing old systems that still function, as companies in other economies often do? This is because, in 2024, Japan’s METI set up a Legacy Systems Modernization Committee under the national plan for building a digital society, urging corporate management to treat aging systems as their own responsibility and commit to replacing them. This pressure turns work that companies could usually postpone into high-priority projects with clear budgets and start dates, which is the point at which Japanese companies start hiring IT service providers like FPT.
Management described Japan as the market where FPT faces the least competition, and two forces explain why. Indian IT services firms are competing harder in Europe and APAC while leaving Japan comparatively open, and Japanese clients are moving offshore development out of China, where much of it was placed during the 2000s, on concerns about geopolitical risk, data security, and rising costs. Vietnam has been one of the main destinations for that work, and FPT has spent more than 20 years building Japanese-speaking delivery teams, a barrier most alternative vendors have yet to clear.
FPT still holds a relatively small share of Japan’s IT services market, with revenue still modest relative to a market dominated by domestic system integrators. At that scale, the company can grow materially without requiring a significant shift in overall market share, and Japan’s shortage of engineers means demand should continue arriving through the cycles that move other markets. While FPT's next few quarters will be shaped mostly by how quickly US demand recovers, the years beyond that depend more on Japan – where the work is already committed, the engineers to deliver it are not available domestically, and FPT holds a position built on two decades of experience.
The Kenno Vietnam Fund invests in fundamentally sound Vietnamese companies at attractive valuations. FPT remains one of our top holdings, and our conviction rests on its execution and adaptability in the fast-moving IT services space, the company's long-standing customer relationships, and the structural demand from Japan's aging systems, which together have supported consistent earnings growth. If you would like to learn more about the fund or our investment approach, feel free to reach out to us.