Exploratory Study of Vietnamese Production Management



AN EXPLORATORY STUDY OF CONTINUOUS IMPROVEMENT IN VIETNAM: LESSONS AND OPPORTUNITIES

Phuong Anh Nguyen

Isenberg School of Management

University of Massachusetts, Amherst

121 Presidents’ Drive

Amherst, MA 01003

Phone: (510) 717-3126

Email: pnguyen@som.umass.edu

Alan Robinson

Isenberg School of Management

University of Massachusetts, Amherst

121 Presidents’ Drive

Amherst, MA 01003

Phone: (413) 545-5640

Email: agr@som.umass.edu

AN EXPLORATORY STUDY OF CONTINUOUS IMPROVEMENT IN VIETNAM: LESSONS AND OPPORTUNITIES

ABSTRACT

As Vietnam emerges into world markets, Vietnamese organizations are facing the predicament of how to avoid the low-cost labor trap and move up the production value-chain by upgrading their processes, capabilities and skills. Continuous improvement (CI) practices have proved fundamental to building and sustaining competitive advantage in other Asian countries such as Japan, Singapore, and Malaysia. If Vietnamese organizations are to pursue higher value-added activities, CI will be critical for them too. Despite the tremendous interest in Vietnam from the international business community, very little research on Vietnamese management practices has been done, in particular on the use of CI techniques. This paper is a report on an ongoing multiyear research project to study the state of CI in Vietnam. It surveys the current management literature relevant to Vietnam and offers a number of important lessons and opportunities for Vietnamese managers, for foreign companies investing in Vietnam, and for academics interested in studying Vietnamese management practices.

Key Words: Vietnamese Management; Continuous Improvement; Transition Economies; Kaizen

1. Introduction

As globalization creates a fundamental shift in the way firms compete, an important issue facing companies in emerging economies such as Vietnam’s is how to avoid the low-cost labor trap and move up the production value-chain. In the past, continuous improvement (CI) practices have proved fundamental to building and sustaining competitive advantage, especially in firms operating in transitional economies like Vietnam’s (Dale 1999; Rao et al. 1997). CI was key to Japan’s economic development and became, according to many observers, the essence of its management approach over the last forty years (Imai 1986; Japan Human Relations Association 1988). It has also benefited firms in Singapore (Chong and Lee-Partridge 1997; Sohal et al. 1989) and Malaysia (Giroud 2007). The goal of these practices is organization-wide incremental change aimed at generating ongoing, systematic, and cumulative improvements (Bessant and Caffyn, 1997). CI, which has delivered major benefits for many companies around the world, will prove critical to Vietnamese organizations as they pursue higher value-added activities.

Currently, there is intense interest in Vietnam from the international business community. Intel is faced with recruiting and training 4,000 Vietnamese employees with the skills necessary to operate its new $1 billion, 500,000 square-feet plant in the country’s southern business hub (VietNamNet Bridge 2008). Nike, the largest indirect employer in Vietnam with 130,000 workers in thirty-five contract factories, has transitioned its footwear lines to lean manufacturing processes as part of its CI strategy (Nike FY05-06 Corporate Responsibility Report 2006). Overseas Vietnamese have played an important role in facilitating commerce in Vietnam by returning to start and run new ventures and by financing capital investment through remittances which totaled $5.5 billion in 2007 (The Economist April 26, 2008). Despite this, Vietnam remains one of the least-researched countries in Asia. Only limited research has been done on Vietnamese management and almost none on CI practices in that country. Sturgeon’s (1998) field study suggested that most Vietnamese autoworkers are exposed to some level of advanced work organization and quality control practices. Other Vietnamese companies have embraced some aspects of Total Quality Management, but fall short in people management, statistical process control, and information systems (Hoang et al. 2006).

This paper derives from an ongoing multiyear field research project to study the state of Vietnamese management, in particular the mechanisms that organizations in Vietnam have in place to improve their products, services, and processes. Our goal was to find out what works, what does not, and why in the Vietnamese culture and context. In this paper, we begin with a broad review of the research relevant to Vietnamese management. Then, using five case studies from our firsthand research combined with interviews with directors and managers of a number of professional and business associations in Vietnam, we present what we believe are a number of important lessons and opportunities for both practitioners and academics.

2. Review of Current Management Literature Relevant to Vietnam

Following the Ɖổi Mới (Renewal) market-based reforms of the mid-1980s and the consequent influx of foreign investment, Vietnam has become a center of economic growth in Southeast Asia, offering foreign investors low-cost production sites and a domestic market of 86 million consumers. As other developing countries cut into Vietnam’s low-cost advantage, Vietnamese organizations will need to upgrade their processes, capabilities, and skills in order to avoid the fate of many other South-East Asian companies, which are often “bloated, over-diversified, too dependent on their contacts with those in power and not especially good at what they do (The Economist April 26, 2008:10).”

