Tech Firms Flock to Vietnam; Samsung now accounts for more than 10% of Vietnam’s exports

September 27, 2013, 12:39 a.m. ET

Tech Firms Flock to Vietnam

Global Names Are Helping to Accelerate One of the Developing World’s Fastest-Ever Transformations

JAMES HOOKWAY

Vietnam is becoming one of the largest offshore production bases for Samsung’s Galaxy smartphones and tablets. The WSJ’s James Hookway looks at how the Korean electronics giant, which now accounts for more than 10% of Vietnam’s exports, is transforming Hanoi. BAC NINH, Vietnam—Opening up a Korean restaurant among the rice fields and limestone karsts north of Hanoi might seem a risky business, but Le Thi Huyen is doing a roaring trade at her bistro here. The reason? Samsung Electronics Co., 005930.SE -0.44% the South Korean firm, is building up Vietnam as one of its largest offshore production bases, churning out billions of dollars worth of its popular Galaxy series of smartphones and tablets, and its engineers and managers are hungry for bulgogi, bibimbap and other tastes of home.

Each day, Ms. Huyen’s restaurants are packed with South Korean customers, as well as a smattering of curious Vietnamese. “Samsung has really helped improve incomes around here,” says Ms. Huyen, 31 years old, who has opened a pair of Korean restaurants in Bac Ninh, a stone’s throw from one of Samsung’s largest factories. She’s now planning on opening a third in nearby Thai Nguyen, where Samsung is building a $2 billion facility, its biggest manufacturing plant anywhere in the world.

Samsung now accounts for more than 10% of Vietnam’s total exports. Other global names such as LG ElectronicsInc., 066570.SE -0.83% Intel Corp.INTC -1.54% and Foxconn are also stepping up investments and helping to accelerate one of the developing world’s fastest-ever economic transformations as Vietnam’s shipments of smartphones and computer parts begin to overtake exports of coffee, garments and shrimp.

International consultancy McKinsey & Co. notes how this Communist-run corner of the global economy could benefit from the way industrialization can happen faster today than it did in the past, especially in high-technology businesses where new trends quickly set root and leapfrog older ways of doing things. While Japanese firms took 40 years to climb to the top of the global value chain, South Korean firms took only 30 years, McKinsey wrote in a report. Chinese firms such as Huawei achieved the same feat in 20 years.

Deepak Mishra, until recently the World Bank’s lead economist in Vietnam, notes that some experts “argue that Vietnam’s manufacturing sector is perhaps at the stage where China was in the late 1990s, when high-tech exports suddenly took off.” And it isn’t just on the hardware side. A number of new tech startups are turning Vietnam into a player on the Asian software development scene, while the computers of its high-school students are wowing seasoned Google Inc. GOOG -0.43% engineers.

Some economists say that despite the trickle-down effects of workers shifting from agriculture to higher-paying factory jobs, the broader economic impact of booming investment figures isn’t yet clear. Samsung, which declined to comment for this article, and other manufacturers largely assemble products from components made elsewhere.

“I’m not sure Vietnam is really adding value from this just yet,” says Tim Condon, Asia-Pacific economist at ING in Singapore.

Vietnamese officials at this early stage credit the wave of foreign investments for helping to keep the economy afloat after a decadelong credit boom popped in 2010, triggering a series of currency devaluations that sent inflation rates spiraling over 20%. They are now laying out the welcome mat for more investors. Local officials in Thai Nguyen province outbid other parts of the country to persuade Samsung to build its third plant there, offering up to 16 years of tax breaks. Prime Minister Nguyen Tan Dung also talks about Vietnam’s focus on bringing in investors from Japan and elsewhere to help upgrade its infrastructure to enable its technology sector to grow.

“We’re aiming for top quality investments,” he said in a written response to questions.

The mushrooming of local tech startups, meanwhile, suggests that making smartphones could just be one sign of a broader shift toward developing technology-related industries in Vietnam, where the median age of its 92 million people is a youthful 26.

In Southeast Asia this year, only Singapore has a better record of tech entrepreneurs starting companies and then successfully selling stakes to outside investors, according to Hanoi-based startup incubator Topica. In the gaming sector, Hanoi-based Emobi launched a videogame world-wide based on Ho Chi Minh’s famous victory over French colonists at the battle of Dien Bien Phu in 1954. Some firms are doing better still. FPT Software is now among the world’s top-100 companies in the field of technology outsourcing, with annual revenues of more than $1 billion.

Others aren’t faring quite so well. A government-started social media site designed to draw users away from Facebook hasn’t really taken off, and firms such as Google and Yahoo Inc. complain that government restrictions on what can and can’t be said on the Internet has chilled the growth of e-commerce in the country. Currently, 35 bloggers are in prison, the highest number in the world after China.

Yet the renewed focus that many Vietnamese schools are placing on teaching computer science suggests there could be better news in the pipeline.

Neil Fraser, a software engineer at Google, recently visited Vietnam on vacation and marveled at the technological skills displayed by computer science students at a school in Danang, in central Vietnam. Fifth-graders, he said, were performing at the level of 11th-graders in the U.S., while he estimated that around half of the Vietnamese 11th-graders could pass the Google interview test.

“To say I was impressed is an understatement,” Mr. Fraser said.

He spent some of his holiday writing fresh educational software for the school, and then when to an ATM to withdraw enough money to cover the annual salary for an additional computer science teacher. The amount spoke volumes about Vietnam’s appeal: Just $1,200.