A vibrant economy and a highly educated labour pool are just two of the reasons why British companies are flocking to Vietnam

Vietnam has been tipped to overtake China and India as the most popular market for UK businesses to set up in Asia. Rising costs, a shortage of skills and new labour laws in India and China have forced companies to start looking elsewhere, and Vietnam is providing what they need.

"India is low risk because there are so many people there, but the costs are rising. China is high risk and has middle costs, but Vietnam sits in the middle. It is still a risk, but the returns on investment are extraordinarily high," says Paul Smith, global managing director of recruitment and outsourcing firm Harvey Nash. "I don't think Vietnam will overtake China and India by volume, but it has overtaken them in terms of being the country of choice."

With an annual growth in GDP above eight per cent, Vietnam is second only to China in the world, and it is the third-largest offshore destination in south-east Asia. The workforce is young—60 per cent of the population is under 35 years old—and highly literate. Combined with low operational costs, this has helped Vietnam grow into one of the favourite up-and-coming markets for western businesses. Added to that are a booming private sector—particularly in retail, wholesale trade, hotels, restaurants and financial services—and a rapidly expanding stockmarket.

The UK government has recognised the importance of Vietnam. Last September, Andrew Cahn, chief executive of UK Trade & Investment (UKTI), led a delegation at the inaugural UK-Vietnam Joint Economic and Trade Committee (JETCO) meeting in Hanoi. And in March this year, Prime Minister Gordon Brown held meetings in London with his Vietnamese counterpart, Nguyen Tan Dung, who also attended numerous trade events with curious British companies during his visit.

"Vietnam is growing like toxic," says Ian Coleman, head of emerging markets at PricewaterhouseCoopers (PwC). Last year, the accountancy firm launched an index of emerging markets, and Vietnam came out ahead of China as the most profitable emerging market for manufacturing companies. Based on the risks and rewards posed by different markets, the index takes into account factors such as  GDP per capita, taxes, transport costs and projected economic growth. "Most indices about emerging markets either say which is the fastest-growing market or the cheapest place to produce, or which is the most corrupt, but we tried to bring them all together and capture risk and reward in the same measure," he says.

Vietnam came out as hugely cost competitive, but it is also the fourth-riskiest emerging market in which to invest. In 2000, Harvey Nash bosses decided it was a risk worth taking. "We found the government was very inviting and entering a phase in its economy that indicated substantial growth, and they were investing heavily in infrastructure and education," says Smith. "We came [to Vietnam] so we could be the elephant rather than the flea."

Today, Harvey Nash employs about 2,500 people in Vietnam, developing software applications and running business-process-outsourcing services for UK and US customers. Smith has seen the country make huge advances. "We did look at China, but we didn't find the staff so committed and we didn't find the English-language capability anywhere near as strong as it is in Vietnam. And the cost of those who actually spoke English to a high standard in China was enormous," he says.

PwC's Coleman says the labour characteristics in Vietnam are particularly attractive to UK companies, with hard-working people and high productivity. Cahn, from UKTI, agrees. "Vietnam is not just about cheap labour and footwear," he says. "It is a highly educated country, which is just galloping ahead."

The Vietnamese economy is based on a broad mix of natural resources, manufacturing, service industries and agricultural industry. This means there are opportunities across the board for British businesses, from power and construction to banking and retail. Many big names, including HSBC, Prudential and BP, are already there. "The financial services sector in the UK is definitely punching above its weight [in Vietnam] and consultancy companies are doing very well with all the work that needs to be done on the country's infrastructure," says Cahn. "Vietnam, like many other Asian countries, has a tremendous appetite for education and is moving on from purely academic education to vocational education."

While still a poor country, Vietnam has Hanoi at one end geographically and Ho Chi Minh City at the other, both with increasingly affluent middle classes. Last year, retail sales were up 20 per cent and the figure this year is expected to be similar. "For the first time in many years, we are seeing people in Vietnam not just having a disposable income, but also being comfortable spending it," says Cahn.

According to the Vietnam Chamber of Commerce and Industry, bilateral trade between Vietnam and the UK reached $1.7bn (£0.86bn) last year, and Cahn says the level of interest has been phenomenal. During Prime Minister Dung's visit earlier in the year, UKTI events were vastly oversubscribed and it is estimated he spoke to about 600 businesses.

"How much of that is just because people don't know about Vietnam, I don't know," says Cahn. "But there is clearly a buzz going on there."
But what about the potential hazards involved with investing in Vietnam? "Not understanding the risks is arguably the biggest risk," says Cahn. "I think you have really got to make the effort, and try to understand the culture and how it works."

Coleman, meanwhile, says that financial stability, the legal system and property are all important factors, as are the cultural norms. "Many of these countries have systems that rely on payments for services that we would call bribes, but aren't necessarily seen that way locally," he says. Political stability, too, is a major issue. Coleman singles out Kenya as an example of a country many would have considered a relatively stable market only a year ago. "But Vietnam is a lot more politically stable than many regimes around the world, and that is one of its great achievements," he adds.

By joining the World Trade Organisation last year, Vietnam made considerable strides in gaining international credibility. "While you can't yet declare victory, the government has committed to a number of developmental goals, which are sympathetic to international investor sentiment," says Coleman. "It is putting a lot more money into training and education, and there are attempts to tackle corruption." He says that while Vietnam is not right for all companies, UK businesses that want to venture into Vietnam should not be put off by its developing status. It's a sentiment echoed by Cahn. "Clearly it is not Singapore when it comes to setting up, but if you have done your research and you know it is a market you want to develop, it is worth the effort," he says. "Hundreds of others have done it so the barriers are not insurmountable."

Those who have invested in Vietnam agree it is still early days in terms of the country's international development, but they insist there are good opportunities to be had for those who take the risk. "There are a lot of companies from all over the world that are not in Vietnam yet," says Cahn. "If you are in there first, you get the first pick of the skills and talents."

Vietnam: The facts

Population 87.4 million
Capital Hanoi
Government One-party state, ruled by the Communist Party of Vietnam
Major exports Oil and gas, textiles, footwear, seafood, rice and coffee
UK exports to Vietnam £133.7m in 2007

A new dawn

"We were asked by a client to help outsource a large number of its staff, and we decided to have a look around. We got some wobbly reports about India and we were challenged on the escalating costs, the staff churn and the skills shortage. We decided to go somewhere we could get high-quality staff and where we could become an employer of choice, rather than being further down the food chain.

In the beginning, the biggest challenges were government red tape and bureaucracy. There was some corruption, meaning you had to pay your way into doing things, and the legal system was fairly primitive. But you just have to accept those things if you want to be an early adopter.
We opened our first business with a small partner in Vietnam in 2000. It was pretty primitive when we arrived.

There were mainly motorcycles and very few cars. The infrastructure was not brilliant and while staff members were available, they didn't have a great deal of experience. Now we have more than 100 Vietnamese staff in the UK at any time. They go over for training and assistance, and we have Brits here on a regular basis. We have repatriated a lot of Vietnamese who moved to the west after the war, so they are educated and trained in the west.

I have helped quite a lot of companies coming into Vietnam, meeting the right people at government level and engaging with other Vietnamese businesses. More often than not, we end up doing business with them. Harvey Nash is small compared to the banks here, but I am seen as strategically important to the Vietnamese government. I was even given a gold award for my services to the Vietnamese software industry.

The biggest challenge for me now is to find space to expand. The people and the talent are already there, but the company is growing so fast that I constantly need new premises."