Multinationals take a longer view of Vietnam

Damon Winter, Los Angeles Times. Vietnams motivated workforce, stability and young population attracted investors. But companies found that many university graduates lacked the practical and technical training needed for careers with them.

Damon Winter, Los Angeles Times. Vietnam's motivated workforce, stability and young population attracted investors. But companies found that many university graduates lacked the practical and technical training needed for careers with them.

Companies scale back as they confront limitations in Vietnam’s workforce and other issues.
By Don Lee

April 11, 2009

Reporting from Ho Chi Minh City — Just a couple of years ago, this city was among the hottest investment zones in Asia.

Multinationals as large as chip maker Intel Corp. and smaller firms such as Ampac Packaging, a Cincinnati-based maker of shopping bags for Gap and Target, flocked here and to other parts of Vietnam. They set up plants to complement or, in some cases, replace facilities in China that were becoming increasingly expensive to operate. “China plus one,” they called it.

Now, with the global downturn and China reasserting itself as the low-cost producer, Vietnam is feeling the effects of a different trend: “China minus one.”

In central Ho Chi Minh City, also known as Saigon, an apartment tower that would have been one of the city’s tallest buildings has been draped in green for months. Pinched for cash, its owner, Daewon Group of South Korea, stopped work on the development even after reaching the top floor. It’s one of many foreign projects in the region that have been halted or put off indefinitely.

Taiwan’s Wistron Corp. had planned to plow millions into building a laptop factory in Vietnam last winter, to supplement its main plant in the Shanghai area.

“Right now it’s just more or less on hold,” spokesman John Collins said.

Taiwanese investment in Vietnam in the first two months of this year was just one-fifth of what it was a year ago, said Catherine Chi, a senior director at Taiwan’s Chamber of Commerce, one of the largest foreign groups here. The government in Hanoi is expecting foreign capital inflows to fall by more than half this year.

Japanese companies such as Sony Corp. and Canon Inc. have closed or reduced operations in Vietnam. Chinese automaker Lifan Group suspended plans to make cars here.

By other measures, Vietnam’s economy is faring better than most in the region. Thanks to a rise in trade of consumer goods, government spending on infrastructure and numerous plant openings in the past, the country’s gross domestic product, or total economic output, is likely to grow by 5.5% this year. That would be the second highest in East Asia after China, according to the World Bank.

Vietnam’s comparative advantages include its motivated workforce, political stability and young population.

But the last couple of years also have been sobering to foreign managers. They’ve learned that Vietnam, with a population of about 87 million, isn’t a smaller version of China.

Though it shares East Asia’s Confucian values of education and family, Vietnam doesn’t have China’s command-and-control way of getting things done quickly. Businesses complain that, even after several years, workers still haven’t finished the highway from Ho Chi Minh City’s airport to downtown. Unlike China, relocation of families is painstakingly slow.

Nor does Vietnam have the depth of skilled labor that some thought. While young Vietnamese show a penchant for learning, universities tend to be heavily theoretical. Many of their graduates lack the practical and technical training needed for careers at multinational companies.

Intel found that out recently when it screened new hires for a $1-billion chip assembly and testing facility that it’s building here. The Santa Clara-based company managed to recruit enough engineering and skilled labor for its first wave of staffing, but realized it would need to build a talent pipeline if it wanted to grow in Vietnam, said people familiar with the situation. Intel is now trying to help local universities develop curriculum and programs.

Intel didn’t respond to a request for comment, but other Western companies also have begun to take a longer-term view of Vietnam.

“There’s been some rethinking,” said Sesto Vecchi, an attorney and consultant in Ho Chi Minh City for the last two decades. Although most foreign investors remain bullish on Vietnam over the long haul, he said, “there’s probably a more realistic sense now of how many people are available to support a fast high-tech industry.”

In some ways, Vietnam’s recent troubles have as much to do with China’s improved business climate than with any particular failing of its own.

Over the last decade, Vietnam had looked more appealing as the U.S. imposed anti-dumping duties on Chinese-made products such as furniture and plastic bags. At the same time, Chinese wages soared, as did raw material costs. Labor laws stiffened. The Chinese yuan surged in value. And authorities thumbed their noses at labor-intensive businesses, eliminating export tax rebates and cracking down on environmental and safety laws.

“The era of China as a low-cost, manufacturing-for-export market has come to an end,” the Shanghai American Chamber of Commerce declared in March 2008, noting that nearly one out of five companies surveyed had concrete plans to relocate some of their China operations to other countries, notably Vietnam.

But the global credit crisis and ensuing recession changed all that. The Chinese government revived export tax rebates and has beefed up infrastructure. China’s commodity prices fell, the yuan stabilized and officials backed away from pressing employers too hard, lest more plants close and jobs disappear.

