Next stop for electronics sourcing and manufacturing could be Vietnam
Vietnam has low-cost labor, but it won't become a serious option for electronics manufacturing until it resolves its critical infrastructure problems.
By James Carbone -- Purchasing, 5/8/2008 2:00:00 AM
“And it's one, two, three, what are we fighting for? Don't ask me, I don't give a damn. My next stop is Vietnam.” —Country Joe McDonald and the Fish, 1965
For many members of the Woodstock Generation in the 1960s, the last place many wanted to be was Vietnam.
But more than 35 years after the end of the war, some U.S. electronics companies have set up operations there and are building printed circuit boards, printers and other equipment. Other companies have announced plans to set up factories in Vietnam to build computers and components.
As with China, India and Eastern Europe, Vietnam is attracting the interest of U.S. based and other global electronics companies because it offers cheap labor. The average wage of an assembly work in China is about $1 per hour. In Vietnam it is 65-67¢.
While electronics companies are not flocking to Vietnam, some name-brand companies have opened operations there and more will follow. Jabil Circuit, based in St. Petersburg, Fla., has a 55,000 sq ft facility at the Saigon Hi-Tech Industrial Park facility that builds printers for export for Hewlett-Packard.
Sparton Electronics, based in Michigan, has its Spartronics subsidiary at another industrial park near Ho Chi Minh City, where it has two surface-mount lines.
Spartronics' 50,000 sq ft facility is in the Vietnam-Singapore Industrial Park in Binh Duong, about 45 minutes north of Ho Chi Minh City, with about 200 other mostly nonelectronics companies.
“We built the factory about four years ago,” says Jason Craft, general manager of the facility. “It is a modern facility with all the electronics manufacturing equipment that you would expect to see in a facility anywhere in the world,” he says.
The facility employs about 150 people and builds boards for avionics systems used in commercial planes and board for industrial equipment.
“Our business is high-mix, low-volume type products,” he says. “The stuff we do is high quality, more complex boards. We also just started a line for box build.”
Craft, who handles purchasing for the facility, says there are few local sources for electronics in Vietnam.
“We source electronic components everywhere else in Southeast Asia except for Vietnam,” he jokes.
Craft says getting components into Vietnam isn't a problem. “We have them drop-shipped into Singapore and then we consolidate the shipments because we have components coming in every week,” he says.
He adds that Spartronics will likely expand operations in Vietnam and has an option to lease property adjacent to its present facility. Eventually, he says, high-volume manufacturing will move to Vietnam.
In fact, plans are already underway.
Taiwan's Hon Hai Precision Co., the world's biggest electronics contract manufacturer by revenue, has announced it will invest $5 billion over the next five years in factories that will build a variety of equipment.
It's not just EMS providers who are locating in Vietnam or already operating there.
Taiwanese computer-maker Compal is building a facility near Hanoi, where it will manufacture laptops. Compal plans to produce 800,000 laptops in 2009 in Vietnam and 6.5 million laptops in 2010. Compal and 24 other Taiwanese suppliers will invest about $1.1 billion by 2012 in Vietnam.
Canon has a facility near Hanoi where it builds printers.
Intel Corp., the world's largest semiconductor company, is building a $1 billion semiconductor testing and assembly plant near Ho Chi Minh City. The move was puzzling to some semiconductor analysts.
Diversify, diversify, diversify
Intel said one reason it decided to open a facility in Vietnam was that it wants to diversify, according to Charlie Barnhart, co-founder and principal of Charlie Barnhart and Associates, a consultant to OEM and EMS providers.
“Intel believes rather than expand their other facilities, which they have all over the place, they want to diversify from some higher risk areas to Vietnam because they feel Vietnam is relatively low risk,” he says.
He added Intel also wants to have a presence in an emerging market.
Barnhart says besides cheap labor there is another advantage in doing business in Vietnam: A pro-business government.
“There is support by municipalities about developing the high-tech industry,” says Barnhart. “They are supportive and want to work with business. They are less obstructive and more cooperative relative to the permitting process than China and willing to give the equivalent of tax holidays.”
He says if a company wants to build a facility in Vietnam, the company is assigned a team of people who will help the company through the permit process and cut the bureaucratic red tape involved.
