Viet Nam: The Newest Knowledge EconomyOpportunities in the IT Sector

Viet Nam is a young country with a deep infatuation with technology. An obsession that puts computers, phones and tablets a priority item in most household budgets. This passion for hi-tech combined with an educa-tion system that not only prioritizes, but excels in mathematics, has created a nation in the sweet spot for IT sector growth. This trend was best captured by a single developer, Nguyen Ha Dong, and a single smartphone application, Flappy Birds. The 29 year old Ha Noian famous for dominating app sales with a game he developed in his bed-room. The notion of more ingenious program-mers in Viet Nam is attracting steady invest-ment, and powering growth in the sector. In 2007, following Viet Nam’s WTO acces-sion, the IT sector took o� as a result of Intel’s billion dollar project in the suburbs of Ho Chi Minh City. The location set to become the company’s single largest test assembly facility. Since then, there’s been a surge of investment to manufacture high-end consumer electron-ics, from smart phones, tablets, to semi-con-ductors. With downturns in foreign direct investment �ows across the region following the Global Financial Crisis of 2008, Viet Nam saw a 17% bump in foreign projects concen-trated around IT exports. In addition to IT products, Viet Nam is

seeing strong growth in software outsourcing and application development. The country now has “1,000 software companies with 80,000 people working in the industry (04/18/2014 Tuoi Tre).” FPT Soft, the software division of Viet Nam’s largest homegrown IT Company, reported 2013 earnings of $100m with expectations of $150m in 2014, stagger-ingly high growth numbers that mimic the sector. The current trend is to turn small scale pilot projects into the anchor facilities, a process that will be facilitated by the coming Third Wave of trade deals that focus on improving investor con�dence. A crucial component of these deals is better de�ned investor rights and protection over proprietary technology and software. Not satis�ed with WTO accession in late 2007, Viet Nam continues to push toward greater economic integration, both with the European Union Free Trade Agreement and as the only low income country included in the Trans Paci�c Partnership (TPP) negotiations. Viet Nam's policy makers recognize the unique position of the country's economic pro�le: the only major East Asian country capable of providing cost competitive, labor intensive, high tech goods in the 21st century.

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Export Growth Potential

Chances are, if you were to look at your shoes, a t-shirt, any athletic apparel, it will be have a tag that says “made in Viet Nam.” Same for most cups of co�ee, and certainly that shaker of black pepper. However, the prevalence of Viet Nam's exports can create a false impression of the country’s status. The reality is that only after the Global Financial Crisis has Viet Nam become a true player in global manufacturing. Today is the dawn of Viet Namese manufactured exports. Since 2001, Viet Nam has continued to build an open, outward looking economy focused on investment, exports and increased integration. This period kicked o� with the US BTA in 2001, which led right into Viet Nam's WTO accession in late 2006. The Global Financial Crisis (GFC) stalled this progress, but by 2009 the export growth hit an incredible speed. After the �nancial crisis foreign investment intensi�ed in manufacturing—a 17% concentrat-ed increase in FDI from 2009-13 that fueled Viet Nam’s electronics exports to lift-o� from the launch pad. As global markets recovered, manufactured exports in Viet Nam accelerated at warp speed. Garments and footwear did well, but the electronics sector was the star. Coming from nowhere, Viet Nam found massive capital stock from post-WTO investments. Top-end facilities operated by Samsung, Intel, LG, Cannon and others with a trained workforce and a restored overseas demand. Electronics increased by over 750% from 2009 to 2013.

In the decade ending in 2013, Viet Nam increased manufactured exports by 420% (€13bn to €83bn). Electronics exports took o� in 2010, averaging 65% growth for the next three years. The result is Viet Nam climbed from the 7th largest exporter in ASEAN to the 4th. Among electronics export-ers in ASEAN, Viet Nam leaped from 7th to 3rd behind only Malaysia and Singapore. Viet Nam is on track to export over €200bn by 2020, making the country the 2nd largest non-oil exporter in Southeast Asia.

