Publications

Overview

Vietnam has become one of the fastest growing economies in the world. During the first six months of 1997, its economy grew at a rate of 9.1%. Even with the recent financial crisis in several Asian countries, the growth rate is estimated to be 8% for 1997. (1) Investors such as Ford Motor Company see Vietnam as a way to get a foothold in the ASEAN region without the high investment costs and strictly enforced regulations of its neighbors. Since 1989, foreign investment in Vietnam has tripled in real terms.(2) As of May 1997, there were a total of 2042 approved foreign investment projects, with registered capital of US$31 billion.

Foreign investors are confident about business opportunities in Vietnam; however, they also point out that the Vietnamese government has not yet adjusted to a strong foreign presence. Thomas Manning of Ernst & Young characterizes the government as unpredictable and working with them fraught with difficulties.(3) For example, in June, dwindling foreign reserves led the State Bank to limit the ability of foreign companies to convert the Vietnamese currency, the dong, into dollars. This is a problem for companies that manufacture for the local market that need to pay their foreign employees, repay loans and repatriate profits.(4) As a result, these companies may find it necessary to scale back investment.

While the Vietnamese government has implemented many investment incentives, government dedication to pursue a course of market orientation with strong government controls does not translate to transparency and consistency in investment laws. Recent incentives for investors to come to Vietnam include 1) improvements in the Law on Foreign Investment; 2) low land rents in industrial zones; and 3) inexpensive labor. However, despite existing incentives, the government has a history of canceling major investment projects in key sectors, as was recently the case with a Swiss hotel chain and several Western oil companies. In addition, Vietnamese joint venture partners can occasionally be confusing or contradictory in their actions. Recently, Maryland-based BBI investments, slated to be the largest American investment project in Vietnam, was accused by its Vietnamese joint venture partner of not contributing enough capital in the allotted time. This claim turned out to be unsubstantiated; close examination showed BBI had contributed more than its necessary share of capital.

Inexpensive Labor: Vietnams Most Valuable Resource

One of Vietnams primary assets is a relatively well-educated and inexpensive labor force. The Vietnamese have a reputation as a hardworking and industrious people, and Vietnamese cultural traditions emphasize learning and a respect for authority. The countrys history has made the Vietnamese people open to foreigners, and easy to communicate with despite language barriers. These investor-friendly traits have been complemented by rising productivity and increased working hours, without corresponding wage increases.(5)

A shortage of skilled labor exists in Vietnam, largely due to an antiquated educational system and the countrys recent opening to major amounts of foreign investment. This is a ubiquitous problem in Southeast Asia as a whole: skilled labor is in demand, and managers who are available tend to be unfamiliar with new technologies. This lack of technical know-how and language skills tends to hamper new investment. Recently, this problem was illustrated in Intel Corporations assertion that they will not pursue in country manufacturing due to the lack of a significant pool of skilled engineering labor and unreliable power supplies. (6)

The shortage of qualified skilled labor in Vietnam has led to job-hopping and employee poaching, especially among the more highly skilled workers. To avoid this, employers must show employees that they are respected and trusted. One of the major complaints of workers at the much-maligned Nike plant, the source of a major labor dispute involving the abuse of workers by their managers, was that employees at the organization felt like cogs in a machine. Workers felt they were not treated like human beings.(7)

Many other companies, however, acknowledge that coping with the shortage of skilled labor is necessary to access this emerging market. Ford Motor Company, for example, began operations despite the shortage because the truck sector, a protected market, was growing at 18% annually. Although Fords initial entry may not be a profitable venture, it will give the company a big head start in the marketplace. Seiji Fuminashi, Deputy General Director of Vinastar, a joint venture with Mitsubishi motors, noted that auto manufacturers must be patient until the market grows. (8) Most investors in the auto industry realize that Vietnam is not a mature market, but holds immense opportunity with a population, and potential market, of 70 million people.

