Business

Low wage costs attract investors to Vietnam

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.

Image caption 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 The 1980s Hondas have been replaced by brand new Piaggios.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.

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

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.

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.

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.