A budding high-tech hub?

Hanoi has high hopes that Intel’s recent decision to set up a base in Vietnam – and the vote of confidence it has in the country’s potential – will serve as the cornerstone of a booming high-tech industry that could propel Vietnam to ‘developed country’ status. But there are some infrastructure issues that need sorting out first, writes Amy Kazmin

Intel, the powerful US-based chipmaker, broke ground in March on a new US$1bn semi-conductor assembly and testing plant in a seemingly unlikely location: Ho Chi Minh City, the bustling business capital of Communist-ruled Vietnam. The plant - which, when complete, will be the largest investment by any US company in Vietnam since the two countries ended their bitter war three decades ago - will eventually employ 4,000 people, including high-level engineers.

Indeed, other high-tech companies are following Intel's trail, moving to set up facilities in one of Asia's fastest growing economies, known for its large, youthful and famously diligent population.

In August, Taiwan-based electronics maker Hon Hai Precision Industries - which produces personal computers and electronic gadgets for customers like Hewlett-Packard and Apple - unveiled a five-year plan to invest a total of US$5bn in Vietnamese factories making a range of high-tech consumer products, including digital cameras. Enthusiastic Vietnamese officials predicted that up to 300,000 people could eventually be employed in the facilities.

Besides seeing a surge in new manufacturing facilities for computer hardware and other high end products, Vietnam is attracting investment in software development and technical services. Japanese carmaker Nissan, for example, has set up an engineering division in Vietnam, employing more than 1,000 people to support its technical engineering department in Japan. UK recruitment agency Harvey Nash chose Vietnam as an offshore software development hub for its clients. And Vietnam also boasts a number of small, indigenous software outsourcing companies - many started by returning Vietnamese-Americans - developing applications, games and other products for clients in both Japan and the West.

But while foreign companies pile into what they see as a rapidly emerging high-tech hub, the reality is that Vietnam still confronts major hurdles to realising its dreams of staking a place on the frontier of the 21st century knowledge economy. Its creaky and underdeveloped physical infrastructure - including electricity, telecommunications, roads and ports infrastructure - are straining to keep pace with the demands of its rapidly growing economy and companies' expansion plans. Perhaps even more importantly, its university system remains a bastion of Communist conservatism, where political loyalty is more highly valued than cutting-edge knowledge or innovative thinking.

'It's not as rosy as people believe it to be,' Henry Nguyen, managing director and general partner of IDG Ventures, an IT venture capital fund, says of Vietnam's current stage of development as a high-tech hub. 'There is a lot of raw potential, but there is a lot of work to do in developing that potential. It's not going to happen tomorrow, or even in five years. It's going to take a decade or more.'

On the consumer and social side, Vietnam's youthful population is enthusiastically embracing new technology, with mobile phone and internet use virtually exploding from almost nothing a few years ago. IDG estimates that Vietnam now has around 21 million mobile phone users, up from around one million in late 2001, and 18.5 million internet users, from around 150,000 six years ago. IDG estimates numbers of internet and mobile phone users will continue to rise sharply, probably doubling over the next three years.

With the rapid growth of Vietnamese internet use has come a surge in demand for local content and services - and a proliferation of local web-based businesses, including e-commerce sites, electronic-based recruitment agencies and games. 'Traditional media in Vietnam is intensely under-developed,' Nguyen says. 'The only open channel out there is the internet. I think that is why it has grown so fast. For young people, it's a window to the world.'

But while companies catering to local internet users may be expanding, Vietnam's indigenous software outsourcing companies - many of which were established in an earlier wave of enthusiasm in the late 1990s - have struggled to make their presence felt in the crowded global tech market. While PwC rated Vietnam as one of Asia's most attractive outsourcing destinations, the Economist Intelligence Unit rated Vietnam the lowest of 19 Asian countries in IT competitiveness. Vietnam's software industry revenues were estimated at a meagre US$350m in 2006.

Constraints

Software executives gripe that expensive and poor quality telecommunication services - which are several times more expensive, far slower and more unreliable than in rival India - is a major constraint. Currently, Vietnam has just 850,000 broadband lines, in contrast to, say, Korea, which has 33 million broadband lines, covering two-thirds of the population. International bandwidth is also inadequate for current needs.

'If they want to be serious on this, they need a bigger pipe,' says Michael Mudd, Asia Pacific director of public policy for the Computing Technology Industry Association, who also heads the Information and Communications Technology Committee of the American Chambers of Commerce in Vietnam.

But while physical infrastructure bottlenecks could be quickly overcome, if authorities get the right mix of policies in place, overhauling Vietnam's antiquated university system - to ensure it can generate sufficient quantity and quality of skilled workers - will be more challenging, and take longer to yield results.

On Vietnamese university campuses today, poor salaries force professors to spend much of their time moonlighting - with pernicious consequences for teaching and research. The curriculum is stagnant, dictated by education ministry bureaucrats, rather than left to genuine academics, and thus unable to keep pace with the rapidly changing world of high technology.

While authorities are trying to adopt more modern relevant curriculum and teaching methods, professors trained in the old Soviet-style lack the skills or familiarity with the material - and are under little genuine pressure to change their ways. University laboratories and other facilities are also dilapidated, overcrowded or non-existent, making it tough for students in science, engineering or other technical fields to get hands-on, practical experience that will serve them later in the job market.

'If you do mathematics, all you need is an old Soviet textbook and a sharp pencil, and you can go very far,' says Jonathan Pincus, chief economist for the United Nations Development Program. 'But when it comes to engineering, applied skills, management, economics, they don't have the laboratories, they don't have the people who are up-to-date.'

And despite the international enthusiasm for Vietnam as a potential high-tech hub, young Vietnamese today have little enthusiasm for pursuing studies in engineering or computer science, opting instead for vogue topics like 'business management'. Uyen Ho, a spokeswoman for Intel in Vietnam, said that less than one-tenth of the 800,000 students entering university each year enrol in technical universities.

'If you talk to people in the universities, they will say we are amazed they can't get enough graduates into the IT courses,' says Ian Lydall, a partner at PwC. 'Students don't see IT as the enabler to their future careers. It just isn't on their radar screens.'

Yet with major international names like Intel forging relationships with universities to help them upgrade their curriculum, and offering well-paid jobs to engineering graduates, IT's appeal is likely to improve in the years to come. The Communist Government also talks of doing what it takes to emerge as an IT hub, though policy reforms to support the industry have not always proceeded apace. Still, Nguyen believes it is only a matter of time and that, eventually, Vietnam will be a player in the global knowledge economy. 'I would love that Vietnam starts to be a producer of global innovations, and low cost technologies, but that is not occurring any time in the near future,' says Ngyuen. 'But we definitely remain bullish.'

Amy Kazmin covers Thailand, Vietnam, Cambodia, Burma and Laos for the Financial Times.