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Some of the biggest names in technology are turning to the Asian country for top-notch game design and software development

When Microsoft’s video game unit began looking to offshore some work in 2002, Vietnam was hardly an obvious choice. But after a fact-finding team returned from an Asia-wide tour including stops in India, China, and South Korea, a small outfit named Glass Egg Digital in Ho Chi Minh City was a top contender. After successfully completing a pilot project designing 3-D racing cars used on the Forza Motorsport game installed in every Xbox console, Glass Egg’s relationship with Microsoft (MSFT) has steadily grown.

Today, Glass Egg Digital designs most of the 330 different models in Forza Motorsport 2. Not only do the digital Lamborghinis, Maseratis, and Mercedes look and handle on screen exactly like the real thing, but equally important, they look just as convincing as crumpled wrecks after collisions.

Next up, Microsoft is planning to contract out the considerably more demanding task of creating the tracks and cities through which its cars race. “Today we work on a massive scale [with Glass Egg],” says Nick Dimitrov, senior business manager at Microsoft Game Studios. “We have pretty much put them through the grinder on QA [quality assurance] compliance, and we couldn’t be happier.”

Selling to the Masters

He’s not the only one singing Glass Egg’s praises. “They have done some fantastic stuff for us,” says Brian Woodhouse, executive producer at Bizarre Creations in Liverpool which outsourced the creation of digital gas masks, telecom towers, and statues that get shot up in a gun-lovers’ game called CLUB under development for Sega.

Glass Egg’s client roster now includes Electronic Arts (ERTS), Sony Computer Entertainment Europe (SNE), Codemasters, and Atari (ATAR). Founded in 1995 by Vietnamese-American Phil Tran as a 2-D production studio, Digital Glass Egg has seen revenues grow 50% in the past two years. The company declined to give exact numbers but says sales this year will be just under $5 million.

Glass Egg is by no means the only Vietnamese company carving out a niche in software outsourcing. Crosstown rival Alive Interactive, also with a U.S. founder, has excelled in car design, while software developer TMA Solutions, founded by Canadian-Vietnamese Nguyen Huu Le does work for Nortel (NT), Comsys, and Alcatel-Lucent (ALU).

Intel Planning Plant

Homegrown Vietnamese companies are gaining momentum too. The country’s largest outsourcing outfit is a division of Hanoi-based IT company FPT Corp., which just garnered a $36.5 million investment from private equity firm Texas Pacific and Intel Capital.

Further proof of Vietnam’s potential are the ringing endorsements the country has received from some of IT’s biggest names. In March, Intel (INTC) Chairman Craig Barrett visited Vietnam to unveil plans for a $600 million chip testing and assembly plant (see BusinessWeek.com, 3/13/06, “Good Morning, Vietnam”). Intel subsequently bumped up the figure to $1 billion.

In April, Bill Gates was greeted like a rock star by some 7,000 students at Hanoi University of Technology where he talked about his vision of IT in Vietnam. Nonetheless, the country faces some big obstacles if it is to become an IT outsourcing hot spot. Internet connections can be painfully slow since there is no fiber-optic broadband network. The staff at Glass Egg often stay up half the night in order to upload and download files.

Lost on the Map

Another drawback is the lack of fluent English speakers, though clients say this problem is minimal as most communication is via e-mail. Helping balance out these deficiencies are the country’s low wages—programmers earn about one-tenth what computer programmers make in the U.S.—a young and highly motivated workforce, and low staff turnover rates of about 5%.

With software and IT exports of just $70 million last year, tiny Vietnam is never going to eclipse India, which logged $17.7 billion in high-tech shipments in 2007. Indeed, for many multinationals looking to outsource this kind of work, the country doesn’t even figure on the map.

“One disadvantage of being here is that some people think we work in rice paddies and little grass huts,” says Glass Egg Chief Operating Officer Charles Speyer. Nothing could be further from the truth. Glass Egg’s 140 employees toil in state-of-the-art facilities just a mile from Ho Chi Minh City’s international airport in E-Town, Vietnam’s first high-rise dedicated to high-tech clients.

Mastering the Background Arts

The company’s big challenge will be keeping its edge over China. “Ultimately China will beat us on cost,” says Steve Reid, a Glass Egg business development manager. “If we want to be in business in five years, we have to move up the value chain.” For his company, that means mastering the technically more demanding task of environment design.

Reid says its first attempt, working with Electronic Arts to create an imaginary Middle Eastern background for EA’s Battlefield 2 war game was a huge learning experience for both companies. Turning out sleek driving machines is a snap, says Reid, compared to the challenge of portraying rusted tanks, bombed-out mosques, and water-stained walls.