Low cost location

However, low cost labour is hardly a competitive advantage in the long term. Labour cost keeps changing and today’s low cost location is not necessarily tomorrow’s viable outsourcing location. If it is not China or Vietnam, it could be Bangladesh or Cambodia. Ig Hortsmann, a professor of business economics at the University of Toronto’s Rotman School of Management notes that Nike originally off shored manufacturing to Japan. As labour costs increased, manufacturing was later moved to South Korea and Taiwan. When labour cost increased in South Korea and Taiwan, it was moved to China and later also to Vietnam. Justin Wood, a Director of the Economist Intelligence Unit Corporate Network in Singapore makes the point that in the last 15 years Vietnam has moved from a low to a middle income country. The move towards a middle income will likely put additional pressure on Vietnam’s low cost labour status.

Intellectual property threat

For many companies outsourcing to Vietnam, intellectual property (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. Designers can “take inspiration” and it is seen as a major driver for setting trends in the industry. The World Intellectual Property Organization (WIPO) has called for stricter intellectual property enforcement within the fashion industry to better protect companies and promote competitiveness within the textile and clothing industries. “It is a hard thing to take care of and you just have to be faster than everybody else”, says Rolskov. For smaller designers and labels it is much easier to switch manufacturing. However to prevent the copying of designs is a challenging undertaking.

Infrastructure development

For Vietnam to advance as an outsourcing location, the textile industry supply chain needs to be considered. Local logistics are influenced by direct and indirect cost. In Vietnam’s textile industry raw materials are often imported, which increases cost compared with those countries able to source locally. Managing reverse logistics can also be a challenging undertaking in Vietnam. Procedures, processes and infrastructure are sometimes not in place to manage repairs, returns and warranties.

According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Vietnam. According to TI analyst John Manners Bell, logistics costs are estimated at 25 percent of Vietnam’s GDP. Even with cheap labour cost, poor infrastructure remains a major barrier for entry. This is largely due to Vietnam being in the early stages of infrastructure development.

Many experts believe that China’s advanced infrastructure gives it a major competitive advantage. Electricity and transportation costs will likely come down even further and and this will have a significant impact on the total cost, even if their labour is more costly. The Vietnamese government is aware of this dynamic and has invested billions of dollars in the country’s infrastructure. The government is actively encouraging foreign direct investment in the country’s infrastructure. This is visible with projects such as the Cai Mep Container Port in the Mekong River Delta and the new Long Thanh airport that’s projected to be completed by 2015.

Through assessing the overall supply chain, rather than a singular focus on labour costs, it is easier to identify where Vietnam’s opportunities and challenges lie in the textile industry. While small scale designers and manufacturers take advantage of a flexible environment, infrastructure and logistics processes will need further investment to make Vietnam an outsourcing destination and source for tomorrow’s fashionista wardrobes.

The government of Vietnam recognizes and promotes the importance of education and training. According to Vietnam Economic Times, there were more than 200 institutions of higher learning in the country in 2004, and that number had increased by 60% in the preceding six-year period. Today the country has a 96% literacy rate and 80% of the country’s college graduates hold degrees in the sciences (Vietnam Economic Times). This makes Vietnam an exceptional country for outsourcing technological projects, because the highly educated population has a high level of scientific and technical literacy. The labor force also have much lower turnover and much higher stability than do those of most other countries that are active in outsourcing. Overall, companies in Vietnam has an IT-related turnover rate of less than 5%, whereas in many other countries, such as India, this turnover rate can be 10% or even higher.

Common outsourcing destinations in Asia-Pacific are often plagued by instability. Consider, for example, the 2006 coup in Thailand, the Kashmir conflicts between Pakistan and India, and the Sri Lankan military’s struggles against the Liberation tigers of Tamil Elam. There are many U.S. travel advisories that warn Americans against traveling to these areas, but fortunately Vietnam doesn’t share these countries’ woes. In fact, Vietnam is a very stable country, which creates a hospitable business environment for outsourcing.

