What obstacles are there in this investment paradise that is so highly regarded by foreign firms from around the world? Why is it getting harder and harder in Vietnam? Let us listen to the experiences of Taiwanese businesspeople there.

"The golden age of investment in Vietnam will last at least another eight years," says Chen Shan-lin, director general at the Taipei Economic and Cultural Office in Ho Chi Minh City.

"There are still five more years in the golden age of investment in Vietnam," estimates Richard Tsai of the Taiwanese chamber of commerce of Binh Duong Province.

Whether that golden age extends five years or eight, Vietnam, with its geographic proximity to Taiwan, has some advantages not duplicated among the five emerging economies of the VISTA countries or the other nations in the "Next Eleven" group of developing economies.

With over half of its population under age 25. Vietnam has ample human resources, but as industry diversifies and upgrades, the shortage of mid- and high-level personnel is growing more and more acute.

"Oldest" foreign investor

Two wars (the Vietnam War involving the US, which ended in 1975, and the 1979 Sino-Vietnamese War) left Vietnam in a sorry state where people found it hard to make a living. In 1986 the government decided to embark on economic reforms that would encourage foreign investment to spur modernization. Vietnam was about ten years behind China on its path toward economic liberalization. In light of their experiences in China, investors from many nations were wary and held back. But Taiwan businesses boldly took the first step.

In its government policy reforms, Vietnam imitated China, but it learned from Taiwan's economy.

Taiwan was Vietnam's earliest trading partner, notes Thomas M. J. Yeh, vice chair of the Council for Economic Planning and Development. Back then Vietnamese government was choosing between the economic models of Taiwan and South Korea. It chose Taiwan's because it lacked the economic wherewithal to support big business in the way that Korea supports its chaebol. Taiwan's economic model centered on small and medium-sized businesses that better met Vietnam's needs.

"Many of Vietnam's economic technocrats were trained in Taiwan," explains Yeh. Although Taiwan and Vietnam lack formal diplomatic relations, it hasn't stopped them from cooperating closely in economics and trade.

To attract foreign investment and spur development, the Vietnamese government has offered various kinds of incentives to foreign investors. Furthermore, after joining international organizations and stepping out onto the international stage, Vietnam has reduced export and import tariffs and swept away non-tariff barriers. These measures have greatly benefited foreign firms investing in Vietnam. For instance, the European Union has given many products from Vietnam favorable status, and the US has also given Vietnam "normal trade relations" (formerly "most favored nation") status. The US and Vietnam have also embarked on Trade and Investment Framework Agreement (TIFA) negotiations. If Vietnam could obtain GSP (Generalized System of Preferences) status for some of its products, that would greatly benefit Taiwanese companies there that export to the American market.

Furthermore, Vietnam is one of the members of ASEAN, and tariffs between those nations dropped to a maximum of 5% in 2006. Because Taiwan has not been permitted to join ASEAN, it urgently needs to find a safe haven in one of the member nations. Vietnam is the closest and most convenient choice.

The streets and back alleys of Ho Chi Minh City and Hanoi are full of charming local color.

More and more intimate

What's more, in contrast to the volatile state of relations across the Taiwan Strait, the Vietnamese government has been sure and steady in its approach, and Taiwanese companies there are treated just like those of any other foreign nation. If anything, Taiwan has ties with Vietnam that are more intimate than most. From 1987 to the present, more than 77,000 Vietnamese women have married Taiwanese men and come to live in Taiwan. And the Vietnamese brides of Taiwanese businessmen and staff in Vietnam would bring the total much higher. Moreover, the anti-Chinese ethnic prejudices found in Indonesia and Malaysia are entirely absent in Vietnam, where the people believe that not sharing the same homeland is no reason for people not to become friends.

"Initially, Vietnamese law was incomplete and full of loopholes," says Shen Ming-jen, secretary-general of the Council of Taiwanese Chambers of Commerce in Vietnam. "Taiwanese firms were able to do well through connections and understanding the bribing culture." Nevertheless, illegally operating marriage brokers have hurt Taiwan's reputation in recent years.

