We often get a lot of questions from investors about Vietnam as an outsourcing destination. What are the pros and cons of Vietnam? Why should I choose Vietnam in particular? What is happening in the Vietnamese market? Questions like these motivated us to write a short post about Vietnam as outsourcing location – a perspective from a Vietnamese-based company.
Proudly, we can say that our country has emerged as one of the most appealing outsourcing destinations in the world that can compete with “outsourcing meccas” such as India and China.
Here are some of the key factors we believe are enabling outsourcing to continue prospering in Vietnam.
1) High-Cost effectiveness
One of the main reasons to outsource is to save on costs and Vietnam is one of the most competitive options in outsourcing or offshoring due to competitive labor costs and other business costs.
IT related employers have developed a reputation of paying good salaries that are even above the average of some middle-class salaries in Vietnam. Because of this employees tend to be more loyal and companies do not have high attrition rates. Low attrition rates mean a surge in productivity and savings in recruitment and new employee induction. However, salaries of developers and other IT experts are still considerably lower when compared to average salaries in EU or USA. We have even found information that in Vietnam labor costs can be up to 90% less than those in the USA (CIO magazine). This alone enables companies to save a lot of costs.
The general Corporate Income Tax (CIT) rate was steadily reduced from 25% to 22% in 2014 and 20% in 2016 as mentioned in PWC’s “Vietnam Pocket Tax Book 2016”. There are many sectors such as health, education, high-tech, infrastructure and software development that have preferential tax treatment such as tax exemption, reduction, and preferential tax rates.
To empower economic growth further government signed a resolution to support enterprise until 2020 with the special focus on startups. On individual level income tax for workers in IT sector and other high-tech information technology will be lowered. To sum it up,
Vietnam is doing many things to ensure that investors get their money’s worth.
Gateway to ASEAN
The Association of Southeast Asian Nations (ASEAN) was shaped in 1967 with forming countries being: Philippines, Indonesia, Malaysia, Singapore, and Thailand. ASEAN promotes political and economic cooperation and regional stability and growth. On 28 July 1995 Vietnam officially became the seventh member of ASEAN.
ASEAN Economic Community in its blueprint for 2025 proposes continuity in market liberation, cooperation, and coordination. JP Morgan Chase describes ASEAN as emerging hotspot and predicts that by 2030 ASEAN should become the fourth largest market after EU, USA, and China. Combined, ASEAN has over 625 million inhabitants with nominal GDP of 2,8 trillion USD and FocusEconomics estimates 4.8% regional growth of GDP in 2017 and 4.9% in 2018.
From 2011 to 2015 Vietnam had an average GDP growth of 5,9% according to Asian Development Bank (ADB) and Trading Economics projects growth trend to be around 6.20% in 2020 according to their long-term economic models. Although it is not a popular topic in the media Vietnam’s growth has been only second to China when looking the first decade of 21st century.
Vietnam strives to think globally and in 2007 becomes a member of WTO. To position itself in world’s economy it has signed several trade agreements, including with the Eurasian Economic Union, the European Union and will most likely join Regional Comprehensive Economic Partnership and Tran-Pacific Partnership.
With all of the above, we can see why it is lucrative to set a foothold in Vietnam.
Investing here means getting access to a market with big potential that looks like it will continue to grow for quite some time.
Obviously, location is not important if you are just outsourcing software development. However, if you are thinking about outsourcing production, the matter of choosing right location should be the topic on the table. Vietnam’s close proximity to other growing markets in Southeast Asia is one major benefit for any investor.
We must not forget that Vietnam has a strategically important location in East Sea and that China is our biggest neighbor. It takes only about 3 hours of flight (or less) from Hanoi to major capital cities in the region such as Bangkok, Kuala Lumpur, Hong Kong and Singapore. This makes Vietnam also a potential cargo transportation hub.
You remember that old mantra? Location, location, location.
Growing pool of talent
Vietnam is one of the largest and most densely populated countries in the region. According to Worldometers Vietnam has a population of over 95 million people and over 50% of the population is under 30 years of age.
Based on official information from government, Vietnam has over 30 000 new IT graduates that enter labor market every year. For software development outsourcing to be successful primary things is to be able to find a talented and experienced team to outsource to. Companies in search of partners in Vietnam will find a strong labor force that is young, flexible, well-educated and always willing to learn more.
Excellent communication with your developer team is pivotal to success for every outsourced software development project. Communication skills, with a focus on English speaking skills, have been making good progress over the years and young IT professionals realize that to be competitive on labor market they need to have good English speaking skills and the government made English part of school curriculum.
Having great education is like having a passport to a better future and we are proud to mention that Vietnamese youth get exposure to STEM disciplines and computer science lessons from an early age.
Our developers have always been hardworking and as Nikkei Asian Review described Vietnamese engineering talent as generally willing to take on tedious work, and to learn skills that others might see as outdated if that is what it takes to get the job done.