The goals of economic stability and an expedited transition to a market economy may be sound in theory but are proving difficult to attain in practice. Researchers who studied the results of both Russia’s and Poland’s “shock therapy” policies of the 1990s concluded that sudden changes to economic structure and incentives also require changes in firm behavior and a gradual development of human capital. But it takes time for firms to adjust, and the labor market to develop and acquire the necessary skills and knowledge in order to raise competitiveness and capacity for growth (Paci et al. 2004; Randall et al. 1994). Although the Vietnamese government does not call its policies “shock therapy”, as it follows an ambitious “short-cut” development strategy of transitioning into an industrial nation by 2020 (Vo and Dao 2001), companies find themselves operating in what some observers have termed a “rich business environment” with extreme uncertainties, and with limited knowledge and understanding of international business practice. Based on what we have found, this environment has impeded adoption and diffusion of CI techniques in Vietnam.

1. A Rich Business Environment with Extreme Uncertainties

Firms in emerging economies, such as Vietnam’s, operate in a rich business environment, under a weak legal system, and without developed market institutions and infrastructure (Hoskisson et. al 2000; Le et al. 2006). While a rich environment can offer business opportunities for companies in Vietnam including exporting, outsourcing, and joint-venture partnerships, the opportunities and widespread optimism based on rapid economic development have spawned a sense of complacency in the country and led many companies to focus on instant profits. The optimism, nurtured by increasing foreign direct investment (FDI), has created disincentives for managers to build long-term capability in their firms. Rather than concentrate on becoming internationally competitive in their core businesses, many Vietnamese firms have expanded into a wide-range of lucrative sectors including real estate, financial services, and tourism to seek rapid returns (Harvard Vietnam Program 2008). This thinking also explains the limited investment in human resource development, resulting in insufficient employee training on the use of quality and CI techniques in their jobs (Hoang et al. 2006).

Without a comprehensive legal system and developed market institutions and infrastructure, Vietnamese firms are faced with an extremely uncertain environment that lacks both transparency and reliable business data. Poor market institutions have hindered the facilitation of business transactions and access to good secondary information regarding potential business partners (Nguyen 2005). It is not even clear how many companies are operating in the country due to the multitude of confusing forms of legal enterprise (Taussig 2005). As Shultz et al. put it, “Details of successful business and marketing practice change daily, often at the whim of an official (2000: 750)…” Operating in such an environment, firms have developed strong cultures of secrecy and fear, are reluctant to let in outsiders, and even more unwilling to reveal much to them. They operate according to a different set of “rules” which are dictated by connections, bribery, and reputation (Gainsborough 2007). In such a climate, Vietnamese firms tend to focus on immediate production and marketing problems and to place a low priority on CI. This is similar to what other researchers have observed in Chinese businesses (Tuan and Ng 1998).

Vietnam’s poor business environment has also constrained the development of the private sector. Private firms are forced to operate in low value-added industries that are vulnerable to rapidly shrinking margins and volatile global markets (Chu and Katsioloudes 2004). As such, it is difficult for these firms to invest in training and development. Yet trained knowledge-workers are essential for companies to transition out of low value-added production. In Singapore, for example, the government has long recognized this and helped its businesses to invest extensively in education and manpower training, to open up to skills and talent from overseas, and to bring world-class management practices into the country (Wong 2001). CI will be critical for Vietnamese firms as they try to achieve higher value-added activities, and move from “made in Vietnam” to “designed and made in Vietnam.”

2. A Limited Knowledge of International Business Practice

Presently, Vietnam’s human resource base and management practices fall far short of international standards. The country lacks skilled personnel in management, finance, accounting, and marketing who also understand the market economy (ICAF 2006). Vietnamese managers are generally unaware of current “state-of-the-art,” management practices in their industries, and of global best practices in general. Outside the state sector, few Vietnamese exporters have traveled abroad and have firsthand knowledge of world markets (Hill 2000). Further, the economy is managed by bureaucrats who generally have little experience and knowledge of international commerce and who continue to be suspicious of private ownership and enterprise (Hill 2000).

Vietnamese managers’ limited knowledge of international business practices is due to their lack of experience and trading with the west (Kozlova and Puffer 1994) and their socialist education which, even today, focuses on production (versus demand) economics. Until recently, there were no words in the Vietnamese language for concepts such as “customer service” or “entrepreneurship” (Napier 2005). Entrepreneurs have few role models, little reliable business data, limited skills to develop business plans, and little time to build their reputation (Le et al. 2006).

