Why software outsourcing in Vietnam is the right choice?
In this section, we present a simple and straightforward framework for understanding the advantages and disadvantages of various offshore locations for your outsourced projects and business functions. This list of factors focuses on the most important and relevant factors, without becoming overly complex by listing unimportant minutiae.
The Benefits of Outsourcing to Vietnam
As stated in the introduction, this section will evaluate Vietnam as an outsourcing destination against each of the factors listed in the preceding section.
In Vietnam, labor costs are 90% less than those in the U.S., which means significant cost savings for your company. Even compared to other outsourcing destinations, Vietnam’s labor costs are attractive. According to an article in “GlobalServices” in August of 2006, Vietnam’s labor cost for outsourcing IT functions and business processes are 30% less than those in India, and also less than those of countries in Eastern Europe. In October of 2006, GlobalServices named Vietnam’s Ho Chi Minh City among the top 50 outsourcing cities in the world, due to its having “one of the lowest production costs,” among other reasons.
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. The aforementioned 2006 GlobalServices article cited Ho Chi Minh’s “significantly low attrition rate” and “strong labor pool” as two other reasons for the city’s inclusion in its list of the top 50 outsourcing cities.
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.
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.
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).
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.
Vietnam has had a free market since its centrally-planned economy was reformed through “doi moi” twenty years ago. 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. At that time, Pascal Lamy, the Director-General of the WTO said, “Viet Nam has shown how anchoring domestic reforms in the WTO can yield dramatic results. Viet Nam’s economic growth topped 8% last year, foreign direct investment rose steeply to over $6 billion, and exports surged by over 20%. More must surely follow with the new laws, administrative measures, and commitments on goods and services that are in Viet Nam’s membership package.” 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.
Who Outsources to Vietnam?
Many Japanese companies are choosing to outsource much of their IT work to Vietnam. According to a November 2006 article in GlobalServices, “Vietnam: Capitalizing on the China-Japan,” by the year 2010 as much as 10% of Japan’s software outsourcing may be sent to Vietnam.
Intel is also heavily reliant on Vietnam to meet its outsourcing needs. In October of 2006, Intel Capital, the unit involved in venture capital for the Intel Corporation, announced a $3.5 million investment in FPT, Vietnam’s largest software company, located in Hanoi. Earlier in that same year, the company said that it was going to build a factory for chip assembly and testing with a price tag of $300 million (San Jose Mercury News, “Intel Invests in Vietnam Software Company, October 24, 2006).
Other companies that have chosen to outsource to Vietnam include Nortel Networks, Bayer, Sony, Cisco, and Anheuser Bush (source: CIO.com, “Outsourcing to Vietnam”).
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