Good Morning, Vietnam

Intel's deal to build a factory is likely to spur more Western investment

Many Americans remember Vietnam's Reunification Palace from film clips of North Vietnamese tanks bashing through its wrought-iron gates to end the Vietnam War 31 years ago. On Feb. 28 a leading warrior of Big Business, Intel Corp. (INTC ) Chairman Craig R. Barrett, crashed the same gates -- albeit without damage -- to mark one of capitalism's most significant advances in Vietnam in decades. On that day, Vietnamese Deputy Prime Minister Nguyen Tan Dung presented Barrett with a $605 million investment license to build a new factory in Ho Chi Minh City.

The deal is the largest American investment in Vietnam ever by a non-oil company. Intel initially will spend $300 million for a test-and-assembly plant that will be finished next year and eventually employ 1,200 workers. Barrett says Intel chose Vietnam over China, Malay-sia, or the Philippines because of the country's lower costs for skilled workers and its booming economy, which grew 8.5% last year. Says Barrett: "Cost is always a driving factor."

Others see Intel's decision as a vote of confidence in Vietnam as an alternative to China. Until now, the bulk of foreign manufacturing investment has been in simple assembly for the likes of Nike Inc. (NKE ) and Limited Brands Inc. (LTD ) Nike's subcontractors employ 130,000 people in Vietnam -- making the country Nike's second-largest supplier after China -- and many big textile manufacturers have set up shop as well. Now, Vietnam is breaking out of the low-tech box. The Intel deal "is a very important step for Vietnam," says Henry Nguyen, who runs IDG Ventures Vietnam, a $100 million fund that invests in startups.

Intel isn't the only company stepping in. In February, Canon Inc. (CAJ ) announced it was spending $110 million on an ink jet printer factory near Hanoi. Nidec Corp. of Japan plans to build two plants to make electronic components, at a total cost of $940 million. Fujitsu Ltd. (FJTSY ) has invested $200 million and employs 3,200 people making circuit boards for PCs and phones. Virginia-based utility AES Corp. (AES ) is negotiating to build a 1,000-megawatt power plant in the northern province of Quang Ninh that could cost as much as $1 billion. And Cisco Systems (CSCO ), Nortel Networks (NT ), and Motorola (MOT ) are installing telecom equipment.

Vietnam hasn't generated this kind of investment interest since the U.S. lifted its economic embargo in 1994. Last year, approved foreign direct investment jumped 41%, to $5.8 billion, while in China the total actually fell slightly. Sure, China still saw commitments of $60 billion, but as a percentage of gross domestic product, Vietnam's total was more than twice what China got last year.

A big reason for the change is rock-bottom wages. As labor shortages in some regions of China drive up costs, factory hands in parts of the mainland can earn more than five times the $55 per month that Vietnamese workers in foreign-owned factories are paid. That differential is a big reason why Sparton Corp. (SPA ) of Jackson, Mich., chose Vietnam over China last year when it made its first investment outside North America. It sank $8 million into a 50,000-square-foot plant to produce chemical diagnostic equipment. "I think productivity and quality will far exceed the U.S.," says Jason Craft, managing director of Sparton subsidiary Spartronics Vietnam Co.


There's more to Vietnam's story than just cheap workers, though. The most expensive land for factories costs only slightly more than half what China's priciest areas do, and shipping from Ho Chi Minh City (the former Saigon) is about 6% to 8% cheaper than from Thailand or Indonesia (though slightly more than rates from Shenzhen, China). More important, Vietnam offers corporations an alternative location in the event their operations in China get shut down. "Companies want flexibility in supply lines and don't want to put all their eggs in the China basket," says Michael W. Marine, the U.S. Ambassador to Vietnam.

And Vietnam this year might wrap up negotiations for World Trade Organization membership. That would be a huge boon if the results of the 2001 U.S.-Vietnam Bilateral Trade Agreement are anything to go by. Vietnamese exports to the U.S. have increased more than sixfold under the deal, to $6.6 billion last year. "If that can happen with one country, imagine what could happen with 100 or more under WTO," says Shankar Viswanathan, country manager at Procter & Gamble Co. (PG ), which has invested more than $80 million in Vietnam since 1995 and manufactures Tide detergent and other products there.

The euphoria makes some observers nervous. Back in the mid-'90s, foreign investors stampeded into Vietnam when the country was hyped as the next big Asian Tiger, only to be foiled by Vietnam's rampant corruption, red tape, opaque laws, and tattered infrastructure. Things have improved somewhat, though, as Vietnam has streamlined its laws to meet WTO requirements and has spent more than $1 billion improving its roads and airports in recent years. That means more foot soldiers of capitalism may soon be breaching the gates of Reunification Palace.

By Frederik Balfour, with Hiroko Tashiro in Tokyo

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