Procurement Intelligence Unit

As labour costs continue to spiral in both India and China, a number of South Asian countries appear well placed to capitalise – and Vietnam is at the head of the queue.

Some estimates suggest that companies sourcing from Vietnam could achieve 17% cost savings over sourcing from China which, in the current environment, places the country on a platform that few others can match and would appear to provide procurement with a golden opportunity.

Vietnam has long been the location of choice for companies sourcing furniture, handicrafts and ceramics, but the past decade has seen the country take massive strides in areas such as manufacturing and R&D. Vietnam is also currently the third-largest offshore service destination in South-East Asia.

So far, so good. However, while the country's pros undoubtedly outweigh its cons, problems still persist, as the impact of the global economic downturn on a nation reliant on its exports has served to illustrate.

Despite Vietnam recording economic growth of 6% in 2008 - a figure which analysts expect to fall to 4% in 2009 - the past 12 months have seen a dramatic dip in much-needed foreign direct investment (FDI). According to recently published figures, FDI inflows into Vietnam dipped an alarming 11% to US$7.2 billion between January and September 2009, when compared to the equivalent period in 2008. Although the country's Foreign Investment Department is confident that this figure will rise again - it set itself a target of US$10 billion by the end of 2009 - those figures have acted as a wake-up call to a country that has enjoyed unprecedented economic growth over the past five years.

The past 12 months have seen Vietnam continue to send out a business-as-usual message against a backdrop of increasing economic turbulence and with exports falling to 4.69% in 2009, compared with 6.1% in 2008, the country was as hard hit by the global slowdown as any other country in South Asia. However, with Nomura International forecasting that Vietnam has pulled out of a crisis that has left its mark on almost all of the world’s major economies, the country is once again looking forward with hope, rather than trepidation.

Part of the reason for this is the stabilisation of inflation, which many are predicting over the next two years. In May 2009, inflation in the country spiked to 9.4%, sparking concern that Vietnam's export driven boom could soon come to an end. Since then, the figure has been brought under control, and is widely expected to level-out around the 5% mark throughout the remainder of 2010 and beyond.

All of which is good news for those companies looking to Vietnam for their sourcing requirements, as well as those firms intent on using the country as a means of diversifying their risk by sourcing from alternative locations within Asia.

That Vietnam offers procurement with value for money is in little doubt, although a shortage of skilled labour and an infrastructure that is developing fast, but still requires far more work and investment, are two factors that are still mitigating a widespread sourcing invasion.

The country's government is pouring vast sums into improving Vietnam's educational systems, and while major IT firms such as Cisco and Microsoft have begun working with local authorities to address the issue, a skills gap is still very much in evidence.

That said, attrition rates in the services sector are still exceptionally low - at 5-15%, compared to rates of nearer 30% in countries such as India - a factor that, again, puts Vietnam in an enviable position when it comes to competing in the global marketplace.

With corruption rife at all levels of government and an increasing prevalence of social unrest, though, Vietnam clearly still has a number of major hurdles to overcome if its rise is to continue. While the country has some way to travel, it might not be too long before it looms ever larger in China and India's rear-view mirror.