At the turn of the millennium, Vietnam barely had any kind of tech industry. Today, the country is home to nearly 14,000 companies.
Over the past two years, Quynh Huong Duong has stared up many times at the imposing Bitexco Financial Tower. The native Vietnamese, who moved to Ho Chi Minh City (formerly Saigon) from Paris in 2014 to co-found an online booking platform called GetSpaces, still can’t quite believe the gleaming 262-metre edifice is actually there.
“If you’d seen the Saigon skyline a decade ago, you’d be filled with surprise, too,” she says.
It was 1986 when the government embarked on a series of economic reforms known as doi moi, setting in place a process that would gradually see Vietnam embrace capitalism. Thirty years later, a burgeoning technological revolution – embodied in bold new architecture such as the Bitexco Tower – now promises an equally transformative effect on the Vietnamese economy.
At the turn of the millennium, Vietnam barely had any kind of tech industry. Today, on the back of significant infrastructure investment and an increasingly fertile business environment, the country is home to nearly 14,000 companies spanning hardware, software and digital content.
Smartphone exports alone were worth US$30 billion last year, making up nearly a fifth of Vietnam’s total export revenue. LG and Microsoft have made big manufacturing investments, but they’re dwarfed by Samsung: the South Korean giant has ramped up Vietnamese production facilities to the point where local media reported last year that Vietnam was manufacturing half of all Samsung mobile phones.
With sustained GDP growth of more than 5 per cent, Vietnam now has a huge opportunity: if it can fully harness the creative skills of its smart and youthful population, it may be able to follow in the footsteps of tech-driven success stories such as South Korea and Taiwan.
As well as internal transformation, Vietnam is being directly impacted by an external trend – China’s continuing transition from low-wage manufacturer to high-tech powerhouse, which is driving up Chinese labour costs.
In a recent Standard Chartered survey of nearly 300 Chinese manufacturers in the Pearl River Delta (which includes tech hubs such as Shenzhen and Guangzhou),
17 per cent of respondents told the bank they wanted to shift production overseas. China’s southern neighbour, Vietnam, was the favourite destination.
“With China’s wages rising rapidly since 2010, Vietnam’s low labour costs have become an increasingly important competitive advantage,” says Rajiv Biswas, Asia-Pacific chief economist at London-based data provider IHS Markit.
“A country where the minimum wage is still only about US$150 a month allows for very cost-effective multinational operations.”
The education puzzle
Low wages may be a key draw, but there’s a lot more to Vietnam than simply cheap labour. Vietnamese high school pupils have shown remarkable abilities in science and mathematics. Vietnam’s per-capita GDP of just over US$4000 a year is the lowest of any country participating in the standardised Programme for International Student Assessment (PISA) test.
Yet, as a recent World Bank paper points out, Vietnamese pupils rack up PISA maths scores roughly three years ahead of students of similar ages in other low-income countries – and in line with those of children in countries such as Finland and Switzerland.
The World Bank suggests that part of the difference is education: Vietnam’s government appears to have invested more heavily and effectively in education – particularly early childhood learning – compared with similar nations.
Vietnamese students also appear to be “diligent and disciplined”, the paper says, and many parents help out at school. However, as the World Bank admits, the full dimensions of this “Vietnam effect” are hard to explain.
Explicable or not, those maths and science skills are helping to build the country’s growing output of competitively skilled tech graduates.
Right place, right time
Vietnam boasts a number of other benefits for overseas investors. The country’s proximity to China, with which it shares a 1280km border, eases supply chain integration. A booming domestic economy, underpinned by an increasingly affluent, tech-savvy population, is another major plus.
“With 45 million internet users and 30 million smartphone users, Vietnam’s 90 million-strong population is increasingly connected,” says Eddie Thai, a general partner of the Vietnamese branch of 500 Startups, an early-stage venture fund and seed accelerator. “More and more tech companies are seeing the market potential.”
A growing number of Asian and Western tech multinationals – some of whom first came to Vietnam looking to cut labour costs – are increasingly focusing on value-added production and service provision. Companies such as Samsung, Intel, LG and HP are investing in areas that include complex software development, data analytics and original R&D.
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This trend has driven up Vietnam’s inward foreign direct investment (FDI). According to national statistics, the country attracted a record-breaking US$14.5 billion in FDI last year and a further US$8.55 billion in the first seven months of 2016, a year-on-year increase of 15.5 per cent.
Recent reports suggest Apple may be about to invest US$1 billion in a Da Nang-based R&D facility, while Samsung, Vietnam’s largest overseas investor, has multiple new investments in the Vietnamese pipeline, including a R&D facility in Hanoi. These could increase the company’s total registered capital in the country to US$20 billion by the end of next year.
Vietnam’s increasing connectivity is largely driven by smartphone uptake. According to the latest Mobility Report by Swedish telco Ericsson, Vietnamese smartphone subscriptions will triple from 30 million in 2015 to 90 million by 2021.
This move to mobile is driving online service provision, which is now showing the first indications of serious growth. Hanoi wants Vietnamese e-commerce revenue to reach US$10 billion by 2020 – it was US$4 billion at the end of last year.
