Vietnam seeks gains as China labor costs rise

A recent spell of walkouts over pay and conditions in China’s southern export zone seems likely to spur low-cost producers to expand operations in countries where wages remain significantly lower than in China.

China’s wage inflation is being closely watched in Vietnam, which has expanded aggressively since the 1990s into labor-intensive industries like clothing, footwear, and furniture. The US, its former adversary, is now Vietnam’s biggest export market and last year became the largest investor here. Exports of textiles and garments, an industry that employs around 1.7 million Vietnamese, rose by 17 percent in the first seven months of the year.

But economists say that Vietnam won’t necessarily reap the immediate benefits of rising labor costs in its giant neighbor.

While labor costs are low – around two-thirds less than in China – export industries are held back by rickety infrastructure, an inefficient bureaucracy, and a lack of skilled workers. Companies are also concerned by signs that the government may impose price controls on private businesses to tamp down inflation, currently around 8 percent.

Keeping labor costs down is only one factor in attracting more investment to Vietnam, says Adam Sitkoff, executive director of the American Chamber of Commerce in Vietnam. Employers also need to see an upgrading of facilities like ports, roads, and utilities, amid a sharp rise in demand for electricity that the state-owned utility struggles to meet.

“How can you attract investors to a place where you can’t keep the lights on?” asks Mr. Sitkoff.

Not just China talking strike

Moreover, as in China, factory workers in Vietnam are also ready to stop work. While independent unions are illegal, wildcat strikes have erupted in industrial zones where foreign-owned manufacturers are clustered. Strikes have risen since 2006 and average 400 a year, of which the majority are in textile factories, according to the Ministry of Labor.

In May, a textile workers’ union and a national industry association agreed to raise starting salaries to $82 a month, up from less than $50. But only 70, mostly state-run, companies have signed the pact, says Nguyen Tung Van, the head of the union. Many foreign-owned companies are reluctant to sign, he says.

“We tell the bosses, if you keep paying low salaries, you won’t keep your workers. They don’t want to listen, but they must listen,” he says.

The collective textile-industry pact marks a departure from Vietnam’s practice of setting a general minimum wage for factory labor. Analysts say it may reflect fears that the official Communist Party-affiliated union is losing its relevancy as workers begin to assert their rights, particularly in the booming private sector.

A skills gap

The sharp pickup in exports has created a labor shortage in the textile industry. More broadly, analysts say Vietnam must tackle a skills gap in other industries if it wants to stick to its path of rapid industrialization. Foreign companies that recruit graduates often send them overseas for the type of training that vocational colleges are supposed to provide, says Matthias Duhn, executive director of the European Chamber of Commerce in Vietnam.

Around 60 percent of workers hired by multinational companies need to be retrained for 6 to 12 months before they can start work, according to a report by a Dutch educational nonprofit. “The lack of qualified human resources is the single biggest factor limiting Vietnam’s future development and economic growth,” the report said.

Mr. Duhn says that new recruits often switch jobs after they return to Vietnam, to the frustration of their employers. This and other obstacles to doing business outweigh crude comparisons of wages between China and its rivals. “There’s no such thing as cheap labor. You have to look at productivity,” he says.

Beyond textiles

In many Asian countries, textiles are seen as a steppingstone to more sophisticated, capital-intensive manufacturing. Vietnam has already started on that transition: Intel has built a $1 billion chip assembly plant in a new technology park in Ho Chi Minh City that has also attracted Japanese investors. Intel is due to open its plant this fall.

Vietnam’s Communist leaders take pride in their newfound status as a middle-income borrower from the World Bank, a category for countries with a per capita income of $995 or above. Last year, the World Bank and other donors pledged more than $8 billion in development aid to Vietnam, which is classified as a lower middle-income economy (upper-middle status starts at $3,945).

In speeches, Vietnamese leaders now make frequent reference to the so-called middle-income trap for emerging economies that fail to outgrow a low-wage, export-led growth strategy. Economists say Vietnam hasn’t reached that stage yet, but is wise to pay attention to the pitfalls of rapid growth without a serious investment in productivity gains.

“You can’t assume that because you’ve made progress in the last three decades … that you’re going to continue that trajectory and perhaps [arrive] at the higher end of the middle-income range. It’s very important for them not to be complacent and to draw the lessons of other countries that have actually gotten stuck at some point,” says Victoria Kwakwa, country director in Vietnam for the World Bank.