Is Vietnam Finally Ready for Foreign Investors? - BusinessWeek

Is Vietnam Finally Ready for Foreign Investors? - BusinessWeek

Is Vietnam Finally Ready for Foreign Investors?

Hanoi is cutting taxes and improving infrastructure in hopes of becoming the low-cost alternative for new factories and outsourcing call centers

By Bruce Einhorn

Has Vietnam's moment finally arrived? Explosive wage growth and labor strife in China and India, favored destinations for foreign investment in Asia, have multinationals taking a serious look at Vietnam as a low-cost alternative for new factories and call centers. "We're cheaper—much cheaper," says Nguyen Than Nam, chief executive officer of FPT, a Hanoi-based IT outsourcer and distributor of cell phones with $1 billion in revenue last year. Vietnam is ready to compete head-on for foreign investment, says Nam. "We are trying to be the 'one.' "

Executives and investors have heard this kind of talk from Vietnam before, only to come away disappointed. After the end of the U.S. trade embargo in 1994 there was a rush of companies such as Coca-Cola (KO) and Procter & Gamble (PG) into Vietnam. Many ultimately were turned off by the bureaucracy and corruption. This time around Hanoi is moving more decisively. President Nguyen Minh Triet's government has cut taxes, such as import duties on personal computer parts, and is promising to improve the country's roads and ports. It's building nuclear power plants and a high-speed train line from the capital to Ho Chi Minh City. The leadership also vows to eliminate some of the notorious red tape that has frustrated investors.

Vietnam's $96 billion economy is far less centrally controlled than last decade, and the country, which boasts one of the youngest workforces in the world, managed to gain membership in the World Trade Organization in 2007. The country last year exported $12.3 billion of goods to the U.S., its biggest overseas market. Foreign direct investment is on the rise and could double, to $15 billion this year according to a May 31, report analysts at Standard Chartered Bank.

This fall, Intel will open a $1 billion chip assembly and test plant near Ho Chi Minh City. Taiwanese laptop PC manufacturer Compal also has a new factory in Vietnam. Arthur Chiao, chairman of the Taiwan Electronics & Electrical Appliances Assn., on June 7 said his group is helping Taiwanese companies find new manufacturing sites in Vietnam in the wake of rising labor costs on the mainland.

Political tensions in Thailand next door also are leading companies to Vietnam. Calm has returned to the Thai capital after May's deadly confrontations in Bangkok between antigovernment protesters and the military, but it was one of many political outbursts in Thailand over the years. Pleasanton (Calif.)-based Polycom buys 80 percent of its video-conferencing equipment from Thailand, says Hansjoerg Wagner, head of the company's Asia operations: "With all the political issues that are ongoing there, we are looking at contingency plans," he says. Vietnam, one of Polycom's (PLCM) fastest-growing markets in Asia, "is on our target list" as an alternative.

Not everyone sees a big manufacturing exodus from other parts of Asia to Vietnam, especially given China's economic scale and far more advanced infrastructure. Even though costs have gone up in southern China's Pearl River Delta, companies can acquire goods from factories in less expensive parts of the country, like Tianjin or Qingdao in northern China. Before relocating to Vietnam "you would have to exhaust all the places in China," says Dan Berman, director of Langton, a Hong Kong-based supplier of stuffed animals and other toys to customers like Tesco (TESO) and Toys 'R' Us.

Vietnam boosters disagree. Don Lam, chief executive of investment firm VinaCapital Group, which manages $1.8 billion in assets in the country, points to the new highways the government is building to connect northern Vietnam to southern China. Those roads will enable Vietnamese factories to become part of Chinese supply chains more easily, Lam says, with a cost base that's at least a third lower than across the border. With China-based employers likely to feel the need to match raises offered recently by Honda, Foxconn, and others, that wage differential is only going to grow larger, he promises. "If people are thinking of relocating," says Lam, "now is the time."

The bottom line: Vietnam hopes to attract investment that otherwise might go to India and China, with new tax policies and infrastructure projects.