Say "Good Morning" to the New Vietnam
from March/April 2008
by John J. Curran
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Leaf, a student at Hanoi University, is the fashionably dressed 19-year-old daughter of a wounded war veteran. She loves to stop by a local mall restaurant after class and occasionally sneaks off to the glitzy movie theater atop Hanoi’s VinCom Towers to catch the latest Western movies. Though a dedicated student, she checks her cell phone frequently and spends hours at home e-mailing, touring the Internet (her favorite website is National Geographic’s), or watching HBO, which costs her family about $3 per month. She jumps at chances to practice her English and Chinese and is searching for grants that will let her study abroad after graduation.
Say good morning to the new Vietnam, energized by a spirit that has not only awakened sleepy Hanoi but perked up every corner of this emerald-green country. Even in the shadow of the decaying U.S. military barracks along Vietnam’s China Beach, Western companies are breaking ground on what will soon be a row of mega-resorts.
In other parts of the country, Fortune 500 titans GE and Intel are drawing up plans to build new plants, as are hundreds of other Western outfits, many of which are scrambling to readjust their Asian supply lines in the wake of unsettling product scares coming out of China. To the newcomers, it’s not just the added incentive of long tax holidays and a literate, eager workforce that is appealing, but also the tempting prospect of a burgeoning consumer market.
“My head is spinning,” says Adam Sitkoff, executive director of the American Chamber of Commerce in Hanoi. Hordes of U.S. executives from “underwear companies to computer giants,” as he puts it, are here to take a hard look at this blossoming economy, which has grown at an average 8.2% rate for the past four years. “Companies today don’t want to miss the boat,” he says.
Vietnam joined the World Trade Organization in 2007, opening up new markets and mandating internal reforms that will greatly increase competition. Though the country is still guided by a quasi-communist government, its 85 million people are now tasting the fruits of a free market. Their discretionary income is finding its way into everything from Honda mopeds to Gucci handbags. According to the World Bank, Vietnam’s retail sales surged 23% during the first nine months of 2007 as consumers scrambled to catch up with their counterparts in more developed Thailand and South Korea. They’re newly connected too: In 2000 hardly any individual Vietnamese owned a personal computer, and few had access to the Internet. Today approximately 17 million are online regularly. Like our student Leaf (that’s her Westernized nickname), many younger Vietnamese consider cell phones a must-have accessory; sales shot from 4.4 million units in 2006 to roughly six million units in 2007, according to GfK Vietnam, part of the German research firm Gfk Group.
The export machine is firing on all cylinders as well, with shipments rising 19.6% during the first nine months of 2007, to $35 billion. Driving that growth are surging foreign sales of agricultural products, seafood, footwear, and clothing. Vietnam ranks among the world’s top 10 clothing exporters, with more than half of its apparel U.S.A.-bound. The World Bank estimates that Vietnam’s economy grew 8.3% in 2007 and believes it will match that rate in 2008. While a sharp U.S. recession could dampen Vietnam’s export growth, the country relies more heavily on exports to Asia, so it enjoys a measure of protection.
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David Hockenbrocht, CEO of Sparton Corp.: "It's all just better here." |
Sparton’s Vietnam subsidiary, Spartronics, makes electronic components and assembles finished products under contract for a variety of Western companies. Hockenbrocht declines to be specific about the tax holiday his company was granted, other than to acknowledge that “it’s generous” (some companies may get up to 10 tax-free years), but he happily ticks off a list of Vietnam’s relative strengths: “intellectual property, respect for property and contracts, respect for family, it’s all just better here.”
Well, not quite all. One glaring exception is Vietnam’s poor infrastructure, a daunting challenge for a cash-strapped government and a potential purgatory for companies that arrive unprepared. Vietnam Airlines doesn’t have enough planes, the country still has no truly deepwater ports, the railroad is rickety, and traffic congestion promises to be a national nightmare within just a few years. Already roads in Ho Chi Minh and other urban areas are a sea of crisscrossing pedal cabs, motorbikes, cars, and trucks. Traffic fatalities are way up, and gridlock is setting in. So is some disillusion.
