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Vietnam, an Alternative Production Base: 2015 Update video

Vietnam’s export-oriented manufacturing sector is fast transforming with emerging new trends of which foreign manufacturers should take note.

Apart from being a manufacturing base for a number of labour-intensive industries, notably those related to garments and footwear, Vietnam has become popular with electronics manufacturers over recent years. This has seen a number of multinationals, including Samsung, Intel and Microsoft (with regard to the manufacture of its Nokia phones) upscaling production in the country. Driven by this expansion and the arrival of new overseas electronics producers, Vietnam’s industrial output in the electronic products sector grew at a compound annual growth rate (CAGR) of 59% during the period 2008-2013, more than double the growth of overall manufacturing output (24%). In fact, since 2013, electronic products have been Vietnam’s largest export sector.

Chart: Growth rates of industrial output
Chart: Growth rates of industrial output

Manufacturing Spreads to Second-tier Locations amid Rising Wages

Its relatively low-cost labour is a clear advantage that Vietnam has as an alternative production base. Minimum wages in the country are only about 60% of the levels in China’s major manufacturing provinces, such as Guangdong, with average wages even lower in relative terms.

Compared to those developing Asian countries specialising in garment and other labour-intensive product manufacturing sectors, including Cambodia and Bangladesh, workers in Vietnam are paid higher wages. Thanks to the country’s strong economic growth, wage levels in Vietnam are rising fast, as are living costs. In response to workers’ demands for higher pay, the Vietnamese government has increased minimum wage levels substantially over the past few years.

Effective from January 2015, the minimum wage across Vietnam has been increased by 13%-15% to US$101-145 (VND2.15-3.1 million). Wage growth in 2015 is in line with the respective increases in 2014 (15%) and 2013 (17.5%). The biggest increase in 2015 occurred in the first tier locations, notably the urban districts of Ho Chi Minh City (HCMC) and Hanoi, where the monthly minimum wage increased by 15% to VND3.1 million (US$145). It is worth noting that workers are invariably paid a higher wage than the minimum stipulated. The average wage in the manufacturing sector, for example, ranges from between US$150 and US$200 in Haiphong (in the north), with higher wages dependent on the experience and skills of individual workers.

Table: Minimum wages in selected Asian countries
Table: Minimum wages in selected Asian countries
Table: Minimum wages in Vietnam (per month)
Table: Minimum wages in Vietnam (per month)

As a result of the cost pressures arising from the surge in wage levels in top-tier cities, such as HCMC, many new manufacturers are setting up in suburban areas or second-tier cities, such as the Thai Nguyen province. At the same time, existing manufacturers staying close to the urban districts are considering relocating their factories to the suburbs.  

Vietnam’s labour force has a literacy rate as high as 94%. Furthermore, English-speaking, quick-learning workers are often cited as among the key assets of Vietnam’s labour force. The number of professionals or technicians graduating from university or vocational schools, however, falls short of the growing demand for skilled workers being driven by the influx of foreign manufacturers. The situation is made even more challenging by factories requiring workers with knowledge of engineering or information technology. According to several foreign investors interviewed during a recent HKTDC Research trip to Vietnam, many foreign investors are concerned that the lack of a skilled labour force may result in lower productivity and weaken the country’s low-cost advantage in the longer run.

Foreign Enterprises Aim to Improve Vietnam’s Labour Quality

In light of the shortage of highly-skilled workers and a professional workforce, many foreign companies provide training courses for their workers. They also work to introduce appropriate technical programmes in universities or vocational colleges, which are designed to help enhance the productivity of the Vietnamese labour force.

Intel Products Vietnam (IPV), the operator of Intel’s largest semiconductor chips manufacturing plant in Ho Chi Minh City, established the Higher Engineering Education Alliance Programme (HEEAP) in 2010. The HEEAP aims to modernise the technical vocational universities in Vietnam, while nurturing a pool of professional and skilled workers through providing electrical and mechanical engineering courses. The Programme has also partnered with other multinationals, such as Siemens, in its bid to equip Vietnamese graduate students with applied skills and technical competencies required by the expanding electronics industry in Vietnam.

Investors Remain Confident Despite 2014 Anti-China Protests

In May 2014, the territorial dispute between China and Vietnam triggered a brief period of anti-Chinese protests in Vietnam, with demonstrations in some of the southern and central provinces escalating into riots at factories and industrial parks. The riots reportedly affected about 1,000 factories owned by Taiwanese, Korean, Japanese, Chinese mainland and Hong Kong companies. The Vietnamese government responded quickly to restore order, raising the security levels in the industrial parks, while offering compensation. Most of the affected factories resumed operations in the second half of 2014.

In 2014, newly registered foreign direct investment (FDI) in Vietnam rose 9.6% to reach US$15.6 billion, with Korea, Hong Kong and Singapore being the top three sources of FDI. Foreign investors’ confidence in Vietnam has largely been maintained, with confidence remaining in the basically unchanged fundamentals of Vietnam’s business environment and economic potential. As a result, many foreign-invested projects have proceeded as planned, resuming after any earlier disruption.

