Why should Viet Nam ranks one of the Top Outsourcing Countries in East & Southeast Asia ?

vietnam
 
Outsourcing index:  
5.4
Rank:  
20

Vietnam’s outsourcing sector is benefiting from the rising costs and growing problems among the Chinese business environment. American firms looking to establish sourcing operations are starting to look towards Vietnam in light of trade tensions between the US and China. Vietnam has proven to be effective for smaller-scale business ventures, but lacks the large skilled workforce necessary for larger productions. These problems stem from the nation’s poor education system. The biggest obstacle that Vietnam faces is the lack of English speakers – holding back the sector from being a major global competitor.  

Vietnam has tremendous potential to become an IT outsourcing hot spot. It has gained the endorsement of some of the top companies in the world, including Intel, which built a USD 1 billion chip plant in the country.

 

Country Overview

Independence Palace

 

Vietnam gained its independence following WWII from the French, but continued to be under their rule until 1954 when Communist forces effectively removed them from power. The Geneva Accords in that year divided Vietnam into a Communist North, and Anti-Communist South, resulting in civil tensions and ultimately leading to war.

South Vietnam has relied on the United States for financial aid to boost its economy, but the nation failed to see growth because of ultra-conservative fiscal policies. Also during the time of conflict, many successful merchants and businessmen fled the country, further derailing economic advancement.

In 1986 the Vietnamese government enacted new policies targeted at modernizing the economy, increasing competitiveness and expanding its exports. Vietnam currently has a GDP valued at USD $278 billion according to its purchasing power parity – ranked forty-second globally. The official exchange rate puts the GDP at $102 billion.

Vietnam benefits from its key geographical location, bordering China and three major bodies of water (Gulf of Thailand, Gulf of Tonkin, and South China Sea). The nation, sized comparably to New Mexico, is densely populated and home to more than 90 million people (fourteenth largest population globally).  Thirty percent of the population live in urban settings, with Ho Chi Minh city inhabiting nearly 6 million and the capital city of Hanoi’s population is almost 2.7 million. 

Population: 91.5 million
Source: CIA Factbook, 2009

 

Gross domestic product: $106.4 billion
Source: World Bank, 2009

 

Gross domestic product (PPP): $278.6 billion
Source: World Bank, 2009

 

Gross National Income Per Capita (Atlas): $1,160
Source: World Bank, 2009

 

Gross national income (PPP): $3,070
Source: World Bank, 2009
 
Cost competitiveness
viet nam dong, vietnam currency
 
Cost competitiveness index:  
7.4
Rank:  
13

Employee Compensation

BPO resources in Vietnam afford large savings, with junior resources with less than a year experience earning just 23 percent of their US counterparts’ salaries. Higher skilled resources with greater experience collect salaries that are 32 percent of US wages.

General operations managers offer no savings, and in turn collect more than those in the US; their salaries average 17 percent higher than those in the US.

Real Estate

According to Colliers International’s annual review of office real estate prices, prime office space in downtown Ho Chi Minh City averages USD $67 per square foot annually. Comparable office space in the suburbs offer sizeable savings; real estate rates are just $40 per square foot. 

Taxes

Vietnam’s corporate taxes are moderate to low at 25 percent. They are more attractive than the taxes in some countries in the region, like Thailand and Philippines (30 percent); and the same as Indonesia, China, and Malaysia. The indirect tax rate is low, but comparable to many nations in Asia at 10 percent. The SMB effective tax rate is 33.1 percent.

Salaries: Software engineer: 17.0 % of US
Source: PayScale, SourcingLine, February 2010

 

Salaries: Junior BPO resource: 22.6 % of US
Source: PayScale, Sourcingline, March 2010

 

Salaries: Skilled BPO resource: 32.3 % of US
Source: PayScale, Sourcingline, March 2010

 

Real Estate: Office occupancy costs (CBD): 67.6 $/sf/yr
Source: CB Richard Ellis, Colliers International, SourcingLine, March 2010

 

 

Real Estate: Office occupancy costs (suburbs): 40.3 $/sf/yrsoftware engineers, staff, developers
Source: Colliers International, SourcingLine, March 2010

 

Taxes: Corporate tax rates: 25.0 %
Source: KPMG, October 2009

 

Taxes: Indirect tax rates: 10.0 %
Source: KPMG, October 2009

 

Taxes: SMB effective tax rates: 33.1 %
Source: Doing Business (World Bank), 2010

 

Notes: 

Real Estate : Office occupancy costs are for Ho Chi Minh City.

 

Resources and Skills

 

Resources and skills index:  
2.5
Rank:  
25
Workforce size: 46 million
Source: CIA Factbook, 2009

 

Adult Literacy: 93 % of population
Source: UNESCO, 2009

 

Basic Education: Expenditure on education: 5.3 % of GDP
Source: UNESCO, 2009

 

University Graduates: Annual graduates: 244 thousands
Source: UNESCO, NASSCOM, SourcingLine, 2009

 

Annual science and technology graduates:  
20.0% of total
Source: UNESCO, 2009

 

Technological Readiness: Internet access: 23.9 users per 100 inhabitants
Source: International Telecommunications Union, 2009

 

Technological Readiness: Broadband Internet access: 3.7 subscribers per 100 inhabitants
Source: International Telecommunications Union, 2009
 
Business & economic environment
meeting, business
 
Business & economic environment index:  
4.5
Rank:  
26

Economic competitiveness and stability

A nation’s ability to compete economically is a major factor in establishing operations. Vietnam scores a 4.27 index and its macro economic stability earned a 4.5 index – higher than the 4.4 score achieved in the US.

Infrastructure

A nation’s infrastructure is a major component in deciding where to set up sourcing operations. The road quality in Vietnam is low, earning just a 2.7 compared to the UAE’s 6.3 and Singapore’s 6.6 index. Electric supply is also quite low with a 3.6, tying with Indonesia. 

Regulation

Vietnam ranks seventy-eighth globally for ease of doing business, based on the complexity of business procedures, legal protections, and contract enforcement.  It typically takes 44 days to register a start-up business. Preparing and filing taxes is an exhaustive process, generally requiring more than 940 hours of prep time – far exceeding the 187 hours required in the US.

Corruption

Vietnam has a poor corruption perception score. At 2.7 it is among the worst globally. With corruption often come many unforeseen costs and inefficient use of time, which make Vietnam less attractive to foreign investors than other nations with less corruption.

Legal and intellectual property protection

Contract enforcement in Vietnam requires 34 procedures to fully execute, generally lasting almost ten months. On average it will cost 29 percent of the total value of the contract to enforce, more than double to 12 percent it costs in Thailand. Intellectual property protections in Vietnam do not score high with just a 2.7 index – the Unites States achieved a 5.1 score. Software piracy is high in the country as well at 85 percent, similar to Ukraine and Sri Lanka.

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