As other developing nations enter the marketplace with even lower labor costs, the implementation of CI practices will be of utmost importance for organizations in Vietnam to stay competitive. Malaysian companies have recognized this and have considered quality and CI essential to their business plans (Samat et al. 2006; Sohail et al. 2004). Yet Vietnamese firms, for the most part, have only focused on upgrading capacity and technology rather than other components of a well-designed and balanced long-term strategy such as human resource training, management development, and CI (Institute of Economics 2001). There remains a significant need for Vietnamese entrepreneurs to familiarize themselves with international quality standards and practices (Chu and Katsioloudes 2004).

3. A Weak Management Education System

While the majority of Vietnamese managers are in dire need of international business education and training, Vietnam does not yet have the resources to provide this. The quality of Vietnamese universities and higher education is far below international standards, consisting of many irrelevant subjects and courses and outdated training facilities (Vu 2008). There are many odd rules and policies that hamper education. For instance, the Ministry of Education and Training prohibits any individual from pursuing a higher degree in a field unless that person already has an undergraduate degree in that field. This rule, which continues to be strongly supported by the government, has greatly impeded the growth of business schools (only people with business degrees and economics degrees can currently study for an MBA in Vietnam). Worse, perhaps, is that degrees and training certificates can easily be bought (Vo and Dao 2001).

There is also an acute shortage of management research in the country. Vietnam’s best professors and lecturers published very few articles in international, peer-reviewed journals (Harvard Vietnam Program). Business schools are set up primarily as teaching institutions, and research is deemphasized and in some cases, actively discouraged. In addition, many universities and research institutes remain chronically underfunded. With an average monthly pay of $70 to $100, researchers are forced to take on additional jobs including private tutoring, translation work, consulting or running an outside business to supplement their salary (Overland 2008). The lack of a research culture in Vietnam is also evident in the limited research and development (R&D) conducted in industry. Aside from R&D centers in large state-owned corporations (SOCs) and in foreign-investment enterprises (FIEs), most Vietnamese companies do little or no R&D (Harvard Vietnam Program 2008). Furthermore, there are few connections between universities, research institutes, and industry in Vietnam, which further inhibits improvement efforts in the country. As long as the CI capability gap between Vietnamese firms and their foreign competitors continues to widen, Vietnamese firms will have a difficult time moving up the production value-chain.

3. Case Analyses

1. Research Methods

It is unquestionably difficult for academics, particularly foreign ones, to do management research in Vietnam. Access is highly dependent on the support of a host institution through government channels (Ashwill 2005), lengthy negotiations with host agencies and research subjects (Scott et al. 2006), and overcoming the language barrier and data inaccessibility (Simonet 2008). While one of the authors is fluent in Vietnamese, we also had to deal with language issues due to the quite different dialects in Vietnam. For instance, we spent one rainy day in Hanoi, going from vendor to vendor, asking to purchase a dù which means “umbrella” to a southern Vietnamese. Each vendor scratched his or her head and directed us someplace else. Later on we were told the reason why: in north Vietnam dù means “parachute”!

Access to information we take for granted in the west can pose daunting challenges in Vietnam. One of the authors was denied access to the public library in Ho Chi Minh City when she did not have an authorized endorsement letter and was not willing to hand over her passport to the circulation desk. She later gained access to an affiliate library at the Vietnam National University in Ho Chi Minh City through a family member working there. However, library regulations strictly forbid bringing any writing instrument or paper inside. A participant at the American Support for Education in Vietnam Conference in January 2008 commented, “What is the difference between an American child and a Vietnamese child? The American child has a library card.”

Even when we were able to get access to companies, our host institution, the Hanoi School of Business (HSB) of the Vietnam National University, was instrumental in providing high-level official endorsement and in helping to ease managers’ anxiety about the research project and its goals. The data were collected through field research at five companies in different industries of varying ownership types, and through interviews with directors and managers of various business and professional associations during three extended stays in Vietnam in 2007 and 2008. We selected these case companies through our interviews and discussions with business leaders in Vietnam, and HSB helped us gain access to them. The companies were located in north and central Vietnam. At each company, we interviewed managers at all levels – including owners, directors, deputy directors, operations and quality managers, and frontline employees. We directly observed operations at the factory floor and examined each company’s leadership, management approaches, training methods, incentive programs, and performance improvements.

Similar to other researchers, we found that the companies in our study had no experience with management research and initially were unsure of how frank and open they could be with us. This was due in part to the culture of secrecy that still exists from the communist era – but also to the lack of a research culture in Vietnam and of both research and business publications. While some of the more prominent business books from the West such as The World is Flat and The Toyota Way have been translated into Vietnamese, the selection of business magazines and books remains very limited. Thus, it took time and a lot of explanation to achieve the mutual trust and ease of communication necessary for us to gather our data.

