Friday, September 14, 2007

Vietnam is becoming a technology hot spot

Vietnam continues to draw investors; is it the next China?

With Intel anchoring a strong investment in the south and a $200 million assembly and test startup coming to the north, Vietnam is becoming a technology hot spot. Yet it has its challenges as well, as companies are learning.

By Drew Wilson, Contributing Writer -- Electronic Business, 9/13/2007

The year 2007 has been good to Vietnam—and it's not over yet.

In January, Vietnam entered the World Trade Organization (WTO). Next came a spate of electronics investment announcements in the wake of Vietnam's centerpiece investor, Intel.

At the end of 2006, Intel upped an earlier investment pledge of $650 million in Saigon Hi-Tech Park, in southern Vietnam, to $1 billion for an assembly-and-test house that will be the company's largest backend IC plant worldwide.





GDP growth








  • Population: 83.1 million
  • 2006 electronics exports: $1.8 billion
  • 2007 electronics exports (first seven months): $1.1 billion
  • 2006 FDI (foreign direct investment): $4.2 billion
  • 2007 FDI: (first five months) $4.4 billion

* Forecast

Sources: World Bank, Vietnam Trade Ministry, Vietnam Electronic Industries Association

Investment inquiries from Intel's competitors and support industries quadrupled, and many translated into actual investment, according to Christopher Muessel, chairman of AmCham Vietnam in Ho Chi Minh City (Saigon) and a partner in Duane Morris Vietnam LLC.

"Intel's investment made it clear that it was now 'safe' to invest in Vietnam," Muessel says.

Not long after, a group of Silicon Valley executives unveiled a $200 million assembly and test startup, Vietnam Chipscale Advanced Packaging Services (V-Caps), in Hoa Lac High Tech Park in Hanoi, which is in northern Vietnam.

Sanford Garrett, president of Garrett Group Technology in San Francisco and one of V-Caps seed investors, says V-Caps executives saw a market opening for another major backend player, formed the company, and chose Vietnam as the site. The 300,000-square-foot facility is expected to employ 1,500, with full production starting in about 18 months.

V-Caps was founded by Harry Rozakis, the former CEO of ASAT, a Hong Kong-based package-and-test house. He was also founder of ChipPac, which is now part of Singapore-based packaging firm STATS ChipPac. Rozakis, who oversaw ASAT's 500,000-square-foot assembly-and-test plant in DongGuan, southern China, used his experience to weigh the benefits of Vietnam and the People's Republic of China.

Make no doubt about it: Vietnam is becoming a technology hot spot for companies that want to escape some of the regulatory hassles and escalating engineering salaries in China. Yet it has its own challenges as well, as companies are learning.

No place is perfect

What initially attracts many companies to Vietnam is avoiding the hassles of doing business elsewhere. For example, some companies say the legal and regulatory systems in China can create challenges to doing business there, and moving products in and out of China can be difficult.

For Garrett, the cost of labor was an issue in China. The touted $100 monthly wages in China are nowhere near actual salaries for skilled labor in the semiconductor industry, he says. An engineer with 3 to 5 years of experience can demand a salary not quite as high as what a company in the US would pay, but it isn't that much lower, either, he says.

By comparison, Vietnam has been steadily turning out engineering graduates who in total match the number in India and China on a per capita basis, Garrett says. But not enough high tech jobs exist, so they've gone into non-tech industries.

"There's a large population of engineers and other professionals with college degrees who are what I call underemployed," adds Jason Craft, managing director of EMS company Spartronics Vietnam, owned by U.S.-based Sparton Corp. "They are highly educated people working in the garment, food processing or similar industries that do not utilize their education."

However, Vietnam's educational system doesn't always meet industry's requirements and engineering graduates still need training. Foreign high-tech companies often work with local universities to build core curriculum.

"By moving into the North, where the better tech universities are, we're going to be able to tap into that engineering fountain," Garrett says. "The pool of semi-skilled labor in Vietnam will be greater than in China for a long time."

Finally, Vietnam's government has more assertively moved to business-friendly policies in order to attract foreign direct investment (FDI). "It's just easier to do business in Vietnam than it is to do business in China," Garrett says.

Other 2007 money-into-the-ground announcements include:

Korea's Samsung Electronics has plans for a mobile phone factory that would turn out 100 million units annually.

Canon and Panasonic, which have been running large production facilities in the country, also recently expanded their operations.

By the end of May, Vietnam pulled in $4.4 billion in FDI, already exceeding the entire 2006 figure of $4.2 billion.

The FDI wave in the first six months of 2007 has been felt by existing operations. Craft of Spartronics says his operation has doubled production since it began in 2005 and he's added customers in the wake of this year's investment boom.

Government pushes incentives

The new investments, however, have raised concerns about human resources. But the new factories seem to be dispersing North and South, and Vietnamese tend not to migrate far from home for work, Craft said.

"We have enough employees and a large, very trainable local population," Craft says.

Skilled labor issues influenced V-Caps site selection. V-Caps had originally decided to set up in the South, Garrett says. But when Intel announced the move into the Saigon Hi Tech Park, the startup didn't want to end up competing for personnel.

Additionally, the government has been anxious to develop the North as a second manufacturing hub and offers incentives to companies to locate there.

Official investment incentives for Hoa Lac High Tech Park are a four-year tax holiday after profitability, and 50% of the tax rate for the following nine years.

Vietnam's corporate tax is currently 28% but is expected to be cut to 25% this year.

The other key incentive was the duty free privilege to move materials and equipment in and out, instead of a VAT system, which involves prepaying tax and getting it refunded on export. Materials are two-thirds of total operational cost for a large-scale backend operation like V-Caps, Garrett adds.

Hanoi also has a new airport and construction of a main highway linking Hanoi with Saigon is underway to smooth travel between the two hub cities.

The government also recently announced a strategic emphasis on high tech. Plans are to increase electronics exports from $1.8 billion in 2006 to $5 billion by 2010, and by 2020 officials expect electronics to become the country's growth engine.

Though V-Caps production is all for export, its license allows shipping to domestic customers.

"Vietnam is the next country on the migration path for the high tech industry and in the future some of our customers will be located there," Garrett predicts.