URL: http://www.entrepreneur.com/magazine/entrepreneur/2006/february/82942.html

When Patrick Kruse realized he'd have to manufacture offshore if he wanted to remain competitive, he started with China. That gave him the labor cost savings he needed, but quality was sorely lacking. "We actually had to refuse some shipments, which really hurt our business," says the 45-year-old founder of Ruff Wear Inc., a Bend, Oregon-based maker of dog booties and other canine gear with $2 million in 2005 sales.

Another entrepreneur suggested Kruse check out Vietnam, and provided a referral to a factory owner there. When Kruse visited, he found a booming sewing industry catering to European buyers, which had developed during the years when Vietnam was on the outs with U.S. trade policy. Kruse noticed that many of the factories in Ho Chi Minh City specialized in backpacks, climbing gear and other products similar to the performance canine apparel and equipment Ruff Wear sold.

"The infrastructure was there," Kruse reports. "All we had to do was plug into it." Since signing on in 2003 with a factory in Ho Chi Minh City, his quality problems have disappeared. Now Kruse deals directly with Vietnamese manufacturers instead of the multiple middlemen he encountered in Hong Kong. And Vietnam's Communist government offers financing and tax incentives for constructing factories in designated economic zones. Kruse is paying a somewhat higher price than he did in China, but quality and convenience make the move worth the cost, he says.

Vietnam may be emerging as a smaller version of what China was a few years ago, according to offshoring and outsourcing experts. The country had the lowest wages for IT workers of seven nations--including China, India, Malaysia, the Philippines, Singapore and Thailand--that were surveyed in 2004 by NeoIT, a San Ramon, California, offshoring consultant.

Demand is catching up to supply in some of the countries that have taken the lead in offshoring, according to Ton Heijmen, senior advisor of outsourcing for The Conference Board in New York City. That leads to rising costs in places that previously based all their appeal on low costs. "India is getting more expensive, especially in IT-related outsourcing," says Heijmen. "And there is a shortage of certain IT skills there already."

Vietnam offers a number of advantages other than cost, says Atul Vashistha, CEO of NeoIT. For example, the country's large population of well-trained, low-cost nurses makes it a popular place for U.S. medical transcription companies to outsource work. And many Vietnamese speak English as well as French, making it easier to communicate there than in China.

Offshoring in Vietnam has its share of problems. With a relatively small population, Vietnam will likely never equal China or India in terms of labor force. NeoIT's report notes the scarcity of senior IT professionals in the Vietnamese labor force, which generally lacks the sophisticated training and experience of other countries' labor forces. Roads, airports, the power grid and real estate developments are less modern and widespread in Vietnam than in China, India and some other countries. "Vietnam is a late entrant to this field," says Vashistha.

Alan Tonelson, a research fellow at the U.S. Business and Industry Council in Washington, DC, believes Vietnam holds much potential. "Like in most East Asian cultures, there's a lot of entrepreneurial energy there," says Tonelson, whose organization serves mainly small and midsize manufacturers. Tonelson says the Vietnamese people's language skills, along with U.S. outsourcers' desires to diversify outside China and India, will serve the country well.

For his part, Kruse says he finds Vietnam a great place to outsource manufacturing, and he's also been impressed with Vietnamese suppliers' capabilities in an activity once reserved for U.S.-based providers--producing quick-turnaround prototypes for new product designs. "They were able to provide solutions in a very quick manner," Kruse says, "and the solutions were excellent."