Vietnam Business

Although businesses have historically chosen adjacent nations when entering the global market, globalization has altered their strategy. Due to rising globalization, companies looking to enter new markets now search the entire globe for promising locations. As a result, many businesses have gone global by making investments in other nations. This has benefited greatly from globalization and the development of transportation technology. Decisions about a company’s operations must take into account the global business climate in light of recent market changes.

Over the past few years, US-based firms’ choice of destination countries has increased significantly, particularly in Asia. As production costs in the US rise, companies are forced to look for countries where production costs are low in order to stay profitable and competitive. For companies whose operations are characterized mainly by assembling and manufacturing, Asian countries have continued to provide cheap resources, particularly labor. China has grown in the past few years to be a manufacturing hub for companies. However, the rise in production costs in the country is prompting organizations to look elsewhere in Asia. In this regard, therefore, Vietnam has emerged as a new destination for firms looking to cut their costs of production (Chandran, 2015).

While the manufacturing power of China and other Asian nations continue to shrink, Vietnam is emerging as a new manufacturing giant. This has been supported mainly by the low wages in the country and a young population. Of the South East Asian nations, the country was the biggest exporter to the US in 2014 (Chandran, 2015). It is for this reason that companies are considering joining others who are presently there including Samsung Electronics, Siemens, and Intel. This paper examines the potential of Vietnam as a manufacturing destination for US-based companies. The paper will also examine if the activities of Apple Inc are consistent with Vietnam as a manufacturing site.

Basic Appeal

According to Wild & Wild (2014), when selecting a site for a manufacturing facility, it is important to first explore the presence of the necessary resources. It is important for the firm to examine the destination for resources including labor, raw materials, and capital. In addition, if part of the raw materials has to be imported from countries neighboring the manufacturing site, the costs of doing so have to be assessed. This prevents them from rising to unacceptable levels.

The basic appeal for many companies opening manufacturing facilities in Asian countries is low wages. It is the objective of many businesses to reduce production costs as much as possible. Having manufacturing sites in Asian countries help them achieve this. Therefore, the basic appeal for Vietnam is the availability of cheap labor. While the wages in other Asian countries are rising, labor is still inexpensive in the country. As noted by Chandran (2015), the average monthly wage rate in the country stood at $197 in 2013. This is way cheaper compared to other South Eastern nations. In 2013, the average monthly wage rates in Thailand and China stood at $391 and $613 respectively. As seen, there is a big gap between the wage rates in Vietnam and other countries in the region that US-based organizations can set up operations in. In addition, the country is composed of a young generation given that only 6% of its population is above the age of 65. In Thailand and China, 10% of the population is above 65 years old while in South Korea it is 13% (Chandran, 2015). It is evident that Vietnam’s population is composed of young, energetic individuals, which makes the country favorable compared to other destinations in the region. Therefore, the basic appeal for western companies is young generation and the low wages.

National Business Environment

Assessing a country’s national business environment is a critical step in examining the foreign countries to start operations in. In assessing the business environment of a country, the major aspects that an organization looks at include cultural forces, economic and financial forces, and legal and political forces. Assessing these major aspects of the national environment of countries helps a company estimate the risks it may face when it starts operations. While it may seem easy to assume that there are similarities in the national environments of countries in the same region, failing to critically examine them can compromise the expansion plans of a firm. For example, if a company already has operations China, it may seem easier to enter another South Eastern nation like Thailand without necessarily carrying out research on the factors characterizing the national environment of the country. This can put the expansion strategies at risk. Therefore, it is crucial not to assume that that the national environments of one region are alike.

The cultural environments of nations differ from one another to a great extent. Vietnam’s culture is particularly different from that of the US and other Western countries. Aspects of culture that differentiates Vietnam from the US include language, traditions, customs, and attitudes towards business. According to O’Neill (2015), relationships characterize to great extend the culture of Vietnamese. The author also notes that many of the citizens of the country are not interested in forming relationships or partnerships with individuals they do not know. In this regard, therefore, a company wishing to start operations in the country has to understand the importance of relationships to the Vietnamese people. Pride is another aspect of Vietnamese people that differentiates them from other Asians. According to Meyer, Tran, & Nguyen (2006), the citizens of the country are proud, and in order for one maintain good relationships with them, courtesy and respect are critical. Companies planning to start operations in Vietnam need to understand these values that characterize the culture of the country’s citizens. This is important as it will help in building relationships with employees of whom some will come from the nation. In particular, if the workforce will be composed of people from different cultures, developing workplace policies to help them work together harmoniously is critical. Understanding the cultural aspects of the Vietnamese people will be essential in formulating the policies.

As informed by Wild & Wild (2014), scanning the legal and political environments of a destination country is also a big step in determining whether or not the business environment favors the operations of a company. Government regulations can hamper the initiatives of a business to start a site in a country. According to Wild & Wild (2014), investment rules imposed by governments can discourage foreign investments. It is important that to note that governments set these rules in order to protect local firms from competition.

According to Meyer, Tran, & Nguyen (2006), Vietnam’s legal environment treats foreign enterprises differently from the local ones. The domestic and state-owned corporations are treated more favorably compared to foreign firms. The author, however, notes that the country is in a process of harmonizing the local legal framework with the international one. The efforts underway include merging company laws for local and foreign firms, leveling of land rental fees, and enactment of competition law that will seek to remove the distinction between local and foreign firms. In addition, with technology becoming an important part of business organizations today, the country is in the process of formulating new intellectual property and technology laws. These initiatives are likely to attract more foreign investments into the country.

Government bureaucracy, according to Wild & Wild (2014) should also be considered when assessing the suitability of a country. A cumbersome and bloated system can limit a firm’s progress in obtaining the approvals required before starting operations. According to a report by PwC (2015), the country’s national assembly is the only institution that has the powers to amend laws and the constitution. Although the government is reported to have issued policies to encourage foreign investments recently, there are particular industries such as mining, telecommunications, and financial services that are still controlled by strict restrictions. Therefore, for firms in these industries, entering the country and operating independently can be difficult. In addition, the report by PwC (2015) notes that the country has a hierarchy or regulations and legal instruments that is issued by different authorities. Therefore, for a US-based firm pursuing operations in Vietnam, considering the costs of such restrictions is essential. As informed by Wild & Wild (2014), if the opportunity offered by investing in a country is sufficient enough to cover the costs of delays and other expenses, a firm can endure the lengthy process.

Political stability is another factor worth consideration when examining the suitability of a country for international expansion. According to Wild & Wild (2014), political risk can disrupt the operations of the manufacturing facility of a company. The UK Government (n.d) informs that Vietnam’s is politically stable and the internal conflicts in the nation are rare. However, there exist restrictions on freedom of speech. Therefore, as companies enter the country, they should consider how these elements of the country’s political environment can influence their operations.

In regards to economic and financial forces, Vietnam has been experiencing increased economic growth in the recent past. In particular; its attractiveness to foreign direct investment (FDI) has increased immensely in recent years. FDI inflows into the country stand at 8% annually (UK Government, n.d). This is higher than most nations in South East Asia. Of the total FDI into the country, over half is related to manufacturing. In particular, large investments are in the electronics and mobile phones industry. It is clear that the country continues to attract firms particularly those dealing in the manufacturing sector. As noted earlier, the main reason for this is the low wages offered by the country’s young generation.

Site Potential

Measuring the potential of a manufacturing site is also another important step when examining the suitability of a country. The quality of the resources required for operations of a plant to run smoothly has to be assessed. In particular, the human resources must be examined fully. For Vietnam, many firms are setting up manufacturing sites in the country because of its cheap labor. However, according to Analytica (2010), the workforce of the country lack crucial skills that are required for successful business operations. Most of the members of the population in their early 20s have no formal training for jobs before joining the workforce. This means that if a company is looking for special skills, finding workforce members that match them can be a challenge.

The shortage of skills in the country is attributed mainly to shortcomings in the education sector. In particular, tertiary education has inadequate quality in regards to engineering and science. Given that 40% of the country’s population is made up of individuals under the age of 23, the problems in the education system is bound to affect to a great extent the future workforce. The major shortcomings in the country’s education sector include low pay to teachers, inadequate class time, and high education costs (Analytica, 2010). If these challenges are addressed, the country’s quality of human resources will increase. However, for now, firms can utilize semi-skilled and unskilled labor.

Suitability of Apple Inc. to Vietnam

Apple Inc. is one of the biggest technology companies in the world. Just like any other firm, cutting costs while maintaining or improving the quality of its products is one of its objectives. Currently, some of the materials used in making its products are manufactured in the US while assembly is done in China. However, as noted earlier, the wages in China have been on the increase in the recent past. In addition, there is also a rise in the rental and land costs. Given that it can be difficult to increase the prices of its final products due to competition, the option of setting up operations in a lower-cost country seems viable. Of all other nations in South East Asia, Vietnam emerges as a probable destination for operations of the company.

The wage rates in China are rising. As seen above, while, the average monthly wage rates in Thailand and China stood at $391 and $613 in 2013 respectively, the wage rates in Vietnam was $197. This big gap in the wage rates between Vietnam and other South Easter nations offers a big incentive for Apple to start new operations in the country. Also, the country’s population is majorly comprised of young people who can offer the necessary skills needed to make the operations of the firm successful. With land and rentals rates also going up in China, continuing operations in the country is likely to reduce profit margins of Apple.

Another factor that favors new operations of Apple Inc in Vietnam is the fact that other firms are entering the country. Companies such as Nike, Intel, and even its biggest competitor, Samsung, already have operations in place in Vietnam. The operations of these companies have proven successful, and therefore, there is a need for Apple too to see the potential offered by Vietnam. In order for the company to stay competitive, it has to find ways to reduce costs of production. With its biggest competitor already having manufacturing sites in the country, Apple’s position as a prime technology firm is at risk. It is thus imperative that it considers setting up operations in Vietnam.

The stability of the economic and political environments of the country also means that the risks of new operations are reduced. The stable economy of the country has continued to attract other firms that can offer complimentary services to Apple’s operations. The country has enjoyed stable FDI inflow in the last few years, particularly in the electronics sector. Given that Apple also deals with electronics products, its chances of being successful are high. With very few political conflicts in the nation, the operations of the firm are assured of continuity.

The aspects that can prove challenging for Apple include cultural forces, inadequate skills, and government bureaucracy. If the company sets up operations in the country, it will definitely have a multicultural workforce. Having policies to ensure they work harmoniously can take a while. As noted in the paper, the shortcomings in the education system in the country have led to a workforce with inadequate skills. The company might be forced to hire workers from other nations if it requires highly skilled labor. The bureaucracy in the country’s system also means that it takes a while for a firm to get the necessary approvals. It is thus important for Apple to measure the opportunity of investing in Vietnam against the costs of these challenges.

Conclusion

Setting up operations in foreign countries has become a way of expansion for companies today as a result of globalization. As companies consider international expansion, assessing the potentials of every possible destination is important. In the recent past, Vietnam has offered a favorable destination for US-based firms. The country’s low wages and young generations have been the major appeals for many companies. In addition, the country has a stable political and economic environment. However, companies entering the nation have to deal with challenges brought about by cultural forces, skills shortage, and government bureaucracy. Apple Inc is one organization is in pursuit of opportunities to reduce its production costs. With Samsung, its competitor, operating in Vietnam, it is time for Apple to consider entering the country also. This paper has assessed Vietnam as an emerging market and the suitability of Apple to conditions in the country.

References

Analytica, O. (2010). Outsourcing To Vietnam. Retrieved March 9, 2017, from Forbes: https://www.forbes.com/2010/03/12/vietnam-china-labor-business-manufacturing-outsourcing-oxford.html

Chandran, R. (2015). Meet Asia’s New Manufacturing Powerhouse: Vietnam. Retrieved March 10, 2017, from Bloomberg: https://www.bloomberg.com/news/articles/2015-04-01/meet-asia-s-new-manufacturing-powerhouse-vietnam

Meyer, K. E., Tran, Y. T., & Nguyen, H. V. (2006). Doing business in Vietnam. Thunderbird International Business Review , 48 (2), 263-290.

O’Neill, T. (2015). Business Information on Vietnam. Global Edge Business Review , 9 (1).

PwC. (2015). Doing Business in Vietnam. Retrieved March 9, 2017, from PwC: https://www.pwc.com/vn/en/publications/2015/dbg_2015.pdf

UK Government. (n.d). Overseas Business Risk - Vietnam. Retrieved March 9, 2017, from GOV.UK: https://www.gov.uk/government/publications/overseas-business-risk-vietnam/overseas-business-risk-vietnam#political

Wild, J. J., & Wild, K. L. (2014). International Business: The Challenges of Globalization. Boston: Pearson.