City leaders lay the groundwork to make a former war zone into a new hub of capitalism

DA NANG - From their new office, former Silicon Valley executives Le H. Hung and Steve Cook can look out on what American soldiers used to call Red Beach, where in 1965 Marines launched a massive buildup in this coastal city.

Da Nang, a major U.S. Air Force staging area during the Vietnam War, is a city whose name still conjures images of Marines, M-16s and Huey helicopters for many Americans, said Cook, chairman of Enclave, a software development company launched less than a year ago.

But now the profound changes sweeping the communist country are transforming Da Nang as officials work around the clock to encourage a new invasion from the West. Today's leaders of Vietnam are unabashedly embracing market economics and personal freedoms that come with wealth.

"Vietnam is a one-party state, but they are moving away from this word 'communism.' They don't want to be tainted by it," said David Paul Brunt, a Da Nang-based senior property manager with real estate consultant CB Richard Ellis.

Cook and Enclave Chief Executive Hung were courted by the Da Nang People's Committee to bring the tools of capitalism to the city of 900,000 in the slender waist of Vietnam. Any time the executives need a meeting with regional leaders, government officials all but snap to attention and salute the Americans. That's because the bureaucrats hope these entrepreneurs will help propel Da Nang, a city with miles of beaches and known more for tourism than software, into a high-tech hub.

"We have no way to compete without the foreign investors," explained Pham Kim Son, a local government official.

In Da Nang, like the rest of the country, government officers continually host investor conferences, pitching Vietnam like a start-up. Investors and corporations, such as Intel, Hewlett-Packard, IBM and Sun Microsystems, are now rushing to set up operations in a nation that Americans viewed as off limits until just a few years ago.

Investment from the United States, which ranked seventh from 1998 to 2007, is expected to soon become the largest in Vietnam. Last year, all foreign investment commitments to the country totaled more than $20 billion, almost twice as much as the previous year. A major electronics manufacturer, Taiwan-based Hon Hai, which produces products for companies like Hewlett-Packard and Apple, announced it was investing $5 billion in Vietnam.

This year, Vietnam holds a temporary seat on the United Nations Security Council, giving the nation of 84 million sudden international political clout.

Two years ago, a visit to the country by Microsoft Chairman Bill Gates created a national stir. "It's a very forward-looking country," Gates told the Mercury News. "Their universities are highly subscribed and they are upping capacity. It's super, super to go there."

Economic reform, or doi moi, which began with small steps in 1986, eventually led to private businesses, lowered trade barriers and policies that have made Vietnam one of the world's most open economies. This has unleashed an economic surge and created a new class of multimillionaires.

Extreme poverty - income under $1 a day - is declining in Vietnam, which now ranks better than China, India and the Philippines. Vietnam, which faced famine in the 1980s when the government squelched entrepreneurship and promoted farm collectives, is now the world's second-largest producer of coffee and rice, as well as a top exporter of other crops and seafood. Last year, the economy grew at a scorching 8.5 percent.

"People talk about business 24 hours a day here," observed Matthew Heller, who founded a San Francisco mapping software company and teaches at the Fulbright School in Ho Chi Minh City.

Vietnamese are also known for abundant optimism.

"Vietnam is a sleeping beauty that is waking up," said Ho Chi Minh City resident Hana Dang. "We grew up in very difficult situations. During the war, it was very hard."

Dang, whose father was killed in the war, founded a marketing company that has annual revenue of $30 million and is now the country manager for Danish private equity firm BankInvest, whose office is on Dong Khoi Street, Ho Chi Minh City's Fifth Avenue.

"People's mindset is changing," the stylish executive said. "They can make money. We have nothing to lose."

Government officials are now getting their first lessons in managing a sizzling economy with its ancillary problems. Soaring inflation is putting pressure on the still largely poor country and triggering strikes for higher wages. The gap between rich and poor is widening. Some worry about a possible real estate bubble.

Officials, scrambling to ease inflation, are working to slow the economy, including increasing reserve requirements for commercial banks and interest rates. The government is also restricting some exports to try to curb food prices. In doing so, officials are lowering their 2008 growth target to 7 percent, down from 9 percent.

Rapid growth is also putting pressure on the nation's weak infrastructure. Power outages are common, and the streets in Ho Chi Minh City, the nation's commercial center formerly known as Saigon, are perpetually jammed as more cars and motorbikes join the stop-and-go fray every day.

Meanwhile, foreign executives are pushing Hanoi to reduce red tape, continue their battle against government corruption and to work harder to meet international business standards.

Vietnam's small but growing software outsourcing industry also feels the strains from this boom. The lack of high-quality engineering schools means companies are constantly hustling for qualified workers, even as customers from Silicon Valley and Japan funnel more work to Vietnam.

That's why Hung and Cook looked to Da Nang to launch their start-up after spending several years in Ho Chi Minh City. In addition to benefiting from cheaper rent and labor - the company's mantra is that it has the lowest prices in Asia - they've been able to recruit the top prospects from Da Nang's University of Technology through their boot camp program, which enables college students to get experience and school credit.

Vietnam's fourth-largest city, Da Nang is what Ho Chi Minh City was 10 years ago, a quietly emerging economic powerhouse, Cook observed. Luxury resorts are being built where U.S. soldiers once relaxed during breaks from combat. The city's economic growth rate of 13 percent is outpacing the nation as a whole.

"Da Nang is the next place," said Hung, who every morning passes Vietnam fruit and sugar cane juice vendors in conical hats on his way into the office.

After Enclave was launched in Da Nang, FPT, Vietnam's largest domestic tech company, announced a $952 million investment to create a software park and training center in the city. More software companies are expected to follow.

"Seven, eight years ago, Vietnam was considered a very risky place to invest," Cook said.

Now, Vietnam's stable government, low crime and terrorist risks, as well as its young and smart workforce, are making the country attractive, despite its growing pains.

Driving along Red Beach at dusk, Cook passed banana-leaf boats bobbing in the bay. At corner restaurants, Vietnamese sat in plastic chairs, eating grilled meat and slinging beer. Cook pointed to a nearly completed bridge. The sweeping structure will link downtown Da Nang with a peninsula where a billion-dollar planned community of high-rises, shopping centers and golf courses is being built.

"Vietnam got a second look," he said. "And it looks real good."

By John Boudreau - The Mercury News - May 5, 2008