Exporting in Viet Nam

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US BTA WTO GF Crisis

Workforce A principle draw for foreign investment in Viet Nam is the young, energetic workforce. The post-war baby boom means the majority of the population is under 35 years old. Investment in schools during the 90's created an environment of high levels of education relative to GDP per capita. Viet Nam has a 95% literacy level and scored a 16th on an OECD survey of student math scores. A country with an average annual income of US$1000 per year scored better on math education than France, the UK, and USA (PISA OECD 2012). Given Viet Nam’s low level of develop-ment, the country scores middle of the pack in most indicators on education (see table). Were the country excels are measures of pay

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Basic Education Stats

Secondary Education Enrollment (% of Pop) 75 Tertiary Education Enrollment (% of Pop) 25 Rankings out of 144 countries

Internet Access in Schools 47 Pay and Productivity 23 Cooperation in labor-employer relations 79 Flexibility of wages 60 Hiring and Firing practices 65 Women in the Workforce 23

Source: World Economic Forum 2014

Overall Heath and Primary Education 61

Primary Education (% of Pop) 98

and productivity, scoring 29 out of 144 countries in the WEF annual study. Viet Nam’s “basic unskilled worker wages of $130-150 a month are around half of what they have to pay in China.” (Financial Times May 2014). How much investment can Viet Nam’s labor pool absorb? An easy answer. Current employ-ment in the IT sector, 350,000 workers. Viet Nam’s new entrants to the labor pool: 1,000,000 new workers, every year.

Googleplex East?Google software engineer Neil Fraser made headlines with a blog article in 2013 saying that, “11th graders could pass googles notori-ously di�cult interview process. (https://neil.fras-er.name/) This anecdote highlights how the educa-tion system has pivoted from basic skills to provid-ing more a more tech savvy graduates. Forty thousand IT related gradu-ates in 2012 and a target of 65,000 graduates by 2014. An additional 143 tech focused vocational schools have around 25,000 students as of 2012. FPT University, a private school run by a local tech �rm, has 15,000 students working solely on IT related degrees. The sector remains new in Viet Nam, but the young, tech a�uent country is charging into the sector.

Key Expressway ProjectsProject/Location Amount Duration/Status

GMS Kunming–Haiphong Transport Corridor: Noi Bai–Lao Cai Highway

$1,096 million

2008–2014 (Finished)

Ho Chi Minh–Long Thanh–Dau Giay Express-way (co-financed with JICA)

$410 mil-lion

2008–2015 (Finished)

Northern Delta Transport Infrastructure Im-provement

$170 mil-lion

2008–2014 (Finished)

Saigon East–West Highway ¥55.0 bil-lion

2008–2012 (Finished)

GMS: Ben Luc–Long Thanh Expressway $636 mil-lion

2011–2017 (Under con-struction

Second Northern GMS Transport Network $75 million 2011–2016 (Under con-struction)

Infrastructure

Power

Ports

Viet Nam’s Big Infrastructure Push

IT Infrastructure

Road Transportation

The Global Financial Crisis caused a slump in GDP growth, from over 7% to 5%. In response the government launched a �scal stimulus, raising infrastructure investment from 9% to 11% of GDP—a higher rate of expenditure than any country in East Asia (Thanh & Pincus 2011).

Viet Nam’s scores well on IT sector evaluations. The country is par with wealthier countries in the region. In 2012, 35% of the population was online. The country scores 4th in Southeast Asia on ICT Development Index (IDI), a broad measure of the country as an information society. The country scores 5th in the region on the Network Readiness Indicator by the World Economic Forum.

Viet Nam’s power supply is a known bottleneck on growth, and the country is responding in full force. The government will invest $50bn in production and improved transmission from 2010 to 2020 and plans another $75bn from 2021 until 2030. The plans call for a “55 GW build-out between 2014 and 2030, with 29.5 GW of [additional] coal-�red generation targeted by 2020 alone.” (FT 27/11/2014). Most power production is focused on coal and hydro. Gas, nuclear and renewable energy (principally wind) coming to the fore over the next decade.

According the World Bank (2012) Viet Nam is on track to have “the highest number of deep sea ports, interna-tional airports and industrial parks in the world relative to the size of the economy.” (VDR 2012 pg. 57). The country currently has 24 deep sea ports more on the way. The country’s major deep water ports are located around Hai Phong in the north and Vung Tau in the south, with additional port services in Da Nang and special economic zone around Dung Quat, the nation’s �rst oil re�nery.

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Viet Nam made substan-tial progress in the last �ve years on road infrastructure with major expressway projects. In addition, the country has public transpor-tation projects in all key cities, such as high speed bus transit in Ho Chi Minh City and Ha Noi, and light rail around the southern com-mercial hub.