Hanoi is a charming and romantic place by night, but the city's disorderly traffic puts foreign visitors on edge.

Flies in the ointment

Yet, in addition to its many favorable attributes, Vietnam also possesses uncertainties and bottlenecks. These obstacles hamper Taiwanese businesses in Vietnam and are preventing Vietnam from quickly developing.

The streets and back alleys of Ho Chi Minh City and Hanoi are full of charming local color.

Inadequate infrastructure

The inadequacy of basic infrastructure is the biggest single issue.

The Vietnamese government collects relatively little revenue (Vietnam is one of few countries in the world that assesses no real-estate tax), so it has little capacity to build public facilities. Moreover, in recent years those limited funds have flowed mostly to the capital, Hanoi.

"All land belongs to the state, but the government is too often ineffectual," says one leading Vietnam-based Taiwanese businessperson. "It lacks the capability to develop land itself, but it won't lease much of it to foreign businesses." Government inefficiency is a key factor holding back the nation's development.

Take transportation, for instance. Vietnam has three times Taiwan's population, and eight times its land area. But down to the present, it lacks proper highways, let alone rail or mass transit systems. The nation is S shaped. Flying from Ho Chi Minh City in the south to Hanoi in the north takes only two hours. But the journey takes 32 hours by train or road. This is altogether different from China, where high-speed rail is expected to cut the trip from Beijing to Shanghai from 12 to seven hours.

Airports and harbors are also insufficient. For all of Vietnam, there are only three international airports, 13 domestic airports, and five international ports. The poor transportation leads to losses of time and money, so that costs are correspondingly higher. Recently, Hon Hai Group, Compal Electronics and other new computer companies have one after another elected to set up in Hanoi, which is relatively close to the Chinese border, for convenience in being supplied with parts.

The streets and back alleys of Ho Chi Minh City and Hanoi are full of charming local color.

Electricity shortage

Unpredictable power outages pose even greater difficulties to Taiwanese firms in Vietnam. The country relies mostly on thermal power generation (52%) and hydroelectric power (39%) for electricity, and its generating capacity is insufficient. Although it began to import electricity from mainland China in 2004, there are serious shortages during the dry season (July-October), with rotating power outages.

"If there are high winds or heavy rainfall, you'll definitely lose your power," says Lee Chun-nan, director of I-Mei Foods. When I-Mei first set up in Hanoi it hoped to build its own electric and steam cogeneration plant. Such a plant would both help it save on energy costs and protect the environment, and resolve the problem of sporadic electricity outages. But frustratingly, the local government wouldn't permit them to build it.

Lee recalls that in 2002 the company's factory suffered more than 421 power outages. The outages happened almost every day. Eventually, the company wrote to the Taipei Economic and Cultural Office and asked it to negotiate on their behalf. "The negotiations were really effective," Lee says. The number declined to only 100-plus last year, and now the company gets advance notice.

Although the number of outages may have declined, with more and more large plants setting up in Vietnam, the electricity shortage is expected to become more acute over the next three to five years.

The streets and back alleys of Ho Chi Minh City and Hanoi are full of charming local color.

Lack of mid- and high-level personnel

"Trouble finding staff" is a common complaint of Taiwanese firms that have recently set up in Vietnam.

Apart from firms from Taiwan, many Japanese and Korean firms have joined the recent wave of global investment in Vietnam. Japanese firms are concentrated in the fields of electronics, automobiles, and home appliances, whereas Korean firms are found in a great variety of industries, from traditional manufacturing to high-tech. In that sense Korean firms are more similar to the Taiwanese companies there.

"Nevertheless, most foreign firms are producing for export, competing in Vietnam more for workers than for sales," says Jeff Hou, director of the Taiwan Trade Center office in Ho Chi Minh City.

Of Vietnam's population of 84 million, 65% are under age 25. The literacy rate is over 90%, and the country has a Confucian cultural heritage. Young people typically demonstrate a lot of ambition and a willingness to study that is quite unlike the laid-back, slow-paced ways of people in other Southeast Asian nations.