One of the major complaints about doing business in Vietnam was a lack of high-quality infrastructure that supports growth and having risks such as IP loss, power outages, and bad roads. In the last decade that is also changing and we have seen tech giants investing heavily in Vietnam. For example, in 2006 Intel announced an investment of 300 million USD and opened a semiconductor assembly and test facility. After one year the investment was increased up to 1 billion USD. In July 2014, Intel announced that it has manufactured the first “made in Vietnam” CPU and the rest is history. Microsoft, Samsung, Hitachi, Cisco, Alcatel-Lucent, and Toshiba are just some of the well-known tech companies that have opened manufacturing plants or R&D centers as well.
In 2010 Vietnam gained the status of a lower middle-income country. By 2020 Vietnam aims to achieve a status of middle-income and be regarded as a modern industrialized state. To reach all the set goals in early 2016 government announced that it will need the support of private sector for infrastructure funding. There is a 48 billion USD infrastructure budget for the period from 2016 to 2020 that will ensure sustainable economic growth and encourage foreign investment in infrastructure projects.
This is certainly good news for IT companies because of the positive impact on broadband connectivity and reliability of internet based services. You could say that Vietnam is fast moving in the digital world since 95% of the population aged between 15 and 24 is online. More than 49 million people in Vietnam are online and there are over 40 million Facebook users according to statistics by Internet World Stats and the number of users is growing and so is their hunger for better speeds and services.
Another goal of the government program is to enable 25 Mbps downlink speeds for a minimum of 60% of internet subscribers until 2020. It is common knowledge that internet speeds correlate with economic development and currently internet services in Vietnam contribute to 0.9% of GDP.
We are excited to see how this percentage will increase in the future.
Stability (ethnic, religious, socio-economic)
When was the last time you read in news about something dramatic happening in Vietnam? Can’t remember? Thankfully we can’t as well. Vietnam is enjoying an unprecedented era of peace and continuous economic growth with war being just a distant memory.
When talking about socio-economic stability, Vietnam can be seen as an example when compared to turmoil some neighboring countries are experiencing. People in Vietnam are having religious freedom and stability, access to the free market with a centrally-planned economy and there has been a lot of improvement in the field of protection of intellectual property rights.
Peace brought stability and stability brought growth with eagerness to prove that Vietnam has what it takes to become one of the economic leaders in ASEAN and wider. With good business climate, supportive government working hard to attract foreign business and rising startup scene we feel that the best is yet to come for Vietnam.
Okay, you got me interested. Where should I go to in Vietnam?
With Vmodev based in Hanoi let’s admit right away that we are a little bit biased about the best city to offshore in Vietnam. Now that we got that out in the open, we need to mention that there are 3 main outsourcing destinations in Vietnam: Ho Chi Minh City, Da Nang and Hanoi. According to Tholons Top 100 Outsourcing Destinations for 2016 HCMC is ranked 18th followed by Hanoi who got 19th place.
From humble beginnings as a small fishing village HCMC is now biggest city in Vietnam; formerly known as Saigon it prides itself on having first IT park in Vietnam. Quang Trung Software City opened since 2001 now has over 120 ICT companies present and over 20 000 people living and working. Nowadays it is regarded as most successful national IT project and serves as an example to other similar projects.
Danang is situated in central Vietnam and it is the key growth engine of that region. Although it is primarily known for tourism it now has small but vibrant startup and IT outsourcing scene. According to Vietnam ICT index Danang was ranked number one 5 years in a row (2009 – 2014) in the management of operating and serving business and citizens. Danang is working hard to develop as green and smart city and as a place attractive to investors and expats.
Our beautiful capital, Hanoi lies at the center of the basin of the Red River and is now a center of economy, politics, culture and society. Currently, it is regarded as a second outsourcing destination in Vietnam. Hanoi has two IT parks and the third one the way, planned to be completed by 2019.
According to Ministry of Science and Technology, Vietnamese current IT parks house more than 700 companies of which 220 are foreign. Overall there are now seven main IT development zones in Vietnam with new ones being in development. No matter which city you chose as your outsourcing or offshoring destination you will for sure find a lot of support for your project. Still, we secretly hope it is Hanoi so that we can take you for a great cup of coffee in Old Quarter or for street food where former USA President Obama had famous Bun Cha for dinner.
Great! I want to outsource here. What should be my next steps?
If you want to proceed with your plan to outsource or offshore to Vietnam then your next steps should be searching for your potential partner. Finding outsourcing/offshoring partners can be a daunting process and we will for sure address the topic in one of our future blog posts. Meanwhile, you can start your research by visiting Vietnam ITO directory or search by using directories/portals such as Accelerance, Clutch, Resiport or ContractIQ .
Of course, alternatively drop us a message here and we will make sure to reach out ASAP and who knows, maybe you will be Vmodev’s next outsourcing or offshoring partner?