|
The 4
million motorcycles on the streets of Ho Chi Minh City
offer a remarkable—if somewhat noisy—testimony to the
prosperity that beckons Vietnam.
A $900
Honda may not be everyone’s idea of affluence. However,
it has the same pride of place in this rapidly
industrializing nation as a bullock cart in an agrarian
society.
Young
men and women—many of them migrants from rural
areas—commute to large, modern factories on the
outskirts of the city on bikes they are proud to own and
scared to lose.
This
mobility is so crucial to the workers’ productivity that
some employers in the city, formerly known as
Saigon, have even begun buying insurance, at their own expense,
against the risk of bikes being stolen from their
factory premises.
Investors who take the boom in Vietnam’s two-wheeler
market as a harbinger of a burgeoning mass market may be
disappointed for a few years. Those who see the lust for
bike ownership as a sign of Vietnam’s young labor force
yearning for the tools it needs to plug into a global
supply chain will win.
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.
Furniture capital
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 United
States.
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.
Ready to
compete
Chinese-made goods have become increasingly expensive in
the United States for the past six months. That gives
Vietnamese manufacturers an opportunity to win a bigger
share in their largest export market.
The
ingredients are in place.
Vietnam’s
accession to the World Trade Organization (WTO) in
January has provided its textile industry with
quota-free access to the
United States.
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 work force 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.
The risk
for
Vietnam is inflation, which accelerated to 10 percent last
month, the fastest pace in three years.
Inflation risk
In the
short run,
Vietnam
must stand ready to sacrifice some economic growth to
halt the increase in prices, especially of construction
material.
If left
unchecked, inflation will become a drag on Vietnam’s
competitiveness even if the central bank doesn’t allow
the dong’s nominal exchange rate to appreciate.
On the
whole, though,
Vietnam
is on the road to prosperity.
The
swanky Louis Vuitton and Gucci show rooms that have
sprung up in Ho Chi Minh City may be a bit premature in
a country where the annual per-capita income was $723
last year.
The time
for the Vietnamese consumer will undoubtedly come.
With a
population of 85 million, and an economy that the
International Monetary Fund forecasts to grow more than
8 percent this year and next, the Southeast Asian
country will soon represent a sizable domestic market.
For now,
the Vietnamese producer is the bigger opportunity.
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.
Increasingly complex
Especially now, when a seemingly simple task like
attaching four legs to a rectangular piece of American
poplar wood and shipping it back to the United States
has become too complex to undertake without overseas
capital and expertise.
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
important, 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. |
