Vietnam living its own Asian success story

VINH CUU, Vietnam -- This South Korean-owned factory, which produces millions of Nike athletic shoes every year, employs ceiling fans and an open-air design to keep its assembly lines comfortable in the tropical heat. Workers strolling between buildings on the manicured industrial campus wear pastel-hued polo shirts. Nearby, cheerful managers lead upbeat training sessions in air-conditioned classrooms.

Yet, one of the biggest problems for Nike and its Korean partner is hanging onto employees. Every year, more than one out of five workers leave for another job in Vietnam's rapidly developing economy, where wages for some skilled positions are rising by double-digit annual percentages. "Because people have so many more options, it's harder to retain people," says Shirley Justice, Nike's chief representative in Vietnam.

Now enjoying its third consecutive year of better-than-8% annual growth, Vietnam is on its way to becoming the latest Asian nation to swap a history of colonial poverty for hard-earned prosperity. On bustling factory floors and crowded city streets, the Vietnamese are visibly leaving old ways behind and embracing the certainty of better days ahead. Outsiders are noticing: Commerce Secretary Carlos Gutierrez last month brought executives here from 22 U.S. companies, including Ford f, Dow Chemical dow and 3M mmm, to scout business prospects. "Our relationship is growing very rapidly. But it could be a lot bigger, and it should be a lot bigger," Gutierrez says.

As Vietnam seeks to attract more U.S. investment, however, investors such as Nike nke are increasingly concerned about the country's ability to surmount looming bottlenecks. Chief among them: a shortage of skilled workers and woefully inadequate roads, ports and rail links. "Costs are going up significantly in this country. … In a couple years, if they don't come through on some of the things they say they'll do with ports, there's definitely going to be a bottleneck here," says Justice, whose background in logistics led Nike to assign her here.

Vietnam is a key link in Nike's global supply chain: Last year, the Beaverton, Ore.-based company shipped 75 million pairs of shoes from its Vietnamese suppliers and expects to ship 81 million pairs in 2008. Nike says its footwear and clothing orders keep 200,000 Vietnamese workers employed, so its views carry weight here.

Long overdue economic growth

Vietnamese officials recognize the need for action but regard the problems as the inevitable consequence of rapid — and long overdue — economic growth. After Vietnam was forcibly unified by the communist North Vietnamese in 1975, it spent a decade mired in disastrous economic experiments that brought it to the brink of famine. In 1986, communist authorities launched doi moi, a policy of market-based reforms, which seemed to mimic China's earlier market-friendly moves. Like its northern neighbor, Vietnam is a one-party state whose leaders are more interested in economic change than in political liberalization.

Only in recent years has the economy begun to gather steam, averaging 7.8% annual growth from 2001 to 2006. A young, well-educated population of enterprising workers and eager consumers is drawing the gaze of multinational corporations, long mesmerized by China's much larger market. Foreign direct investment exceeded $10 billion last year and is on pace to top $12 billion this year, thanks in part to Vietnam's joining the World Trade Organization in January.

Vietnamese officials say they are determined to avoid the excesses of Chinese-style reforms, such as a politically dangerous gap between rich and poor. But globalization isn't yet an epithet here. At Pace Educator, a business school in Ho Chi Minh City, enrollment of about 7,000 midcareer students is up from 1,000 in 2001. Mercedes-driving Gu Tu Trung, 32, the company's chairman, says he provides Vietnam's budding CEOs the "global vision" they need to succeed.

"I tell them where we live is not Vietnam but the globe. And if you keep the old way of thinking, you can't survive," he says.

The capitalist transformation is molding the next generation. At Le Qui Don high school, one of Ho Chi Minh City's best, teachers overhauled the curriculum to encourage students to search for answers on their own rather than receive information passively, says principal Pham Van Phiet. When a visiting journalist asks a classroom full of teenage students what they want to be when they grow up, one young man stands and confidently replies in English: "I want to be a businessman like Bill Gates."

In the capital Hanoi, the target of fierce U.S. bombing raids in the 1970s, the streets are thick with noisy motorbikes. KFC yum outlets draw enthusiastic crowds, and flat-screen television monitors tuned to the Bloomberg financial channel adorn sleek investment offices.

