Vietnam: From Catfish to Computers

Helped by Intel's new facility, the country is poised to become Southeast Asia's fastest-growing contract manufacturing hub

by Frederik Balfour

Vietnam has long been known as a low-cost manufacturer of Nike (NKE) sneakers, blouses for Liz Claiborne (LIZ), and wooden furniture, not to mention its huge exports of coffee, catfish, and rice. But a growing wave of high-tech investors is helping this country of 84 million lay the foundation to become Southeast Asia's next big center for electronics manufacturing.

The world started to take notice after Intel (INTC) made big headlines more than a year ago when it announced it was building a semiconductor test-and-assembly facility in Vietnam. As expected, Intel's $1 billion investment was pivotal in raising Vietnam's profile and has since helped attract other IT companies.

"The real 'Intel effect' is starting to occur," says Henry Nguyen, managing partner at IDG Ventures Vietnam. "Upstream and downstream partners and suppliers and customers it needs are coming."

Vietnam's accession to the World Trade Organization in January is also widely seen as a boon for export potential, and the country has just unveiled an ambitious program to goose electronics exports. The government aims to see those exports grow to as much as $5 billion by 2010. According to the Vietnam Electronics Industry Assn., exports last year totaled $1.4 billion, a 34.1% increase over 2005.

Expanding Into TVs

That ambitious target is premised on the realization of some enormous investments in the pipeline. Foxconn of Taiwan, also known as Hon Hai, the world's largest contract manufacturer—with clients like Hewlett Packard (HPQ), Dell (DELL), and Apple (AAPL)—has applied for a license to invest up to $5 billion. It plans to manufacture electronics and computer products including digital cameras, personal computer printed circuit motherboards, and music players.

The venture would employ up to 30,000 workers. A contract manufacturer is a company that manufactures components or products for another company under its own brand name.

Compal Electronics has unveiled plans to invest $500 million to build notebook PCs in Vietnam. It also plans to expand into LCD TVs, said Chairman Rock Hsu Sheng-Hsiung at an annual shareholders meeting in June. Compal is expected to receive its investment license in July.

A June report by industry research group iSuppli predicts that contract manufacturing in Vietnam will grow more than 100% annually between 2006 and 2011. The sector is expected to explode from $36 million in 2006 to as much as $1.8 billion by 2011 as more major manufacturers move in, making it the fastest-growing sector in the area.

Moving to Hi-Tech Park

Although these investors are focused primarily on exports, Vietnam is gradually becoming an important market in its own right. It boasts the region's second-fastest-growing economy after China, and its rapidly expanding middle class is buying up cell phones, personal computers, and iPods. There are some 10 million mobile phone subscribers, and computer penetration in Hanoi and Ho Chi Minh City is approaching 50%, says Intel.