Viet Nam currently has around 290 industrial zones and about 200 more approved to be built over the next decade. In addition, the country has 15 economic zones—essentially more devel-oped, larger industrial parks for heavy industry. Many hi-tech parks are located in Ho Chi Minh City, Hoa Lac (Ha Noi) and Da Nang city with substantial invest-ment since 2009

Industrial and Economic Zones

Viet Nam—21st Century Manufacturing Hub

Key Current and Pending Trade Deals

Beyond WTO: The Third Wave of Trade Deals

oped country in the negotiations, will be pulled by the other eleven members toward even faster growth. Furthermore, Viet Nam is intentionally layering trade deals to take advantage of commutative bene�ts. Trade deals between the Europe and Viet Nam and Viet Nam and the US (or other TPP countries) equals European deals with the US. For example, a European investor in Viet Nam would have the privileges of the TPP deal when exporting to TPP countries, or the customs Union with Russia (and other CU members). It is this aggregate trade regime that will establish Viet Nam as a hub for global manufacturing.

Each trade deal creates a major change in Viet Nam’s economy. Normalization with the US kicked-o� agriculture in the 90’s. The US BTA in 2001 ignited the country’s garment and footwear. And the WTO accession in 2007, produced a take-o� in elec-tronics. For the most part, the accession to WTO leveled barriers in the goods trade. However, this is not the end of the integration process. The two key deals in negotiations are the Trans Paci�c Partnership (TPP) and the Viet Nam - European Union Free Trade Agreement (FTA). Expectations from these are:

Improved foreign inves-tor’s rightsBetter protection of intel-lectual propertyArbitration system for disputesIncentives for higher rates of localization.

While previous deals Opened markets, the ’third wave’ of trade deals are about intensifying investment in Viet Nam. In the case of TPP, Viet Nam, as the least devel-

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Opportunities in the IT Sector

Viet Nam’s Big Electronics

Several key projects typify Viet Nam’s electronics sector boom: Samsung has committed a total investment of $11.2bn in Vietnam, including three plants in Bac Ninh province ($2.5bn, $123million and $1bn in scales), two plants in Thai Nguyen ($2bn and $1.23bn), and two plants in HCMC ($1.4bn each). Nokia’s $300m plant in Bac Ninh province has 39 separate production lines, produces version of the entire company’s product line and will soon be taking over all the company’s production from China. (Thanh Nien 2014). LG Electronics invests $1.5 billion in its electronics complex in Hai Phong. Intel’s largest single manufactures of processors is a $1bn facility outside of Ho Chi Minh City coming online.These are just a handful of projects developed in the wake of either Viet Nam’s WTO accession or the �nancial crisis. For all of these plants, there were major complementary improvements in surrounding infrastructure, ports, and industrial zones. Policy adaptations by government, such as allowing onsite customs clearance. The leveling-up of Viet Nam’s manufacturing is not just a switch from one product to another, it is evolution. Viet Nam’s economy teleporting from pre-industrial to post-industrial modernity in the blink of an eye.

The three year hyper growth of Viet Nam’s electronics exports is wake-up call about the potential of the country’s workforce. Traditionally sidelined as the bottom-end manufacturing, capable of only simple tasks with minimal value added, Viet Nam’s workforce is proving the consensus wrong. In 2013 “exports of mobile phones jumped by 69 percent last year to $21bn” (Financial Times May 2014). Growth rates across the top �ve exports (4 digit HS6) were well above 100% that year. The top two categories of IT exports well exceeded those �gures, hitting shockingly high numbers. Over �ve years the numbers get massive. From 2009 to 2013, mobile phone exports grew by 3742%, integrated circuits by 2633%. This is a phenomenal achievement during sluggish global demand in the wake of the global �nancial crisis.

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Software Development in Viet Nam

Internet Commerce

Critical Mass for Clustering

The IT sector is clustering in Viet Nam. The huge proj-ects mentioned on the oppo-site page are drawing in their suppliers. In key areas such as, Bac Ninh, Ho Chi Minh City, Thai Nguyen, Vinh Phuc, and Hai Phong, we’re seeing an increase in both project development and interest. The intensity of this change is unprecedented for Viet Nam. The balance of trade in the IT sector reverted in 2013, going from –€2bn in 2009 to a €8bn surplus. This shift to net exporter is a sign of how well the country’s workforce has adapted to modern production and a harbinger for future development in the sector. Suppliers to the major manufacturers are clustering not only to reduce transportation costs and take advantage of the workforce, but also thanks to a pro-investment business environment. The policy regime promotes localization and rewards it with incentives. Tax breaks and preferen-tial leases carry the investment until the labor is ready. Once the workforce is trained and the cost bene�ts kick in, the companies expand their investments. The result is mass escalation in the scale of investment, with Samsung expanding a project in late 2014 from $2bn to $5bn. (15/11/14 Bloomberg).

