STEEP WAGE INFLATION HITS HCMC EMPLOYERS, CONSULATE

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000239 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA, DRL/IL STATE PASS USTR FOR BISBEE USDOL FOR DUS PONTICELLI, ZHAO USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO TREASURY FOR CHUN E.O. 12958: N/A TAGS: ECON EFIN ETRD ELAB EINV VM SUBJECT: STEEP WAGE INFLATION HITS HCMC EMPLOYERS, CONSULATE INCLUDED REF: A) Hanoi 193, B) Hanoi 56, C) 07 Ho Chi Min 1196, D) 07 Hanoi 2013 HO CHI MIN 00000239 001.2 OF 003 ¶1. (U) Summary. Rapid economic growth accompanied by years of rising foreign investment in Vietnam mean companies new and old are competing over human resources, especially the limited pool of professionals (ref B). Combined with uncomfortably high inflation, the corporate scuffle for personnel has led to unprecedented wage growth -- 13 percent nationwide in 2007 and more than 50 percent in certain hot sectors like finance and information technology. Geographic disparities are even greater, with the "war for talent" felt most acutely in HCMC, where wage increases in key sectors reportedly reached 150 to 200 percent in 2007. If these trends continue, rising salaries, inflation and the high cost of office space rental may start to deter investment in the future. Closer to home, this situation has already started to erode the Consulate's ability to retain highly-qualified staff, as nine of the sixteen employees who have resigned in the past two years told us they left for higher-paying jobs. End summary. Labor Market Woes: Quantity over Quality -------------- ¶2. (SBU) Currently in Vietnam, 1.4 million young people enter the workforce each year, while only 35,000 older workers exit it. This trend likely will continue for the next 10-15 years as the economically active population reaches a peak. By 2010 Vietnam will have 48.5 million people of working age, an advantage compared to other countries in the region such as Thailand, which is estimated to have a labor force of only 41.6 million by the same year. Despite this influx of new workers, when it comes to staffing key management and technical positions, companies are finding a severe shortage of qualified personnel, particularly for the top-level senior management positions. ¶3. (SBU) Each new company is forced to dip into the same shallow pool of qualified people or to hire staff away from other employers. This trend of companies' aggressively poaching each other's employees is increasingly common. Last year HSBC lost a dozen bankers to local banks, and Unilever had a number of experienced local managers leave for local consumer-goods firms offering comparable salaries as well as stock options. Banks often turn to hotels for entry level workers with good people and language skills. The General Manager of the Sofitel, for example, told CG that he lost 84 employees to banks last year. With the advent of job-searching sites like Vietnamworks.com, workers are easily able to discover how much they could earn by switching to a new job, and many will do so without hesitation. ¶4. (U) The shortage of highly skilled and trained workers means trouble for companies looking to build businesses in Vietnam. While GDP has increased more than tenfold since 1990, from $6.5 billion to $71 billion in 2007, spending on education has not risen to produce the increasingly skilled labor the nation desperately needs. Public expenditure on education (as a percent of GDP) was just 3.4 percent in 2007. The Minister of Education and Training recently reported that the county's 234,000 businesses face a shortage of 1.4-1.6 million trained workers. By 2010, they project the shortage could be up to 8 million. HCMC Leading the Wave of Wage Growth -------------- ¶5. (U) Nowhere in Vietnam is wage pressure felt more acutely than in and around Ho Chi Minh City, where the per capita GDP is already nearly triple the national average and the city's 12.5 percent growth rate continues to considerably outpace the country average of 8.5 percent. In HCMC and the neighboring provinces that make up the "Southern Economic Zone," the labor shortage is leading to increasingly large migration amounting to approximately 500,000 new migrants every year, according to city officials. In Binh Duong province local villagers account for only 40 percent of the total workforce and in Dong Nai the percentage is just 30 percent. This migration is occurring partly because even HCMC's "low end" wages are higher than elsewhere. Nationwide, the official poverty rate as measured by GVN standards is about 25 percent. In HCMC, it is less than 2 percent. In 2008, the HCMC city government officially created its own poverty line that is 67 percent higher than the national standard. Even with this new standard, the poverty rate in HCMC is expected to drop to a statistically insignificant level (below 2 percent) before the end of this year. In contrast, poor HO CHI MIN 00000239 002.2 OF 003 infrastructure and spotty implementation of reforms leave many regions of the country poor and with little opportunity for their young, eager populations. ¶7. (U) In HCMC, in particular, the changing makeup of the work force also plays into the steep wage curve. While most of the Vietnamese economy remains in agriculture and industry, in 2007, services comprised 53 percent of the HCMC economy. Not only that, the service industry is growing at a 14.3 percent annual clip and will make up an even larger percentage of the city's economy in future years. Many of these new services jobs are in finance, real estate, corporate headquarters services, and personnel -- fields that demand the highest salaries. Inflationary Pressures Squeezing Workers and Companies -------------- -------------- ¶8. (U) Inflation ran above 14 percent in January, thereby contributing to wage pressure (ref D). The prices of basic foodstuffs, gas and other essential goods have increased significantly and are expected to continue to rise. Most companies feel compelled to compensate their employees for this increase in the cost of living, usually by increasing pay or awarding higher bonuses. This month a new record high for the annual Lunar New Year pay bonus was set by a foreign-invested IT firm