China's cheap labor force facing competition from Vietnam

~ China isn't brooding over the loss of jobs and businesses, at least not yet.

LONG THANH, Vietnam -- Check that label: "Made in China" is starting to give way to "Made in Vietnam." Taking a page from Beijing's economic playbook, Vietnam is luring makers of shoes, garments and computer chips with tax breaks, inexpensive land and cheaper labor.

Factory wages average $50 to $60 a month -- half as much as in manufacturing centers along China's coast. The incentives are so attractive that even Chinese companies are relocating.

Inside the Johnson Wood plant near the rice paddies, hundreds of young migrant workers toil away, making beds and dining sets for American consumers. Chinese supervisors bark orders.

This could be a scene in any number of factories in Dongguan in southern China, the furniture-making capital of the world. But Johnson Wood is in an industrial park outside Ho Chi Minh City in southern Vietnam.

Since 2003, Johnson's owner, Taiwan-based Green River Group, has been steadily moving production from mainland China. The company came to Vietnam to avoid paying penalties on China-made goods, but managers soon found that many business conditions here were better. By early next year, the number of Green River's employees in Vietnam, already 12,000, will surpass its Chinese work force.

"The future is in Vietnam," said Jerry Chang, the furniture maker's general manager. To facilitate business, Vietnam is building roads, airports and seaports. The country is benefiting from its highly literate population and millions of young workers hungry to improve their families' living standards.

"I'm saving to help my younger brother stay at school," said Le Thi Hoa, a 21-year-old high-school graduate who left her farming village a year earlier to sew shoes at a Nike plant near here.

In many cases, Vietnam can match or outdo its northern neighbor in incentives. Soon it is expected to join the World Trade Organization - as China did five years ago - which would make it easier for foreign companies to do business in Vietnam, a market of 84 million.

"In earlier years, the made-in-Vietnam tag was considered a negative," said Sesto Vecchi, a New York-born lawyer who served as a Naval officer during the Vietnam War and has been living here the last 13 years. For some Americans, he said, that attitude reflected the vestiges of the war.

The United States normalized trade with Vietnam in late 2001, but it wasn't until about a year ago that Vecchi began to see significant interest from American businesses.

"Americans can't believe there's any place cheaper" than China, he said.

China isn't brooding over the loss of jobs and businesses to Vietnam, at least not yet. The numbers may be insignificant to China, and officials in Beijing and local areas may be happy to see smokestack plants leave and take some of the steam - and pollution - out of an economy that's churning too fast. The nation's trade surplus hit $14.6 billion in July.

"China won't be afraid of production moving out," said Ma Xiaoye, a former Chinese trade official and now head of the Academy for World Watch, an independent civic group in Shanghai. "It will address some of the imbalance." But the pace of outsourcing to Vietnam is picking up, and more companies in high-end industries, including Japan's Canon Inc. and South Korea's LG International Corp., are looking at Vietnam for expansion - something that Chinese officials would be concerned about.

Intel Corp. recently said it would spend $300 million to build a microchip facility near Ho Chi Minh City, or Saigon as it was formerly known and many still call it. The Santa Clara, Calif.-based company picked Vietnam over Thailand and China.

Among the key factors: Vietnam's comparative political stability and strong focus on education, said Walter Blocker, chairman of the American Chamber of Commerce in Ho Chi Minh City, who spoke with Intel's chairman, Craig Barrett, about the decision.

Blocker and other Americans doing business here argue that it's in the United States' economic and political interest to expand commercial ties with Vietnam, in part to offset China's growing global clout, - particularly in Asia.

Vietnam attracted $5.8 billion in pledged foreign investment last year, up about 40 percent from 2004 and $2 billion less than India, a country more than 11 times its size in population. Companies from Taiwan, Japan and South Korea have led the way in Vietnam.

Inside Vietnam's Ministry of Planning & Investment compound in Hanoi, dotted with pink buildings with French windows, a parade of investors from around the world keeps Nguyen Anh Tuan, the ministry's deputy director, hopping from one meeting to the next.

His agency's goal is to secure $25 billion in foreign capital over the next five years. "China has a big advantage. But we not only have cheap labor but also favorable conditions for the future," Nguyen said, rattling off a list of tax breaks and other spoils for new arrivals.

In China, foreigners invested about $60 billion in each of the last two years, but figures for the first half of 2006 showed a slight decline.

China's extensive supply chain and growing pool of skilled workers give it an edge that Vietnam and most other countries simply cannot match. Yet land, labor and housing costs in China's manufacturing hubs have been climbing rapidly.

Shenzhen, a pioneering industrial city in southeast China, has seen sharp minimum wage increases in the last three years. Chinese workplace and environmental regulations are getting more stringent, and energy shortages are a perennial concern.

Partly to escape such pressures, Chinese manufacturers of motorbikes, home appliances and even cattle feed have set up operations in Vietnam. In some cases, companies are offered free land, said Wu Wanhua, chairman of the China Business Association in Hanoi.