Speaking Truth to Power on Vietnam

One of the ways our Outsourcing Navigator Council members use our data is to help the manufacturing operations team push back when told by senior management to do something the ops team knows will be catastrophic. Since our data are from real-time industry-specific case studies, and can be tailored to like-kind, scale equivalent analysis, this approach is usually quite compelling, and we have been part of some heroic rescues by the hard-working folks on the front lines for, especially, low to medium volume, complex electronics OEMs.
 
Recently, journalists and other industry tourists have published cheerful and well-meaning articles about Vietnam, expressing positive surprise at the high level of expertise available in the country. This caused us a quiet 'uh-oh' as we anticipated a new round of client complaints about C-Suite pressure to 'drop everything and move manufacturing to Vietnam' as labor costs in China escalate.
 
So let's look at the facts. Vietnam is a small (size of New Mexico) populous (9th in the world) country that's listed as 'lower middle income' on the World Bank rankings. It has a per capita income of US$1,100. It experienced a boom in FDI in the late 1990s and early 2000s, which accelerated during that decade and after joining the WTO in 2007; investment by the electronics industry included that by Jabil, Foxconn, Sparton, and others who set up EMS facilities, mostly located in industrial parks around HoChiMinh City and Hanoi. Its supply chain ecosystem was enhanced when Avnet bought a local distributor in 2009.
 
However, CBA's Outsourcing Navigator Council global capacity utilization table shows Vietnam losing favor in each of the last 4 quarters.

Why?
 
One reason is infrastructure. All the things C-Suite executives take for granted that are necessary for the highly complex human activity known as manufacturing: reliable power, internal transportation systems; telecommunications, water and sanitation. These support systems are better than they used to be in Vietnam, but add risk to manufacturing there.
 
The second reason is skilled labor. While there may be 89 million people in Vietnam, the urbanization rate is still only 30%, compared with 47% in China and 72% in Malaysia. Many Vietnamese young people want to be engineers, but you might find nearly as many skilled Vietnamese engineers if you send your work to the Jabil facility in Tempe, Arizona as their facility in HCM City. Sons and daughters of the intellectual cream of South Vietnam, ex-pats escaping the 'Reeducation' camps of the 70s and 80s, are disproportionately represented in the undergraduate engineering programs across the U.S. These well-educated U.S. citizens return to Vietnam and spend money during Tet, but don't typically want to return there to work. They'd much rather stay in the U.S. where they can speak their minds about the government of Vietnam without fearing reprisals.
 
The third reason is Ease of Doing Business. Vietnam is a Communist country, where corruption and inefficiency are a way of life, and the current global economic crisis is exacerbating the problems of a managed economy. The country dropped 8 points on the World Bank's Ease of Doing Business Ranking, from 90th in 2011 to 98th in 2012, out of 183. Just to put that in perspective, China is ranked at 91, Zambia 84,  Belarus is 69, Kazahkstan is 47, and Tunisia comes in at 46. The government is scrambling to initiate economic and fiscal reforms of banks and state owned enterprises (which represent 40% of GDP)  as the country's inflation rate soared to the highest in the region, averaging 18% in 2011.
 
So, aside from the fact that it's a great country to visit with beautiful beaches, why would it make sense to move an electronics manufacturing program from any geography to Vietnam, when the risks are high and increasing?
 
Good question, and speaking of a good question: Are OEMs buying equipment for internal operations? Please answer our Pulse question and we'll let you know what we find out.