At a hotel lounge bar in Ho Chi Minh, a visiting American businessman is enjoying a beer, having just bought a jade necklace for his wife back home. He’s pleased with his purchase, but when he begins talking of his American industrial company’s experience in Vietnam, his smile fades. “We won’t be putting any more money in here,” he says. What drew his company to Vietnam in the first place? “Low wages, a quarter of what we would have been paying in China.” But that wasn’t the only expense to consider: “Our structural costs have been huge,” he says, lifting his beer. “We didn’t do our homework.”
In a recent speech, the World Bank’s top Vietnam specialist, Ajay Chhibber, lauded the country’s progress but chided it for slow advances in strengthening infrastructure, cutting red tape, and improving the supply of skilled labor. The Hanoi government has clearly put infrastructure at the top of its priority list, but the pace of change remains unpredictable. Only a third of the roads are paved, and even the major ports—the south’s Ho Chi Minh City and the north’s Haiphong among them—will not be capable of handling very large container ships for several years. Instead, companies collecting or delivering goods must use feeder ships that connect with bigger ones at deepwater ports like Shanghai’s. This adds costs and delays. Ambitious plans are under way to bring a subway to Ho Chi Minh City and even build a high-speed railroad connecting the north and south, but there’s not enough money to move either project along. According to ISI Emerging Markets, an online research service, even the assistance Vietnam might get from foreign governments leaves it far short of what it will need for such ambitious transportation-infrastructure goals.
Any company that considers setting up production in Vietnam must have a realistic take on how it will ship its goods. There are ways to leapfrog the problems—Spartronics, for example, flies right over them. It brings all its components in by air and moves out finished product the same way. Equally important, it is situated in an industrial park just outside Ho Chi Minh City that has its own power generators, its own customs-clearing office, and even an ombudsman to guide park tenants through the government bureaucracy. Vietnam’s industrial parks are numerous and thriving; some are even going public. But they are not the ultimate solution to the country’s pressing infrastructure shortfalls.
Vietnam, as one quickly learns, marches to its own drummer, something this reporter was reminded of when a government economist skipped a scheduled interview to have his house blessed. But while out of step in many ways with a free-market world, it is generally a happy community of odd bedfellows, where capitalism blends with communism as seamlessly as Christianity blends with Confucianism. Though the government has no taste for political pluralism and retains a “harsh stance on dissent,” according to the Economist Intelligence Unit, a business service of the Economist magazine, there is for most of the population a benign coexistence of religions, cultures, and political beliefs. That harmony enlarges Vietnam’s appeal as a place to make long-term investments. Its people seem to harbor no ill feelings toward Americans—in Vietnamese my, the same word they use for beautiful.
Each month brings trade liberalization, much of it mandated by the WTO, and more decentralization, which moves decisions out of the hands of Hanoi and into the provinces. But Vietnam remains far more centralized than its neighbor to the north, which can simplify life for Western companies. “One of the advantages of doing business here,” says Tom O’Dore, president of Boston-based Liberty Mutual’s Vietnam subsidiary, “is that our insurance license is good throughout the country, whereas in China it’s only good for a particular province.”
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Sparton trainees: The company gets five qualified applicants for every job. |
Wages, though rising, are still a bargain. Technology Forecasters, a market research organization that recently polled Western companies in Vietnam, notes that while the legal minimum wage is around $50 per month (plus 17% for social insurance), the lowest wage Western employers pay is around $75 per month. Professional staff are paid more but still make roughly one-quarter as much as their counterparts in the U.S.
The weaknesses of Vietnam’s workforce are twofold. Companies that need English fluency can be disappointed, even though English-language study is required at all levels in school. When Intel began interviewing Vietnamese for its planned semiconductor assembly and test facility in Ho Chi Minh City, it reportedly found the language standards far below what the government had promised (Intel would not respond to requests for comment). Computer skills are the second soft spot—a critical one, given Vietnam’s hopes of attracting more high-tech investment.
“Our education system has to do a better job,” declares Pham Chi Lan, an independent business consultant and a past member of the Prime Minister’s Research Commission, the government think tank on economic reform and development issues. She’s echoing the frustration of many Vietnamese. But while the education ministry recently came under new leadership, there is no quick fix. As one government report recently observed, “Teaching staff are insufficient in numbers, inconsistent in structure, and low in quality. The majority of teachers still use very old and out-of-date teaching and educational methods.”