Foreign investment has led to some positive changes in the nature of the labor force. For example, foreign investment has enabled local staff to access advanced technology and learn the dynamics of Western management methods. Of course, the steady operation of Foreign Direct Investment (FDI) projects has also generated jobs for hundreds of thousands of workers. As a result, Vietnam has experienced employment creation of 2.9% annually. In order to promote the skills necessary to encourage foreign investment, the government has initiated a project to increase literacy rates from 91% of the population to 95%. Currently, 81% of communes and wards, 64% of districts, and 44% of cities and provinces have achieved national standards of literacy and primary education.

To regulate investors, a new labor law was promulgated in June of 1994. It took effect in January of 1995, and superceded all previous labor legislation. The general framework is supplemented by a number of additional circulars and decrees that clarify specific aspects of the law. The Labor Code provides a general framework for labor issues, including labor agreements, social insurance contributions, overtime, strikes and employment termination. There are no provisions for part-time work.

Due to the shortage of local skilled managers, many foreign investors look to expatriate labor as a short-term solution. Corporate Resources Group Inc, a human resources consulting firm based in Detroit, Michigan, notes that the reliance on expatriate labor is especially high when a foreign company is initially setting up operations in Vietnam. There are however, a number of difficulties that come with using expatriate labor. Foreign workers, both expatriates and overseas Vietnamese, must now obtain work permits (approximate cost: US$ 18 per year) and are restricted to a three-year stay. This applies to foreign workers employed at joint ventures, 100% foreign owned companies and local companies. Additionally, expatriates tend to be extremely expensive for a number of reasons. Expatriates will have to pay more for housing, there must be emergency medical evacuation procedures in place (since Vietnam has poor health facilities), and there are many other significant costs associated with poor infrastructure, such as transportation, communication and utilities.

As for the living conditions for expatriates, the existence of international schools assures that education is easily provided. However, there is an irregular supply and poor storage of Western foods. Further, given limited housing, expatriates should plan an average of six months to find a house. The Vietnam Business Journal notes that although the current quality of accommodations available for expatriates remains limited, there are many new housing projects underway. There are nine residential accommodation projects underway now in Hanoi alone, and seventeen in the planning stage.(9) Additionally, many service companies targeted towards foreigners have sprouted in major cities.

Recruiting

In general, the employee recruitment process for local Vietnamese takes about six months. Foreign enterprises may recruit labor through the local labor office or by engaging a local labor company or headhunting firm to do a search. Only when these routes prove unfruitful is a company allowed to advertise for the position and/or recruit workers from other regions. In reality, however, most joint ventures and foreign owned enterprises recruit their workers directly through in-company channels.

Labor contracts are made in accordance with a standard form issued by the Ministry of Labor, War Invalids and Social Affairs. There are three forms, consistent with the duration of the employment: indefinite term, definite term, and seasonal or specific. The contract must include a job description, duration of contract and probation period, specification of the workplace, and wage rate. In addition, the contract must address social insurance and labor protection. Although people under the age of fifteen years are ineligible for hire, anyone between the ages of thirteen and eighteen years can be hired as a trainee under the conditions of parental approval and reduced working hours.

The general manager of a foreign enterprise must sign a collective labor agreement with the organizations workers no later than six months after commencement of operations. This agreement is valid for a minimum of one year and a maximum of three years. It includes information such as salary for each type of occupation, working conditions, labor protection, collective welfare, and social insurance.

Article 16 of the Labor Code requires companies to give hiring priority to Vietnamese nationals. As in Thailand, a company can only employ foreign workers if there are no qualified Vietnamese national candidates. (10) In this case, the provincial labor office must be notified, and a work permit must be obtained. This system is more liberal than in neighboring countries such as Indonesia and Thailand, where there are limits imposed on the number of work permits granted for foreign workers. However, when a company has hired foreign workers, it must simultaneously establish training programs to prepare Vietnamese national workers so that they can replace the foreign laborers within 3 years. This condition does not apply to general directors of representative offices, employees of non-governmental organizations, members of the boards of foreign-owned companies, journalists or diplomats.