The same chamber survey a year later found that the percentage of companies planning to relocate out of China had dropped by half, as had the number of respondents expressing concern about China losing its competitive edge.

“The larger companies that have had the experience of looking elsewhere have returned to China,” said Dean Ho, the Shanghai-based vice president of Unison International, an investment and consulting firm. Some of them couldn’t find enough good workers, he said. Others found rival countries had their own challenges.

Liu Guizhong, deputy director of foreign trade for China’s Galanz Group, the world’s largest microwave oven producer, remembers visiting Vietnam last April. He and his colleagues liked what they saw.

They got visas easily upon arrival. Ho Chi Minh City boasted several port facilities. Liu said production wages in Vietnam would be around $60 a month per worker, about half that of rural China and about one-third what Galanz pays workers in China’s coastal cities.

Galanz was considering three sites in Vietnam to build a $25-million plant, including the sprawling suburbs around Ho Chi Minh City near the Saigon River. Then Vietnam’s economy went into a tailspin. Inflation soared to 28% last summer, fueled by soaring commodity prices and rampant speculation in real estate and stocks. Vietnam’s currency sank. A series of labor strikes at garment and footwear plants added to the turmoil.

Galanz retreated. Like others, it now wants to wait until the global financial storm passes. Vietnamese authorities have rolled out new tax relief and other incentives to lure back investors, but Galanz remains noncommittal.

“Many companies are evacuating, so we decided to hold our plans,” Liu said. At the moment, “there are too many negative aspects.”,0,2261495.story


Vietnam Pushes State-Owned Firms to Diversify

HANOI, Vietnam — In the fume-choked western suburbs of this nation’s capital, scrawny cows wander the streets as bulldozers churn up a patch of dusty soil that will soon become a $300 million five-star hotel.

The company behind the luxury resort isn’t a well-known hotel chain. Instead, it’s PetroVietnam, the country’s national oil and gas group.



The Situation: Some of Vietnam’s biggest state enterprises are diversifying into new businesses as the country gears up for increased foreign competition.

What It Means: The move is creating uncertainty about the depth of commitment to free-market overhauls.

What’s Next: Vietnam’s government says it will ensure a level playing field for state-owned, private and foreign companies.

The oil company’s foray into the tourist trade is part of a bold — and divisive — push by Vietnam’s prime minister, Nguyen Tan Dung, to create state-owned conglomerates that can stand up to the international companies that are making inroads here as Vietnam’s economy booms. The government expects growth in gross domestic product to top 8.5% this year.

Vietnam’s drive to create more-powerful state companies sits awkwardly with the prime minister’s carefully crafted image as a supporter of liberal economics. It reflects some nervousness among the Communist Party elite about entirely surrendering its grip on the economy, even though there is little threat to its political control. Among the concerns: Without a bold makeover, state enterprises may struggle to secure sufficient credit once Vietnam opens up to foreign banks as part of its commitments in joining the World Trade Organization.

In recent months, Mr. Dung has signed a series of orders directing large state companies to diversify into unexpected new businesses, in some cases asking them to compete directly with privately owned firms. State shipbuilding company Vinashin, or Vietnam Shipbuilding Industry Corp., will soon start brewing beer. Mining company Vietnam Coal Corp. is investing in electricity generation. Several other state companies, including PetroVietnam, formally known as Vietnam Oil & Gas Corp., are establishing their own banks to help finance their expansion.

Mr. Dung’s critics contend that building these new businesses risks crowding out Vietnam’s vibrant private sector, the backbone of the country’s economy. Around 60% of Vietnam’s GDP is generated by local and foreign private businesses, compared with less than half a decade ago, according to the Asian Development Bank.

Mr. Dung has strong credentials as an economic liberalizer. He ran Vietnam’s central bank in the late 1990s and helped steer the country’s entry into the WTO. Yet, he is also steeped in the traditions of Vietnam’s strongly nationalist military.

[Nguyen Tan Dung]

Mr. Dung began his career as a child soldier in 1961, signing up as a messenger with the Viet Cong guerrillas when he was 12 years old. He rose through the ranks to become a political commissar, and was wounded several times in battles with U.S.-backed southern Vietnamese troops in the 1960s and 1970s. His army bosses sent the young Mr. Dung to the Communist Party’s elite leadership academy, and he became the youngest-ever member of Vietnam’s 14-member Politburo. He became prime minister in 2006 at the age of 56.

Some of Mr. Dung’s mentors are surprised at his plans for bulking up Vietnam’s state sector, which had been gradually diminishing in importance as economic overhauls have progressed. Former Prime Minister Vo Van Kiet, who engineered Vietnam’s painful transition to capitalism in the 1990s, has warned his protégé that creating giant state-run conglomerates threatens Vietnam’s hard-won free-market credentials.

