Vietnam is a top contender for investors

Foreign investors and the Vietnamese government are trying to push this emerging economy up the learning curve, nudging it into higher-tech and higher-margin businesses — and winning commerce away from better-established countries.

When British recruitment agency Harvey Nash PLC began scouting for an offshore hub for its new software-development business six years ago, Vietnam wasn’t an obvious choice.

While countries such as India, the Philippines and South Africa already were latching onto the outsourcing phenomenon, Vietnam still was in the business of trying to make shoes, bicycles and clothes cheaper than anybody else. But when Harvey Nash’s inspection team returned from Hanoi to assess the options, Vietnam was the top contender. Its mix of low wages, improving English-language skills and technical proficiency helped tip the balance in its favour.

An alliance with FPT Software Corp., a unit of Vietnam technology company FPT Corp., also gave the nation an edge, at a time when outsourcing wages and job-hopping were on the rise in India.

Today, Harvey Nash employs 1,500 people across Vietnam through its own business and its partnership with FPT. It develops billing software for telecom companies such as Belgium’s Belgacom SA, creates applications to manage human resources at Honda Motor Co. HMC -0.21% ‘s British unit, and tests software systems for Discovery Communications Inc.’s Discovery Channel and NBC Universal’s MSNBC.

Since beginning to open up its economy in the late 1980s, Vietnam has mostly seen its economy expand on the back of agricultural exports and low-wage manufacturing. But many prospective investors sensed Vietnam is capable of doing much more. During a visit to Hanoi last year, Microsoft Corp. MSFT +0.67% founder Bill Gates said there was no reason Vietnam couldn’t follow India into software development and other forms of outsourcing. Last year’s decision by Intel Corp. INTC +1.06% to build a $1 billion semiconductor factory near Ho Chi Minh City was a turning point of sorts for such efforts.

Intel’s announcement was a sign to the international investment community that major high-tech companies were comfortable channelling large amounts of money into Vietnam. Industrial land here is cheaper than in China. Wages are about a third lower than in China’s industrial coastal regions. And with a population of almost 90 million people, half of whom are under 30 years old, Vietnam’s talent pool is deep and increasing. The fact that Vietnam is controlled by the Communist Party isn’t a concern for most investors.

Adam Sitkoff, Executive Chairman of the American Chamber of Commerce in Hanoi, said “Vietnam’s leaders have closely watched China’s development and are following Beijing’s strategy of opening up the economy to investment while maintaining a tight hold on political power.” While corruption remains a problem in Vietnam, government leaders said they are working to reduce the bureaucratic processes that could lead to graft. At the same time, Vietnam is offering incentives to investors such as Intel. Since Intel’s commitment, Vietnam has seen a surge of interest from technology companies hoping to follow in the semiconductor firm’s path, said Vice Minister for Planning and Investment Cao Viet Sinh.

“Higher-end investors are coming here and sensing the opportunity,” Mr. Sinh said. “We have a young work force here, which is familiar with technology, and the training is getting better all the time.”

California consultancy neoIT ranked Vietnam’s Ho Chi Minh City as the top non-Indian city in its 2006 review of the most competitive cities for outsourcing, based on the available labor pool and infrastructure. The only other non-Indian cities in the top 10 are Manila and Shanghai. While foreign companies are paying closer attention to Vietnam, the country also is beginning to spawn home-grown high-tech outfits such as Glass Egg Digital Media and Alive Interactive Media Inc. in Ho Chi Minh City, which design parts of videogames for companies such as Microsoft, Sony Computer Entertainment Inc. and Electronic Arts Inc.

Other Vietnamese companies, such as TMA Solutions, develop software for clients including Nortel Networks Corp. and Alcatel-LucentALU +1.44% “This is a very bright sector for Vietnam,” said Louis Nguyen, a Vietnamese-American financier, who, until recently, was a fund manager at VinaCapital Group, overseeing a technology investment fund that invests in Vietnamese companies.

Vietnam still is some way from becoming the next India, China or even a Philippines — the reigning outsourcing giants in Asia. The latter two are leading the race to get a slice of an information-technology outsourcing market with an estimated value of $34 billion in 2005, according to industry consultancy B.E.A. Associates Inc. Moreover, the global outsourcing industry relies as much on the quality of telecommunications as on the talent pool, and in this respect Vietnam still is lacking, industry analysts said. The English spoken by its work force doesn’t flow off the tongue as fluently as it does among Indian or Filipino workers, either. But building up telecommunications is a quicker fix than building up a competent work force, and an increasing number of companies, such as Harvey Nash, are getting in early to tap as much talent as they can.

Graham Davies, Vice President of Harvey Nash’s software-development unit, said software development and business-process outsourcing comprised about 20% of the company’s £251.7 million ($499.5 million) in revenue in the 12 months ended Jan. 31, after starting from scratch six years ago. Over the next two to three years, he expects more work to come from U.S. clients to complement Harvey Nash’s mostly European business base. The nature of the company’s business is a good match with the increasing number of Vietnamese graduating into the work pool and aspiring to snag the kinds of jobs that can help them climb into the country’s middle class.

Mr. Sinh, Vice Minister for planning, said Vietnam’s government is focusing on improving education to strengthen what he describes as the country’s “soft infrastructure.” Mr. Davies, among others, said this focus is paying off. “There’s a lot of concentration on the hard sciences and mathematics in the Vietnamese universities,” he said, while acknowledging that newly arrived companies are beginning to compete with his firm for the pick of graduates. Tuan Nguyen, 28 years old, is just the kind of person the outsourcers hope to nab. Sitting in his cubicle in Harvey Nash’s three-floor office in Hanoi, he speaks fluent English and is a skilled coder. “This is just the right work for me,” Mr. Nguyen said, while figuring out the coding on the software for a London financial-services company. “Sometimes the problems are difficult to solve, but that’s the challenge.”