Viet Nam, in particular Ho Chi Minh City, became a hotspot for outsourcing software development in 2007. Ha Noi came one after, but has made steady progress. Tholon, an advisory service, ranks Ho Chi Minh City as the 17th most attractive destination for outsourcing and Ha Noi at 22nd in the 2014 rankings. Several foreign �rms are setting up shop in Viet Nam, IBM recently expanding on of its innovation centers. Most of the sector is fragmented, with some 1000 or so new companies to emerge in the past couple of years (Research and Markets 2013 Viet Nam IT report). FPT is the largest local �rm, but several games under the umbrella of IDG-Viet Nam (a tech investment fund) are growing fast, in particular Vinagames.

Smartphones, tablets, and fast internet are the platform for e-commerce and the sector is growing at an alarming rate. Delivery services, often by motorcycle, are fast and reliable. Viet Nam’s banking system, in particular credit cards, are underdeveloped, but the sector has an e�ective ‘cash on delivery’ standard. The VECITA estimates the sector to net $2.2bn in sales per year, and minimal annual growth rates of 60%.

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Much as Viet Nam’s aggressive development of its trade regime spurred a change from agriculture to textiles (BTA) to electronics (WTO), the returns from the next round of trade agreements show every indication of repeating the success. The closed negotiations on the Trans-Paci�c Partnership (TPP) as of writing means we don’t yet know the full details of the deal, but two key areas are preferential tari�s for producers with higher local content and greater investor protection. Viet Nam’s growing but immature IT sector will see direct bene�ts o� the new deals. All aspects of software and online investment will bene�t from the improved protection of intellectual property. In the software sector, the new deals will help protect against counterfeit-ing and intellectual property. For online content and commerce, the new laws will open the market, providing clearer guidelines and a level playing �eld with local companies. Viet Nam’s track record speaks for itself. The young workforce can adapt to new work envi-ronments with ease, and the government ensures that foreign investors have a safe environ-ment for their most valuable, proprietary fabrication and development. Proven productivity, proven pro-business climate, Viet Nam is the newest knowledge economy of in the 21st century.

The Investment Case for the Viet Nam’s IT Sector

Note on Data: All data not indicated from the General Statistics O�ce of Viet Nam or the World Bank development Indicators. All trade data used in graphs from ITC (http://www.intracen.org/)

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CONTACTS

European Trade Policy and Investment Support Project (EU - MUTRAP)Room 1203, Floor 12, O�ce Building, Ha Noi Tower, 49 Hai Ba Trung street, Hoan Kiem district, Ha Noi, Viet Nam Tel: +84 4 393 78472 | Fax: +84 4 393 78476http://mutrap.org.vn/index.php/en/homeEmail: mutrap@mutrap.org.vn

Foreign Investment Agency (FIA)Ministry of Planning and Investment6B Hoang Dieu street, Ba Dinh district, Ha Noi, Viet NamTel: +84 80 48461 Fax: +84 4 3734 3769Email: �avietnam@mpi.gov.vnhttp://�a.mpi.gov.vn

(FIA) Investment Promotion Center – Central Viet Nam103 Le Sat, Da NangTel: +84 511 3797 669/689/738/699 Fax: +84 511 379 7679Email: ipcmientrung@gmail.comhttp://centralinvest.mpi.gov.vn

(FIA) Investment Promotion Center – Southern Viet Nam178 Nguyen Dinh Chieu, Ho Chi Minh City Tel: +84 8 3930 6671 | Fax: +84 8 3930 5413Email: bbt@ipcs.vnhttp://ipcs.vn/en

(FIA) Investment Promotion Center – Northern Viet Nam65 Van Mieu Street, Ha Noi.Tel: +84 4 3747 5998 | Fax: +84 4 3843 7927Email: ipcn@mpi.gov.vnhttp://ipcn.mpi.gov.vn