Wages and Benefits

Wages are generally only a small portion of an individuals total income. The remainder or an individuals compensation comes from benefits and bonuses. In Vietnam, there are also a number of additional charges that specifically apply to foreign-invested enterprises. As a result, costs associated with these types of compensation rise exponentially with wages. Additional charges can include: a Tet bonus of at least one months salary for all those employees who have been with the enterprise at least one year; social insurance; transportation charges; and social equality contributions which can amount to as much as 20% - 30% of salary rates. The salary levels of skilled workers are generally much higher than the minimum wage. Additionally, most skilled workers negotiate their salary in dollars, although provisions in the Labor Code are made in terms of the Vietnamese currency (dong).

Wages should be set forth clearly in labor contracts, and may not be lower than the foreign enterprise rates that are published annually by the Ministry of Labor, War Invalids, and Social Affairs. The government established minimum wages for different parts of the country; however, the government has clearly stated that these rates are only for those workers performing the simplest tasks. The minimum monthly wage for foreign-invested industries is $45 in Ho Chi Minh City and Hanoi, $40 in Hai Phong, Ba Ria-Vung Tau, Can Tho, Danang, Binh Duong, and Hue, and $35 elsewhere. However, government statistics note that in 1996 less than one-quarter of foreign companies were paying the minimum wages required by law. Often, companies realize the value of jobs in the city and thereby bypass many regulations.(11) In addition, these minimum wages do not apply to state-owned companies.

In general, wages at Vietnamese enterprises tend to range from $30 - $180 per month; minimum wages are among the lowest in the ASEAN region. By starting operations in Vietnam, an investor can enter the region with less expense than would be incurred by investing in Vietnams regional counterparts. Minimum monthly wages in Taiwan, for example, were US$ 512 in 1995 more than ten times the wage rates in Vietnam. Workers at foreign enterprises may be paid 70% of the minimum wage during a trial period (which cannot exceed 60 days for specialized or highly technical positions and 30 days for others). Employers must also provide an inflation adjustment allowance and a hardship allowance for work performed in dangerous or toxic environments.

The official workday, similar to other countries in the region, is fixed at eight hours (48 hours per week), with a thirty-minute lunch break daily. However, in most offices, workers take an hour and a half for lunch. Women who are more than seven months pregnant, or with a child younger than one year old, and people less than eighteen years of age are granted one extra hour off per day, and are not permitted to work overtime.

Every worker is also entitled to one day off per week. Workers who have been with a firm more than one year are entitled to 12 days of paid leave, and 14 -16 days of leave for people who engage in dangerous jobs or are under 18 years of age. Official paid holidays include: Western New Year, Tet holiday, Victory Day, International Labor Day, National Day, and National Day of the Individual Employee. Workers are given three days off for marriage, and one day off for their childrens marriages. Female workers are also entitled to four to six months of maternity leave per year, depending on the nature of their work.

The protocol for excused absences varies by company. Some companies, such as the Louitech-Leasgo joint venture, penalize workers 28,000 dong per day for not working overtime - regardless of their excuses. Goh Hsing Co, another joint venture, deducts a months lunch allowance for excused absences lasting three days or more.(12)

Overtime is restricted to 200 hours per year, which amounts to less than four hours per week. Often, companies will engage in labor agreements that allow employees to work more overtime than is legal. On normal working days, overtime payment is 150% of wages. For night work, compensation is 150% of wages, and 200% or more is paid for work on holidays.

In addition to the previously delineated non-wage costs, the enterprise must pay 2% of an employees salary or wages to an authorized health insurance company for health insurance benefits. Also, the employee must contribute approximately 1% of his salary to the health insurance premium. Although this figure is similar to other ASEAN countries, it remains lower than most other Asian countries.

Employers must withhold an additional 5% of a workers salary and pay it on the workers behalf to a local insurance fund. The local insurance fund provides for: 1) old age benefits; 2) benefits for those who are permanently disabled through work-related accidents or occupational diseases; and 3) burial expenses related to the first two categories.

A foreign-invested enterprise must also pay an amount equal to 15% of the wages and salaries of its Vietnamese employees as social insurance benefits. While 10% of that amount is paid to the local labor office for employment benefits, the other 5% is paid to a social insurance fund established by the enterprise and jointly administered by representatives of the enterprise. This fund is used for benefits relating to sickness, work-related accidents, occupational diseases, maternity leave, childcare, and funeral expenses for workers who die at the enterprise. However, despite the existence of this fund, workers are often expected to cover their own expenses for on the job injuries. For instance, in Sang Y Corp., a worker contracted a nose infection from the inhalation of toxic chemicals, and was refused compensation for the illness. Another employee was forced to cover her own costs when a machine ran over her hand.(13) These social insurance taxes do not apply to foreign workers.