in HCMC, which gave a generous $15,000 to top employees. ¶9. (U) While salaries have increased dramatically for highly educated and skilled employees, wage increases for average laborers have been more measured, compared to the sharp spike in inflation. Labor experts say that inflation worries helped spark the many pre-Tet (lunar New Year) strikes at industrial parks in Binh Duong, Dong Nai and HCMC, further pressuring businesses. ...and the Demand for Talent Goes Through the Roof -------------- -------------- ¶10. (U) According to Navigos, one of the leading HR companies in Vietnam, demand for labor grew 67 percent in 2007, compared to an increase of only 22 percent in supply. Consequently, Navigos reports, average private-sector incomes increased 13 percent in the past year across all economic sectors in Vietnam. Another HR consulting firm, Le and Associates, confirmed the overall rise but brought home the incredible impact of geography on wages when she explained to the Ambassador recently that salaries at some of the bigger companies in HCMC increased by as much as 150 to 200 percent in 2007 due to the struggle to retain staff. ¶11. (U) Both Navigos and Le and Associates point out that the shortage of qualified personnel is caused in part by the low quality of university graduates, who generally lack critical-thinking and problem solving skills. The low overall number of university graduates is also insufficient to meet demand. There are only 300,000 university spots open every year for 1.8 million applicants. Overall tertiary enrollment in Vietnam is only 10 percent, compared to 15 percent in China and 89 percent in Korea. Price of Talent Could Discourage Investment -------------- ¶12. (SBU) According to Watson Wyatt Global, a human-resource consulting firm, the shortage of senior managers and other qualified personnel is more acute in Vietnam than in any other ASEAN country. The pressure for higher wages could quickly erode the advantage of low labor costs in Vietnam compared to the rest of the world. Already, several major foreign firms such as Intel, Renensas (Japan),Grenada (Japan) and Hon Hai (Taiwan) are struggling to find qualified personnel. If this problem continues, it could deter foreign firms from further investment. For now, some companies are attempting to solve their labor shortage by establishing their own training programs to bring employees up to their standards. At a recent lunch with the Ambassador, several leading local Vietnamese firms explained that they can no longer afford to hire Vietnamese workers for some key positions, such as accountants, and have instead turned to hiring expatriate workers from Taiwan and Malaysia -- two economies where the average per capita income is much higher than in Vietnam. ¶13. (U) A recent anecdote from Intel illustrates the issue. After scouting the country for top engineering graduates to HO CHI MIN 00000239 003.2 OF 003 staff the 1000 engineering positions needed in the $1 billion assembly and test facility it is building, the company found that only 90 of 2000 students could pass its rigorous screening exam. Of those, only 40 successfully passed the interview stage and were selected for more training and possible employment. This is clearly a worrisome sign for American investors looking to hire local talent, and it is also detrimental to Vietnam's ability to move up the value chain to develop more advanced industries. What's in the GVN Toolbox? -------------- ¶14. (U) Since his promotion to Deputy Prime Minister last year, Minister Nguyen Thien Nhan has focused on improving Vietnam's educational system. This includes increasing the availability of student loans and scholarships and studying the training curricula of foreign schools to adopt some of the same practices in Vietnam. However, this is a long-term solution that will not solve the immediate need for personnel. In the meantime, Minister Nguyen is also encouraging businesses to partner with MOET to establish training centers that will funnel qualified graduates to work in companies that finance the centers. As an incentive for this investment, the government will offer favorable tax rates to participating businesses. So far, 75 education and training contracts have been signed between the government and private, mostly foreign-invested, businesses. ¶15. (U) The government is expected to remove the current cap on the number of foreign personnel a company can employ, making it easier for foreign firms to hire the expatriate workers they need to fill slots for which no Vietnamese are available. Navigos reports that after a slight dip in the 2nd quarter of 2007, the number of foreigners looking for work in Vietnam more than doubled in the 3rd quarter. The Impact at Home -------------- ¶16. (SBU) The recent rise in salaries and increase in competition for talented employees, particularly in HCMC, has also affected ConGen Ho Chi Minh City's ability to recruit and retain locally engaged staff. For example, some Consulate employees are likely competitive for IndoChina Capital's recently advertised positions paying net monthly salaries starting at USD 2,000 per month for college-educated English speakers with experience in a multinational environment. From January 2006 until the present, sixteen employees ranging from grades FSN 1-10 have resigned their positions. Nine of the employees left to take higher paying jobs. In the most extreme example, one former employee reported that the salary at her new job would be $42,000 a year, more than three times the salary of an FSN-10. Several positions at the Consulate remain unfilled despite repeated advertisements. Comment: -------------- ¶17. (SBU) American firms investing in Vietnam should be prepared for a competitive environment and a war for talent. Especially for the IT, electronics and telecommunications industries, businesses may have to set up in-house training programs, and/or hire managers and skilled employees from other countries to fill in the gaps. In the long term, if the human-resources crisis is not alleviated, Vietnam will experience decreased interest in investment and deceleration of economic growth. End comment. ¶18. (U) This cable was coordinated with Embassy Hanoi. FAIRFAX