In addition to the information we collected inside the five companies, we were careful to triangulate our findings and hypotheses as they emerged through additional interviews of individuals who have extensive knowledge of Vietnam. We interviewed directors and managers of many associations, including the American Chamber of Commerce in Hanoi, the Center for Sustainable Community Development, the Hanoi Business Association, the Institute of Education – Vietnam, and the Overseas Vietnamese Business Association in Vietnam – Ho Chi Minh City. They added greatly to our understanding of and ability to interpret the information we gathered and to the lessons we developed. We also taught six executive MBA classes on CI and operations comprising more than 200 senior executives from a diverse set of industries. The frank in-class discussions and the managers’ responses to team exercises validated the insights we were developing into how foreign best-practices might be adopted to Vietnamese companies.

We first give a brief summary of each company before we present our findings.

Company 1. Company 1 is a ceramic-tile firm started in 1994, a subsidiary of one of the largest SOCs in Vietnam. The company is in a fiercely competitive industry – more than thirty ceramic-tile firms in Vietnam offer similar products. Company 1 had low productivity, a defect rate of almost 20 percent, a 20 percent scrap rate, and constant and extensive line stoppages due to frequent breakdowns of its extremely old equipment. Due to the government’s initiative to relocate all pollution-causing plants away from major cities, the firm moved to a new location in 2006 and restarted production there in 2007. The relocation caused another problem – Company 1 had to almost completely replace its workforce. Except for only a handful of employees, all of the managers and workers were hired in 2007, just months before startup. The vast majority of the workforce had little knowledge of production, factory work, or the company’s products and processes. As the Director put it, “Yesterday they [the new employees] were working in the rice paddies. Today they are in the factory.”

The company had an in-house training and development group. For a new employee, the first three months on the job consisted of classroom instruction including safety and task-specific training. Afterwards, employees would be sent to different areas of the plant for a few months of hands-on experience before their training would be complete. Company 1 also offered competitive wages compared to Vietnam’s minimum wage of VDN 580,000 ($35.52) per worker per month for domestic enterprises in suburban districts. The average monthly pay at Company 1 was approximately $80 for a frontline employee, $100 for a manager, and $400 for the operations manager. In addition, the firm had a bonus system based on each team’s daily production. Each worker could receive up to VDN 100,000 per day ($6.16 per day) in bonus.

Even with the high pay and bonus incentive, employees were not able to achieve the production goals. So in 2007, the company implemented “suggestion meetings” to gather ideas from employees on how to increase productivity. The suggestions we reviewed indicated that the company had not addressed some basic problems. One idea, for example, was to install fans to keep the factory cooler (it is very hot there during the summer months). Another suggestion was “To do a good job, I need this machine fixed.” At the same time, top management told us that frontline workers were not yet competent to carry out even basic job duties. This divide, where workers are asking for basic problems to be solved and management does not respect their ideas, is characteristic of low-performing or start-up initiatives to get employee ideas (Robinson and Schroeder 2004). Although we asked the question in a variety of ways and to different managers, it appeared that Company 1 had no other mechanisms for quality and productivity improvement, nor did it plan to improve its existing suggestion system.

Although Company 1 was ISO 9000 certified, we were surprised to find no preventive and corrective systems in place (a major requirement of the standard). There were many improvement and safety issues that should have caused certification problems. Fuel was kept in open fuel drums next to the furnaces and a number of workers on the factory floor were barefoot even though they were working with heavy equipment – both serious safety hazards. And for a new facility, it was already piled high with trash, clutter, and defective tiles. Not only were these defects taking up a lot of space, but they were costly to dispose of. We also observed that employees stacking the finished tiles did not handle the products in a careful manner. Stacking damage was one of the main reasons for the high defect rate. At one point, when we were on the factory floor with the Director, he removed a clearly-defective tile from the defect cart and put it back on the conveyor belt, while chastising the worker for rejecting it. It seemed that management was blaming low-skilled workforce for all its quality and productivity problems, when poor leadership and lack of CI were the real issues.

Company 2. Established in 1999, Company 2 is an unlisted joint-stock pharmaceutical company. The company specializes in producing a key raw material for anti-malarial drugs. While the efficacy of the drugs made from the raw material is very high, they are in short supply globally because of the lengthy cultivation time required for this raw material. As such, it is highly notable that Company 2 can not only meet the domestic demand but also export to leading pharmaceutical firms in Europe, Asia, and Africa. The company also produces a wide range of end-use drugs including antibiotics and vitamins with the capacity of roughly 1 billion tablets per year and 100 million antibiotic combination therapy doses per year. The firm is ISO 9001 registered and one of only a few firms in Vietnam to be GMP/GSP/GLP-WHO certified.