Organized Labor

Trade unions in Vietnam are powerful political and economic forces. There are 53 trade unions nationwide, with representatives from every major state enterprise. Although unions are active in most state plants, they have been slow to develop in the private sector. In late 1995, only 11% of non-state companies had trade union representatives. This proportion is currently increasing because the Labor Code requires that each enterprise have a trade union within six months of beginning operations. While the foreign investment law does not mention unions, it does say that foreign enterprises must allow workers to participate in political and sociopolitical organizations. The collective labor agreement must be signed between the enterprise and a representative of the employees and must also be signed by a member of the executive committee of the trade union.

As in Thailand, an unprecedented level of discontent currently exists in the labor force. Since Vietnam is heavily dependent on overseas investment, the Vietnamese government has been reluctant to criticize the labor practices of foreign companies. Today, however, Vietnamese workers are walking off the job in strikes in record numbers. Although unions are under government control, strike activity is becoming more frequent. Vietnamese workers went on strike thirty times in 1997 (as of 8/97), and most of these strikes occurred at foreign-invested companies. Three years ago, less than 3,000 total workers in Vietnam went on strike. Last year, there were 12,000 striking workers in Ho Chi Minh City alone. This increase was largely due to increased foreign investment, and the lifting of the ban on strikes three years ago. The majority of strikes occur at foreign-invested enterprises, as the law forbids strikes at most state-owned industries. Deputy Labor Minister Le Duy Dong noted that most labor conflicts were at small-scale enterprises from South Korea, Singapore, and Taiwan. The 1995 Labor Law allows for strikes as the last solution and attaches many restrictions regarding reconciliation efforts. According to Le Du Dong, the Deputy Labor Minister, the main causes of strikes are unreasonable wages, long working hours, and limited annual leave.

The decision to strike must be made by the executive committee of the trade union in a company. It must also be approved by more than half of the employees in a labor collective. In 1996, the Ministry of Labor, War Invalids, and Social Affairs said that workers should give at least three days notice before striking. Strikes are prohibited in enterprises that serve the public, or those that are important to national security or defense. A directive issued in September 1997 defined these key sectors as: electricity, water, post and telecommunications, public transport, banking, sea/air navigation, oil exploration, fuel distribution, defense, and security. The Prime Minister also has the power to suspend or end a strike if it is considered to be detrimental to the national economy.

Vietnam has a firm system of arbitration in place to assist in labor disputes, and there is a hierarchy of councils at three levels. The labor conciliatory council of the enterprise or the labor conciliator of the district labor office functions as the first level. The next level is a provincial labor arbitration council. The third and final level is the Peoples Court, which has the power to decide if a strike is legal or illegal. It should be noted that Vietnams nascent legal system has sided with workers in many recent labor disputes. However, enforcing these rules and decisions is proving to be elusive. (14)

Termination Procedures

The labor code specifies six instances when an employer may unilaterally terminate a labor contract:

• The employee repeatedly fails to perform the work in accordance with the terms of the contract.
• An employee commits an act of theft, bribery, disclosure of business or technology secrets, or other conduct detrimental to the assets or well being of the enterprise.
• An employee takes seven days off in one month or 20 days off in one year without proper reason.
• An employee suffers illness or injury and is unable to work after receiving proper treatment for one year (in the case of an indefinite contract), six months (for a definite term contract), or more than half of the length of the contract for a specific or seasonal job.
• The employer is forced to reduce production and employment while trying to recover from natural disaster, fire, or in the event of a force majeure.
• The enterprise ceases operation.

Before terminating a labor contract, the employer must discuss and reach an agreement with the executive committee of the enterprises trade union. If there is a disagreement, both parties must submit a report to a competent body or organization and the agreement must be resolved in accordance with a procedure stipulated by law.

