Chapter 7
The foreign vendors and the foreign direct investors

At the end of the 1980's, Vietnam was in desperate need of foreign direct investment (FDI) to help modernize the country's industrial production capa- cities. Foreign capital was required for the rehabilitation and maintenance of existing machinery as well as for the installation of new machinery. There was not enough capital accumulated within the country for the investments planned and for the transfer of technology. Five years later, the situation has changed dramatically. Capital needs are still enormous, but more FDI is beginning to move into the country. The government has been active in attracting foreign capital to its industrial sector, while hoping for the transfer of know-how and modern technology as part of commercial investments. Some of these investments are related to microelectronics and IT.

In general, foreign investment in electronics and IT industries have moved slowly into Vietnam. Many of the leading companies have paid visits to the country and planned for their commercial activity, but they have not yet announced or realized their plans. A few companies, like the French- owned IT company Bull, have invested in joint ventures, but failed to accomplish their objectives and have now scaled down production. The GenPacific company, based in HCM City but also with an office in the nation's capital city, was founded in 1988 and was set up to assemble personal computers (PCs) at the circuit board level for the Soviet and eastern European markets. Its production line never reached full operation before these markets collapsed. Government tax policy also contributed to the cessation of PC production (see Chapter 15 , and Chapter 3 and 8 for discus- sions on tariffs and Vietnam's IT industry development). GenPacific is now more of a software production house, systems integrator, and service company than a manufacturing firm.

At the time, GenPacific was seen as a pioneer joint venture in a "high- tech" area. Many similar arrangements were expected with foreign-owned IT companies, who were expected to provide advanced IT products such as computers and telecom equipment. Some such arrangements did actually appear, but only in the hand assembly of consumer electronics products built to the design of Japanese, Korean, and European companies (see Part Four of this report). Assembly now takes place in Vietnam for the mass market of radio-cassette players and television sets. These products are manufactured using parts sold to the Vietnamese companies by the foreign partners.

Among foreign computer and other IT firms, most that are currently investing in Vietnam seek local partners to represent them as sales agents and service centers. Actual production of computers and other electronic equip- ment is rare, and, so far, it seems that only little production is planned.

In our 1989 investigation, we discussed indications of growth in foreign investments within the emerging Vietnamese software industry. Given the relatively high numbers of software engineers and other specialists in the country, a software industry seemed a likely prospect for Vietnam. The competition in international subcontracting from countries like India proved to be strong and a take-off in software subcontracting is yet to be seen. There are, however, a number of examples of successful sales of software, from HCM City area in particular, but they are all economically insignificant.

Some overseas companies are now doing what we expected in the late 1980's, namely running small software development or computer training centers in Vietnam to investigate the local capabilities and monitor the man- power development in the IT sector more generally. The conditions for some of these new investments is assessed by the Technology Promotion Department of the Ministry for Science, Technology and Environment, but the foreign companies are given no special status or other benefits.

Some of the show-room or training activity by foreign vendors is combined with building a sales and after-sales-service organization in Vietnam. These companies are actively recruiting local staff among young computer specialists, who are thus given a chance to use much more sophisti- cated equipment than they were trained on. Foreign firms are also active in building market confidence and a positive image among potential consumers after thirty years of trade embargo. Among US companies, Apple Computer has provided the Ministry of Education with equipment for a small training unit. Compaq Computer has offered to equip a similar unit elsewhere and to run seminars on microcomputer applications for government staff in Hanoi. Hewlett-Packard will create its own "open systems center" in Hanoi. IBM, which came back to Vietnam somewhat earlier, in September 1993, has not only signed a dealer-contract with its former South-Vietnamese company -- which survived the embargo years as a service firm under a different name, but with some of the same IBM 360 computers from pre-1975 vintage -- but also with two local distributors in Hanoi. Like Hewlett-Packard, IBM will create its own Institute of Science System (for education and applied research) in Hanoi and is conducting a feasibility study on hardware development and production in Vietnam. Digital Equipment (DEC) exposed its technological capabilities and know-how in a highly-esteemed series of seminars on open systems, and is now building its organization to sell its products and services. Oracle has visited the country, but has not started commercial operations. Vast numbers of illegally copied versions of Micro- soft personal computer (PC) application programs (such as Word, Excel, and FoxPro) and operating software (such as DOS and Windows) are in use all over Vietnam. This is because of weaknesses in the legal protection of commercial property rights in the country. Microsoft has indicated this as the main reason why the company has not yet entered the Vietnamese marketplace.

In the group of US companies, the most far-reaching business venture to take place before the lifting of the trade embargo was engaged by UNISYS. Bringing to Hanoi a team of 14 consultants to work during for one month with the Ministry for Science, Technology and Environment, UNISYS created a "strategic review of national information technology development" in Vietnam. The v ork was finalized in December 1993 together with 10 Vietnamese IT experts and focused on areas such as education and training; data communications (e.g. wide-area networks for the government), the financial sector; and the higher-education sector. The report (called the "IT 2000 programme" (1) also suggested a National IT Agency to deal with technical standards and to coordinate educational initiatives. The whole endeavor, paid essentially by the company's own funds, was performed under contract between the Ministry of Science, Technology and Environment, Mitsui (Japan), and UNISYS Asia (USA).

