On The Road with Riverwood: Southeast Asia Part 1

Ho Chi Minh City (Saigon) is not quite as hot as I expected for mid-August, and for that I am very thankful.  The last 30 hours have been a blur of meetings and activity here as we sort out the local manufacturing environment for an OEM client looking for a lower cost alternative to China.

Yesterday we met with one of the top manufacturing and technology headhunting firms in Ho Chi Minh to try and get some broader perspective on the hiring environment, employee turnover, pay and benefits packages, and a general sense for the economic state of manufacturing in the southern part of the country. The official unemployment rate in Vietnam ranges from about 4.3% to around 7% depending on which province and city you look at, although some official numbers place the rate at "around 3%."  Ho Chi Minh City for example is targeting unemployment for 2012 to be around 4.9%.  Demand for skilled professionals in manufacturing support roles (planning, purchasing, production engineering, etc.) is relatively strong, though there is not a large concentration of high tech manufacturing operations in the vicinity from which to pull fully trained talent.  Both demand and wage premiums remain high for what the local business community refers to as "Vietkiews" which literally means Vietnamese from far away.  Western raised and western educated ethnic Vietnamese are finding considerable opportunities in Ho Chi Minh and Hanoi in a wide range of industries including high tech manufacturing.

After meeting with a commercial real estate firm to gauge pricing, demand and activities levels for commercial and industrial real estate, we met with the managing director of a prominent local venture capital firm that has roots and financial backing in Silicon Valley.  Although our colleague's bullishness regarding Vietnam was unabashed, he expressed some concerns about the slow pace infrastructure development, logistics challenges, and the problem of inflation that has plagued the higher growth regions of Asia over the past few years.  But our VC friend, unlike some of his peers in Silicon Valley, has a long term perspective on his investments in Vietnam - a perspective befitting an ancient and storied land such as this.



Today we spent the bulk of our day visiting Jabil's facility in the Saigon High Tech Park (SHTP) about 15km outside the city center.  Jabil along with Foxconn were early movers into Vietnam and the company has been in volume production at this site for more than 5 years.  The company operates a 150,000 square foot facility in SHTP building a range of not excessively complex products for a handful of US and European OEMs.  We were fortunate to be able to spend the majority of the day with the local GM as well as some of Jabil's top operating execs for the Asia region discussing the pros and cons of manufacturing in Vietnam in a very open and interactive forum.  Between the Riverwood Team and the Jabil team, the execs in the room had run meaningful EMS operations in 20 countries and were extremely well equipped to debate the merits of all of the viable EMS locales in China, Southeast Asia and India.

I was pleasantly surprised to learn that in bound freight cost to Vietnam on an average basket of EMS material was a bit less than we had expected, although not inconsistent with our own data which show about a 50 - 70 bps increase over coastal China.  Although efforts are still a bit nascent, Jabil seems to have done a pretty good job of localizing a supply base for mechanicals and packaging materials which tend to be commodities that can drive a disproportionately high incoming freight number as a percentage of raw material cost.  Our team was a bit surprised to learn that the employee turnover in Vietnam for both DL and IL is only slightly better than the average in China - I for one had fully expected turnover rates to be considerably less given the lack of a highly concentrated local EMS industry cluster and the stronger population demographics in Vietnam.  Jabil, as is the case with Foxconn and many of the local Japanese OEMs, continues to rely on a core group of expats in the professional IL ranks to drive processes & procedures and to train local support staff.
    


After a morning of review the sites capabilities and weighing them against other EMS operations that we work with in China, Thailand, Malaysia, et. al, we took an extended tour of the factory with the management team.  And although I have been in literally hundreds of EMS factories on four continents, I must say I was pleasantly surprised by how the factory showed.  All of the tier one EMS providers - Jabil included - have learned to run pretty lean, well organized, highly systematized, scalable operations in the world's low cost manufacturing centers and Saigon High Tech Park was no exception.  Having started up and ran a few factories myself, I know that there is nothing like time that works as well at turning a factory into a well oiled machine.  Factories are highly complex systems that Dr. Ishikawa taught us are a complicated interplay of man, materials, machine, method and environment - and they take some time to get well tuned.  For a relatively young factory in a relatively new and underdeveloped EMS market, the Jabil Saigon facility was better than I had expected it would be.

Of course every closet has its skeletons, and perhaps a few cold Tiger beers tonight with the company's execs will shed some light on what they might be, and where they are hidden. 

Tomorrow we are off to Malaysia followed by a few supplier visits in Indonesia Thursday and Friday.  Stay tuned for more observation on the EMS world from Southeast Asia.

Contributed by Ron Keith, Riverwood Solutions