With the aim of capturing more market share in international markets, Company 2 was trying to expand its operations, especially in the production of the anti-malarial raw material. There were, however, a number of problems with the expansion. In our interviews, it quickly became clear to us that the company did not have a viable strategy to meet the ambitious goals set by top management. Middle managers told us how frustrated and overwhelmed they were, due to the lack of training in pharmaceuticals and insufficient direction from top management. Prior to the founding of Company 2, the president (one of the owners) had spent his entire career in construction, and had no experience in the pharmaceutical industry.

We observed other problems at Company 2. Initially, top management was extremely reluctant to let us inside the production facility. After considerable negotiation, we were allowed in, but the HSB faculty members helping us were not. While the new factory was well kept – clean, organized, and temperature controlled – there were clear violations of GMP. For instance, many workers did not wear proper protective equipment – while some employees wore face masks and white coats in the clean rooms, others did not with no apparent consequences. We were told that the facility housed a ten-person R&D department. Despite persistent and repeated questioning we were never able to find it or to figure out why top management would be secretive about it. We were also surprised to learn that none of the firm’s drugs had undergone clinical testing. When we brought this up with top management, they did not appear concerned. They assured us that Company 2 had met all requirements of the Ministry of Health of Vietnam.

Although Company 2 was regarded as one of the highest-potential start-ups in Vietnam, we began to suspect that the firm was not what it appeared to be despite the best efforts of upper management to disguise that fact. While we were not allowed to see its financial data, several middle managers confided to us that the firm was far from being highly profitable. And despite its ISO 9001 and GMP/GSP/GLP-WHO certifications, as far as we could tell the company had neither active CI systems in place nor any training programs for its people.

Company 3. Started in 1993, Company 3 is a foreign joint-venture that assembles one of the top automobile brands in Vietnam. Company 3, like all automakers in Vietnam, was faced with a major challenge – low vehicle demand. Although its capacity was 10,000 units per year, its annual production was only 6,000 units. Top management attributed the low demand to the country’s high vehicle tax rate and undeveloped road infrastructure. Taxes imposed on new vehicles (the Special Consumption Tax is 50 percent per passenger car) discouraged many consumers from purchasing them. These taxes are intended as a stop-gap measure to temporarily address the poor infrastructure by curbing the number of vehicles on the road, but they put a strain on Vietnam’s automakers. Moreover, 61 percent of the roads in Vietnam are dirt roads and over 10 percent of villages are not accessible by road for at least one month of the year in the rainy season (The Economist Intelligence Unit 2007). Another damper on demand is the severe shortage of parking places in major cities.

Vietnam’s booming development also contributed to Company 3’s second major challenge – high employee-turnover. Due to the increase in FDI and rapid growth in the number of enterprises in the country, there was intense demand for skilled workers. The firm was in a constant struggle to recruit and retain employees. However, Company 3’s wages were among the lowest in the Vietnamese auto industry. Skilled autoworkers could earn up to ten times their salaries by working as mechanics in dealerships or by opening their own repair shops.

Again, the primary CI mechanism at this company was its suggestion system. An employee whose idea was implemented was rewarded with a bonus of up to 20 percent of the cost savings and was eligible to participate in a paid internship at headquarters. The suggestion system helped Company 3 to solicit employee ideas to improve productivity, safety, or the environment, save money, and better organize the workplace. By world standards, expectations for idea submission and implementation were low and results were poor. In 2006, management collected just over 200 employee ideas (approximately 0.8 idea per employee) and only implemented 70 or 35 percent of them. Best-practice idea systems in the auto industry routinely implement 50 or more ideas per employee per year (Robinson and Schroeder 2004).

Most of individual suggestions we reviewed were extremely simple and also pointed primarily to a lack of training. For example, one idea which the plant manager himself singled out to us as particularly good was that workers organize their tools on tool-boards so that they did not waste time looking for them. This we found surprising – normally tool-boards are one of the first things taught in a 5S program, one of the basic lean tools, and are in standard fixture in automobile companies around the world. Another suggestion was to up the Predelivery Inspection (PDI) program so that a weekly PDI be done on every car in the lot and a final PDI be done on every sold vehicle. In today’s automotive world – which emphasizes process improvement over inspection – this idea was a step backwards.

While the suggestion system did produce some useful improvements at Company 3, it needed improvement itself. The process of calculating rewards for each implemented idea was extremely tedious and time-consuming. It often took as long as a year for workers to receive their rewards. Furthermore, the internships – the big prizes – seemed to have an unintended negative side effect. Employees who won the internships often became frustrated with their low salaries once they returned from the parent company and many subsequently left due to pay dissatisfaction. Overall Company 3 had very weak CI as well. Other than the suggestion system there were no other formal CI mechanisms in place at this company.

Company 4. Company 4 is a seafood processor and exporter, an equitized member of a large SOC. While private investors currently own some shares in Company 4, the central government remains the majority stakeholder. The firm produces aquaculture feed, processes and exports seafood products to international markets, trades imported goods, and provides cold-storage services for food products. Company 4’s main objective was to expand its seafood exports, especially to capture more market share in the United States. However, there were a number of potential problems facing its planned expansion. While the company is a leading firm in Vietnam’s seafood industry, its production methods were seriously outdated and perhaps non-scalable. Its equipment was extremely old. Seafood products – for example shelled shrimp – were manually processed by hundreds of workers standing at stainless steel tables. Even though the facility was jammed with workers, top management told us that Company 4’s biggest challenge was a shortage of labor. And yet, in the packing area, a one- to two-person job had at least a dozen workers standing idle and watching for most of the time.

As far as we could tell Company 4 had no active CI except the reactive system it had in place for its ISO 9001 certification. This poses a barrier for the firm as it tries to expand. The rapid growth of the Vietnamese seafood industry has led to major quality problems in international markets (Saigon Times Weekly 2005). The industry is continually confronted with accusations of poor food quality similar to those leveled at Chinese companies. In 2007, Japan, Vietnam’s biggest global seafood customer, threatened to ban all Vietnamese seafood products due to food safety issues (Le 2007). Unless Company 4 puts into place a more rigorous CI mechanism, our fear is that it may soon not be able to compete globally or rise above an already growing global sentiment about Vietnam “as a producer that dumps cheap and often unsafe food products onto the global market (Le 2007).”

Company 5. Company 5 is a privately-owned footwear manufacturer. Established in 2002, the firm started out in the textile business. In 2006, the company switched its operations to footwear production – both as a third-party outsourced manufacturer and as a producer of its own brand. The majority of its production goes to overseas markets including the U.S., France, England, Spain, Holland, and Mexico. A major challenge for Company 5 was the competitive nature of its industry. Profit margins are generally extremely low – between 5 to 8 percent for factory owners in Vietnam (Kahle et al. 2000). (Company 5’s profit margin was around $.50 per pair of shoes.) In addition, it was very difficult for the firm to compete with its Korean and Taiwanese competitors given that they operate in Vietnam too but deploy much more advanced technology.

The second major challenge for Company 5 was its high operating costs - the majority is for materials and labor. Except for plastics, most of its raw materials had to be bought from international suppliers. As a buffer against defects, the company also purchased 1 percent more material than it needed. While the labor market had not been a concern in previous years, Company 5 was now experiencing a shortage of skilled laborers. Rising wages were not only making it difficult to recruit workers but also to retain them. Company 5’s rising turnover has also driven up its training costs. New employees require six months of training to be able to operate heavy machinery and to learn the rubber production process. Thus, the high turnover has caused Company 5’s costs to soar dramatically in recent years.

Despite the labor-shortage concerns expressed by management, it seemed to us that Company 5 also had far more employees than it needed. Certain areas on the factory floor were so crowded that it was hard to get in to see what employees were doing. Conditions were cramped everywhere. Many employees knelt and worked on the floor due to the lack of bench space. Tasks that in other companies would have been done by machines were done manually. For example, in one area, ten female employees hand-painted the silver lines around the sides of sneakers. Again, the primary CI tool at Company 5 was a suggestion system. However, at this company, there was an unusual twist. While employees could earn a bonus if management liked their ideas, they could also be punished for ideas which management deemed as “bad”. It is hardly surprising that the ideas were not exactly pouring in.

4. Lessons and Opportunities

The five case studies summarized above led us to formulate several hypotheses which we explored and tested in interviews and discussions with business leaders, directors of business and trade organizations, executives in the MBA classes at HSB, and prominent members of the expatriate community including some who have lived and worked in Vietnam since the 1960s. In the following section, we provide a number of lessons that we believe to be important for Vietnamese managers, foreign companies, and academics who are interested in conducting research and understanding organizations in Vietnam.

Finding 1: Minimal Focus on Continuous Improvement. Our first finding in all five companies was well aligned with what other researchers have found. Vietnamese companies continued to “bet on cheap labor” (Harvard Vietnam Program 2008) and feel little urgency to improve their operations. Despite more than 600 worker strikes in a fifteen month period in 2006 and 2007 (The Economist Intelligence Unit 2007), the Vietnamese managers we interviewed hold firm that Vietnam’s labor costs will remain low compared to neighboring countries. And if the companies we have studied are any guide, costs have to remain low. The five case companies relied on low labor costs as their primary source of competitive advantage. In addition to having few other sources of advantages, these firms had outdated equipment and processes, high defect rates, shortages of both high- and low-skilled personnel, and high turnover rates. At the same time, these companies uniformly placed little or no emphasis on improvement mechanisms.

