NEW DRAGON , QUIET ROAR
NEW DRAGON , QUIET ROAR
2006-01-03 at 12:21:00 pm #13469
New Dragon, quiet roar
Vietnam is priming itself to be the next choice investment site
Sometime next year, the world’s largest laser printer factory will open. At full capacity, it will turn out 8 million units a year, all for export, and be the source for one-third of all laser printers sold globally.
News stories about this type of manufacturing investment milestone pour out of China so much that they’ve become routine. But this plant, being built by Canon Inc., is going up in Bac Ninh province, near Hanoi in northern Vietnam.
The plant will add to Canon’s burgeoning Vietnam operations. In 2002, when the company opened a 200-employee factory in Hanoi to make inkjet printers, sales turnover was $25 million. By 2005, with the work force grown to 6,500, turnover was expected to reach $400 million, said Sachio Kageyama, general director of Canon Vietnam Co. Ltd.
To meet strong printer demand, Canon could have expanded in nearby Thailand, where the company runs what is now its largest printer factory, or it might have added to its China operations.
“We now have three printer factories in China at full capacity, and we needed the capacity,” said Kageyama. But Canon Vietnam, he added, can build and ship a printer as quickly as any other Canon factory worldwide–and it can do so at roughly half of China’s labor costs.
Canon’s new Vietnam plant is not being widely announced. Nonetheless, it highlights Vietnam’s quiet and steady pull on manufacturing investment dollars, as investors increasingly seek refuge from political and economic concerns in China and as foreign companies seek to reduce the potential for supply chain disruptions in the fast-growing communist nation.
“Companies feel they made too large a bet in China,” commented Adam Sitkoff, executive director of the American Chamber of Commerce in Hanoi. “Capital follows other capital.”
Today, the streets of Hanoi and Ho Chi Minh City resemble those found in Chinese cities, with rivers of motorcycles carrying entire families. Crammed with cubicle shops, the streets suggest that everyone owns a small business.
Though Vietnam has less than 7 percent of China’s population, it makes a persuasive argument for putting up a factory: the work ethic, social and political stability, lower labor costs and a government warming to electronics as an engine of growth.
Commitments to Vietnam for foreign direct investment, or FDI, are expected to reach $4.2 billion this year, according to the Ministry of Planning and Investment. And if that’s small change compared with Asia’s roaring dragons, it’s nevertheless an increase of 45 percent over 2004 and the third straight year of FDI growth.}
Simply put, Vietnam is becoming the alternative investment site for companies suffering China fatigue.
“Most companies already have manufacturing in China, and you don’t want all your eggs in one basket,” said Frederick Burke, managing partner in the Vietnam office of Baker & MacKenzie, a legal and consulting firm in Ho Chi Minh City. “That’s the strategic mentality we’re seeing more often than not across industries.”
Vietnam offers advantages that seem to be slipping away from China. Take wages. A skilled employee in China earns two to three times more than his Vietnamese counterpart. Any further revaluation of China’s yuan currency, considered likely, would only widen that gap.
MTEX Ltd., a Japanese chip packaging company, has been assembling and exporting semiconductors in Ho Chi Minh City since 2001. Taira Yasuhiko, general director of MTEX (Vietnam) Co. Ltd., said that the packaging operation began with 50 employees and a $1 million investment. Next year, MTEX expects to put in $10 million more and grow the employee base to 280. Then, production of 16 million units per month should increase 25 percent.
Lower wages have made the chip packaging plant’s costs roughly one-third those of a comparable operation in China, Yasuhiko said.”The main reason we are here is cost,” he added.
Moreover, employee turnover in China’s electronics hotbeds like Suz-hou is typically 25 percent annually.
“Job hopping is a big concern in China,” said Tsuneo Sato, CEO of Vietnam’s first semiconductor design house, Renesas Design Vietnam Co. Ltd., located in Ho Chi Minh City.
