News

Silicon Dream

by Vietnam Investment Review

No. 576/Oct 28 - Nov 3, 2002

SILICON DREAM

How can the emerging software industry stay afloat amid fierce global competition? Can Vietnam become the next Silicon Valley? Nguyen Hong investigates in the first of two-part report.

India may be known as the world’s leading software developer – but Vietnam is fast receiving kudos from the global software development community.

Ho Chi Minh City-based TMA Solutions is one of a number of local firms leading the charge. The company recently beat two large Indian rivals to land a high-end outsourcing contract from Critical Path, a San Francisco-based technology company, to develop communication platform software for Internet Service Providers, telcos, wireless carriers and postal authorities in the US and Europe.

Critical Path is now ranked among the world’s top 15 companies, by the prestigious US-based market analysis firm Aberdeen Group, in the use of offshore software outsourcing practices.

TMA Solutions chairman Dr Nguyen Huu Le said: “I think our firm’s success in a very competitive market is based on its determination to embrace good practices to ensure quality and increase productivity.”

Critical Path has since signed two more software outsourcing contracts with TMA.

“The deals are proof of the quality of work we are doing in Vietnam. We believe the partnership will be further developed with new deals,” said Le. He said his company was looking to establish an offshore development centre (ODC) in Vietnam with Critical Path.

“If established, the centre will help the US company outsource to TMA steadily,” he said, adding Critical Path had already established ODCs in San Francisco, Canada and Ireland.

A number of other local firms are tasting success. Hanoi-based VietSoftware, a small software development company which boasts a strong domestic presence, has inked large contracts with giants such as IBM after fighting to overcome the recent global sag in IT firm fortunes.

Paragon Solutions Vietnam subsidiary to the US company Paragon Solutions, announced that its e-learning software package, SoftSim received a gold medal for technology innovation in the 2002 Excellence in e-Learning Awards held in the US.

SoftSim, which is produced for the US-backed e-learning company OutStart, was selected as one of three gold medal winners from 130 countries, while the Dolsoft Company has been successfully selling shrink-wrapped software products into the European market for many years and has recently broken into the US market.

Competitiveness?

For many years, offshore software development was considered an experimental activity by many multinationals. However, it has quickly become a more mainstream practice.

The number of companies prepared to use offshore providers is expected to grow by 50 per cent over the next several years. Existing companies utilising offshore providers expect to double their budgets for offshore development in the same time frame.

In an analysis of Vietnam’s emerging software industry released at a two-day workshop held in Ho Chi Minh City last week, experts from US-based Access America Trade Service (AxamTrade) said: “There are distinctions between software development giants (India and China) and Vietnam.”

According to the analysis, India is currently the undisputed leader of offshore services with more than 80 per cent of the market. However, it is expected that the Indian labour pool will not keep pace with the expected spike in international demand.

While estimates range depending on the reported source, the trend is clear. By 2005, the Indian labour pool will have 700,000 professionals, but demand for offshore IT professionals will number more than one million. Therefore, as supply falls short of demand, wage rates in India are expected to rise.

India is the leader but, according to the report, China looms as the greatest threat. Chinese companies and government officials are candid about their desire to become a major offshore software outsourcing destination.

But the report said: “The differences in scale do not mean Vietnam cannot compete in the outsourcing services market or cannot serve as an alternative to the undisputed leader, India.

“Vietnam already provides a lower cost alternative to India and as the wage rate differential increases over the next few years, companies will increasingly be seeking alternatives for their offshore outsourcing,” the report said.

However, in light of the global expansion of the market, AxamTrade experts said: “There is room for companies from many countries to participate.”

“Although Vietnam may present itself now as an alternative to India, customers indicate that in the long run competition, given wage rate structure and global visibility, will come from countries such as Russia, Malaysia and the Philippines,” said AxamTrade president Brian Christie.

The AxamTrade analysis pointed out two competitive edges of Vietnamese software companies, cost and technical capability.“With cost considerations figuring so high in the decision making process and underemployment being so prevalent in Vietnam, we can only expect that international contract opportunities for Vietnamese companies will continue to grow in the future.

“Already, Vietnam is being utilised as an overseas development centre for many Fortune 500 companies and this trend will increase as these companies expand their offshore outsourcing budgets, look to mitigate global risks and seek lower cost alternatives to India,” read the analysis.

In terms of technical capability Vietnamese software engineers are rated on par with their counterparts in other countries for technical aptitude. However, Vietnamese engineers are better known for application development, maintenance and testing rather than for skills in areas such as design.

The report concluded: “Due to scale, Vietnam is not positioned to ‘dominate’ the software outsourcing services market, but is positioned to participate fully in this market.”

The value of industry clusters

Many developing countries strive to become the next Silicon Valley in the hope that building a software industry could prove the key to national economic success.

Yet, studies reveal that most are falling short of their intended targets.

The reason, according to industry experts, is that IT development initiatives focus on comparative advantages such as cheap labour costs and attractive tax incentives without developing long-term, sustainable competitive advantages.

“Competitiveness is not abundant natural resources, cheap labour cost, currency and better government incentives.

But it is sustainable increases in productivity leading to improved standards of living for the average person.

A nation’s competitiveness is driven by its micro-environment, macro-environment, and quality of business strategy and operations,” said Vietnam Competitiveness Initiatives (VNCI) director Dr Roger Ford.

The VNCI, led by the US Agency for International Development, is currently being managed by J.E Austin Associates,the Hanoi School of Business and Galaxy Company. It is working with local partners to identify and assist industry clusters to work together to identify weaknesses and formulate strategies.

The cheap labour trap

Ford said the region’s competitive advantage is largely determined by two factors.

The first is the collaboration between IT companies, financial and insurance institutions, university and educational centres and government policies and regulations.

Meanwhile, the region’s ability to differentiate itself from its competitors is an advantage.

“This is best accomplished by a clustering approach with a common strategic vision based on that area’s uniqueness,” he said.

Clusters offer a number of advantages such as increased productivity and innovation, better access to skilled employees and capable suppliers, improved brand imaging and access to specialised information. They also improve accessed to global distribution and one stop shopping for international customers.“Building and facilitating cluster development is an option that the Vietnam software cluster can consider to help develop a common strategic objective and to overcome obstacles to competitiveness,” said Ford.