Vietnam: Asia’s Newest IT and Outsourcing Tiger
January 28, 2010
3.6. Human Capital
Vietnam has a fairly well educated workforce while the strong Confucian regard for education makes the Vietnamese highly receptive to advanced training and education. In fact, a number of Western and Indian IT training companies, language schools and universities such as Australia’s RMIT have established state-of-the-art training centers to provide up-to-date IT and management education. Moreover, Vietnam’s education system tends to emphasize rote learning, mathematics and logic and such an educational system tends to create good computer programmers.
Meanwhile and in the World Economic Forum’s Networked Readiness Index for 2008-2009, Vietnam ranked #51 (between Serbia and China) for having a score of 4.49 (1 being rare and 7 being widely available) for the availability of scientists and engineers; ranked #72 (between Cote d’Ivoire and Turkey) for having a score of 3.95 (1 being a laggard and 7 being among the best in the world) for the quality of math and science education; ranked #120 (between Mali and Libya) for having a score of 2.59 (1 does not meet the needs of a competitive economy and 7 meets the needs of a competitive economy); ranked #72 (between Albania and Georgia) for having a score of 3.80 (1 means they invest little and 7 means heavy investment) for the extent of staff training; and ranked #120 (between Azerbaijan and Malawi) for having a score of 3.08 (1 is limited and 7 is among the best in the world) for the quality of management schools.
However and like many emerging markets, finding and retaining qualified staff can be difficult. Prior to the global financial crisis, employee turnover was estimated to be 16.7% for 2008 and much higher at senior levels with the demand of qualified professionals in finance, human resources, marketing and general management far outstripped the supply of qualified locals [18]. Hence, expatriates from the West and increasingly from India, Pakistan and the Philippines stepped in to fill the gap. However and while the financial crisis has since cooled the overall employment market, demand for qualified and English speaking local staff remains strong.
3.7. Operational Costs
Vietnam’s low cost workforce has made the country an attractive destination for foreign IT and outsourcing firms. In fact, Vietnam salaries in general can be as much as 30% lower than in India while the website of CMCSoft notes that Vietnam’s labor costs are 57% and 66% (for both IT outsourcing and business process outsourcing) less expensive than India’s and China respectively and as much as 80% less expensive than labour costs in the USA [19]. CMCSoft’s website also notes that junior software engineers can be hired for US$150 to US$300 per month and senior software engineers can be hired for US$300 to US$600 per month [20]. Meanwhile, VietSmall’s website notes that Vietnamese programmers can charge less than half of what their counterparts in India will charge and when overhead charges are taken into consideration, corporate customers may only pay approximately US$20,000 per programmer per year in Vietnam [21].
In addition, it should be noted that the government of Vietnam mandates nine paid days for public holidays plus 12 days of annual leave per year. Employees are also entitled to paid leave for personal reasons and these reasons include for the employee’s wedding (three days), the wedding of the employee’s son or daughter (one day) and the death of a close relative such as a parent, in-laws, spouse or child (three days). Labor law also mandates that overtime must be less than four hours per day with a maximum of 200 hours per year.
As for taxes, reforms to the public taxation system were introduced in 1999 and this has been followed by some tinkering via legislation. The Law on Foreign Investment offers a variety of tax incentives to encourage investment but these incentives are for the most part offset by the high taxes elsewhere while personal income tax rates are considered to be the least competitive aspect of Vietnam’s taxation system. Furthermore, companies who hire expatriates need to be aware that on January 1, 2009, expatriate perks such as a company car, education for children and flights home became subject to taxation. With top tax rates being around 35%, this has impacted the number of expatriates (especially Western expatriates) being employed and is further expected to accelerate the localization process in the coming years.
Meanwhile and just like China, Vietnam maintains a relatively fixed exchange rate regime with a trading band in relation to the US dollar. However and unlike in China, Vietnam’s government has orchestrated a gradually currency depreciation since the years of the Asian Financial Crisis in an effort to keep the country’s exports competitive. In 2008, the Vietnamese dong (VND) was allowed to gradually depreciate to VND16,302 per US$ compared with VND15,510 per US$ in 2003 [22].
However, capital flight during the financial crisis and a lower economic outlook has further weakened Vietnam’s currency. Hence and starting in early 2009, the trading band was widened from 3% to 5% and then in November, a 5.2% devaluation from 17,034 to 17,961 per dollar was carried out [23].
Table 6. Exchange Rates (VND:US$)
Source: World Development Indicators Online.
3.8. Quality Track Record
In order to attract investors and international clients, leading Vietnamese IT and outsourcing firms are increasingly seeking international quality certifications such as ISO-9000 certification and the Capability Maturity Model (CMM) of all 5 levels. Generally speaking though, domestic firms do not have the capabilities of taking on large-scale IT or outsourcing projects and hence, foreign firms have entered the market to serve local clients. Moreover, most domestic IT or outsourcing firms tend to be both undercapitalized and inefficient.
