Vietnam: From Catfish to Computers

By Frederik Balfour

Vietnam has long been known as a low-cost manufacturer of Nike (NKE) sneakers, blouses for Liz Claiborne (LIZ), and wooden furniture, not to mention its huge exports of coffee, catfish, and rice. But a growing wave of high-tech investors is helping this country of 84 million lay the foundation to become Southeast Asia's next big center for electronics manufacturing.
The world started to take notice after Intel (INTC) made big headlines more than a year ago when it announced it was building a semiconductor test-and-assembly facility in Vietnam. As expected, Intel's $1 billion investment was pivotal in raising Vietnam's profile and has since helped attract other IT companies.
"The real 'Intel effect' is starting to occur," says Henry Nguyen, managing partner at IDG Ventures Vietnam. "Upstream and downstream partners and suppliers and customers it needs are coming."
Vietnam's accession to the World Trade Organization in January is also widely seen as a boon for export potential, and the country has just unveiled an ambitious program to goose electronics exports. The government aims to see those exports grow to as much as $5 billion by 2010. According to the Vietnam Electronics Industry Assn., exports last year totaled $1.4 billion, a 34.1% increase over 2005.
Expanding Into TVs
That ambitious target is premised on the realization of some enormous investments in the pipeline. Foxconn of Taiwan, also known as Hon Hai, the world's largest contract manufacturer—with clients like Hewlett Packard (HPQ), Dell (DELL), and Apple (AAPL)—has applied for a license to invest up to $5 billion. It plans to manufacture electronics and computer products including digital cameras, personal computer printed circuit motherboards, and music players.
The venture would employ up to 30,000 workers. A contract manufacturer is a company that manufactures components or products for another company under its own brand name.
Compal Electronics has unveiled plans to invest $500 million to build notebook PCs in Vietnam. It also plans to expand into LCD TVs, said Chairman Rock Hsu Sheng-Hsiung at an annual shareholders meeting in June. Compal is expected to receive its investment license in July.
A June report by industry research group iSuppli predicts that contract manufacturing in Vietnam will grow more than 100% annually between 2006 and 2011. The sector is expected to explode from $36 million in 2006 to as much as $1.8 billion by 2011 as more major manufacturers move in, making it the fastest-growing sector in the area.
Moving to Hi-Tech Park

Although these investors are focused primarily on exports, Vietnam is gradually becoming an important market in its own right. It boasts the region's second-fastest-growing economy after China, and its rapidly expanding middle class is buying up cell phones, personal computers, and iPods. There are some 10 million mobile phone subscribers, and computer penetration in Hanoi and Ho Chi Minh City is approaching 50%, says Intel.
The most recent example of this trend is Jabil Circuit (JBL) of St. Petersburg, Fla., which in June began operations at its facility in Saigon Hi-Tech Park in Ho Chi Minh City, where it makes laser printers for HP. Jabil plans to spend up to $100 million on its operations in Vietnam, which is increasingly seen as an alternative to China.
"Vietnam will be able to offer us competitive costing," says C.C. Lum, Jabil's regional commodity manager for Asia Pacific. "It is also important to have a location outside China." While the minimum wage in Vietnam of about $60 per month is less than in much of coastal China, Lum says that China's extensive network of component suppliers still gives it the edge.
Training a Young Workforce
But Vietnam's reliance on imported parts will change as more suppliers follow their customers. Allied Technologies (AMOT) of Singapore operates three separate divisions supplying Jabil. In operation since 2005, it now employs 250 workers in metal stamping, plastic molding, and extrusion facilities for parts Jabil uses to produce HP printers.
Another big challenge is training Vietnam's young yet inexperienced workforce. The government hopes to double the number of qualified IT workers to 330,000 by 2015, of whom 240,000 will be electronics and telecom specialists. It aims for 15,000 with masters or doctorate degrees.
That's an ambitious target. In 2006, Vietnam had roughly 9,000 IT graduates, according to the Vietnam Software Assn. Lam Nguyen, director of IDC Vietnam, says the country could become a strong player more quickly if it could tap into the pool of overseas Vietnamese talent. "These overseas Vietnamese would transfer technical knowledge and innovation/creative leadership to assume cost advantages," he says.
Overseas Companies Investing

As in other emerging markets, the industry itself will take the lead in developing appropriate skills. For example, Altera (ALTR), of San Jose, Calif., on June 4 announced it would establish a technology center in Ho Chi Minh City to support its global chipset development network. This is part of Altera's strategy to develop its international contingent of engineers.
One of the first overseas companies to recognize the importance of investing in the local labor force was Japanese semiconductor design company Renesas Technology. In 2004 it established Renesas Design Vietnam, which develops LSI [large scale integrated] devices for applications in consumer electronics, mobile products, and automobiles.
"The young engineers are relatively excellent, smart, and very serious about study and work," says Tsuneo Sato, chief executive officer of Renesas Vietnam, which employs 150 and plans to expand to 500 in two or three years.
He also says that unlike the Chinese, workers in Vietnam "don't so frequently job hop." However, that's likely more a function of supply and demand for engineers—and as others wake up to the idea of the country's IT potential, staff turnover will become a big challenge there, too.
Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.