This "strategic review" gave UNISYS access to vital information on public sector needs for its own business planning, and opened the possibility of implementing the detailed proposals in the review report. However, the Ministry has so far avoided any exclusive deals or commitments to buy the company's products and IT services.

For the Vietnamese government, a close but temporary collaboration of this kind with one of the leading IT companies in the world may have given important insights into the way in which large programs are planned from a business point-of-view. However, the experiences from other developing countries that work very closely over a long period of time with one particu- lar IT firm have not been entirely positive. Vietnam should study further the experience of Singapore and its close relations to IBM, whose systems have not met the country's needs in terms of flexibility and adaptability.

Among other internationally operating IT vendors and electronics manu- facturers, East Asian firms are the most visible in Vietnam marketplace. Some of them, like Mitsui and Fujitsu, seem to deliberately avoid advertising their presence in the country to their competitors and to the general public. Fujitsu has started to build a software education center with the Ministry of Science, Technology and Environment to be located in Hanoi. With the very limited time of our investigation, it was not possible for us to screen all the foreign IT vendors or study their market behavior.

It would be difficult to overestimate the importance of these new players to the future of electronics and IT in Vietnam. Figure 3 compares the relative size of the US-based IT companies now active in Vietnam.

Figure 3

US-based IT firms in Vietnam

Company HQ Location Products/Services '93 Sales
IBM Armonk, NY Large computer systems, personal computers, etc. $62.7B
Hewlett-Packard Palo Alto, CA Mid-range computers, networking equipment, technical work stations, printers, etc. $20.3B
Digital Equipment Maynard, MA Mid-range computer systems, PCs, etc. $1 4.4B
Unisys Blue Bell, PA Large computers, databases, systems integration, government systems, etc. $8.4B
Apple Cupertino, CA Personal computers, etc. $8.0B
Compaq Houston. TX Personal computers, etc. $7.2B
Microsoft Redmond, WA Personal computer software. $3.7B
Oracle Redwood City, CA Large database software. $1.5B
Total Sales $126.2B
SOURCE: Computer Select CD-ROM, Company Profiles, New York: Ziff-Davis Publishing, /no date/.

The annual sales of most of the firms listed in Figure 2 far outstrip the output of Vietnam's manufacturing sector (US$4.9 billion US dollars) and the largest two, IBM and Hewlett-Packard, have annual revenues larger than Vietnam's entire gross domestic product ($15.2 billion US dollars in 1992). Many Japanese electronics firms are also very large. For example, Fujitsu's 1993 revenues were 29.8 billion US dollars.

When negotiating with companies as large as those listed in Figure 3 , it is important for policy makers to bear in mind that the current market for IT products in Vietnam is insignificant in terms of worldwide reven ues. These companies are in Vietnam to gain a position in the future growth of Vietnam's IT industry. They are interested in establishing an early position in a market with sizable potential over the long term. For that reason , most are not interested in establishing a local manufacturing presence in the near future, if at all.

Over the next few years, the principal force of change in information technology in Vietnam will be the rapid increase in trade and for eign direct investment (mostly in services). According to our sources, the foreign IT firms currently operating in Vietnam see the following positive fact ors in the country:

FE A small, but rapidly increasing domestic market for consumer electro nics, computers and other electronics products and services, based on a population of mo re than 72 million.

FE A strategic location in the South East Asian region that could fo ster a certain industrial specialization or division of labor among nearby countries ac tive in IT industries (i.e. software).

FE A relatively well-trained work-force with a high number of experienced IT specialists compared to many other developing countries.

FE Relatively advanced institutions performing IT research and developmen t.

FE Concrete plans for substantial improvements in the country's econo mic infrastruc- ture, including options for wide-area networks and advanced internat ional tele- communications.

Compared with some of its neighboring countries, Vietnam is still far from being a leading-edge market for the products and services generat ed by the internationally operating 'information industry', but the govern ment seems determined to make the best of the country's position in the A sia-Pacific region. Ambitions are strong among government decision-makers to make Vietnam a compelling location for assembly and manufacturing i n consumer electronics and, possibly, in the assembly of computers and rela ted equip- ment.

One of many reasons why the typical foreign investor in th e interna- tional IT industry is still waiting to invest in Vietnam, is the fact th at business regulations are unclear. Some of the institutions supporting the new market economy are not in place or, if they actually are, they are not compatible with the new economic situation. Important institutional capab ilities in support of a dynamic industrial environment have yet to materia lize. This will be elaborated in Part Three of this report, especially in Chap ters 8 and 12.


Foot Notes:
  1. Also known as A strategic review of national information technology development, Hanoi, 1993.

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