Some foreign companies are addressing this problem on their own. Glass Egg Digital Media is a graphic-design outfit that does work for game makers like Sony, Microsoft, and Electronic Arts. Based in Ho Chi Minh City, it employs 150 people, mostly designers. Co-founder Phil Tran was sent to Vietnam in 1995 to start an animation studio for a Western media company. He launched Glass Egg in 1999 with the help of one major investor, Dragon Capital, a Vietnam venture capital firm.
After disappointing results from hiring graduates of Vietnam’s art colleges, Tran reached out to the schools and established paid internships where students work in Glass Egg’s offices for a stipend of $60 a month. “It serves the colleges’ purposes,” he says, “because it allows them to get their students exposure to state-of-the-art 3-D production technology.” If students pass the final exam, he offers them a job. A 3-D artist on staff at Glass Egg can make $250 to $800 per month, depending on his or her skills.
The bigger labor challenge for most Western companies is the shortage of capable middle managers. Chris Freund, managing director of Mekong Capital and a director of Vietnam’s biggest recruiting firm, attributes the dearth of talent to “the short history of the private sector” and the “predominance of short-term thinking,” a product, he says, of Vietnam’s communist past, “in which the only way to make money was to quietly siphon cash out of businesses.” Mekong is making hay addressing this shortfall, investing money and management mojo in Vietnam’s small companies. Says Freund: “We help them strengthen their management teams faster than they would otherwise do on their own.” The profits at Mekong Capital’s companies have been growing at an average rate of about 46% over the last few years.
Of course, Western companies can always parachute in their Western managers, and most now working in Vietnam say it’s an enjoyable experience—“I can’t believe that some of my friends still get hardship pay,” marvels one. Even so, foreign managers are expensive and not always effective. Says Freund: “Managing in Vietnam requires significantly more time invested in the relationships between managers and their direct reports than would be the case in the West, and this is difficult for many Western managers to get used to.”
An overnight train from Hanoi to the ancient city of Hue carries a young Spanish couple—two twenty-something offspring of Vietnam’s “boat people,” among the thousands who fled the country after the communist takeover. Both the young man and the young woman have a Vietnamese parent and a Spanish one. The pair are bubbling with excitement to see their ancestral land at last, but with them is the girl’s Vietnamese father, who now owns a chain of retail stores in Spain. As the train rumbles along on old French railway tracks, he stares wistfully out the window at the land he left behind.
With opportunity in high gear, why is there not a surge of investment and expertise from overseas Vietnamese? “There is intense social pressure among the American Vietnamese community not to have any dealings with Vietnam’s government,” says Anh Do, editor of the English-language edition of Nguoi Viet, a Costa Mesa, California, newspaper for America’s Vietnamese population. It isn’t the boat people of the 1970s who are in opposition, Do explains, but the Vietnamese who were left behind and sent to reeducation camps. Many subsequently emigrated to the U.S. and to this day remain passionately opposed to the Vietnamese government. But that hostility may be diminishing. “There are many [Vietnamese Americans] who have investments in Vietnam, but they don’t talk about it. They stay under the radar,” says Do. Quiet repatriations from overseas Vietnamese to relatives and business associates now top $5 billion a year, and, anecdotally at least, direct investment from overseas Vietnamese has picked up since the country joined the WTO.
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The retail area inside the Saigon Trade Center. Consumers are "increasingly demanding." |
The biggest shakeup in consumer markets is courtesy of the WTO. Tariffs are being rolled back and barriers dismantled. Under Vietnam’s commitments to the WTO, for example, open season on its pharmaceutical companies begins next January, when foreign concerns will be able to import drugs directly into the country. The cosmetics industry is headed for similar competition, with import tariffs set to slide from the current 44% to a more modest 17.9% in a few years.
Even those incentives cannot push Vietnam past China on the corporate priority list. But is your business so good that you can ignore falling tariffs, fat tax holidays, and sizzling growth?
