Up the value chain in Vietnam

November 11, 2007

HO CHI MINH CITY

EVERY WORKDAY at a high-tech-oriented office complex here called e.Town, scores of computer artists beaver away quietly at their terminals, manipulating digital renderings of cars and brick patterns on the walls of imaginary buildings. The artists' employer, a company called Glass Egg, specializes in the video game equivalent of set design; it creates the 3-D objects that players move about onscreen.

Led by two Americans, the firm works as a contractor for well-known game developers such as Electronic Arts and Sega. Glass Egg boasts that clients generally save 50 percent by outsourcing 3-D art production to the firm. Entry-level artists there earn about $3,000 a year plus benefits, a decent salary for Vietnam but less than what similar workers would earn in, say, South Korea.

The company's work is mesmerizing to watch. I'm in Vietnam for the first time, with a group of journalists organized by the East-West Center in Honolulu. Video game design is not the sort of activity one expects to see in a one-party state where the gross domestic product per capita last year was just $726.

Sure, it's a little odd that a city named for a communist revolutionary has become one of Southeast Asia's business hubs. Vietnam is attracting established foreign companies and new entrepreneurs, and not just those looking to make clothes on the cheap.

But how long can the boom last? While rising prices are a common complaint, the more fundamental question is whether and when Vietnam's political structure - with its vast bureaucracy, its restrictions on expression, and its still-incomplete body of business law - will become too big a drag on growth.

From knockoffs to video games

Racked by war and bad policy, the Vietnamese economy began to revive in the late 1980s, when reforms opened the door to private enterprises. Southeast Asia is best known for industries that require low skills and a tolerance for repetitive labor, and Vietnam is no exception. The shoe company Nike, along with its contractors, is the country's largest private employer. One reason Vietnam's economy is taking off is that wages have crept up at garment plants in Thailand.

Yet the movement toward more advanced industries is evident. Intel is building a $1 billion microchip plant. On a more modest scale, consider Phong and Hung Nguyen, two Vietnamese-American brothers from Newton, whose company operates a drug-manufacturing plant. Then there's Paul Song, a 44-year-old Korean-American with an MIT computer science degree. He founded two companies in Washington state: an IT services company that later merged with another firm, and a software company where he's still chairman of the board. He moved to Vietnam in April. He now runs Met Vuong, a real estate website that aims to make up for the lack of a multiple-listing service in the country.

This activity could become a force for progress in Vietnam. Glass Egg initially had trouble finding employees with the right art and computer skills, CEO Phil Tran says. So in addition to setting up its own intensive training program, it's now working with a local art school - a welcome sign, since businesses often complain that Vietnamese schools are long on theory and short on useful skills.

But some things haven't changed. Despite Vietnam's entry into the World Trade Organization this year, protections for intellectual property are still weak. Walk around Vietnam's capital, Hanoi, for about four seconds, and you'll see a phantasmagoria of designer-knockoff clothing. Maybe Giorgio Armani and Donna Karan New York can ignore the likes of "George Armani" and "DKYN," but software firms, for instance, are unlikely to succeed in a country where piracy is rampant.

Joint ventures and red epaulets

There are other quirks to doing business in Vietnam. Foreigners complain not just that the rules are burdensome, but that it's hard to ascertain what they are. Land transactions regularly take the form of long-term leases rather than outright sales. Some sectors of the economy, including telecom and Internet-related areas, are off limits to companies that are entirely foreign-owned, so would-be investors have to find Vietnamese partners.

Ideally, such joint ventures could be a way for Vietnamese entrepreneurs to learn from foreign companies. In practice, the local partners mainly provide political access. Foreign firms bristle over rules that often give veto power over decisions to local partners that put up next to nothing.

And while some of those restrictions are fading, others persist. Song says he wants to start a magazine to promote the contents of his real estate website. But publishing anything is difficult in Vietnam, where the media are state-owned.

Indeed, the gold stars and the red epaulets on border guards' uniforms aren't the only signs of continuing communist rule. In some situations, a visitor gets a clear sense that there's an invisible hand shaping economic decisions, but it's not that of the free market. The international concourse at Hanoi's airport abounds with souvenir shops and duty-free stores, and a central planner intent on extracting money from departing tourists would be thrilled by all the tchotchkes and whiskey bottles on the shelves. What travelers can't find are the more prosaic things that they might actually want: a pack of gum, a fast-food sandwich, a real newspaper.

Song says he's encouraged by a general sense of optimism in Vietnam - a widespread feeling that life will keep getting better. And maybe more microchip plants and 3-D art production companies are on the way.

The more Vietnam's economy evolves, though, the greater an obstacle its political system is likely to become. Ho Chi Minh's party has made peace with global capitalism. Maybe accountability, a legal system, and free expression will emerge over time - once it's clear that their absence isn't just bad for people; it's also bad for business.

DANTE RAMOS