Almost all of the Vietnamese entrepreneurs and managers we interviewed had little or no international business knowledge or experience. For many, the concept of CI – apart from suggestion systems and the requirements of ISO 9000 standards – was quite new. We felt our most direct read on the situation came from the managers we interviewed outside our case companies. They all reported difficulty implementing more advanced CI practices such as lean manufacturing, and that their workers lacked the necessary problem-solving and critical-thinking skills. Furthermore, several foreign managers commented that it had proved hard to train their Vietnamese employees in CI practices because many of these workers were illiterate – they could not read or write Vietnamese. This was astounding to us given that Vietnam’s reported literacy rate is 96 percent in urban areas and 91 percent in rural areas (The Economist Intelligence Unit 2007). It is possible that the high variation in Vietnam’s literacy rates is one explanation for this. Literacy rates in rural areas range from 44 to 94.7 percent and from 89.3 to 98.4 percent in urban areas (Phan et al. 2004). And from 1993 to 2002, illiteracy actually increased among poor women (Besley and Cord 2007).

While low labor costs will continue to provide an advantage to firms in Vietnam for several more years, labor on average accounts for only 3 percent of manufacturing costs in developing countries and less than 1 percent of retail prices of all manufactured goods sold in OECD markets (Harvard Vietnam Program 2008). The foreign sector that currently outsources to Vietnam will continue to look for the most productive labor at the cheapest price and will move on if they can find lower costs elsewhere. If history is any guide, Vietnam will not always have the lowest labor costs. Vietnamese organizations urgently need to adopt CI not just to move up the production value-chain but, ultimately, to stay in business.

Finding 2: Labor Shortage. It is clear that Vietnamese companies face major difficulties in recruiting and retaining skilled workers. In our case firms, the intense demand for labor has driven very high turnover rates. Employees switch companies for even a slightly higher wage. For example, a vice president of a large U.S. company with operations in Vietnam disclosed that at one of his manufacturing facilities there was an annual turnover rate between 36 to 60 percent resulting in a constant influx of 300 to 500 new employees each month. His concern was that additional companies entering Vietnam would further pressure the labor pool. His firm has progressively been forced deeper and deeper into the countryside to recruit workers and the VP predicted that it may soon have nowhere else to go.

Trained laborers accounted for only 25 percent of Vietnam’s workforce in 2005 (Ngoc Minh 2006). Even college graduates lack the qualifications that employers are looking for including problem-solving and critical-thinking skills, and English proficiency (Vu 2008). As such, the labor shortage poses serious problems for Vietnamese and foreign firms alike, and was also one of the major concerns for many of our interviewees outside the case companies. As of October 2008, Intel Vietnam has only been able to recruit forty workers out of the 4000 needed for its chipset factory, which is set to go into operation in late 2009 (VietNamNet Bridge 2008). Since low wages are a major reason for the difficulty in recruiting and retaining high-skilled labor (Institute of Economics 2001), indigenous Vietnamese firms have an even more daunting task of competing for trained laborers due to their limited financial capability.

A large supply of skilled labor is highly important to Vietnam’s continued economic development. If this supply is not increased fast enough, it is very likely that FDI will start to move to other developing countries. This would be detrimental to Vietnam since FIEs accounted for 43.7 percent (2005) of the total industrial output and 17 percent (2006) of the GDP in Vietnam (General Statistics Office of Vietnam). As Friedman put it, “jobs are going to go where the best-educated workforce is with the most competitive infrastructure and environment for creativity and supportive government (2005: 409).”

Finding 3: Vietnamese-Owned Enterprises Are Young, Inexperienced, and Not Building for the Long-Term. From all five of our case companies and from our interviews with business leaders, most Vietnamese firms are focused on immediate survival and profits rather than on long-term sustainability and CI. While Vietnamese-owned private firms make up the most dynamic and entrepreneurial sector of the economy, many of these companies are still very young and inexperienced due to Vietnam’s fairly recent market liberalization. All of these firms, including the two private companies in our study have been established in the last ten years. Private firms have been legally recognized in the country only since 2000. As such, Vietnamese entrepreneurs and managers have not yet had the time to familiarize themselves with international business practices. Even foreign owners of private enterprises have basic survival issues to contend with such as corruption. One Hanoi restaurant owner – an American expatriate – told us that his main challenge was fending off requests from government officials for bribes, permits, and licenses. His success made him a target.

CI will be critical for Vietnamese firms but especially so to young and inexperienced ones, as they try to upgrade their processes, capabilities, and skills. However, investment in CI requires a considerable amount of effort, management know-how and coordination, and a sustained period of time before benefits are realized. Employees must be continuously trained and developed, particularly in techniques of methods improvement. Moreover, CI needs to be a key feature of the organization’s long-term strategy. The more short-term a firm’s orientation, the less likely it will adopt or sustain CI practices which build for the medium- and long-term.