Opened in 2004 with $4 million in capital investment, Renesas Vietnam has 49 employees and will design system LSI chips and software in conjunction with Renesas Japan, according to Sato.
Renesas came to Vietnam for the favorable skilled-labor conditions. The company had considered LSI design in China and India. But they were jammed with chip design houses, which drove up wages and employee turnover. Management turned to Vietnam, which has no comparable problems, Sato said.
Foreign manufacturers in China tend to have dormitories housing staff from all over the country, creating a kind of manufacturing campus, added Jason Craft, the managing director of Spartronics Vietnam Co. Ltd., an electronics manufacturing services (EMS) provider owned by U.S.-based Sparton Corp. He believes that distance from family and hometown pushes up the employee turnover rate.
At Spartronics, in Ho Chi Minh City, most employees live nearby and go home on motorbikes every day.
Skilled labor is also plentiful. The Vietnamese have put the war behind them and see education and hard work as the path to victory. By some accounts, 700,000 people in Ho Chi Minh City are going to some type of night school, whether vocational, English or business.
Craft said he had no trouble finding qualified staff. “A lot of people with technology and business degrees are unemployed or working in garment factories, way below what they’re educated for,” he said.
The other thing universally mentioned is tenacity. Manufacturers are deeply impressed with the diligence of the average Vietnamese employee. “After I hired several engineers and managers, they read through the equipment manuals,” Craft said. “By the time the equipment arrived, they knew all about it. I can’t say enough about the work ethic.”
Spartronics opened a modest $8 million plant earlier this year and is building low-volume industrial products for a U.S. customer, shipping directly to the States. Management intends to test the market and see how much interest companies have in outsourcing to Vietnam. Companies typically see a 20 to 30 percent cost reduction by getting products made in Vietnam, Craft said.
Cang Tran, vice president of overseas engineering for Renesas Technology America (San Jose, Calif.) and executive manager at Renesas Vietnam, added that employees are willing to work hard at any task.
“Some engineers consider verification tedious and not glamorous work,” Tran said. “Over here, engineers look at it as a chance to practice design skills that they previously only learned from a book.”
On a larger scale, Vietnam’s political stability has been a primary attraction, particularly with Japan.
Fujitsu Computer Products, which already runs a pc-board assembly operation that is expected to account for $515 million in export revenue this year, plans a $10 million expansion. Matsush*ta Electric Co. Ltd. runs manufacturing plants in both Ho Chi Minh City and Hanoi for Panasonic consumer electronics and household appliances. Sanyo Electric Co. Ltd. recently opened a digital camera factory.
Representatives from Casio Computer Ltd., Toshiba Corp. and Hitachi Ltd. all have visited Renesas Vietnam to learn about establishing a branch of their operation in the country. “When Japan and China tensions erupted last year, there was a sudden interest from Japan to have fallback capacity in Vietnam,” said Baker & Mackenzie’s Burke.
But Japan is not the top investor in Vietnam. Taiwan, which walks a political tightrope with China, has about $7 billion in total registered FDI capital in Vietnam, making it the country’s biggest investor.
“Taiwan has a huge a mount in Vietnam due to cultural affinities and concern about overdependence on China,” Burke added.
Tough domestic market
Companies set up in Vietnam’s industrial parks have advantages. The government has opened problem-solving channels between officials and manufacturers. Most industrial parks have on-call fixers, people who keep the supply chain oiled.
Spartronics’ experience constructing a factory and setting up SMT lines has been painless because someone from the park’s customer service operation came to see Craft three times a week. “After we signed the lease agreement, they brought a road map of all the further steps that needed to be done,” Craft said.
Customs officials are also set up in most parks. In Spartronics’ case, the freight forwarder picks up assembled products and takes them to customs for clearance, then to the port for shipping. The on-site arrangement also tends to speed the importation of materials and supplies.