Economic Stability: Vietnam’s economy is healthy and growing rapidly, with a GDP that, according to CEIC, grew an average of 7.4% in the six years leading up to 2005. This is the second fastest GDP growth in all of Asia, as published in the New York Times article, Vietnam’s Roaring Economy Is Set for World Stage, on October 25, 2006. FDI (foreign direct investment) was almost US$5 billion in 2005, which makes a favorable comparison with that of other countries that are popular destinations for outsourcing work.

Ethnic/Religious Stability: Because 95% of Vietnam’s population is ethnically Vietnamese and more than 80% of the citizens do not identify themselves with any particular religion, Vietnam is largely free of ethnic/religious conflict. A 2003 UNDP (United Nations Development Programme) study concluded that Vietnam had one of the most secure environments for investment, given the conflicts in Iraq and the surrounding region. Likewise, Vietnam was ranked as the safest among the 14 countries in the Asia-Pacific Region by the Political and Economic Risk Consultancy in Hong Kong (Berth of a Nation in Time, autumn 2002).

Political Stability: The current government has held power since Vietnam’s 1975 reunification, meaning that there have been more than 30 years of political stability in the country. The last major conflict with a neighboring country was almost 30 years ago, in 1978. Two American presidents (Bill Clinton during his presidency and in 2006, and George W. Bush during the APEC summit) have visited the country, and Bush met with several top officials including the president, prime minister, and Communist Party chief, thereby underscoring the country’s political stability.

Today, Vietnams’ policies create a warm and welcoming business environment for foreign investment. The country became the World Trade Organization’s 150th member in November of 2006, thanks to a vote of the organization’s General Council. Vietnam is also taking great strides in protecting intellectual property rights and since 2002 has largely been complying with the guidelines established in the WTO Trade-Related Aspects of Intellectual Property (TRIP). When Vietnam became a WTO member, it agreed to comply with TRIP immediately, without a transitional period. The country is expected to achieve full TRIP compliance soon, thanks to legislation that was passed in 2006. This legislation prompted the U.S. to laud the country for its “extensive revisions and updating of its intellectual property laws.”

Unlike many Asian languages, Vietnamese uses the Latin alphabet, just as English does, which makes it relatively easy for Vietnamese speakers to learn English. English is the second most popular language in the country, and the majority of Vietnams’ college graduates have high proficiency in English. Consequently, most IT workers in Vietnam are able to communicate easily with U.S. companies in English when completing outsourcing projects.

Vietnam has its fair shares of people in rural areas as to educated urban/city areas. This gives the best of both worlds; business labouring and industrial establishment will be beneficial aswell as quality service outsourcing and other tertiary sector businesses. They have greater population, economic growth, and more competitive GDP per capita than rival neighbours, this is the imitating competitive edge China had that made them one of the most powerful country on earth.

Vietnam jumps to first place in the 2008 annual Global Retail Development Index (GRDI), kicking India out of its 3 year top spot as the number one destination for retail investment. The progress was driven by strong GDP growth, changes to the country’s regulatory structure favouring foreign investors and increasing consumer demand for modern retail concepts. Vietnamese consumers are among the youngest in Asia, with 79 million below the age of 65 and consumer spending has increased by more than 75% between 2000 – 2007.

Regardless of the global economic crisis, Vietnam still manages to pull themselves together and implement major development plans. Vietnam is currently building their biggest highway project (US$1.5 – $2bn), the 105 km Haiphong – Hanoi Highway is of international standards and the first ever highway in Vietnam designed without residential houses on both sides. The highway is an important route to link all the cities and provinces in the Northern Key Economic Region that helps facilitate implementation of the strategic project named as “Two corridors, one economic belt” in Vietnam – China economic cooperation

Vietnamese Prime Minister Nguyen Tan Dung appointed the state-owned Vietnam Infrastructure Development and Financial Investment Joint Stock Company (VIDIFI) to construct the nation’s highway and raise financing for it aswell as other coordinative projects along the highway. The coordinative projects consists of many major development plans such as science parks, industrial zones, new town/urban area and the Cat Hai Island industrial service trade complex located in Cat Hai island with an incredible area of 2,800ha. The estimated value of all coordinative projects is over US$4 billion. All projects lies within Vietnam’s prime locations.