Innovative responses to the challenges of China - EMS in emerging Vietnam and Thailand

By Jennifer Read, Director of Client Services, Technology Forecasters, Inc.
Sep 07, 2005 (Reprinted with permission)

Two case studies: Spartronics and Fabrinet

This past spring, US-based EMS company Sparton Electronics flipped the switch on its surface mount assembly line housed in a 50,000 SF manufacturing facility, Spartronics, located in the Vietnam Singapore Industrial Park outside of Ho Chi Minh City. This move heralded the first US-owned global outsourced electronics manufacturing operation in Vietnam. It was a leap of faith that Sparton's management team hopes will give them first mover advantage in the SE Asian country many believe is next in line for global development. Vietnam's connections to China (Ho Chi Minh started the Vietnamese Communist Party as an exile in Guangzhou in the early 1930s), its central geographical location, decent ports, and historic connection to the US and other European countries bode well for a global future.

Compared to TFI's first visit and report on the electronics industry in Vietnam conducted in the fall of 2000, Vietnam has made significant progress. Currently in final stages of bi-lateral negotiations for WTO membership slated for December 2005, Vietnam is ramping up for global trade in a wide variety of industries, including electronics. For those doubting the viability of the electronics industry in Vietnam, consider this: Vietnam ComputerWorld Expo 2005 this past summer drew 200,000 visitors. In 2003, 800,000 new cell phone subscribers signed up for service; another 1.8 million new subscribers came on in 2004. The projected total cell phone subscriber base is projected to be 25 million by 2010. Internet usage is similarly ramping up quickly (see chart) and high speed internet access is available in most hotels in major cities throughout Vietnam.

Chart 1 - Vietnamese Internet Usage

US is behind the curve
While Spartronics is the first US-owned EMS company to do business in Vietnam, it is not the first company manufacturing electronics there. Several Asian countries are investing there. For example, Taiwan-based Ritek Advanced Media announced last spring it would shift its CD-R disc manufacturing equipment from Europe to Vietnam; Korean companies and Japanese companies, like Fujitsu have been manufacturing sub-assemblies for export to Japan there for years.

The country exported electronics, PCs and components worth US$1,077 million in 2004, up from $US 686 million in 2003 and $505 million in 2002. Imports of those products were $1,324 million in 2004 and $968 million in 2003. Countries investing in Vietnam currently include Japan, Korea, Australia, Italy, France and many others.

According to the Ministry of Planning and Investment (MPI) the US presently ranks 11th of the 75 countries and territories investing in Vietnam, with total registered capital of US$1.3 billion, of which US$730 million has been disbursed. However, that figure is expected to increase dramatically, especially after the Vietnamese Prime Minister's visit to Washington this past June. Since 2001, American investment in Vietnam has increased an average of 27.3 percent a year while total foreign investment from all countries to Vietnam increased only 5.5 percent annually.

Spartronics' specialty is industrial manufacturing, including medical electronics, and aerospace; they have recently achieved AS-9100 certification. This type of manufacturing requires a skilled and stable workforce. General Manager Jason Craft was surprised at how easily he found those employees and got Spartronics up and running. Currently his facility employs around 70 workers; as they add more assembly lines, they will have over 500 employees at that facility. Jason believes that Vietnam has an edge over China because skilled workers with engineering degrees, who speak English, already live in HCM City. His employees live at home and commute short distances to work - Spartronics is not expected to provide dormitories for workers coming from remote regions, as they would if the facility were in China.

Industrial parks pave the road
Jason and his team built the facility from the ground up, with help from his account team at the Vietnam Singapore Industrial Park, (VSIP). Industrial park development in Vietnam has grown substantially over the past five years: One very important advantage of working through an industrial park is "one-stop shopping" for licensing and applications. The Vietnamese government has opened up considerably since the early 90's when it adopted a strategy called 'doi moi' to move the country from a planned to a market economy. However, there are still layers of bureaucracy:  Department of Trade for import licenses, the Department of Investment and Planning for key personnel registration and Department of Labor for foreign labor permits. Centralized industrial park provincial management boards are authorized to review and decide on all of those issues, simplifying the process immensely.

This strategy has been expanded from Ho Chi Minh City and Ha Noi exclusively to other provinces. Industrial zones have been announced in Hai Phong, Phu Tho, Hai Duong, and Binh Duong, These zones enjoy corporate income tax incentives. For example, new service enterprises inside industrial parks are entitled to tax rates of 15-20 per cent, as opposed to 28 per cent outside the zone, and new manufacturing enterprises inside parks are entitled to the rate of 15 per cent, instead of the standard 28 per cent.

Industrial parks did not even exist less than a decade ago, and many are not running at full capacity. Vietnam Singapore Industrial Park has 185 tenants from 21 countries, and is beginning its third phase of development, 50% of which has been committed to, according to company sources.

Differentiation through a focus on precision optical manufacturing
In contrast to Vietnam's emerging status, Thailand has an established electronics manufacturing industry and proven infrastructure. EMS company Fabrinet specializes in precision manufacturing of optical components. The company is run by Tom Mitchell and his seasoned management team; Tom was one of the founders of disk drive manufacturer, Seagate Technology, and a pioneer in establishing the electro-mechanical manufacturing industry in SE Asia. Seagate Technology was Thailand's largest employer until automation and manufacturing efficiency gains in the disk drive industry reduced manual labor content. His executive management team is arguably one of the most experienced and knowledgeable regarding the region. The team compiled considerable research about labor conditions, utilities and infrastructure, engineering, transportation, automation capabilities, political stability, supplier base and language issues before settling in Thailand with Fabrinet, and continues to monitor conditions in the region.

Fabrinet's OEM customers serve the optical communications industry. The company puts its high-volume, precision manufacturing disk drive expertise to good use in this field. OEMs like JDS Uniphase and Finisar rely on Fabrinet for the manufacture of their critical components, subassemblies and finished goods because of Fabrinet's advanced manufacturing technologies and confidential handling of proprietary intellectual property issues in this highly competitive field. For customers operating at the bleeding edge of technology, Fabrinet may erect an all-encompassing wall around specific operations. They call the result 'factory within a factory' and it has been quite effective in winning the confidence of OEMs. When visitors walk through Fabrinet's facilities in Bangkok, they see covered windows, dedicated employee teams, and physically isolated manufacturing lines for certain processes and product lines.

Avoid the travel issue - move to the region
Maintaining stability and executing these strategies takes management commitment to the regions. Both Jason Craft of Spartronics and Tom Mitchell of Fabrinet live full time in their adopted countries. They both are enthusiastic advocates; in Thailand, Fabrinet's business development process includes arranging for a thorough tour of the city for potential customers - with a tour guide on contract with Fabrinet on a nearly full-time basis. His job is to help visitors feel confident that their business is in good hands. It's an effective strategy.

As the challenges of doing business with China continue to unfold, and as the region evolves, outsourcing options and specialties like those represented by Spartronics and Fabrinet will continue to emerge to give OEMs innovative choices for their outsourcing strategy.

 

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