In 2015, the global outsourcing market for IT and business process outsourcing (BPO) was estimated at approximately US$180 billion, with India capturing approximately 50 percent of that market. However, Vietnam is rapidly becoming quite a serious player in these outsourced technology-heavy fields thanks to a number of factors that make the country attractive to supply management practitioners seeking cost-friendly solutions without high-level risk. BPO is a high-growth potential segment in Vietnam, even more so than IT outsourcing, due to the availability of human resources, affordable costs and untapped demand from companies with mature, outsourced operations in India and China that are considering other global locations for skilled workers.
Vietnam, part of South East Asia, is bordered by oceans on the East and South, with China as its neighbor to the north and Cambodia and Laos, its neighbors on the West. Vietnam is larger than the size of New Mexico in area but shaped in a long, narrow “S” – a little longer than Florida in length. Vietnam’s population of 90 million is young and tech-savvy, with 65 percent of its citizens younger than 35 years old. It has one of the fastest-growing economies in the world, and the country is considered relatively stable from a political standpoint. According to the General Statistics Office of Vietnam, the government is highly supportive of the IT/BPO industry. Around Vietnam’s Hanoi and Ho Chi Minh commercial hubs, the IT industry has more than 15 industrial parks and export-processing zones in addition to the popular Quang Trung Software Park and Saigon High-Tech Park.
In Vietnam, employees are in abundance with more than 290 universities offering IT and engineering training and, according to research from the World Economic Forum, Vietnam has over 100,000 students earning undergraduate and graduate degrees in engineering each year. On top of an ample workforce, employee loyalty is strong in the culture – Vietnam workers tend to be loyal to their workplaces. Employee attrition rates in Vietnam are in the 8-9 percent range while other outsourced destinations like India and the Philippines are facing attrition rates in the 40-50 percent range.
Most Vietnam services companies are located in urban areas. The International Labour Organization reported that in Vietnam, more people are expected to move from rural to urban areas. There should be no shortage of individuals seeking work. The share of the population residing in urban areas had been forecast to reach 33.6 percent in 2015, an increase from 30.4 percent in 2010. This growth rate in the urban population is significantly higher than in most countries in the ASEAN region. Of course, this urbanization trend will add pressure on urban areas in terms of employment, infrastructure and services to handle the increase in population.
Improving technical education among Vietnam’s workforce is an ongoing priority — both in urban and more rural areas. One of the largest reform initiatives is happening through the Higher Engineering Education Alliance Program (HEEAP), an international education consortium founded by Intel, Arizona State University, and USAID in 2010. The main objective is to expand educational offerings in vocational tech schools to make sure graduates leave school ready to join the workforce. The group is also working to help Vietnam universities switch to modern teaching techniques and upgrade technology, hopefully leading to more online learning and accreditation for workers of all ages.
Foreign countries are investing in developing the promising Vietnamese workforce as well. In 2008, Germany worked with Vietnam to create Vietnamese-German University (VGU), a research-oriented institution with a strong focus on technical education. All courses are taught in English at VGU, and students can benefit from research opportunities in computer science, engineering and other high-level areas of study. According to an April 2015 Forbes article, although VGU is still a small school with a current enrollment just over 1,000 students, VGU was recently awarded $180 million in funding from the World Bank to be used for campus expansion to service up to 12,000 students, lecturers, and researchers by 2017.
Over the last 15 years, Vietnam has been known for its low-end manufacturing industries, e.g. garment, footwear, and furniture. An illustrative example is the growth of Nike’s manufacturing capabilities in Vietnam. In 2010, Vietnam surpassed China as the largest producer of Nike footwear and presently, Nike employed over 333,000 manufacturing jobs in Vietnam (30% more than China), producing shoes, apparels and equipment.
In the last five years, Vietnam has attracted more technologically-advanced and higher value-added manufacturers in industries such as power generation, automotive and consumer electronics. Vietnam is becoming the “go to” place for manufacturers like Microsoft/Nokia, Intel and Samsung. In addition to lower operating costs (labor, land and electricity), the Vietnam government incentivizes businesses in selected industries by providing a lower corporate tax rate versus the standard national corporate rate of 25%.