“These groups will hoard market share, material resources and business opportunities that are the lifeblood of Vietnam’s private sector,” wrote Mr. Kiet, who is now 85, in an article published in a state newspaper earlier this year. “And that prevents businesses from expanding their important role in the Vietnamese economy.”

Mr. Kiet also warned that, among other things, the presence of PetroVietnam in the tourism business will hurt Vietnam’s image as a free-market economy. Just the perception of a strong state hand steering the economy might be enough to ensure that the U.S. and European Union can continue levying tariffs on Vietnam for allegedly exporting goods at below-market prices.

Government spokesman Le Dzung says Vietnam’s leaders are committed to ensuring a level playing field for all business, whether private, foreign or state-owned.


At PetroVietnam, the head of planning for its northern Vietnam projects says the company plans to begin construction on its hotel in earnest in the next few months. Nguyen Ngoc Lich says PetroVietnam plans to hold a 30% stake in the venture, with the rest being offered to a selection of local — mostly state-run — banks.

Some government economists share Mr. Kiet’s fear that Mr. Dung’s new tack risks undoing some of the momentum that has helped Vietnam become a fast-growing and attractive manufacturing hub for global names such as Intel Corp., Canon Inc. and Hon Hai Precision Industry Co. Government officials expect Vietnam to attract $16 billion in foreign direct investment this year. In the first eleven months of the year, foreign companies committed $15 billion to the country — a record.

A burgeoning middle class is patronizing luxury boutiques and golf courses that are sprouting across Hanoi and the old southern capital, Saigon, now known as Ho Chi Minh City.

Last month, U.S. Commerce Secretary Carlos Gutierrez traveled to Vietnam to meet with Mr. Dung, and described the country as “Asia’s newest economic tiger.” In an earlier interview with The Wall Street Journal, Mr. Dung pledged that more overhauls are on the way to draw in more foreign investment. Chief among them are plans to introduce transparent, predictable laws that will enable private business — both local and foreign — to play a bigger role in sustaining Vietnam’s heady growth.

“We can’t clap with one hand. We need private business, too,” says Mr. Dung. Two of his three children have studied in the U.S. and have entered private business in Vietnam.

Business, donors look at booming Vietnam’s growing pains

HANOI (AFP) — Nearly a year after Vietnam joined the WTO, business groups have lauded its booming economy but also pointed at obstacles such as red tape, infrastructure bottlenecks and a shortage of skilled labor.

In a yearly stocktake of Vietnam’s economy last week, observers said the developing country, where economic growth will top eight percent this year, has come a long way since it joined the World Trade Organization in January.

But they also urged the communist-ruled country to speed up ongoing institutional reforms and boost civil society to ready itself for the next stage of growth as it seeks to become a middle-income economy by 2010.

World Bank country chief Ajay Chhibber said 2007 had been a “”banner year for Vietnam”” which was now “”a highly attractive investment destination,”” drawing a record 16 billion dollars in foreign direct investment this year.

A recent UN survey of multinational companies ranked Vietnam, a country of 84 million people, as the world’s sixth most attractive business location, and Japanese firms see it as the third most promising medium-term destination.

A sense of optimism

A new sense of optimism is fuelling the stock market, driving up property prices and bringing fashion boutiques and luxury cars to the congested centers of Hanoi and Ho Chi Minh City, the port city formerly called Saigon.

But Chhibber also warned that Vietnam must now “”maintain the momentum”” by meeting all its WTO commitments, building up infrastructure, cutting bureaucracy and red tape, and improving its skilled labor pool.

These and other concerns were echoed by many experts at two annual meetings in Hanoi last week, the Vietnam Business Forum and the Consultative Group conference of donor countries, development agencies and state officials.

Vietnam may be on the fast track to becoming a new “”Asian tiger”” or a “”mini-China,”” but it still suffers growing pains, many of them the legacy of decades of war, isolation and centralized economic planning.

Vietnam has implemented many of its WTO commitments but falls short in areas such copyright protection. WTO-compliant laws passed in Hanoi are not always understood at the provincial level.

Foreign companies are pushing Vietnam to more quickly open markets such as banking and telecoms.

Bureaucracy and opaque laws make paperwork a headache and feed corruption, a major concern.

Business tenders are often untransparent and corporate reporting standards weak, business groups say. The World Bank ranks Vietnam 91st out of 178 economies in ease of doing business.

Power blackouts, congested ports, poor roads and railways, and slow internet lines still top the list of gripes.

Donors pledged a record 5.4 billion dollars in aid for next year, over half of it for infrastructure, but many projects will take years to come online.

