What Do Medical Device Manufacturers Need to Know About Vietnam?
As Asia Grows Increasingly Popular as an Outsourcing Option, Vietnam Offers Myriad Benefits for Medical Device Manufacturers
By David W. Hockenbrocht, President and CEO, Sparton Corporation
With Vietnam ranking at the top of Price Waterhouse Cooper’s ‘Emerging Markets’ Top 20 Manufacturing Destinations this past summer, foreign direct investment (FDI) has been pouring into this country. With FDI expected to reach one quarter of the country’s gross domestic product (GDP) this year, the government is racing to build transportation infrastructure, address some lingering legal concerns and decentralize and streamline paperwork for registering businesses. It’s like the Wild, Wild West in Ho Chi Minh City. Things are changing rapidly, and it’s exciting to see the improvements and commitment from the government to manage the growth effectively.
The country has many positive qualities to bring to the table. In a recent Outsourcing Navigator Update, Charlie Barnhart, a market research consultant tracking global electronics manufacturing total cost of outsourcing data for the past 10 years, made the following points regarding Vietnam and competing locales for outsourcing ventures:
• China continues to be plagued with one sourcing disaster after another: product safety issues, environmental problems, ongoing quality problems, rising labor and operating costs, diminished labor availability (especially for skilled labor), parts counterfeiting, non-compliant materials, political corruption, institutionalized theft of intellectual property and many other concerns. These issues contribute to increased consumer (and OEM) anxiety over the value of this country’s current offering and long-term viability.
• While Thailand and Malaysia are viable alternatives to China (and very competitive given today's exchange rates), both of these geographies come with legacy issues. Malaysia and Thailand have geo-political issues and, therefore, neither is perceived by the majority of OEMs as a “fresh alternative.” Perhaps this is more supposition than factual concern (especially for Thailand), but too often—especially in business—presumption is what drives some decision-making.
• Vietnam, on the other hand, has demonstrated the government’s commitment to electronics manufacturing and is beginning to be recognized as an alternative to the ongoing meltdown in China. This is especially true given Vietnam's expanding value proposition, including flexibility of lot size/mix, a competitive and skilled labor force, functional and expanding infrastructure, a strong relationship with Singapore (a trusted and highly regarded source for materials procurement and quality management) and a stable and more transparent government that embraces an “international” interpretation of the rule-of-law.
• The bottom line is that for today's North American and European OEMs (who always seem to be on the hunt for the next “hot” geography), there are only two main alternatives: India or Vietnam. While India has a reasonable long-term potential, for many of today’s lower-volume electronic manufacturing requirements Vietnam offers a lower total cost to operate (compared to India) with considerably less risk.
With Intel’s announcement last year of its plans to build a $600 million assembly and test facility in Ho Chi Minh City, the floodgates opened for the rest of the electronics industry to set up shop there. While Vietnam may be news to some companies in the United States, a large number of enterprises in Asia have partnered with Vietnam for a decade or longer. Canon has a significant presence in Vietnam; NEC Tokin Electronics just opened its second manufacturing plant, bringing its total investment in the region to $21 million. Other Japanese companies and consulting firms have worked with the government in Vietnam as well. Taiwanese appliance manufacturer Tatung recently announced it is moving a manufacturing facility to Vietnam. Why are so many high-tech companies looking at Vietnam now?
A Highly Educated, Stable Workforce
Vietnam has an excellent university system in both the North (Hanoi) and the South (Ho Chi Minh City), and the government reported that 1.7 million students took entrance exams last spring to qualify for university attendance. The work force around the major cities is highly educated with well-trained engineers eager for high-tech jobs.
One of the strengths of manufacturing in Vietnam is the highly skilled work force. At the Spartronics training center, Vietnamese workers learn techniques required for low-volume, high-mix manufacturing.
Here are some examples of support labor:
• Production lines often are changed two to three times a shift, and it takes technical people to make the changeover, check for proper operation and quality for the new setup.
• Customer change orders for quantity and mix happen every hour in low-volume, high-mix products. Customer service and material planners constantly must support these changing conditions.
• For low-volume products, material is purchased in smaller quantities, meaning increased activity and possible confusion around receiving orders of the same part number that may be from a different qualified supplier. They could be identical except for a particular obscure characteristic that must be checked out.
Government Commitment to High Tech
Vietnam has a population exceeding 80 million and is rapidly becoming a middle-income country. It has a diverse international culture and growing foreign investment. According to a recent survey of business economists, terrorism is on the top of the list again as the leading risk factor for business disruptions. Vietnam is considered less risky than other nations in the region from that perspective, however, and attitudes regarding US-based companies are very positive. The population is hungry for technology, and since entering the World Trade Organization (WTO) in January 2007, the government has hosted trade meetings with delegates from the United States, Poland, China, the United Kingdom and many other countries in the global high-tech playing field. The lifting of trade quotas in the apparel industry has meant that it is more difficult for Vietnam to compete with China to sell garments and shoes to the global marketplace; thus, the high-tech industry is an extremely attractive substitute.
