In May, Japanese motor maker Minebea broke ground in Phnom Penh for a 5,000-worker plant. The company had at first considered Vietnam but rejected it because strikes had become increasingly common there. "A strike would be trouble," Yasunari Kuwano, a spokesman at Tokyo-based Minebea, says of the $62 million plant, which will make motors for appliances and digital equipment. "Labor is the key focus for us in choosing Cambodia."
As Minebea was starting to build its plant, London-based cable maker Volex Group and Japanese lingerie company Wacoal Holdings (WACLY) were among the foreign investors in Vietnam facing illegal wildcat strikes. Workers are demanding better pay as the highest inflation in Asia hurts their purchasing power. Inflation quickened to a 29-month high of 19.78 percent in May, stoked by fuel and electricity prices. The key index for the Ho Chi Minh City Stock Exchange has declined about 14 percent over the last 12 months, the worst performance for that period in Asia, and the currency has slid 8.6 percent against the dollar.
Vietnam had 336 strikes in the first four months of 2011, according to its General Confederation of Labor: That's on course to beat the 2008 record of 762. Many are wildcat stoppages, which lack legal authorization, according to the Geneva-based International Labor Organization. "Every day, somewhere in the country there is a strike," says Youngmo Yoon, a Vietnam labor specialist for the ILO. Average wages should rise 12 percent this year.
The strikes have dented Vietnam's 25-year-old policy of offering foreign investors a stable workforce whose minimum wage, at $85 a month, is still half that of China. It was an effective policy, until now. Planned foreign direct investment in Vietnam fell 48 percent in the first five months of 2011, to $4.7 billion. "The nation is at a crossroads," says Victoria Kwakwa in Hanoi, the World Bank's country director in the Southeast Asian nation. "Vietnam can't assume that FDI will continue. Money can go elsewhere."
In March the government switched its focus to inflation rather than expansion and has cut its 2011 growth target to 6 percent from up to 7.5 percent. Since the credit-rating agencies lowered Vietnam's sovereign debt rating in December, some foreign investors have become wary of making a long-term bet. In June, Srithai Superware, a Bangkok-based maker of tableware, suspended plans for a $5 million expansion at its plant in southern Vietnam because of "economic instability," says Santi Sakgumjorn, general director of the Vietnamese unit. The company says it will set up a subsidiary next door in Laos. "In the short term, we have no confidence in the economic situation in Vietnam," Sakgumjorn said in an e-mail. Production costs have gone up after two salary increases this year, he says.
Vietnam's workers say they have to strike. At an industrial park in Hanoi, factory hand Le Kien scans job openings on a bulletin board, looking for better pay. He has just finished his shift at a plant that assembles cables used in Honda (HMC) and Yamaha motorcycles. "The price of everything—food, gas, electricity—has gone up by more than my pay raise," says Kien, 24, whose monthly salary is equivalent to $87. "I can't even afford to start a family. I wouldn't have enough to buy milk for my baby."
The bottom line: Vietnam has to control inflation and restrain wage hikes or risk losing its reputation as a reliable outsourcing alternative to China.