Since 1993, economic advances have slashed the share of the population living in poverty by almost two-thirds. This summer, World Bank President Robert Zoellick on a visit to Hanoi hailed Vietnam for achieving "one of the fastest improvements in living standards in the world" and said the country was on course to join the ranks of so-called middle-income nations such as Brazil and Mexico by 2010. "We've been able to totally alter the face of our country," crows Deputy Prime Minister Pham Gia Khiem.

Some changes have been disorienting. Le Tan Phuoc was just 10 years old when the conflict known here as The American War ended in 1975. His father, a captain in the U.S.-allied South Vietnamese Army, was slapped into a labor camp for 2½ years by the communist victors from the country's north.

Today, Le is the CEO of Searefico, a maker of industrial refrigeration systems in Ho Chi Minh City that has enjoyed strong growth since being privatized in 1999. He's also a member of the Communist Party that imprisoned his father.

A few years ago, Le's young son asked him why he and his grandfather were on opposite sides of the country's historic political divide. "It was hard to answer him," Le says.

He still has trouble articulating the reason, though he adds that the party members at Searefico who recruited him were "the best people" in the company, and he harbors hopes that the party will evolve as the economy prospers. "I love my country," he says simply.

Economy still small

Despite breathtaking changes, Vietnam's economy remains small. Total economic output each year of about $62 billion is roughly equal to U.S. retailer Target's tgt annual revenue. Foreign investors complain the communist bureaucracy remains opaque and, at times, corrupt. Vietnam ranked 165th of 178 countries in investor protections, according to a recent World Bank survey. "More reforms need to be done on all dimensions of investor protection, so investors can be more confident to invest," the report concluded.

Since signing a bilateral trade agreement with the U.S. in 2001, annual trade between the former battlefield antagonists has grown to more than $10 billion. But Vietnamese executives complain that U.S. trade measures designed to protect domestic producers are crimping their export hopes.

The imposition of U.S. duties designed to thwart what American producers claim was the sale of Vietnamese shrimp for less than the cost of production, for example, have depressed exports at companies such as Saigon Aquatic Products Trading Co. Before the duties were imposed, U.S. orders accounted for up to one-quarter of the company's $60 million annual sales, says Nguyen Van Cong Hau, the company's No. 2 executive. Now, the U.S. share is down to 15%.

"We worry a lot about that," he says. "Next year, if there's more barriers, we'll reduce (shipments to the U.S.) even more."

Vietnam's biggest success has been in the garment industry, which draws sizable orders from U.S. importers looking to avoid complete dependence on low-cost Chinese factories. Through September, Vietnam exported to the USA this year $3.27 billion in textile and apparel products. That represented a 27% increase over the same period in 2006 and ranked Vietnam behind only China and Mexico as a supplier of Americans' clothing.

With temporary limits on Chinese apparel exports to the USA, Vietnam was expected to post even greater increases. But special U.S. monitoring of the country's garments exports, a measure designed to win congressional approval of Vietnam's WTO application, is having a chilling effect on Vietnam's apparel exports. Some retailers have shied from placing new orders here out of concern that the monitoring could evolve into formal tariffs.

At the Garco 10 factory in Hanoi, workers toiling at sewing machines and presses produce 12 million shirts, pants and suits each year. About 45% of that is exported to the USA to be sold as Van Heusen pvh, Perry Ellis pery and Tommy Hilfiger products in J.C. Penney jcp, Kmart shld and Gap GPS stores.

Factory boss Nguyen Thi Thanh Huyen, a veteran of 24 years in the apparel trade, frets over pressure from low-cost Chinese rivals and steadily rising costs. Wages are up — workers now make $120 to $150 monthly — plus oil, steel and other inputs are pricier. The falling U.S. dollar also is pinching her profits, as the factory's goods are priced in the American currency.

The company, boasting $90 million in annual sales, is a good example of the market-oriented changes remaking Vietnam's economy. Once entirely state-owned, Garco 10 is now a joint stock company with ownership split between a 51% state share and 49% held by workers. Nguyen says the garment maker is registered for an eventual listing on the stock exchange named for former president Ho Chi Minh.

Managers still treasure the memory of the day in January 1959 when Ho visited. But the cozy operating style of a state-owned enterprise is long gone. Managers have had to learn new ways of operating, balancing costs and profits with an eye toward the iron logic of a global marketplace. Says Nguyen: "Now, the rules have changed. … (But) we can compete with any company, any country, in the world."