You can hardly blame the Vietnamese for leaking the news early. It's not every day that a country known for exporting rice and Nike (NKE) sneakers snags a heavyweight foreign investor like Intel (INTC). Though they were supposed to keep quiet until Intel Chairman Craig Barrett arrived in Vietnam to make the announcement on Feb. 28, word trickled out early that Intel has been granted an investment license worth as much as $605 million to build a semiconductor test and assembly plant in Ho Chi Minh City.
In fact, the figure Intel is set to announce today is less than half of that. The actual initial investment will be just $300 million dollars, still a huge figure for a country like Vietnam. The test and assembly plant will be located in the Saigon High Tech Park, and will employ up to 1,200 people by the time construction is finished in the second half of 2007.
The deal is a huge vote of confidence in Vietnam's potential. "We applaud the progress the country has made in building up their technology infrastructure and the support of education programs to advance the capabilities of the local workforce," Barrett said in a press release.
PR VALUE. The discrepancy between Intel's figure and the Vietnamese government's arises from the way in which foreign investments are typically licensed. The Vietnamese chose to disclose the maximum possible investment figure stated in Intel's license, though this may cover several phases of investment over many years. The Intel figure refers to the initial investment only.
Either way, the deal was probably one of Vietnam's worst-kept secrets. Vietnam wanted to get maximum public-relations value out of the news, and pulled out all the stops to make the event as high profile as possible. That's why officials chose to hold it at the Reunification Palace, arguably the most historic site in southern Vietnam. Deputy Prime Minister Nguyen Tan Dung flew down for the event from Hanoi to personally hand the investment license to Barrett.
Vietnam has been trying to kick-start the information-technology sector since 2000, when the government declared it as a key pillar in its development strategy. Attracting an investment from Intel is going to send a very strong signal to other foreign investors that Vietnam has the potential to move up the value chain.
"FIRST STEP." Another U.S. investor expressing optimism about Vietnam's future is IDG, which has set up a $100 million fund to invest in startup IT companies in Vietnam.
"This is a very important first step for Vietnam, to be at a stage where it can attract a world-class giant tech player making a significant investment," says Henry Nguyen who manages IDG Ventures Vietnam. "This may be on the lower part of the value chain of what it means for Intel, but for Vietnam it's huge."That Intel chose to build a greenfield site on Vietnamese soil when it could easily have expanded its operations in Shanghai, Chengdu, the Philippines, or Malaysia, says a lot about Vietnam's competitiveness and potential. Minimum wages at foreign-invested enterprises are about $55 per month in Ho Chi Minh City, vs. nearly triple that in Shanghai, and even more in Malaysia. That's a huge saving in the labor-intensive processes entailed in semiconductor test and assembly plants.
TRAINING CHALLENGE. But not everyone is convinced about the wisdom of the move. "I'm scratching my head right now," says Philip Koh, semiconductor research director at Gartner Dataquest in Singapore. "Usually original-equipment makers come in first, then chipmakers arrive to support their customers. But the OEMs aren't here yet. From a semiconductor perspective, it doesn't sound logical," he explains.
As elsewhere, Intel Vietnam will import chips produced at its silicon wafer fabrication facilities in Ireland, Israel, and the U.S. Given that Vietnam only has about 1.5 million computers in the entire country of 82 million people, clearly Intel's investment is all about exports, which makes a lot of sense given that Vietnam is expected to join the World Trade Organization sometime this year.
Intel has its work cut out in training the local staff. Though the country's workers have strong fundamental skills in math and sciences, there are virtually no experienced semiconductor engineers, and Intel will have to rely on overseas help initially. Intel Vietnam Country Manager Than Trong Phuc says he has already started receiving e-mails from overseas Vietnamese within Intel looking to come back to the country. Phuc himself came back to Vietnam with Intel in 2000, after leaving as a refugee in 1975.
LOW PENETRATION. Though the country has changed a lot since then, it's a long way from being a digital economy. IDC estimates that computers have penetrated less than 2% of potential users, and the country has been connected to the Internet for less than 10 years. It's expected to have about 10 million Web users by the middle of this year -- most of them information-hungry youths surfing from Internet cafes.
In the past two years, gaming has been keeping those users logged on for long hours. Vinagame, an online-gaming provider in which IDG Ventures Vietnam has a stake, has more than 2 million registered users, says Nguyen.
Indeed, Internet penetration is clearly constrained by cost. With GDP per capita of just $620 per year, affordability is a big issue for the expansion of personal computers in Vietnam. The bulk of machines in operation are generic desktop computers costing between $250 and $500. A total of 339,000 computers were sold in the country in 2005, up 8% from a year earlier, and more than double the 162,000 units sold in 2001, according to IDC.
BRANCHING OUT. However, Intel is encouraged to see laptop sales are now starting to pick up, especially in Ho Chi Minh City, where per capita GDP is more than twice the national average. "Last year and particularly this year, we see rapid growth of laptop space," says Phuc. "At the end of 2006, we think it will reach 15% of the market, doubling from 7%." All laptops sold in Vietnam are imported foreign brands from the likes of Hewlett-Packard (HPQ), Lenovo (LNVGF), and Dell (DELL).
But with Intel expanding beyond microprocessors and branching into consumer electronics, health care, and wireless communications, Vietnam may have a lot more potential than its PC penetration suggests. Phuc notes that Wi-Fi hot zones are springing up in cafes and hotels in Hanoi and Ho Chi Minh City, and that early this year, Vietnam announced it was awarding Wi-Max licenses to three local service providers, which should launch trial services this year.
Perhaps the next time government officials decide to leak a big corporate announcement, the Vietnamese will be able to read about it on handheld devices.
Balfour is Asia Correspondent for BusinessWeek based in Hong Kong
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