3.9. Risk
The risk of operating in Vietnam should be considered moderate as the country faces few internal or external threats. The Communist Party is and will remain firmly in control well into the future while all major leadership changes occur seamlessly (at least publicly). Nevertheless, Vietnam is increasingly cracking down on dissent in advance of the Communist Party Congress in 2011 and actions have included several high-profile arrests of activists and the blocking of access to Facebook and several other websites. Despite the crackdown, the perception that corruption is widespread remains a serious problem that could ultimately undermine party authority over the long term; while over the past year, the momentum for reform in general has stalled.
In addition, two high profile cases have also raised concerns among foreign investors in Vietnam. Since December 19, 2009, Daniela Marsilli and Tristan Freeman, the chief operating officer and chief financial officer of Qantas Airways Ltd.’s Vietnamese operation, JetStar Pacific, have been banned from leaving Vietnam as they are subjects of an investigation into why the airline lost US$31 million in fuel-hedging contracts and other perceived anomalies or concerns over safety (The State Capital Investment Corporation owns 70% of the airline). Moreover, when a state-owned bank lost US$5.6 million in speculative foreign-currency trades back in 2006, four employees of the Dutch bank (ABN-AMRO) who had facilitated the trades were detained and the bank was forced to pay US$4.5 million to obtain their release.
Meanwhile, the latest Global Risks and Vulnerabilities Report from Euromonitor has noted that Vietnam’s dependence on exports continues to make the country vulnerable to external shocks such as the global financial crisis that caused a plunge in exports and FDI. In addition, Euromonitor noted that budget deficits have risen significantly in 2009 due to stimulus spending to keep the economy growing and also cited skills shortages, the potential for natural disasters and regional and ethnic imbalances as factors that could restrict the country’s overall growth potential.
Table 7. Vietnam Risks and Vulnerabilities Summary
|
Indicator |
2009 |
|
|
|
|
External Shocks |
High |
|
Real Estate |
Low |
|
Government Finances |
Medium |
|
Energy |
Medium |
|
Socio-Political |
High |
|
Environmental Shocks |
High |
Source: Euromonitor International (November 9, 2009)
4. Conclusion
While Vietnam is more known for exporting basic commodities and as a manufacturing alternative to China, its large and well educated population combined with a low cost environment makes the country an attractive destination for foreign IT and outsourcing firms. Moreover and while Vietnam’s export orientated economy is vulnerable to external shocks and the perception of widespread corruption may undermine government authority in the future, Vietnam offers a relatively stable operating environment. In fact, Vietnam is well poised to position itself as an alternative to China for both IT and outsourcing work and as a cost effective alternative to India for certain niche areas such as programming. Hence, look for Vietnam to emerge as Asia’s newest and next IT and outsourcing tiger.
References
1. “Despite the wobble, Vietnam is a solid long-term play.” The Daily Telegraph. December 2, 2009.
2. “Late to the Export Arena, Vietnam Is Refining Its Role on the Global Stage.” The New York Times. December 25, 2009.
3. “Vietnam vows to boost IT development.” BBC Monitoring Asia Pacific. December 1, 2008.
4. “Vietnam Software, Services-Driving Forces for Vietnam IT.” Thai Press Reports. April 4, 2009.
5. “Vietnam Ministry Preps Regulations, Requirements for IT Sector.” Thai Press Reports. July 8, 2009.
6. “Business Vietnam to Develop IT Industry into Key Economic Sector Deputy PM.” Vietnam News Briefs. July 16, 2009.
7. Ibid.
8. “Software and IT Have Greatest Potential in Vietnam Expert.” Asia Pulse. July 20, 2009.
9. “HCM City’s IT turnover equals 40% of nation’s total.” Vietnam News Agency. September 12, 2009.
10. “Vietnam Ministry Preps Regulations, Requirements for IT Sector.” Thai Press Reports. July 8, 2009.
11. “Business Vietnam to Develop IT Industry into Key Economic Sector Deputy PM.” Vietnam News Briefs. July 16, 2009.
12. “Vietnam Software Giant FPT Reaches US$1 Billion in Earnings.” Thai Press Reports. January 16, 2009.
13. “Vietnam vows to boost IT development.” BBC Monitoring Asia Pacific. December 1, 2008.
14. “HCM City’s IT turnover equals 40% of nation’s total.” Vietnam News Agency. September 12, 2009.
15. Ibid.
16. “Business Vietnam to Develop IT Industry into Key Economic Sector Deputy PM.” Vietnam News Briefs. July 16, 2009.
17. “Vietnam Country Profile.” Euromonitor. November 6, 2009.
18. “Vietnam locals see silver lining in skills battle.” Financial Times. January 29, 2009.
19. “Vietnam IT Industries can find gold.” Thai Press Reports. October 9, 2008.
20. CMCSoft Website
21. VietSmall Website
22. “Global risks and vulnerabilities: Vietnam.” Euromonitor. November 9, 2009.
23. “Vietnam Weakens Dong, Raises Rate to Combat Inflation.” Bloomberg. November 25, 2009.
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One Response to “Vietnam: Asia’s Newest IT and Outsourcing Tiger”
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Frankly, I am surprised to know that Vietnam has already surpassed China one of the best in Asia, in Outsourcing and IT businesses. I am really dumbfounded by the short time given to have this kind of progress. However, this was also not that surprising given that Vietnam has been working out several economic strategies relative to outsourcing and IT for several years already.