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Vietnam Eyes Top Outsourcing Status
By Brad Frischkorn

Don't look now, but Vietnam is on the move, and quietly eyeing a spot among the world's top outsourcing destinations. The nation's effort is good news for companies looking for an alternative to rising wages in China, particularly IT firms on the hunt for engineers to help them build computer networks, databases and other systems on the cheap.

Vietnam's somewhat stealthy ascendance as a low-cost manufacturing mecca in recent years has not gone totally unnoticed. U.S. President Barack Obama's May visit, in which he lifted a decades-old arms embargo, pointed the way to a full restoration of diplomatic relations, and a great deal of potential American foreign direct investment (FDI).

In April, accounting firm Deloitte Touche Tohmatsu Ltd. and the U.S. Council on Competitiveness published its annual Global Manufacturing Competitiveness Index (GMCI), in which Vietnam, along with Malaysia, India, Thailand, and Indonesia (aka the "Mighty Five") were seen breaking into the top 15 nations in terms of manufacturing competitiveness over the next five years, representing a "new China" in terms of low cost labor, agile manufacturing capabilities, favorable demographic profiles, and market and economic growth.

The prediction was based on an in-depth analysis of responses from more than 500 CEOs and senior leaders at manufacturing companies throughout the world.

Labor costs in China, which have seen the steepest rise in Asia over the last 10 years, are cited with alarm by manufacturers. By contrast, Vietnam has raised its overall productivity by almost half over the last decade, while wages have remained relatively low.

"Political and economic stability is usually the first thing foreign investors ask about Vietnam," says Tran Ngoc Tram Anh, marketing officer at FPT Japan Co., Ltd., one of Vietnam's largest IT software developers and talent outsourcing providers. "Critics don't really worry so much about the fact that the government is Marxist when peace and stability are maintained and the economy is growing well."

Since 2000, Vietnam's economic growth rate has been among the highest in the world, with GDP averaging about 6% for the last five years. The nation sports other advantages, including low inflation and interest rates, a stable currency, a young and educated population, an expanding middle class, a single language, a single religion, and a contiguous land mass.

The government also offers numerous tax incentives and reduced duties on capital goods and raw materials used in export-oriented production. Manufacturing-oriented investments now account for over 70% of registered FDI, according to Vietnam's General Statistics Office. Export growth has averaged over 23% per annum for the last five years. Even tourism is booming; the total number of foreign tourists to Vietnam has already topped 4 million in 2016, a 20% year-on-year increase.

In February, the Vietnamese government, together with the World Bank Group, produced the Vietnam 2035 report, laying out key reforms for the country to grow its economy, become more equitable, and install modern governance over the next 20 years. Reaching the ambitious goal of upper-middle-income status would require Vietnam to grow at least 7% per year, raising the average income level to over $7,000 - or $18,000 in purchasing-power parity (PPP) terms - by 2035, compared with $2,052 - or $5,370 in PPP terms - in 2014.

Vietnam is still performing below potential due to slow progress on cleaning up non-performing loans in the banking sector and removing barriers to private investment by reforming over-leveraged SOEs (state-owned enterprises), notes Tony Diep, Managing Director at Indochina Capital.

"IT skills can be very expensive. Our Japanese clients are catching on to the fact that hiring Vietnamese personnel can help cut cost those costs by up to 60%," she says.

FTP Japan has set a goal to educate and train 10,000 Japanese-enabled Vietnamese engineers over the next five years for outsourcing or direct employment opportunities. Some 5,000 have already completed the company's course, and 200 have been placed with clients in Japan.

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“The government has aggressively opened the country to both tourism and business, which is a welcome sign." -- Tran Ngoc Tram Anh

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