The government is actively courting the high-tech sector for higher paying jobs for its well-trained workers. After a visit to Hanoi by Bill Gates, who announced, among other things, that Microsoft is going to get serious about cracking down on bootleg copies of software in Vietnam, the Law on Intellectual Property Rights was approved by the National Assembly and went into effect in July 2006.
Low-volume, high-mix manufacturing requires highly skilled workers on the manufacturing line. Vietnamese engineers at Spartronics provide on-site support for these types of products.
This year, the number of Internet users in Vietnam continued its explosive growth path, reaching almost 18 million people, or nearly 20% of the population. In the 2005-2006 period, Vietnam's information technology (IT) market grew 20.9%, with software and IT service industries increasing 41.1%.
The government has hosted large US telecom corporations that are pushing to invest in Vietnam, with AT&T, Intel, Microsoft and Motorola all paying visits. According to the Ministry of Planning and Investment (MPI), the United States recently ranked 11th of the 75 countries and territories investing in Vietnam, with total registered capital of $1.3 billion, of which $730 million has been disbursed. However, that figure is expected to increase dramatically in the next few years, once industry leaders such as Intel become established. Since 2001, American investment in Vietnam has increased an average of 27.3% annually, while total foreign investment from all countries to Vietnam increased only 5.5% annually.
In its most recent statistics, the MPI reported that over the last six months, the FDI-invested sector has posted healthy growth, bringing in $12.45 billion, up nearly 17% over the same period last year. The value of exports from FDI programs grew by almost 30.8% to $6.64 billion.
The Vietnam government granted new licenses to nearly 350 FDI projects worth $2.84 billion in the first half of 2006, the MPI reported. Most of the newly licensed projects focus on the industrial, construction and service sectors in key economic zones such as Ha Noi, Ho Chi Minh City and the southern provinces of Ba Ria-Vung Tau, Dong Nai and Binh Duong.
The US government granted Permanent Normal Trade Relations status in January 2007 around the time the country was accepted into the WTO. United States/
Vietnam trade has soared to $8 billion—five times what it was in 2001.
Medical device manufacturing requires a skilled and stable workforce. In cities across Vietnam, educated workers already are living in close proximity to government-established industrial parks, making it unnecessary for companies to build dormitories or living campuses. This type of stability is unknown in China, making Vietnam a better long-term solution for low-volume, high-mix applications.
Recent reports from China of impending labor shortages across the board mean manufacturers continue to move inland to chase lower labor rates. Some experts predict increasing instability in China due to explosive growth and lack of mobility between lower paying, less desirable jobs and higher paying management positions.
The United States has a complicated relationship with Vietnam, due to the number of US citizens that served there during the war. Currently millions of “Viet Kieu” live in the United States—Vietnamese ex-pats who were forced to flee the country in the 1970s. This history unites the two countries—people to people. Today, those negative experiences have been forgotten and the people and government of Vietnam are committed to rebuilding strong and mutually beneficial business relations.
Not to Say There Aren’t Any Challenges
While labor costs remain the lowest in the region, the flood of investment has created a shortage of skilled workers in recent months. For the first time, an annual government business forum addressed this issue earlier this year. According to a report by Vietnamworks, a human resources service company in Vietnam, labor demand increased by 100% in the past 12 months, while supply rose by only 60%. Companies that are just now establishing manufacturing facilities are finding it more difficult to find skilled workers. However, there is a very large pool of highly educated people that are underemployed, working in non-technical, lower salary, and non-challenging positions. These people are more mature, motivated and eager to learn and are easily trained to new skills and jobs.
The ability to build transportation infrastructure at a fast enough clip to accommodate the rapid growth also remains a challenge. According to a World Bank report, expenditure for transportation infrastructure in Vietnam increased by 21% annually between 1994 and 2002, reflecting the strong commitment of the government to modernize the transport system to support economic growth. However, the funds are not being disbursed quickly enough to get projects completed. During the first 10 months of 2007, only $252 million was disbursed for transport infrastructure, which was 64% of what had been planned for this year.
The good news is that under a US-Vietnam Bilateral Maritime Agreement signed this year, US companies will be able to acquire a 51% share of joint ventures enterprises, promising to accelerate international trade and give US companies better access to Vietnamese port services.
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Vietnam has hit the ground running in promoting high-tech, with government support and highly skilled workers for the type of manufacturing required with medical products. Those medical device companies considering Vietnam as an Asian manufacturing location will find cooperative government support, a robust infrastructure and a well-trained, yet relatively low-cost labor force.