While labor rates are low and the government is pro business, the biggest problem Vietnam faces in terms of attracting electronics business is the lack of adequate infrastructure.
“They are talking about building dams and working on the electricity problems and the roads, but those are problems,” says Barnhart.
Infrastructure for logistics is an issue. “There is not a major port in the south. “There are a lot of lesser small-craft ports, but no major container port in the south,” he says.
Where's the power?
There is also not enough electricity to go around. When Intel made the announcement it would build an assembly and test facility in Vietnam, it also said it would build a power plant.
“They were talking about how many power outages they would experience per year and how they would deal with it,” says Barnhart. “They are doing a good job in terms of trying to mitigate infrastructure-related issues.”
“I'm sure the plant is for backup reasons,” says Barnhart. The plant will be hooked into the national grid in two different places.
Infrastructure will be a problem for a long time because of a lack of investment. “Investors don't want to build roads and dams. They want to build plants,” he says. That means taxes are needed to fund infrastructure projects and Vietnam has a low per capita income. “You just can't tax these people because there isn't a lot of money around. It is going to take awhile.”
Barnhart adds there are also some problems relative to communications infrastructure inside the country. Last year an earthquake knocked out Internet service to the country for eight days.
Tech talent wanted
Another issue that could impede Vietnam from being a significant player in the electronics supply chain is the lack of technical talent.
“Engineering skills are a void,” says Barnhart. “At Jabil, they were talking about adding board assembly. There was a real dialogue about trying to find engineers, especially manufacturing engineers to support surface-mount technology,” he says. “Someone from Jabil said there are probably five surface-mount engineers in the whole country.”
However, Craft of Spartronics says he has hired engineers from other industries.
“I don't have trouble finding people, but I have to train them,” he says. “They are very competent and hard working.”
Another issue is the lack of experienced business managers. Since it is a Communist country, they don't have a lot of them.
“They don't have any embedded senior management class. The facilities are run by expatriates coming from all over the place, Korea, Singapore,” he says.
Despite these many issues, Barnhart says Vietnam has the potential to be a location for electronics manufacturing and component supply although it may take 10 years or more.
The reason it will attract electronics manufacturing is that the cost of labor is lower than China's.
“OEMs are infatuated with chasing low-cost labor around the world,” says Barnhart. “Companies ran out of Mexico and went to China because labor was 60% of what it was running in Mexico,” he says.
He adds that the cost to produce electronics equipment in Vietnam will remain lower than China for the foreseeable future and it's not just because hourly wages of workers are less.
Lower total cost
EMS companies measure the total full burden cost to make a printed circuit board assembly, the guts of electronics equipment.
The fully burdened cost includes labor along with overhead costs associated with board assembly such as amortization; depreciation of equipment; costs needed to run the plant like electricity and air conditioning; and cost of management. It is called the cost per direct labor hour.
In Vietnam one direct labor hour for printed circuit boards rolls up to $8.75, according to Barnhart. As of last December, in China the cost was $9.50, which was up from $6.80 three years ago.
However, China has been building boards for many years and has achieved the benefit of economies of scale. In Vietnam, board manufacturing is barely in its infancy and has not built enough to achieve economies of scale, but that will change as time goes on and its board production volumes increase.
Achieving economies of scale will help keep Vietnam's fully burdened cost to build boards less than China's according to Barnhart.
Barnhart adds that OEMs should not transition manufacturing to a new region just to take advantage of low hourly wages because labor is a very low percentage of the total cost to build a product.
“When they have something built, the labor content is 5-6% of the cost of goods sold. The vast majority is materials, 80-85%,” he says.
If Vietnam can keep its labor costs low, builds its infrastructure and gets more foreign investment, it will become a viable global source for electronics manufacturing and component supply.
Barnhart says that Vietnam wants to compete with China in business. “They hate the Chinese, but have good relationships with Korea and Singapore. China is also pro-western business and they really like Americans. Go figure.”
See also:
Business in Vietnam defies misconceptions
a buyer's guide to the ins and outs of doing business in Vietnam, part of Purchasing.com's World Tour series.
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