But language poses difficulties. The workers speak Vietnamese (with various distinctly different dialects north and south), and English is not widely spoken. Newly arriving Taiwanese firms hope to hire employees that can communicate in Chinese, especially for management positions and more culturally oriented professions. Consequently, Taiwan companies are seeking commitments from Vietnamese language majors at Guangxi University in China (Guangxi Province lies just over the Chinese border) before the students even graduate. There is also an insufficient supply of Chinese majors from the Ho Chi Minh City University of Pedagogy. Even Vietnamese speakers in Guangxi villages near the Vietnamese border are being hired by Taiwanese firms to work in Vietnam.

The problem is that although all say that they know Chinese, the actual quality is hit or miss.

"When graduates of Chinese departments at Vietnamese universities read the newspaper aloud, I can't understand them," says Chang Po-wei, who represents Taiwan Paper and Pulp Corporation (TPPC) in Vietnam. With university graduates of uncertain usefulness, he prefers to use local ethnic Chinese (who comprise about 1.5% of the population), with whom communication is easier.

There are also great shortages of skilled professionals. Consequently, foreign firms end up poaching talent from each other.

"The quality of education is the biggest obstacle to Vietnam's economic development," holds Wu Chun-chung, head of finance and administration for the TECO Group. The nation's history, with communist rule, long wars, isolationism, and poverty, have meant that the Vietnamese education system, professional training and other ancillary resources have not been able to keep up with the demands of foreign businesses. It is very difficult for firms to find workers who can communicate using the terminology of global professionals.

"Accountancy graduates don't understand accounting terminology; and plant technicians don't even understand electric current and voltage," says Wu, who explains that TECO has had a tough time training staff in the year since the it opened its plant. But the most serious poaching occurs in the financial services industry.

Vietnam has been in the WTO for less than a year, but it has already fully opened its borders to the establishment of foreign-invested banks. Before foreign banks can gain a foothold, local banks have been energetically expanding their branch networks. This has lead to an acute shortage of personnel and abundant poaching.

Martin R.C. Luo, the Vietnam-based Asia area chief representative of First Financial Group, notes that the firm has had to raise staff salaries three times this year. First, it found that staff on US$300 a month were leaving to work at another bank for $600 a month. But not long after increasing salaries to match, the firm discovered that staff were being poached to work at Taiwanese-owned banks for US$1200 a month.

Income inequality in Vietnam is rising in step with rocketing housing and land costs. Although the supply of luxury housing can't keep up with demand, 37% of the population lives below the poverty line.

Growing labor shortages

With more and more plants being opened by firms of various nations, companies are also gradually facing shortages of labor as well as managerial and professional personnel.

Kuo Ting-feng runs a pig feed factory in the coastal Bac Ninh Industrial Zone, near to where Hon Hai is currently building its new base. He notes that recently he has often seen clusters of three to five people in the industrial park, which demonstrate that factories are losing workers and need new hires. This sort of recruitment of new workers was rarely seen in the past. Senior employees, moreover, are engaging in much more job jumping than they used to, which has made it tough on companies that require skilled old hands.

Rising rents

In contrast to ten years ago, when foreign firms hesitated to come to Vietnam because they worried about a lack of domestic demand and revenue, firms are now arriving in droves but finding outrageous increases in land costs.

"Particularly since 2006, after Vietnam hosted the APEC summit, the cost of real estate in Vietnam has rocketed," says Jeff Hou, who argues that speculation has simply driven the price of real estate too high.

For instance, since early 2003, real estate costs in Ho Chi Minh City's District 1 have doubled. Apartment going for about US$1,800 per square meter have sold out in a few months. Prices are ten times what they were when Vietnam first opened up.

Compared with Ho Chi Minh City, Hanoi up north has experienced less dramatic economic growth, with development more comparable to 1970s Taipei. But because there is an imbalance between supply and demand, real estate isn't much cheaper than down south, and A-list buildings are more expensive than in Taipei.

"Office space in Hanoi rents at about NT$4000 per ping [3.3 square meters, or 36 square feet], but supply still isn't enough to meet demand," says Jason Hung, head of Cathay Life Insurance's office in Hanoi. "In comparison, space in Taipei 101 only goes for NT$3000 per ping."