Formosa Plastics, for example, the Taiwanese developer of a site in the central province of Ha Tinh, has resumed construction of its US$10 billion integrated steel mill complex. In July 2014, Samsung’s US$1 billion factory complex in Bac Ninh province (in the north, adjacent to the capital, Hanoi) was approved. In the same month, Tai Yuen, a Taiwanese textile manufacturer, received permission to build a US$150 million textile mill in Ha Nam, a northern province. This was followed by the August 2014 announcement that Microsoft’ was to reduce its level of Nokia handset production in China in favour of increased production in Hanoi. 

Industrial Parks: The Preferred Locations for Foreign Manufacturers

Map: Vietnam’s Key Industrial Zones
Vietnam’s Key Industrial Zones
Map: Vietnam’s Key Industrial Zones
Vietnam’s Key Industrial Zones

Vietnam has about 290 industrial parks (IPs) designated for the manufacturing sector. As of June 2014, there were more than 5,000 IP-based foreign-invested projects, with accumulated FDI of US$77 billion accounting for about 80% of FDI in the manufacturing sector. Although many provinces have an industrial zone authority that offers single-window services to help investors select the IPs that best suit their needs, most of the large-scale IPs are run independently and managed by private companies. Foreign manufacturers, therefore, usually approach the specific company that manages the IP.

Examples of well-established IPs run by foreign developers include Singapore’s SembCorp, and Japan’s Sumitomo. These IPs are preferred by foreign manufacturers, as they provide ready-built factories along with utilities and infrastructure, including electricity, telecommunications and sewage treatment, all of which are well-managed. A number of the IPs established in the Economic Zones are classified as Encouraged Investment Locations – areas where special tax incentives are available. For example, investment incentives are available in the IPs in Haiphong’s Dinh Vu-Cat Hai Economic Zone, where investors are entitled to the tax incentives applied to the Economic Zone.

Photo: A Japanese machines manufacturing plant, Vietnam-Singapore Industrial Park(VSIP), Haiphong
A Japanese office machines manufacturing plant, Vietnam-Singapore Industrial Park (VSIP), Haiphong
Photo: A Japanese machines manufacturing plant, Vietnam-Singapore Industrial Park(VSIP), Haiphong
A Japanese office machines manufacturing plant, Vietnam-Singapore Industrial Park (VSIP), Haiphong

In order to encourage investment from the private sector, the Vietnamese government reduced the standard corporate income tax (CIT) rate from 25% to 22%, as of January 2014, with further plans to cut the CIT down to 20% from 2016. In addition, some CIT exemptions or reductions are available to investment projects that satisfy certain conditions, such as investment in particularly encouraged sectors (e.g. energy-saving products) or encouraged locations [1].

Electronics Industrial Clusters in the North

Foreign manufacturers tend to set up factories close to each other, thereby forming a cluster in industrial parks so as to enhance their economies of scale when it comes to accessing public facilities, utilities and input supplies. Hong Kong companies specialising in particular product categories or related parts and components are advised to consider the existing industry clusters.

In general, the northern provinces of Vietnam are home to more capital-intensive manufacturing activities.  Hanoi, Thai Nguyen, Bac Ninh and the surrounding provinces, for example, host industrial clusters specialising in automobile, electronics and office equipment manufacturing. The presence of a number of automakers, including Toyota, Honda, Yamaha and Ford, has led to the emergence of the relevant ancillary industries, creating an industrial cluster in Hanoi and the surrounding provinces. Meanwhile, the presence of Canon, Panasonic and Samsung has led to the emergence of industrial clusters dedicated to electronics and electrical appliances, a development that has attracted many Japanese, Korean and Taiwanese parts and component suppliers to northern Vietnam. 

Opportunities Arising from Free Trade Deals

Another spur to the growth of Vietnam’s manufacturing sector is the country’s increasing number of free trade agreements (FTAs) with developed countries. As pointed out by foreign investors in Vietnam, the prospects of Vietnam entering into FTAs, such as the EU-Vietnam FTA and the Trans-Pacific Partnership (TPP), are attracting ever more foreign manufacturers and associated supporting industries to the country. When these FTAs are concluded, Vietnamese exports to the major developed markets of North America and Europe will enjoy considerable tariff cuts, further enhancing the competitiveness of Vietnam’s exports in the international markets. For instance, the Vietnam-Korea FTA was concluded in December 2014, with both countries committed to removing import duties on more than 90% of tariff lines. Korea is Vietnam’s third-largest trading partner, with bilateral trade reaching US$30 billion in 2014. The FTA is expected to boost bilateral trade between the two countries to US$70 billion by 2020.

Although some of the FTAs have not yet been concluded nor come into effect, they have already induced a positive perception of Vietnam and helped generate orders for the manufacturers based in the country, any of whom are already exporting to markets covered by these agreements. According to the Vietnam Textile and Apparel Association, the sector’s strong export growth of 19% to US$24.5 billion in 2014 was attributed to Vietnam’s FTA negotiations with the EU and Korea, as well as the TPP. The major export markets for Vietnam’s textiles and apparel include the US, Japan and Korea.

Related information: Vietnam infographics

[1]  For details, please refer to Vietnam Foreign Investment Agency (FIA), the Ministry of Planning and Investment.

Content provided by Picture: Jacqueline Yuen
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