Up the value chain in Vietnam


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EVERY WORKDAY at a high-tech-oriented office complex here called e.Town, scores of computer artists beaver away quietly at their terminals, manipulating digital renderings of cars and brick patterns on the walls of imaginary buildings. The artists’ employer, a company called Glass Egg, specializes in the video game equivalent of set design; it creates the 3-D objects that players move about onscreen.

Led by two Americans, the firm works as a contractor for well-known game developers such as Electronic Arts and Sega. Glass Egg boasts that clients generally save 50 percent by outsourcing 3-D art production to the firm. Entry-level artists there earn about $3,000 a year plus benefits, a decent salary for Vietnam but less than what similar workers would earn in, say, South Korea.

The company’s work is mesmerizing to watch. I’m in Vietnam for the first time, with a group of journalists organized by the East-West Center in Honolulu. Video game design is not the sort of activity one expects to see in a one-party state where the gross domestic product per capita last year was just $726.

Sure, it’s a little odd that a city named for a communist revolutionary has become one of Southeast Asia’s business hubs. Vietnam is attracting established foreign companies and new entrepreneurs, and not just those looking to make clothes on the cheap.

But how long can the boom last? While rising prices are a common complaint, the more fundamental question is whether and when Vietnam’s political structure – with its vast bureaucracy, its restrictions on expression, and its still-incomplete body of business law – will become too big a drag on growth.

From knockoffs to video games

Racked by war and bad policy, the Vietnamese economy began to revive in the late 1980s, when reforms opened the door to private enterprises. Southeast Asia is best known for industries that require low skills and a tolerance for repetitive labor, and Vietnam is no exception. The shoe company Nike, along with its contractors, is the country’s largest private employer. One reason Vietnam’s economy is taking off is that wages have crept up at garment plants in Thailand.

Yet the movement toward more advanced industries is evident. Intel is building a $1 billion microchip plant. On a more modest scale, consider Phong and Hung Nguyen, two Vietnamese-American brothers from Newton, whose company operates a drug-manufacturing plant. Then there’s Paul Song, a 44-year-old Korean-American with an MIT computer science degree. He founded two companies in Washington state: an IT services company that later merged with another firm, and a software company where he’s still chairman of the board. He moved to Vietnam in April. He now runs Met Vuong, a real estate website that aims to make up for the lack of a multiple-listing service in the country.

This activity could become a force for progress in Vietnam. Glass Egg initially had trouble finding employees with the right art and computer skills, CEO Phil Tran says. So in addition to setting up its own intensive training program, it’s now working with a local art school – a welcome sign, since businesses often complain that Vietnamese schools are long on theory and short on useful skills.

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But some things haven’t changed. Despite Vietnam’s entry into the World Trade Organization this year, protections for intellectual property are still weak. Walk around Vietnam’s capital, Hanoi, for about four seconds, and you’ll see a phantasmagoria of designer-knockoff clothing. Maybe Giorgio Armani and Donna Karan New York can ignore the likes of “George Armani” and “DKYN,” but software firms, for instance, are unlikely to succeed in a country where piracy is rampant.

Joint ventures and red epaulets

There are other quirks to doing business in Vietnam. Foreigners complain not just that the rules are burdensome, but that it’s hard to ascertain what they are. Land transactions regularly take the form of long-term leases rather than outright sales. Some sectors of the economy, including telecom and Internet-related areas, are off limits to companies that are entirely foreign-owned, so would-be investors have to find Vietnamese partners.

Ideally, such joint ventures could be a way for Vietnamese entrepreneurs to learn from foreign companies. In practice, the local partners mainly provide political access. Foreign firms bristle over rules that often give veto power over decisions to local partners that put up next to nothing.

And while some of those restrictions are fading, others persist. Song says he wants to start a magazine to promote the contents of his real estate website. But publishing anything is difficult in Vietnam, where the media are state-owned.

Indeed, the gold stars and the red epaulets on border guards’ uniforms aren’t the only signs of continuing communist rule. In some situations, a visitor gets a clear sense that there’s an invisible hand shaping economic decisions, but it’s not that of the free market. The international concourse at Hanoi’s airport abounds with souvenir shops and duty-free stores, and a central planner intent on extracting money from departing tourists would be thrilled by all the tchotchkes and whiskey bottles on the shelves. What travelers can’t find are the more prosaic things that they might actually want: a pack of gum, a fast-food sandwich, a real newspaper.

Song says he’s encouraged by a general sense of optimism in Vietnam – a widespread feeling that life will keep getting better. And maybe more microchip plants and 3-D art production companies are on the way.

The more Vietnam’s economy evolves, though, the greater an obstacle its political system is likely to become. Ho Chi Minh’s party has made peace with global capitalism. Maybe accountability, a legal system, and free expression will emerge over time – once it’s clear that their absence isn’t just bad for people; it’s also bad for business.