Tigers battle dragons in Vietnam

Against this backdrop of primitive and modern juxtaposed, where sweat seeps out of fissures in dilapidated concrete walls and cases of pirated CD-ROMs become coasters for cups of tea, 28-year-old Hai beamed with excitement as he explained how his business has grown over the past three years.

"I quit my job at a [state-owned] electronics and telephone company because I had enough technical skill but not a lot of money. It was hard. When we started in 1998, we sold four PCs. But last year we sold about 100, mainly to the students."

The PCs Hai mentioned would be barely recognizable as such to any Westerner. Exactly how he comes about his parts is a bit of a trade secret, he added, brandishing a price list from one of his wholesalers.

Using them, and his own contacts forged through China, Taiwan and Singapore, Hai and his technicians can custom-build whatever his customers want, patching together CPUs, motherboards, memory and hard drives. A typical low-end configuration using, for example, a 500-MHz Celeron, a 10-Gbyte hard drive and a 64-Mbit memory sells for 5 million VND ($345). At the high end, Hai can put together a P4 plus a 20-Gbyte hard drive and 128 Mbits for about 15 million VND ($1,035). "Pentium IIs are the most popular right now, but Pentium IIIs are coming along, and Cyrix for the cheap ones," he said.

If a customer has a problem during the first year after the sale, Hai's staff will repair the unit free, except for replacement-part costs. Word of mouth ensures good service, and, with competition growing, "service will decide who wins," he said.

Hai is taking advantage of what thousands of crouching tigers-Vietnam's new generation of tech entrepreneurs-have discovered; the huge demand for, and the glaring lack of, cheap, reliable PCs for Vietnam's computer-literate young. Hai estimates that in Hanoi alone, some 400 computer "shops" have sprung up recently.

The government has also made progress in its effort to wire Vietnam, following a series of initiatives that began back in 1993. With its Quang Trung Software Park in Ho Chi Minh City fully booked, the government is setting up another in Da Nang City and still another, Hoa Lac High-Tech Park, in Hanoi. It has also set a goal of training up to 25,000 software engineers by 2005 in order to reach a turnover of $500 million in software exports.

Other policies with prospects include providing tax breaks and tax reductions for software companies and software engineers, increasing Internet band-width, and reducing leased-line costs for software companies located inside software parks.

VASC business development director Quang Minh: 'We're just a baby.'

"There was an explosion of activity," said IDC country analyst Le Thanh Tam, who estimates the total of new businesses is nearer 20,000. "A company can get approval to set up a business in a day or two, or within a day if they apply online. It's a major area of empowerment."

After a crash in the late 1990s, the total registered capital for foreign-invested projects in Vietnam last year was $2.4 billion, up 9 percent from 1999, according to Michael Frisby, commercial counselor at the U.S. Embassy in Hanoi. Prospects have never looked better for foreign investment, ahead of the long-anticipated approval of the U.S.-Vietnam bilateral trade agreement later this year, he said.

"It's been a slow process . . . but when the bilateral trade agreement is reached, it will lower average tariffs from about 43 percent to 3 percent, and that will lead to an investment stampede," said Frisby.

"We're just a baby," said Nguyen Quang Minh, director of business development at Vietnam Posts and Telecommunications Corp.'s Software Development Company (VASC). With a staff of 150, VASC has three years to build up a client base before its parent ministry cuts the cord and privatizes it. Minh, who claimed to be on the verge of signing contracts with "blue chip" U.S. and European networking companies, believes VASC can profit from a series of ministerial infrastructure buildouts, then from agreements with state-owned utilities, before moving onto supporting the hoped-for influx of major foreign companies.

Meanwhile, VASC continues to recruit bright graduates and send them overseas for training in light of of a "very poor" domestic engineering base, said Minh. VASC estimates that there are perhaps 20,000 qualified IT engineers in the whole of Vietnam and that only about 2,000 people capable of being retrained as programmers or software engineers graduate from the country's 100-plus universities annually.

Barriers to business
Despite its many aspiring tigers, Vietnam is still also a country of hidden dragons. The American Chamber of Commerce (AmCham; Hanoi) cites insufficient protection for intellectual-property rights; limited, restricted Internet access; excessive taxation; and high telecommunications costs as the main business impediments to creating a domestic IT market.

Despite a government directive (76/CP) and the signing of the U.S.-Vietnam Bilateral Copyright Agreement in 1998, Vietnam's software piracy rate continues at an astounding 99 percent of all titles sold. Monthly rental of a 64-kbit leased line costs nearly $2,000 here, compared with $319 in Thailand, $69 in Singapore and $40 in the United States, while data transmission speeds remain much lower than advertised because of chronic congestion. The congestion is made worse by a firewall system for Vietnam's 25 mail and 21 file-transfer ports that also blocks standard business software, such as Lotus Notes and Real Player.

