Special Report Global WorkforceAsia Looking South
The plant employs 45 workers, primarily production operatives, plus finance, marketing and HR staff. All are Vietnamese. And the company’s wage costs in Vietnam are 25 percent to 30 percent below its costs in China.
Rich is one of hundreds of foreign companies making Vietnam and other Southeast Asian nations part of their "China-plus" strategy. Driven by concerns about the appreciation of the yuan, rising materials prices, higher tax rates, wage increases and poor employee retention, multinationals are moving into Southeast Asia, where investment incentives are higher and labor costs are lower.
The China-plus strategy, long practiced by Asian multinationals, reduces the risk of concentrating investment in one country, including the risk of excessive reliance on Chinese labor. Southeast Asia offers significant workforce-related advantages and, for consumer products companies such as Rich, a market of 600 million people with rising incomes.
Based in Buffalo, New York, with $2.6 billion in annual sales, Rich sells food products in 73 countries and employs 7,300 workers worldwide, including more than 1,000 in Asia—primarily India and China. The new Vietnamese plant will manufacture products for the region.
"Exporting products from the U.S. is cost-prohibitive and it’s very difficult to provide all products from China," says Judy Campbell, vice president, international human resources.
A new Booz Allen Hamilton survey of foreign manufacturers with facilities in China found that most are worried about China’s loss of competitiveness. When respondents were asked to compare China with other countries as a venue for relocation, they cited lower labor costs in other developing countries as the largest differentiator, at 3.74 on a scale of 1 to 5. The countries most often cited as possible alternatives to China were India, Vietnam, Thailand, Malaysia and Brazil, in that order.
Alternative Asian locations are problematic, however. Singapore is priced out of the market for all but the most highly skilled positions. Malaysia does not have the cost structure or scale to compete at the low end, but is suitable for high-value-added services and may attract more investment when it lowers its corporate tax rate to 25 percent in 2009.
Vietnam is already facing skilled-labor shortages. Thailand is caught in low-level civil unrest. Rich, like many companies, leaves Indonesia off its shortlist because of perceived levels of political risk. The Philippines may be nearing saturation for call centers and IT facilities. Across the region, currencies are appreciating at alarming rates.
Still, diversifying outside of China is a best practice not only for procurement and risk management but also for human resources. Southeast Asia offers many of the benefits of China without the severe overheating that is driving up wages along the Chinese coast and even in second- and third-tier cities. For a growing number of multinationals, the first stop outside China is Vietnam.
Fifteen years ago, Rich had 15 employees outside the U.S.; today it has 2,275. The company moved into Mexico in 1994, South Africa in 1995 and China in 1998. When Rich decided to expand in Asia outside of China, the choice for a new site hinged on regional market needs and the ease of establishing a facility. "Executives at Rich had a substantial debate about where to locate the new plant," Campbell notes. "The key to selecting Vietnam was government incentives and Rich’s familiarity with the markets."
In any expansion, Campbell is at the first meeting to consider new plant locations and reports directly to the international leadership team. She brings to the meetings information from their regional HR managers and due diligence questions concerning government labor regulations in the country. She also contributes information on the local labor force.
"The initial investigation into labor markets in Southeast Asia was not pretty. The war for talent is not a
cliché in Asia. Vietnam is like Shanghai 20 years ago."
—Judy Campbell, vice president, International human resources, Rich Products Corp.
"You have to understand the country’s culture and the company’s culture to know how they are going to fit together," she says.
Campbell’s evaluation of site locations outside China produced mixed results. "The initial investigation into labor markets in Southeast Asia was not pretty," she notes. "The war for talent is not a cliché in Asia. Vietnam is like Shanghai 20 years ago."