Rising wages

Labor has been rising along with the cost of real estate and goods.

After the lunar New Year in February 2006, minimum wage hikes (which applied only to foreign firms) greatly increased labor costs. There is a three-tier minimum wage structure, set at 870,000 dong (about US$55) in Ho Chi Minh City and Hanoi; 790,000 dong (about US$50) in Haiphong, Dong Nai, and Binh Duong; and 710,000 dong (US$45) elsewhere. On average the hike amounted to about 40%.

The Vietnamese government notes that even with wages rising about 7-8% per year nationwide, this minimum wage hike was necessary to combat the cost of living increases associated with the recent depreciation of the dong. Whereas US$1 used to buy 10,000 dong, now it buys 16,000. A wage worth US$45 would have to rise from 450,000 to 720,000 dong to maintain that value.

Yet this unexpected wage hike caught many foreign firms, which had grown accustomed to the advantageous currency trend, completely unprepared. Richard Tsai, general manager of Active International Co., points out that the company already raised salaries before the lunar New Year. They didn't expect to be forced to raise salaries again right after it. With 400 employees at its plant, the hike will cost the company several million NT dollars a year. All Tsai can do is suffer in silence.

Because the Vietnamese government gave companies incomplete information about implementing the policy, some were biding their time, hoping to negotiate. But they didn't expect that workers, who were expecting quick wage hikes, would go on strike.

"In fact, if foreign firms just behave themselves and follow government policy, they don't have to worry about strikes," says Kuo Chao-hung, general manager of the Taiwanese firm Chiu Yi Vietnam Co., which makes motorcycle parts in Vietnam. If your aim is for long-term operations, you've got to adapt to local customs and be careful. It is expected that investment in Vietnam will increase rapidly over the next five years.

Tough times for traditional industries

Since 1986, when liberalization began, Vietnam has never wavered in welcoming foreign investment, but the Vietnamese government has not ceded economic authority to provinces and cities as in China. The central and local governments are often not on the same page about the implementation of policy, and many laws have not been fully implemented. When you add an unwieldy and complex bureaucracy and poor administrative inefficiency, it means that the foreign investment experience in Vietnam is not always smooth sailing.

Take the financial services industry. In the 15 years since the start of liberalization in 1993, even though all the procedures have been drawn up and all the conditions met, only six Taiwan financial institutions out of 47 seeking to set up operations in Vietnam have obtained licenses and formally established branches.

What's more, in recent years the government has been hoping to upgrade industry, and has gradually been less welcoming of labor-intensive and high-polluting industries, such as textile dyeing and finishing or scrap metals. Not only do these industries have to meet wastewater standards that are more stringent than in Taiwan, but the administrative review process is slower than for other industries.

Apart from industry type, scale is another important consideration for deciding whether to set up in Vietnam. Chang Po-wei, the TPPC representative in Vietnam, says, "Vietnam has been open a full 20 years. To enter now, you really have to be a large firm to make it. Individual operators are already finding it tough to survive.

No more wandering?

Every path has its own hardships. No matter where they invest, Taiwanese firms will discover different struggles and joys. But as Taiwanese businesspeople like to say: "There's only opportunity where there's risk." As long as there is opportunity for profits, Taiwanese firms will overcome all kinds of hardships to set up in Vietnam.

In June of this year Thomas M. J. Yeh, vice chairman of the Council for Economic Planning and Development, had this advice to those Taiwan firms planning on investing in Vietnam: "Taiwan companies must develop unique niche products, and they cannot simply transplant to Vietnam factories that cannot survive in Taiwan, China or Southeast Asia. One can only get big by aiming higher. You've got to be farsighted, or else you will have to go somewhere else in the not-too-distant future!"

In accordance with Taiwan's southward economic expansion campaign to create another "safe haven" and avoid becoming overly dependent on China, the hope is that Vietnam will not serve merely as a temporary waystation, but rather as permanent overseas destination for Taiwanese firms.