Samsung, for example, appear to enjoy beneficial operations in Vietnam due to the lower costs and favorable corporate environment. Samsung is currently manufacturing 50% of its mobile phones in Vietnam and is reported to shift the majority of its global manufacturing to Vietnam. Samsung’s two plants in Vietnam have a combined annual production capacity of 240 million mobile units. Samsung is planning to expand the plants with an additional investment of US$3 billion, and their capacity is expected to reach 270 million units at the end of 2016. In comparison, Samsung’s two factories in China have a maximum capacity of 150 million phones and Samsung is looking to reduce their China production by approximately 40 million due to increasing labor costs. Samsung is also manufacturing other consumer electronic products, e.g. cameras, appliances, and flatscreen TVs in Vietnam.
Vietnam’s government has set an ambitious target of 7 to 8 percent annual growth by 2020. To meet this goal, the country also needs to boost its overall labor productivity growth as some manufacturing segments appeared to have plateaued. To that end, Vietnam is actively working to develop partnerships with foreign companies and encouraging these businesses to build relationships with Vietnam service providers and suppliers.
With the 20 years old historical tie between the United States and Vietnam since the Vietnam War, Vietnam companies are strongly interested in working with U.S.-based companies and are focused on developing long-term strategic partnerships. Conditions for the two countries to work together are perceptibly improving. According to the 2015 Index of Economic Freedom, Vietnam has steadily opened its market to foreign trade and reduced other tariff and non-tariff barriers. A.T. Kearney’s Global Services Location Index ranked Vietnam as the 12th most attractive country for offshore services outsourcing. Cushman and Wakefield, in its annual ranking of the top outsourcing locations worldwide by assessing costs, risks and operating conditions, put Vietnam at the top of its CW Global Outsourcing Location Index for the first time in 2015.
Of notable importance, the Trans-Pacific Partnership (TPP) was agreed to in October 2015 and will change the game for Vietnam. The TPP is intended to enhance trade and investment among partner countries, promote innovation, economic growth and development, and support the creation and retention of jobs. All signatory countries, including the U.S., Vietnam and others (China and India are not currently part of the TPP), will need to conform their domestic laws and policies to the provisions of the TPP agreement. This agreement will follow international standards in areas such as cross-border service supply, financial services, e-commerce, investment, intellectual property, government procurement, employment, environment and state-owned enterprises. Vietnam is not a democratic country and, as such, has not always been considered a strong contender for foreign business investment in the past. The TPP agreement, once ratified by the 12 signatories, will go a long way allaying some of the historic concerns about the ease and risk of doing business in Vietnam.
The potential cost savings of outsourcing to Vietnam can be considerable. In general, Vietnam’s labor costs averages around 90 percent less than those in the U.S., which translate to significant savings. Based on an analysis after working professionally with India offshore suppliers over the last 10 years, Vietnam’s labor rates may be as much as 30 to 50 percent lower than those in India. In 2014, analysts from the research firm Gartner commented, “Vietnam remains one of the most competitive options in the world for software outsourcing due to its competitive labor costs and other business costs.”
In the early 2000s, there was a shift of semi-skilled manufacturing jobs from China to Vietnam. It is anticipated that a similar shift to Vietnam for BPO will soon occur as U.S.-based companies look to mitigate or transfer operations from India and China with labor costs and concerns about intellectual property protection and other challenges of doing business in these two countries continuing to increase.
Take the time to examine all your options in BPO, and be sure to look beyond the traditional China and India suppliers. In BPO, Vietnam suppliers have demonstrated capabilities and growth in areas such as data entry and conversion, digitization, document processing, online catalog/image processing, loans and mortgage processing, title insurance processing, and back-office support (e.g. procurement, accounting and finance).
While Vietnam may still have some issues to improve — for instance, some critics say verbal English-language skills in Vietnam can be problematic in some areas, but over a short period of time I continue to see improvement in these skills because of increased investment in education and opportunities. For BPO services that are “non-voice” (in other words, where verbal skills are not as important), I find that Vietnam workers have an additional advantage of a stronger working knowledge of the written languages from Europe, China and Japan. For example, on a recent advisory project, the small Vietnam team of nine people was able to support work in multiple languages, including English, French, German, Chinese and Japanese, without any additional costs.
Overall, due to its many strengths and efficient costs, Vietnam has proven to be a solid contender for quality and affordable outsourcing.