Finding 4: The “Runaway” Problem of Foreign Investment. Many of our interviewees and respondents made the same point to us in different ways. A number of foreign firms currently in Vietnam are “runaway companies” or “enterprises that may invest abroad in order to secure the advantages of cheaper labor costs in the production process” (Bean 1994: 188) and leave when it is more profitable for them to operate elsewhere. FIEs can be a double-edged sword for emerging economies. On the one hand, they have been critical to Vietnam’s economic development, enabling it to access capital, technology, and management expertise. On the other hand, FIEs generally put their own interests ahead of the host country’s long-term welfare.

We were first alerted to the term “runaway company” in the context of Vietnam by Lady Borton, an expatriate who is a well-known figure in the country. In Vietnam, runaway companies are careful to prevent the transfer of any significant knowledge or technology to their host country. For example, an executive at one of the largest U.S. ventures in Vietnam told us that certain foreign firms that he worked with had specifically barred Vietnamese employees from middle and top management positions to protect their trade secrets. We observed this directly in one of our case companies. There were only two Vietnamese in management positions and they were administrative and accounting areas. This was similar to what Van Staveren and Knorringa (2007) observed in Vietnam’s footwear industry: Vietnamese managers of multinationals mainly took care of organizing the labor force and dealing with government officials, while foreign managers operated the production processes.

5. Opportunities

This paper argues that Vietnamese organizations need to avoid the low-cost labor trap by adopting a CI philosophy. We conclude with three recommendations in this area, based on our interviews and direct observations.

Opportunity 1: Energize the Vietnam Quality Award. Just as the Deming prize and the Malcolm Baldrige National Quality Award have greatly contributed to Japanese and American quality movements, the Vietnam Quality Award (VQA) could also become instrumental in increasing awareness and use of CI in Vietnamese business and industry. Established in 1995, the VQA is modeled after the Baldrige Award and aims to encourage enterprises to become more competitive by improving the quality of their activities. However, the VQA has become devalued because it has been awarded so easily and frequently, that it no longer serves to identify and hold up national role models and best practice. Between 1995 and 2007, 982 companies received the VQA (1996 to 2007), compared to only 76 Baldrige Award recipients (1988 to 2007) and 195 Deming Award recipients (1951 to 2006). The VQA selection process has to become more rigorous, and single out only best-practice firms. Were the VQA to become more selective, it would have a greater impact on awareness and use of CI. And Vietnam would signal to the international community that it is a good place to do business for the long-term.

Opportunity 2: Develop Vietnamese Managers and Entrepreneurs. Human capital investment is critical to the success of every emerging nation and it requires participation from both the government and the business sector. Like Singapore, Taiwan, Japan, and Korea, Vietnam needs to develop top-notch research universities that are capable of educating its engineers, scientists, managers and entrepreneurs, and also officials who can lead in a modern society (Harvard Vietnam Program 2008). Employers need to understand the value of employee training that addresses performance issues and incorporates state-of-the-art tools and techniques. They need to educate and develop Vietnamese managers who understand global best practice and are capable of operating world-class companies. This should be done in collaboration with research universities and institutions. The government should lift the rule that is impeding business education and allow managers from all backgrounds to participate in MBA programs – engineering, science and humanities, not just business and economics. We were never able to get a clear explanation of why this rule was put in place, and why it continues to have strong support at the highest levels of government. Regardless of the reason, it is undoubtedly holding back the state of management in Vietnam.

Opportunity 3: Increase Indigenization and “Spillovers”. The Vietnamese government will need to implement specific policies for Vietnamese companies to capture “spillovers” of knowledge and to adopt technology and management practices from FIEs. We believe the Vietnamese government should identify runaway companies and can be more careful and discriminating with any incentives offered. Perhaps it can create incentives against runaway companies. For example, the Labor Code stipulates that 97% of staff of foreign companies should be from the local workforce, otherwise they must put into place training programs to develop workers for these positions if they are not yet qualified (Vietnam Trade Office in the USA 2008). But the code says nothing about management positions; so many foreign companies meet the law’s requirement by employing Vietnamese in only low-level positions. We believe the law should require that Vietnamese managers be proportionally represented in the company, and not just in administrative positions, otherwise training programs should be in place to develop them until this is the case. For Vietnam to move up the production value-chain and develop its human capital, the Vietnamese government needs to actively get involved in promoting a national CI philosophy and bring world-class management practices into the country so that organizations can better transition into the next phase of the development process. From new laws to incentives to lifting onerous visa requirements for foreigners, there is a lot it can do.

Acknowledgements: The authors would like to thank the administration, faculty, and staff at the Hanoi School of Business for their generous support of this research project.

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