Why you should be keeping an eye on Vietnam

Vietnam has quietly become one of the fastest growing economies in the world, says Chris Mayer in The Daily Reckoning. And a major turning point in the country's development has just taken place. This is one awakening tiger economy that investors should definitely be keeping a close eye on...

Vietnam - a nation of 83 million people on a thin strip of lush country slammed up against the Gulf of Tonkin and the South China Sea. To the west lie Laos and Cambodia. Excluding various islands, the land area of Vietnam is not much bigger than New Mexico, though it supports a population more than 40 times as large.

In the south is Ho Chi Minh City (locally, it's still often referred to as Saigon, even though the name officially changed in 1976). And all along the coast on the way north are plenty of sun-kissed fishing villages and quiet, pristine beaches - such as those found in Nha Trang. The green jagged mountains inland, carpeted in dense misty jungles, provide a stunning backdrop. Most of the people on the beaches are adventurous foreigners - Americans, Germans, Australians and French. Mostly, they stay in foreign-built resort-style buildings dotting the bay. It is usually hot, often wet, and sometimes wetter.

The seafood is always fresh, usually alive moments before it's eaten. Right up to the water's edge, women pull up their full nets from colourful boats. And you're also likely to see them skilfully handling thung chais, little round dinghies constructed of bamboo.

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The women gut fish, chop squid, wrestle with shellfish and cook up interesting pots of fish, noodles, peppers and other goodies. This is one of the places in the world where the dollar goes a long, long way. A family can eat like kings for $7 or less. The bird's nest soup is quite the local dish - flavoured with ginger, scallions, chunks of pigeon and coconut milk.

In Hanoi, the capital city in the north, you see busy tree-lined streets full of cars, cycles, scooters, and - as if to remind you of its fading past - rickshaws. Old French villas evoke Vietnam's colonial history. Street vendors will offer you shrimp on a stick, pho (beef noodle soup), fruit, steamed crabs, and other assorted foods. The swirl of noise and smells assaults your senses.

This is Vietnam. For Americans, it inevitably stirs up ugly memories, or at least a painful chapter in US history. The Vietnamese people and countryside bear the physical and psychological scars of that not-too-distant conflict as well. Yet, Vietnam is rapidly changing, with time and market forces doing their parts to mend old wounds and bring new growth. Even here, the biting winds of globalization carve new pathways into the old country's business landscape.

Vietnam still produces a lot of old-world agricultural goods - things like rice, coffee, cotton, tea, pepper, soybeans, sugar cane, peanuts, and bananas. More than 60% of the work force is engaged in agriculture in some way. However, the manufacturing and service industries are growing and taking bigger slices of the pie as the years roll by. The Vietnamese make garments and shoes, as well as glass, tires, and steel. They produce cement and paper and mine for coal. But there's much more to the story.

The Vietnamese economy has quietly become one of the fastest growing in the world, approaching the scorching pace of India and China. It's also become a magnet for foreign capital. In 2005 alone, investment in Vietnam totalled over $5 billion. Already, about 260 US firms have invested directly in Vietnam. In 2006, another $6 billion is expected. This includes major technology and infrastructure projects.

In the last week of February came the most telling announcement yet. The Vietnamese government approved Intel's plans to build the biggest single technology project in the history of Vietnam - a chip assembly plant in Ho Chi Minh City, an investment that could cost as much as $605 million.

This major turning point was barely mentioned in the mainstream press - if it was noted at all. While the country had attracted investments from a diverse range of companies, including Sony Corp. of Japan and Samsung of South Korea, none comes close to Intel's plans.

Intel's plant will engage in the final process of the chip-making process, in which the chips are packaged in ceramic casing and tested. The work is labour intensive and requires a sophisticated work force, which is why insiders are impressed with the deal. It means Intel believes the Vietnamese can do more than the expected low-skilled jobs. More foreign investment will surely follow Intel's lead.

The attraction? The Vietnamese work very hard for very little by Western standards. The foreign private companies pay the best - on average, about $60 per month. State-owned enterprises paid only $19 per month.

(It's an old myth that foreign companies go overseas and pay poorly. In fact, in most cases, the foreign-owned companies pay more than the local alternatives.)

Those are cheap rates, even by the standard of the Chinese. And it doesn't take long to get things done in Vietnam.

While in China, I heard Chinese business people talk about Vietnam like Americans talk about Mexico. Indeed, the Chinese are losing some of their manufacturing jobs to the Vietnamese. The rise of China is the best thing that ever happened to the economies of Southeast Asia, Vietnam in particular. Not surprisingly, China is Vietnam's largest trading partner.

Much of what's happening in China is only beginning in Vietnam. Recently, the state-owned Vietcombank announced plans to list its shares in Hong Kong or Singapore. This would be Vietnam's first overseas initial public offering. And several Western banks are taking minority positions in Vietnamese banks, anticipating future IPOs and growth.

The market has a long way to go before it approaches the likes of even China in terms of a developed stock and bond market with some semblance of disclosure.

Nonetheless, all great journeys begin with a humble first step. Vietnam is on its way.

By Chris Mayer for The Daily Reckoning. You can read more from Chris and many others at www.dailyreckoning.co.uk.

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning.