Why the nation is an ideal spot for high-mix/low-volume production.
For OEMs, the number of potential locations for outsourcing has
expanded as emerging regions compete for high-value electronics
business. OEMs can choose among more than 20 geographies. Of those
regions, Vietnam is currently showing the lowest fully burdened labor
rate in an educated workforce.1
Intel's announcement to invest $600 million in an assembly and test
facility in Ho Chi Minh City seems to have opened the floodgates for
the rest of the industry to set up shop. While Vietnam may be news to
companies in the U.S., companies in Asia have partnered there for over
a decade. Canon has a significant presence in Vietnam; NEC Tokin
Electronics just opened its second manufacturing plant, bringing its
total investment in the region to $21 million. Other Japanese companies
and consulting firms have worked with the government in Vietnam as
well. Taiwanese appliance manufacturer Tatung is moving a manufacturing
facility to Vietnam. Why are so many electronics companies looking at
Vietnam at this time?
Sparton is a mid-tier EMS company with capabilities in engineering,
manufacturing and supply-chain management, serving the aerospace,
government, medical and industrial sectors. Since these sectors have
not traditionally been candidates for global manufacturing, why would
we open a facility in Vietnam? Opening a facility abroad takes years of
planning and preparation. Vietnam has only recently been on the U.S.
industry's radar screen, but Sparton has been designing its strategy
there for years. That strategy has been to focus on low-volume/high-mix
assemblies that are not a good fit for manufacturing in China.
Our decision was based on a careful analysis of several important
factors: local talent pool; government commitment to high tech; and an
array of intangibles that we believe make Vietnam a good choice.
Vietnam has an excellent university system in both the North (Hanoi)
and the South (Ho Chi Minh City), and the government reported that 1.7
million students took entrance exams this spring to qualify for
university attendance. The workforce around the major cities is highly
educated and underutilized, with well-trained engineers eager for
high-tech jobs.
Chasing the lowest direct labor cost alone is typically not the best
reason for choosing a geography, since direct labor costs do not
comprise a major percentage of the costs of global manufacturing. While
the lower direct labor costs are one reason for considering Vietnam, it
is important to factor in cost savings in support labor - an
oft-overlooked element. Support labor for high-mix/low-volume products
is typically 50% of the total labor cost. In Vietnam, labor cost
savings for support engineers and technical personnel are as much or
more than direct factory labor cost savings (Figure 1).
Some examples of support labor include:
Production lines are often changed two to three times a
shift and it takes technical people to perform the changeover, check
for proper operation and qualify the new setup.
Customer
change orders for quantity and mix happen every hour. Customer service
and material planners must constantly support these changing conditions.
In
low-volume products, material is purchased in smaller quantities,
meaning increased activity and possible confusion around receiving
orders of the same part number that may be from a different qualified
supplier. They could be identical except for a particular obscure
characteristic that must be checked out.
Government Commitment to Tech
Vietnam's population exceeds 80 million and is rapidly entering the
Internet age. It has a diverse international culture and growing
foreign investment. According to a recent survey of business
economists, terrorism is on the top of the list as the leading risk
factor for business disruptions. Vietnam is considered less risky than
other nations in the region from that perspective, and attitudes toward
U.S.-based companies are very positive. The population is hungry for
technology; and once Vietnam enters the World Trade Organization, it is
expected to see a rapid stampede onto the global high-tech playing
field. The lifting of trade quotas in the apparel industry has made it
more difficult for Vietnam to compete with China to sell garments and
shoes to the global marketplace; high tech is an extremely attractive
substitute.
The government is courting the high-tech sector for higher paying
jobs for its well-trained workers. After a recent visit to Hanoi in
which Bill Gates announced, among other things, that Microsoft is going
to get serious about cracking down on bootleg copies of software in
Vietnam, the Law on Intellectual Property Rights (ITR) was approved by
the National Assembly and went into effect in July.
According to Vietnam Economic News Online (ven.org.vn), on Jan. 10,
2006, the Vietnamese government officially inaugurated two Websites:
vietnam.gov.vn and chinhphu.vn. These sites are intended to represent
the Vietnamese government on issues related to the global information
network. English versions of these sites will be available after
September.
The country exported $1.08 billion worth of electronics (including
PCs and components) in 2004, up from $686 million in 2003 and $505
million in 2002. Electronics imports totaled $1.32 billion in 2004 and
$968 million in 2003. The nation exported $636 million worth of and
electronics and computer parts in the first five months of 2006.2
In the first half of 2006, total industrial exports were $14.3
billion, over 76% of the total exports from the country. Countries
investing in Vietnam include Japan, Korea, Australia, Italy and France.
This year, the number of Internet users in Vietnam continued its
explosive path, reaching almost 13 million, according to the HCM City
Informatics Association. From 2005-06, Vietnam's IT market grew 20.9%,
with software and IT services increasing 41.1%.