U.S. multinationals still trail companies based in South Korea, Singapore, Taiwan, Japan and India for direct investment in Vietnam, but Intel’s $1 billion investment two years ago in a facility in Ho Chi Minh City and Vietnam’s 2007 entry into the World Trade Organization have spurred a new wave of investment by U.S. and European multinationals. These firms created 188,679 jobs in Vietnam in 2007, the third-highest number in the world for jobs created by foreign direct investment, topped only by China and India, according to OCO Global, a foreign-investment research firm.
Vietnam’s GDP growth will hit 8.5 percent in 2008, up from 8.3 percent in 2007 and the highest in 10 years, according to the Asian Development Bank. The foreign-
investment sector now makes up more than 16 percent of GDP and 58 percent of export value. Foreign direct investment has created 1.3 million direct jobs and 1 million indirect jobs, according to the Ministry of Planning.
Vietnam ranked fifth in the world for total foreign direct investment in 2007, with $40.2 billion in greenfield—or new development—projects, outranked only by China, India, the U.S. and Russia, in that order, according to OCO. The Intel facility, which will eventually employ 4,000 workers, competes against General Electric, IBM and dozens of other major foreign firms for Vietnamese workers.
"The Vietnamese workforce is highly educated, but it’s difficult to find managers who speak English," Campbell reports. "We hired the HR manager first because we wanted that employee on the ground to participate in hiring for the plant. It was difficult. You have to reach some balance in terms of what you want and what you are going to find. At the level of a HR manager, you are lucky if you can find candidates with solid technical HR skills. It’s also difficult to find financial people with English skills and finance experience."
To establish the new plant in Vietnam, Rich deployed a team made up almost entirely of employees from China. "We wanted them to go into Vietnam and transfer their knowledge to there," Campbell says. "It was also good training for our Chinese associates. Our competitive advantage is the speed with which we can transfer knowledge."
Rich takes a prudent approach to hiring to avoid reductions in force in its international locations.
"We target a smaller size going in and then expand," Campbell says. Production employees at the new Rich plant have to be computer literate and familiar with good manufacturing processes. Rich provides on-the-job training for all employees.
"Our strategy has always been to focus on local talent development," Campbell explains. "We have never had more than six expats in any of our international locations. Our intent is to use local managers so that we learn about different ways of doing business and develop intimacy with customers."
Labor costs in Vietnam are lower than in China, but Rich also focuses on retention and rigorous talent management. In Vietnam, retention programs are geared to the high-risk positions, most of which are managerial. "Our turnover is low," Campbell reports. "Even in China, where average turnover is 12 percent to 14 percent, our turnover is 7 percent to 8 percent."
Multinationals like Rich may soon feel the pinch of labor shortages. The total Vietnamese labor force is 46 million and growing by 1.5 million a year, but more than half of all workers are employed in agriculture. The Vietnam labor market index created by the Navigos Group shows that labor demand rose 67 percent in 2007, while supply rose only 22 percent. Multinationals may face severe shortages for management, manufacturing, sales, accounting and finance, engineering and administrative employees. Navigos predicts severe labor shortages could last at least through 2012.
"In China, we face challenges in recruiting the number of people we need. In India, we face less of a challenge. And in Southeast Asia, we do not face any constraints."
—Geraldine McBride, president and CEO, SAP Asia Pacific
Wage increases in Vietnam reflect these shortages. Salaries rose by an average of 10.3 percent in 2007, the first year that increases in Vietnam outpaced those in China, where average salaries rose 8.6 percent, according to Hewitt Associates.
SAP, the world’s largest supplier of business software, expanded into Vietnam with facilities in Hanoi and Ho Chi Minh City in early 2007. In the fourth quarter of 2007, SAP established its first sales operations in Cambodia, working with an SAP Business All-in-One partner in
Phnom Penh. SAP is taking a regional approach to Southeast Asia, with offices now spread across most major cities.
"In China, we face challenges in recruiting the number of people we need," says Geraldine McBride, president and CEO of SAP Asia Pacific. "In India, we face less of a challenge. And in Southeast Asia, we do not face any constraints. We will continue to expand in Southeast Asia and will double our revenues from the region by 2010."