If there are any snags, Craft calls the mobile phone of Nguyen Ngoc Tu, senior customer service officer for Vietnam Singapore Industrial Park JV Co. Ltd.
Nguyen, one of about a dozen of the park’s fixers, said common problems include updated customs laws that aren’t immediately announced or manufacturers’ forgetting to submit import documents.
If goods are held up at customs and the company has an urgent need to get them in, Nguyen speaks to customs officials. “They have allowed shipments to clear first and the company to submit import documents later,” he said.
Likewise, Renesas officials can call their fixer at the Ho Chi Minh City Export Processing and Industrial Zones Authority (Hepza) to work out similar problems.
“The experience of clients in [industrial park] zones has been quite professional,” said Burke, the Baker & Mackenzie partner. “The authorities are hitting a relatively high standard, and it’s much easier to get things done.”
Burke added that the ease of setting up an export operation contrasts with manufacturing for domestic sale. The domestic market has problems with fair access for foreign companies and has required companies to satisfy corrupt officials, sources said.
“If you’re exporting, you’re almost in a quarantined area from the economy and the legal system,” Burke said. “Selling domestically, there’s a lot of red tape, distribution is controlled, and there are obstacles in promotion and advertising and getting the products to market.”
He added, however, that Vietnam’s legal system is undergoing fundamental change. For example, in 2005 the country adopted its first antitrust law, which in principle levels the playing field for fair competition. “Vietnam is becoming more transparent, and decision-making is more accountable,” Burke said.
Vietnam is also expected to join the World Trade Organization soon, underscoring progress in moving from a command to a modern market economy. Sitkoff at the American Chamber of Commerce in Vietnam said WTO entry may not be the turning point for investment, but it will certainly ensure the introduction of arbitration rules and transparency. “These have been obstacles to FDI,” Sitkoff said.
Perception has been another hindrance. Spartronics’ Craft said some U.S customers have a negative idea of Vietnam related to the war. “Over here not one person ever mentioned the war,” he said.
Vietnamese authorities also seem to be particularly proud that a U.S. electronics company has set up operations in the country. They treat Spartronics well in the hope that other U.S. manufacturers will follow, Craft said.
Sparton was introduced to Vietnam by a U.S.-based firm with expatriate Vietnamese. The two companies intended to set up a joint venture, but the partner had financial difficulties and pulled out. Sparton stayed.
Spartronics’ staff size is 70, although that could swell to 500 in two years. Craft’s own opinion is that Spartronics then will be building another factory beside the existing one to double capacity to 100,000 square feet.
“Companies with operations in China have contacted me with interest in bringing some production to Vietnam,” he said. “They’re delighted they found a U.S. company here.”
Sinapore’s Allied Technologies Ltd., for its part, expects to invest $52 million in Vietnam over 10 years. If operations go to maximum capacity, it would require a 5,000-employee work force, said Jeffrey Soh, the company’s executive director for Vietnam. Allied has been talking to European customers, Soh said.
“We have the potential to transfer production here from other areas, but we want to generate business in Vietnam and export,” Soh said.
The company expects to ramp up production in 2006, when head count should reach 500, said Loo Boon Tong, general manager.
Renesas hopes to employ 500 Vietnamese engineers by 2008 and, in the long run, move into mixed-signal IC design. “The Vietnamese are very similar to the Japanese,” Renesas’ Sato said. “That makes it easy to operate here.”
Still, the big money just hasn’t come in yet. But the feeling is, it’s just around the corner. Intel Corp. and Flextronics International Ltd. have made no commitments but have carefully evaluated Vietnam as a manufacturing site.
What’s needed to get the big investors to come in? Some think it would take only an influx of foreign suppliers. “But manufacturers want to come in after the suppliers set up, and the suppliers want to come in after the manufacturers set up,” Canon’s Kageyama explained.
Allied’s Soh believes there is no single big obstacle to clear. “You just need someone to say, ‘Let’s go.’ “