Bloomberg's Andy Mukherjee has been to Ho Chi Minh City - and he likes what he sees: After China, Vietnam Will Be World's Factory
After China, Vietnam is emerging as the world's next factory of choice for labor-intensive goods.
One can see that in the changing composition of the country's exports. Rice and coffee -- two of Vietnam's biggest agricultural exports -- are now becoming less significant to the $61 billion economy than textiles. Footwear shipments are gaining prominence over seafood.
The other fast-growing export industry is furniture. Exports of wood-based products have grown 24 percent from last year to more than $2 billion.
James Koh, a Singapore businessman, makes dining tables and chairs in Vietnam for customers around the world, including Williams-Sonoma Inc.'s Pottery Barn stores in the U.S. Koda Ltd., of which Koh is the managing director, also has factories in Malaysia and China. Yet, it's Vietnam's lower costs that are prompting the company to expand capacity here by 25 percent. "The labor cost in Vietnam is half that of China, while worker productivity is about the same,'' says Koh.
Starting next year, the government will increase the mandated minimum wage for foreign-funded companies in Ho Chi Minh City and Hanoi, the national capital, by 13 percent to 1 million Vietnamese dong ($62), a level that is still affordable, Koh says.
Chinese-made goods have become increasingly expensive in the U.S. for the past six months. That gives Vietnamese manufacturers an opportunity to win a bigger share in their largest export market.
Vietnam's accession to the World Trade Organization in January has provided its textile industry with quota-free access to the U.S. Joining the WTO regime has also caused a 37 percent surge this year in overseas investment commitments to $13 billion.
The biggest draw of the country is clearly its labor. The median age in Vietnam is 25 years. The workforce isn't just young, but also literate and healthy: The proportion of people who are undernourished has been cut in half over the past three decades.
But there are also challenges ahead:
There is, however, no room for complacency. Cheap labor makes it relatively easy for a country to enter the global supply chain, but it has to work hard to stay in.
...First, there is a minimum investment in technology without which large orders from retailers are impossible to win. Each of the Taiwanese-built assembly lines that Koda is installing in its new Vietnam factory costs $300,000.
Second, buyers in Europe are demanding more exacting environmental standards from their vendors, such as minimum use of packaging material, Koh says. Americans, meanwhile, are getting fussy about making all shipments terror-proof.
Most importantly, no retail store -- European or American -- wants a sweatshop scandal at any of its suppliers' units.
Like most developing countries, Vietnam is dogged by corruption and red tape. It must strive to improve its record now that it's getting the investments it needs for the workers to graduate from motorcycles today to cars in the future.