economics

March 15, 2010

Outsourcing To Vietnam- Rising labor costs and tensions with China have sent companies looking for labor in Vietnam, but Hanoi has its own set of serious problems.

Filed under: Uncategorized — ktetaichinh @ 6:31 pm
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Vietnam is viewed as a viable alternative to China for foreign (particularly U.S.) companies seeking to establish or increase their lower-cost manufacturing capacity.

This is due to the increasing costs of labor in China; rising Chinese taxes on foreign enterprises; difficulties with the business environment in China; and the perception among some U.S. firms that the political risk of doing business in China may increase due to rising U.S.-Chinese trade tensions.

However, over the long term, foreign firms seeking to expand their operations in Vietnam may discover that the Vietnamese workforce lacks crucial skills, due to problems with its education system.

Working-Age Population Surge
The workforce in Vietnam (defined as adults aged 23 to 65) is expected to jump by 23 million over the next 20 years, to 65 million. This should help make the country a viable alternative to China as a manufacturing center–if Hanoi can reduce the corruption and incompetence that plague its primary and secondary schools. Tertiary education in Vietnam also has problems, particularly in the quality of its science and engineering instruction.

Skills Shortage
A recent employer survey by Vietnam’s Ministry of Labour, Invalids and Social Affairs found that just 40% of the workforce had training of any sort. The majority of respondents experienced difficulty in finding workers with skills to match their needs. Among workers in their early twenties, nearly 80% had no formal job training before joining the workforce.

Education System Shortcomings
Approximately 40% of Vietnam’s population is of school age or younger (under 23). Yet the school system’s problems are acute:

–Inadequate class time. An recent analysis by U.K. research group Young Lives, An International Study of Childhood Poverty, highlighted the fact that the Vietnamese school year is just 33 weeks and only 20% of children receive the international norm of at least five to six hours of class time per day. These figures are both significantly worse in rural areas, where children must help their families with agricultural work.

–Out-of-pocket cost. In 1991 Vietnam made primary school education compulsory and free. However, its cost recovery policy initiated in 1992 shifted the cost burden from the government to the consumer for subsequent education: junior secondary school, senior secondary school and technical/vocational training school. The emergence of a middle class in Vietnam with sufficient means to fund rising education costs is hiding structural deficiencies in the system. Children of families with lesser means are sometimes forced to forgo secondary education entirely. Again, the problem is particularly severe in rural areas.

–Low teacher pay. Low teacher pay has led to situations where educators have pressured students to participate in additional study activities in order to augment their meager official salaries. The practice was so pervasive that National Decree 242, approved in 1993, included regulations limiting “extra classes.” Only authorized teachers are now allowed to provide such classes, and primary school students may undertake no more than two extra lessons totaling four hours per week.

Outlook
The education system’s shortcomings have created significant challenges for foreign investors seeking to recruit and retain prospective Vietnamese employees.

Not only should they expect to incur significant costs for training and development programs, they will also likely need to adopt creative methods to retain these employees once they are skilled and competent.

Also, as witnessed in India during that country’s services outsourcing boom, local labor markets will heat up as the economy grows. This will increase demand for the relatively limited pool of skilled workers, and boost employee turnover as employers engage in a bidding war for staff.

To read an extended version of this article, log on to Oxford Analytica’s Web site.

Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visit here.

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