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Low wage costs attract investors to

Vietnam
By Pauline Mason Editor, BBC Asia Business Report, Hanoi

Pham Van De: "I'm really happy and hopeful about moving to a new area"

For years, the sound and sight of thousands of motorbikes weaving through
the narrow streets of Hanoi's old quarter has been an everyday occurrence.

Vietnam's young workforce is attractive to long-term investors

But recently, the street scene has changed. The 1980s Hondas have been replaced
by brand new Piaggios. Young, well dressed Vietnamese speed by with Nokias and
even iPhones clamped to their ears.

Vietnam is booming. The economy is forecast to grow by 7% this year.

Traditionally, the country's wealth has come from agricultural exports and low-cost
industries like shoes and garments. But rice, coffee and affordable clothing are global
commodities: basic items that yield very low profit margins.

So, in recent years, the government has been working to attract higher value
industries to Vietnam.

Sweatshop no more

Some 90 minutes south of Hanoi are the wide avenues and modern, purpose-built
offices of Que Vo Industrial Complex.

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“The final choice we may have to take is to move production to a lower cost area like
Indonesia or Vietnam” Toh Poh-Heng Lovely Creations

It is in Bac Ninh province, Vietnam's new industrial heartland.

The deputy director of Que Vo, Nguyen Thu Huong is upbeat. "We have 50 foreign
companies here, mostly from hi-tech industries.. firms from Korea, Taiwan, the
United States and Japan," she says.

Mrs Nguyen is particularly proud of this last achievement. In 2008, Canon chose Que
Vo as the home of its new laser printer plant. It is the biggest such facility in the
world. And Canon is building a second plant at Que Vo's neighbouring sister complex.
"Japanese companies demand very high standards of infrastructure and services."

Right next door to Canon is another big international name. Foxconn. The Taiwanese
contract electronics manufacturer made history last month when it announced it
would, effectively, double wages at its main plant in Shenzhen in China following a
spate of suicides.

Low wages

Vietnam raised minimum wages at foreign enterprises by up to 28% this year. It was
the first rise in six years, yet it only raised wages to the leve seen in neighbouring
Cambodia.

Average wages - or seen from a company's point of view; labour costs - are still
lower than those of its other neighbours Thailand and China. Vietnamese factory
workers earn just two thirds of what their comrades in China bring home.

Companies such as Foxconn, which assembles gadgets and phones for big brand
companies such as Apple and Sony, already operate on razor-thin profit margins.
They rely on huge workforces turning over huge volumes of goods very quickly to
make their money.

Move production

“They'll have open minds to the way we do business in western companies and also
eastern companies” Jeffrey Joerres Manpower

The toy industry is another low cost, high volume industry. And Toh Poh-Heng is the
general manager of another Taiwanese firm, Lovely Creations. His cuddly toys end up
on the shelves of cut-price retailers such as Walmart and Family Dollar.

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Wages in China's coastal manufacturing areas, such as Ningpo, where his main
factory is based, have risen between 15 and 20% this year.

He says his profit margins have been halved in just five years. Many of his
competitors have already gone bust. "The final choice we may have to take is to
move production to a lower cost area like Indonesia or Vietnam," he says.

Young workforce: But, low wages are not the only attraction.

Jeffrey Joerres, chairman and chief executive of Manpower, made his first trip to Ho
Chi Minh City this month. The world's second biggest employment agency is really
excited about Vietnam.

“There is no substitute for China's supply chain” Gianfranco Lanci Acer

Half the country's population are under the age of 30. Hence companies investing in
Vietnam can think long-term. "If I'm here five years from now, 10 years from now, I
can really work with these 30-year-olds and 20-year-olds," he says. "They'll have
open minds to the way we do business in western companies and also eastern
companies."

But productivity in Vietnam remains lower than in China and even fell last year.

Many of Vietnam's industries rely on relatively small teams of skilled manual labour:
hand-finishing furniture and garments, for instance. Big, efficient, modern plants
such as those in Que Vo are still in the minority.

Infrastructure: A bigger disincentive is the state of Vietnam's infrastructure.

In Hanoi, cobwebs of power cables hang low from telegraph poles up and down the
street. Roads are rocky and uneven. The ports are small and unmechanised.

Yet Acer's chief executive Gianfranco Lanci says he would not consider moving his
factories from China to Vietnam. "There is no substitute for China's supply chain," he
says. "Other countries (such as Vietnam) are quite a way behind."

Mrs Nguyen credits government support at provincial and national levels for the
notably superior roads and services around Que Vo Industrial Complex.

Business leaders gathered in Ho Chi Minh City last week for East Asia's World
Economic Forum all agree that Vietnam needs to replicate this success across the
country if it is to attract more foreign investment.