Vietnam is a communist country, but this Southeast Asian country is very entrepreneurial and business focused. Vietnam is taking over China’s role as Asia’s hotspot for foreign investment in manufacturing.
Over the last 15 years, Vietnam is known for low-end manufacturing industries such as garment, foot-ware and furniture industry. An illustrative example is the growth of Nike’s manufacturing capabilities in Vietnam. In 2010, Vietnam surpassed China as the largest producer of Nike foot-ware and now Nike employed over 333,000 manufacturing jobs in Vietnam (30% more than China), producing shoes, apparels and equipment.
In the last five years, Vietnam is attracting more technologically-advanced and higher value-added manufacturers in industries power generation, automotive and consumer electronics. Vietnam is becoming the go to place for manufacturers like Ford, Toyota and for hi-tech giants like Microsoft/Nokia, Intel and Samsung. In addition to lower costs (labor, land and electricity) the government is providing lower corporate tax rate for selected industry. For example: Samsung only pay 10% corporate income tax versus a standard 25% rate.
Two illustrative examples of electronic manufacturers in Vietnam:
Microsoft’s smart phone production:
In 2014, Microsoft restructured Nokia’s global manufacturing capability. It halted and reduced Nokia production in Hungary, China and Mexico and switched the majority production to Bac Ninh factory in Vietnam. Microsoft’s main production center for its cell phone is now at the Bac Ninh factory.
The Bac Ninh factory was constructed in 2013 and started full production at the begin of 2014. The factory was upgraded to 39 assembly lines by the end of 2014 from six lines in 2013. Most of the production volume was moved from Chinese factories in Beijing and Dongguan. Volume is expected to increase threefold with more complicated products, guaranteeing an annual export of 76.4 million products worth US$1.86 billion.
Samsung is currently manufacturing 50% of its mobile phones in Vietnam. The two plants in Vietnam have a combined annual production capacity of 240 million units. Samsung Electronics is planning to expand the plants with an additional investment of US$3 billion, and their capacity is expected to reach 270 million units at the end of this year. In comparison, the two factories in China have a maximum capacity of 150 million phones and Samsung is looking to cut their production by approximately 40 million because of the high labor costs in China. Samsung is also manufacturing other consumer electronic products such as camera, appliances and Flatscreen TV in Vietnam.
The future for Vietnam manufacturing:
Vietnam’s lower labor cost received headlines and CEO’s attentions. It is generally accepted that Vietnam is a serious alternative to China. The recent increase territorial disputes/tensions between China and its major trading partners such as Japan and the US will make Vietnam more attractive to companies with significant manufacturing capacity in China looking to diversify their risk as well as company looking to start manufacturing operations in Asia.
It is my belief that Vietnam will need to work on its own “business case” to attract investors beyond the headlines and the “not China crowd”. Vietnam will need to make long term investment in key areas such as infrastructures (port, road, utilities and reduce red-tape) to ensure total cost of operations is still low and education/training of young people to increase the skills and productivity of Vietnamese worker.
Vietnam is attracting both companies with a history in China and those fresh to Asia. It’s often part of a “China plus one” strategy in which firms maintain production in China but add operations in Vietnam to spread out such risks as supply chain disruption.