Given these kinds of figures, it’s little surprise that more and more young Vietnamese are now looking to take advantage of their country’s mobile, internet and e-commerce revolution.
The country’s start-up fever has been stoked by the global success of Flappy Bird, a mobile game developed by a Vietnamese programmer. It’s estimated there are now around 1500 Vietnamese start-ups in operation.
“The demand for venture capital [VC] funding is strong and getting stronger,” says Binh Tran, also a general partner with 500 Startups Vietnam. “The global start-up hype, Vietnam’s ample greenfield opportunities, the ready supply of Vietnamese tech talent and the relatively low cost of launching a start-up here are all contributing factors.”
Investment capital is now pouring into Vietnam’s start-up sector. Earlier this year, Goldman Sachs and Standard Chartered raised US$28 million for Vietnamese e-wallet MoMo, while 500 Startups has also announced a US$10 million Vietnamese start-up fund.
“We have invested in more than 10 Vietnamese companies over the past 12 months and now we want to pick up the pace,” says 500 Startups’ Thai. “With a huge queue of initiatives lined up, it’s all about defining best practice.”
Golden Gate Ventures, a San Francisco- and Singapore-based VC firm, has been keeping a close eye on Vietnam since 2012 and has “done four deals”, according to managing partner Jeffrey Paine. “We like the dynamism of the country, the growth in consumer spending and the explosive growth in mobile penetration and user engagement,” adds Paine.
Vietnam’s tech manufacturing boom has so far largely relied on heavyweight overseas investors such as Samsung and Intel. This means that almost all of its exports are either commodity-driven or have next-to-zero added value.
“Most tech products manufactured in Vietnam are not driven by external marketing pull or push efforts,” says Ralf Matthaes, managing director of Infocus Mekong Research, a Ho Chi Minh City-based business advisory firm.
“Vietnam is still well behind the curve in innovation and developing global relevance in terms of brand equity.”
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With international marketing often beyond the economic reach of Vietnamese companies, a focus on innovation is essential in order to develop global appeal. As was the case with China, early-stage Vietnamese tech innovation often involves business model adaptation and localisation.
“If you’re launching a paradigm-shifting technical innovation, you should be in the real Silicon Valley,” says 500 Startups’ Tran.
“Vietnamese innovation is different. We’re seeing people apply existing technology and business models to an emerging market that is often complex and highly regulated.”
High-tech park progress
Vietnam is pinning much of its ongoing and future tech success on the development of high-tech parks. Under the country’s 2020 IT Master Plan, three new high-tech parks are set to complement existing parks in Hanoi, Ho Chi Minh City and Da Nang by 2030.
According to government figures, Hanoi’s Hoa Lac Hi-Tech Park has so far attracted US$2.47 billion of inward investment and the Saigon Hi-Tech Park US$4.3 billion. Despite these impressive figures, many are calling for increased investment and the creation of incentives for more R&D projects.
"Smartphone exports alone were worth US$30 billion last year."
Ground was also recently broken on Saigon Silicon City (SSC). Scheduled for completion in 2020, this US$40 million private venture is located on the outskirts of Ho Chi Minh City. SSC chairman Hieu Minh Nguyen hopes the venture will attract US$1.5 billion worth of investment over the next five years and will eventually come to rival its Californian namesake. Others, however, sound a note of caution.
“Any place ... aiming to be the ‘next Silicon Valley’ is setting itself up for failure,” says Tran.
Zennon Kapron, director of Asia-based financial research firm Kapronasia, believes “it would be more realistic to advertise SSC as a place where international companies could have a regional hub, while maintaining their headquarters elsewhere.”
Over the past five years, Vietnam has made rapid progress in establishing its IT and electronics manufacturing industries. As with all developing economies, the key challenge over the next decade will be to shift toward higher value-added production and service provision.
As Vietnam’s tech sector becomes increasingly sophisticated, the demand for appropriately skilled local talent is increasing. Facing talent shortfalls, some overseas companies such as Samsung, Intel and Google have taken matters into their own hands by starting training and educational initiatives.
On the start-up side, Vietnam’s young entrepreneurs also face numerous challenges. While Hanoi has declared this “the year of the start-up”, many would like to see the Vietnamese Government doing more to improve the country’s business environment.
“The government needs to stay out of the entrepreneur’s way,” says Paine. “A more streamlined regulatory infrastructure would encourage more FDI.”
Despite these obstacles, an air of optimism still appears to pervade much of the Vietnamese tech sector, as the country’s digital doi moi gathers pace.
“One day soon we’ll see a Vietnamese start-up go global,” says GetSpaces’ Quynh Huong Duong. “I’m sure of it.”
Movers and shakers: Vietnamese start-ups to watch
A mobile-optimised e-commerce site, dubbed the “Vietnamese Amazon” by many analysts. Recently valued at about US$45 million.
An e-commerce platform for consumer electronics. Made its stock market debut last year, raising more than US$250 million.
A Vietnam-focused hotel booking service provider founded in 2014 and valued at more than US$13 million.
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