So while there are seven major government programs to train software engineers, "Vietnamese programmers are at a severe disadvantage . . . and are shackled into producing small, unsophisticated, low-value software," an AmCham report states. "Until Vietnam can really participate in the worldwide revolution of Internet-based business operations, it will continue to lag behind."

Even government officials admit that basic connection charges remain a major obstacle to increasing Vietnam's tiny online community. On top of a 150,000 VND (roughly $10) setup fee and 30,000 ($2) VND monthly charges, Internet access costs about $1.05 per hour of dial-up, five times that of regional neighbors and hundreds of times higher than in the United States. "The first week I was online it cost me hundreds of dollars; can you imagine it?" said Bach Hung Khang, president of Vietnam's Association for Information Processing and the godfather of Vietnam's Internet.

Vietnam Posts and Telecommunications Corp. (VNPT) has already cut costs seven times, each time by 10 to15 percent, with the next cut due July 1, noted Bui Quoc Viet, director of the state-owned monopoly's information center. Viet argued that the revenue is essential for VNPT's plans to install 900,000 new digital lines this year to meet the politburo's target of achieving five lines per 100 people by the end of 2001, an upgrade estimated to cost $700 million, according to IDC.

"We have certain reasons for high tariffs; we are a developing country, and this investment requires a huge amount of money," Viet asserted.

AmCham argues that telecom costs will still prove prohibitively expensive for companies. But even more pervasive barriers exist for foreign participation in IT buildout.

Cozy oligopoly
Officially this year, foreign companies will be able to break into the Internet-service and Internet-access provider businesses here, potentially shaking up the cozy oligopoly of five government-regulated ISPs. "There may be as many as 20 or 30 or even 50 ISPs," predicted IDC's Tam.

But nobody is going to give up his slice of the pie without a fight, suggested Bui Quang Ngoc, vice managing director of the Ministry of Science Technology and Environment. MSTE believes in managed, regulated competition, Ngoc said.

"I think it is not going to be too easy to become an ISP. I think our government does not like to give out too many licenses, because it can't control them. [Internet access is] a very new service, and it is seen as a social service and something sensitive. Therefore, I think the government is right to limit it. . . . In the West you can do anything, but not here," he said.

But when published law and actual practice part, as they often seem to do in Vietnam, private enterprise fills the gap. That brings us back to Hai and his backyard-built PCs and bootlegged software. About 80 percent of Vietnam's PCs are made on a tolerated but disliked quasi-black market, admitted Nguyen Viet Hung, director of the the Ministry of Industry's state PC builder, VEIC. VEIC plans to bring out three state-sanctioned PC models, for homes, schools and businesses, to improve quality, he said.

"They import legally and illegally," Hung said, laughing, of businesses like Hai's, "so our government wants to concentrate and take control."

Established offshore vendors would argue that Hung has a point. Motorola, for one, has stated concern about "gray imports" with inferior, non-OEM parts that result in poor quality and a secondary black market for genuine branded phones. The root problem is the import tax, which runs to 20 percent for mobile phones, 21 percent on hardware and peripherals and 10 percent on software, the company argues.

Customs regulations are a "subtle problem," said Yukichi Takeda, group president of Fujitsu Ltd.'s corporate manufacturing-systems division, which runs what is perhaps Vietnam's most successful foreign-owned semiconductor plant: Fujitsu Computer Products of Vietnam Inc.

It took six months and "a lot of paperwork and a lot of negotiation" to get "inexperienced" local customs officials to acquiesce to Fujitsu's requests to import raw materials and export its 2 million monthly production of printed-circuit boards without interference, Takeda said.

After having built its own power-generation and waste-treatment plants, secured raw materials and battled to find suitable local contractors to build its fab, the company struggled three more years before it was licensed as a 100 percent foreign-owned high-tech company. But the rewards have proved considerable. Whereas in China only joint ventures are permitted, the Fujitsu operation's foreign-owned status lets Fujitsu Ltd. exert complete operational control, as well as exempting the plant from corporate tax until 2004, when a 15 percent rate kicks in.

Established in 1995, the 27,950-square-meter facility, which today employs 2,700, has proved a cash cow. The operation contributed revenue of $466 million in 1999, up from $104 million in 1996. With a well-educated, easily trained pool of local graduates and average labor costs that Takeda estimates are one-third lower than in China, the plant can churn out products at a cost estimated to be 10 percent lower than would have been possible in China.

"We plan to expand our business 30 percent very soon into boards for mobile phones, notebook PCs and PDAs, but 100 percent-100 percent-for export," Takeda said.