The government has hosted large U.S. telecom corporations who are
pushing to invest in Vietnam with AT&T, Intel, Microsoft and
Motorola paying visits of late. According to the Ministry of Planning
and Investment (MPI) the U.S. recently ranked 11th of the 75 countries
and territories investing in Vietnam, with total registered capital of
$1.3 billion, of which $730 million has been disbursed. However, that
figure is expected to increase in the next few years as industry
leaders like Intel become established. Since 2001, American investment
in Vietnam has increased an average of 27.3% a year while total foreign
investment to Vietnam increased only 5.5% annually.
Vietnam granted licenses to nearly 350 foreign direct investment
(FDI) projects worth $2.84 billion in the first half of 2006, the MPI
reported. Most of the newly licensed projects focus on the industrial,
construction and service sectors in key economic zones such as Ha Noi,
Ho Chi Minh City and the southern provinces of Ba Ria-Vung Tau, Dong
Nai and Binh Duong. Recently, the MPI reported that the FDI-invested
sector brought in $12.45 billion in the first half of 2006, up nearly
17% over the same period last year. The value of exports from FDI
programs grew by almost 30.8% to $6.64 billion.3
According to the MPI's estimates, although the number of FDI
projects and the amount of registered capital during the last six
months did not surpass by far figures from last year, Vietnam has
succeeded in attracting large-scale tech projects that are needed for
its economic growth, including the Intel project, which is singled out
in the government literature. The government recognizes that
foreign-invested enterprises have created jobs for Vietnamese workers.
In the first six months of 2006, the Ministry reports, the total number
of workers increased 29% to over 1 million employees.3
In the U.S., proponents are encouraging Congress to grant Permanent
Normal Trade Relations status to Vietnam. (Were Vietnam to gain
admission to the WTO without achieving PNTR, it would be the only
nation in the WTO without that status.) Achieving PNTR will solidify
the advantages of trading with Vietnam for U.S. businesses in all
sectors. Furthermore, Vietnam has gained attention as a travel
destination for eco-tourism; U.S. tourists have discovered the beaches,
resorts, historical and cultural sites that have attracted Australian,
Japanese and European tourists for a decade.
The Intangibles
Spartronics' specialty is industrial electronics manufacturing,
including medical and aerospace, which requires a skilled, stable
workforce (Spartonics is the wholly owned Vietnam subsidiary of
Sparton.). In cities across Vietnam, educated workers already live in
close proximity to government-established industrial parks, making it
unnecessary for companies to build dormitories or campuses. This type
of stability is unknown in China, making Vietnam a better long-term
solution for low-volume/high-mix applications.
Recent reports of China's impending labor shortages mean
manufacturers continue to move inland to chase lower labor rates. Some
experts predict increasing instability in China due to explosive growth
and lack of mobility between lower paying, less desirable jobs and
higher paying management positions.
The U.S. has a complicated relationship with Vietnam, due to the
number of U.S. citizens that served there during the war. Currently
there are millions of "Viet Kieu" in the U.S. - Vietnamese ex-pats that
were forced to flee the country in the 1970s. This history unites the
two countries - people to people. Today, most negative experiences have
been forgotten and the people and government of Vietnam are committed
to rebuilding strong and mutually beneficial business relations.
When Sparton was considering the decision to build a facility in
Vietnam, CEO Dave Hockenbrocht met with the Vietnamese Ambassador to
the U.S. in Washington and was assured that the government would
provide all the support required to make the venture successful.
Several years into the project, he says that so far all his surprises
have been pleasant ones.
Spartronics remains the only company in Vietnam with an AS9100
certification for avionics. We will soon announce an engagement with a
large multinational avionics OEM based in the U.S.; we are already
producing avionics products for an OEM based in France. Quality and
delivery are always of major importance but even more so with avionics
products.
Typically avionics products are stable and mature before being
considered for offshore manufacturing. Sparton as a corporation has
created a uniform, consistent process for manufacturing our customers'
products, regardless of the location of the facility. No matter the
site - in the U.S. or in Ho Chi Minh City - we use identical processes
for NPI, supply-chain management and production, with a proprietary
information technology system that allows us to share information
across the organization.
For customers destined for our Vietnam facility, we create a project
plan for each new product which details each step in the transfer
process. Here are the steps we take:
Export compliance approvals.
Technology transfer (documentation, manufacturing processes, test, etc).
Transfer supply chain from U.S. to Vietnam.
Production overlap to minimize delivery risk.
Qualification lots phased to focus on each major manufacturing process.
Logistics review regarding moving materials and product in and out of Vietnam, to resolve any customs issues.
Final qualification and acceptance review.
Spartronics guides the customer through every phase of the transfer
project plan to provide assurance that every risk factor has been
addressed and mitigated.
References
Charles Barnhart, The True Cost of Outsourcing, techforecasters.com.
Vietnam Ministry of Planning and Investment, mpi.gov.vn/showTinvan.aspx?Lang=2&ma_tinvan=10890
Vietnam MPI, mpi.gov.vn/showTinvan.aspx?Lang=2&ma_tinvan=10998.
Jason Craft is vice president and managing director of Spartronics, (spartronics.com); jcraft@sparton.com. |
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