Because of Southeast Asia’s rapid growth, recruiting and hiring is one of SAP Asia Pacific’s largest corporate initiatives for 2008. McBride is leading the regional talent push.
"There are a lot of similarities in talent across the region," she says. "The talent consists of bright, young candidates who may need to be trained to work for a multinational corporation."
Two-thirds of SAP’s 42,750 employees are based outside the company’s home in Germany. SAP first established a presence in Southeast Asia in 1989 with an office in Singapore that now employs 400 people.
SAP’s Malaysia office, opened in 1992, now employs 120, and its Indonesia office, established in 1997, employs 45. Thirty SAP employees are based in Thailand. A new office in Pakistan is already operating, with a formal launch scheduled this month and a staff of 21 predicted by the end of fiscal year 2008.
SAP hired 3,384 new employees in Asia Pacific in 2007 for consulting, training, sales, marketing and customer support, bringing the regional total to more than 9,500 FTEs.
"You can’t really isolate Southeast Asia from Asia," McBride says. "In Asia Pacific, 150 million people will enter the workforce between now and 2010 —more than at any time in the history of the region. The region will become an exporter of talent."
"More Southeast Asian countries want to play in the export services marketplace, and each country is trying to find a niche so they have a place to compete."
—Tarun Mehta, managing director and head of global outsourcing,
SAP goes into emerging markets such as Cambodia, Vietnam and Pakistan with a combination of its own staff and local partners. "We look at the job descriptions for the positions we need to fill and we look at the marketplace and then determine whether we can acquire talent or whether we will have to build and develop it," McBride says. "We attract employees easily because we are an employer of choice."
"It is sometimes difficult to hire a managing director or find candidates for other high-level positions, so we may take someone from the region and send them off for training," she says. "Otherwise we build from the ground up in each country with local nationals. They become loyal employees. In Southeast Asia, our attrition rate is very low—about 5 percent—because our employment brand is very strong."
Labor market forecasting
Southeast Asia offers a wide range of cost propositions for multinationals looking for new opportunities or alternatives to China and India.
"More Southeast Asian countries want to play in the export services marketplace, and each country is trying to find a niche so they have a place to compete," says Tarun Mehta, managing director and head of the global sourcing practice at Protiviti Inc., a global risk management firm with 14 offices in Asia Pacific.
Mehta notes that along with U.S., European and Japanese multinationals, Chinese and Indian companies are also looking at Southeast Asian locations to outsource some of their low-margin work.
He advises workforce management executives who are evaluating Southeast Asian locations to try to forecast the labor supply three to five years out, beginning with an analysis of the current labor supply/demand balance.
"In Asia Pacific, 150 million people
will enter the workforce between
now and 2010—more than at any time in the history of the region."
Typically, the suitable labor pool may be 20 percent to 50 percent of the available labor pool, which is the working-age population, but local knowledge of specific markets is essential.
"For example, one company needed 3,500 finance and accounting employees in a Southeast Asian city of 2 million, which might seem reasonable," Mehta notes. "But when we talked to recruiters in the city, we found that the skill set was in high demand and completely overheated."
Companies must determine whether local universities are producing enough candidates to fill demand for the next three to five years. "Also, it’s important to understand the trading zones that a country is involved in and if that involvement will require, for example, infrastructure spending, which can absorb labor and lead to wage inflation," Mehta says.
Particularly in Southeast Asia, government incentive programs are strong and should be built into the business case, but it’s also necessary to understand the drivers behind the incentive programs. "When you are negotiating for incentives, it helps to understand the government’s motivations," Mehta says.
The China-plus strategy will gain momentum as the yuan continues to appreciate and multinationals grow more disenchanted with third-tier inland locations. Southeast Asia offers rich talent pools for workforce management executives who are tired of the double-digit wage increases and attrition rates that now plague China’s coastal cities.Workforce Management, April 21, 2008, p. 21-24 -- Subscribe Now!