Employers must give notice to terminated employees. The length of notice for termination is specified in each individual labor contract. For those with definite term contracts, workers must be given 30 days notice, while those with indefinite term position must be given 45 days notice. In addition, exceptions exist for employees with seasonal positions or specific jobs with duration of less than one year. Laborers on the aforementioned types of contracts only require three days notice. A dismissed worker may appeal to the local labor agency for reinstatement after termination occurs. If an employer is found to have unlawfully terminated an employee, the enterprise must re-hire the employee and pay compensation equal to lost wages, in addition to being liable for payment of any applicable training costs.

Conclusion

Vietnam continues to promote economic and labor development, both through projects instituted by the government and international aid projects. One such international aid project is the Asian Development Banks $1.2 million grant to provide legal training to help the country adjust to a market economy. In light of the fact that demand for trained managers is growing faster than supply, many businesses are instituting their own training programs and educational campaigns. Individual corporations also contribute to the development of training programs; Hewlett Packard recently donated $140,000 in equipment and services to establish a training network in Hanoi and Ho Chi Minh City. There are currently sixteen US companies, including Citibank, who are funding a cooperative literacy promotion program between the Vietnamese Ministry of Education and Training and the American Business Alliance for Vietnamese Education. Additionally, there are many new management training programs operating through international universities such as Harvard University, Boise State University, and Dartmouth College. These programs are increasingly viewed as the best way to educate Vietnamese managers.

Vietnam has been somewhat isolated from the recent financial troubles in the region. This is due, at least in part, to the absence of a stock market and a non-convertible currency. (15) Vietnam is also just beginning to integrate with the regional ASEAN economy. One result of the recent Asian financial crisis is a major shift in the nature of investment in Vietnam. The main investors in Vietnam are its Asian neighbors, including South Korea, Singapore and Taiwan. However, as the economic crisis in Asia continues to ravage their economies, these investors are re-evaluating their operations. Additionally, foreign investment in general is being scaled back as shifting regulations, weak infrastructure and invasive bureaucracy affect investors. (16)

Foreign investment in Vietnam is currently becoming more suited to the market. As such, the quality and efficiency of Foreign Direct Investment projects has improved and is now more suitable to the economic structure of the country. In other words, businesses are restructuring their operations as they become more familiar with the Vietnamese market. The new Prime Minister, Phan Van Khai, an economist and a technocrat, holds promise for Vietnams future. The Vietnamese labor market is one of Vietnams best assets, due to its strong level of primary education and low cost. As training and educational programs are implemented, and as foreign enterprises continue their investments, the quality of the labor force will continue to improve and spur further investment.

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Sources

1 Judge, Michael, and Joshua Levine. Good Fences, Bad Neighbors, Vietnam Business Journal . 12/97, 24.

2 Vietnam Deepening Reform for Growth, World Bank Report No. 17031 - VN, 10/31/97, 20.

3 Thomas Manning, managing director of Ernst & Youngs Asia consulting group. 10/6/97

4 Andy Soloman, Foreigners Flight Out of Vietnam. Business Week. 11/06/97.

5 Free Vietnam Alliance, Labor Conditions in Vietnam, Recent History and Future Direction, Paris , 10/1/96.

6 Intel Corporation Opens Rep Office, Vietnam Business Journal. 6/97, 5.

7 Stewart, Ian. Workers Speak Up in Vietnam. Associated Press, 6/22/97.

8 Joshua Levine, How Many Cars is Enough? Vietnam Business Journal. 08/97.

9 Hang, Dang Phuong. Housing Hanoi, Vietnam Business Journal. 12/97, 42.

10 Circular No. 16/LDLDTBXH-TT. 9/5/96.

11 On Their Own. Vietnam Insight Online, 04/96.

12 Free Vietnam Alliance. Opp.cit.

13 Ibid.

14 Ian Stewart, Labor Problems Strike Vietnam, Associated Press. 1997.

15 Judge, Michael, and Joshua Levine. Good Fences, Bad Neighbors, Vietnam Business

16 Faith Keenan. Killing the Goose, Far Eastern Economic Review. 12/18/97.