Vietnam has emerged as a top location for manufacturing investment due to its strategic location and advantages in shipping, competitive labour, and production costs. This is because international businesses are looking to diversify, increase the resiliency and connectivity of their supply chains, and decrease their reliance on a single country.
Vietnam stands out among the nations of Southeast Asia thanks to its extensive network of international airports, seaports, and rail connections that facilitate trade and transit.
Manufacturing and processing continued to receive the majority of the nation’s foreign direct investment (FDI) in 2020, accounting for 58.2 percent of the total. Vietnam’s economy is anticipated to regain momentum and achieve GDP growth of 6 to 6.5 percent in 2022 thanks to its contribution.
The industrial industry experienced substantial supply chain disruptions in 2020–2021 as a result of COVID–19. Vietnam’s manufacturing output was down due to workforce shortages, temporary firm closures, and transportation issues.
The epidemic also made it more difficult for manufacturers to produce goods because of rising input costs, a scarcity of raw materials, limited shipping capacity, and transportation problems.
However, commercial activity in Vietnam has sprung up again after the lockdown restrictions were eased, and consumer confidence is gradually returning.
IHS Markit reported that higher new orders and government incentives were mostly to blame for Vietnam’s manufacturing purchasing managers’ index (PMI) rising to 52.2 in November from 52.1 in October. A score of 50 or higher indicates increased manufacturing.
Manufacturing’s key drivers
Several important elements drive the industrial sector. First off, Vietnam is promoted as a cheap manufacturing destination with reasonable labour rates. Vietnam’s labour costs, at US$2.99 (VND 68.000) per hour, are, on average, half as high as China’s labour costs, which are US$6.50 (VND 148.000) per hour. This helps Vietnam solidify its position as a more affordable alternative to its neighbours in the area.
Second, Vietnam is a desirable hub for production due to its relatively large and educated worker pool. To further prepare the workforce, the government has offered a variety of vocational education and training programmes.
The government has implemented additional policies and programmes in response to the current labour shortage and the lack of trained people in particular industries, such as IT.
The recent approval of the vocational education and training policy 202-2030 and the release of Decision 17 on vocational training support are just two examples of recent incentives. This demonstrates Vietnam’s dedication to enhancing the effectiveness of education and training for the job market.
Numerous free trade agreements (FTAs), including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the EU-Vietnam Free Trade Agreement (EVFTA), and the UK-Vietnam Free Trade Agreement (UKVFTA), boost Vietnam’s competitiveness as a hub for low-cost manufacturing exports.
With the help of these trade agreements, Vietnam can benefit from lower tariffs with the EU, the US, and other members of the ASEAN Economic Community (AEC) in order to entice exporting enterprises to invest in domestic production and trade with partners outside of ASEAN.
Vietnam has also benefited from the effects of the US-China trade spat, as higher US tariffs on a variety of Chinese exports have prompted enterprises to shift output away from China and toward alternative manufacturing centres like Vietnam.
Vietnam in particular has developed into a flexible and affordable manufacturing location outside of China, but it still has to grow to fully utilise its manufacturing skills.
Government incentives in manufacturing
Recently, the government issued Decree No. 57/2021/ND-CP (Decree 57), supporting industries related to the supply of raw materials, spare parts, and components to manufacturing industries such as electronics and mechanical engineering industries, garment and textile, leather, and footwear industries, hi-tech industries, and the automotive industry.
Businesses whose operations have been hampered by the epidemic will get financial support from the tax savings resulting from the adoption of the Decree. Additionally, it will increase trust in the government’s initiatives to change tax structures and procedures, fostering a more hospitable business environment in Vietnam.
By 2025, Vietnamese businesses should be able to produce goods in supporting industries with a high level of competitiveness, meeting 45 percent of the fundamental requirements of domestic production and consumption, according to Resolution No. 115/NQ-CP, a goal set by the government in 2020.
Additionally, Vietnam has issued a number of corporate income tax (CIT) incentives and tax holidays for manufacturing projects, as well as incentives in high-tech zones, specific industrial zones, and challenging socioeconomic areas. These incentives apply to large investment projects with capital of more than VND 6 trillion (US$264 million).
Additionally, incentives are provided for the high-tech industry as well as for textiles and apparel, IT, vehicle assembly, and other related industries.
Key industries driving manufacturing
Apparel, garment, textile, and footwear
Vietnam is now the world’s fourth-largest exporter of apparel behind China and the EU as a result of the textile and apparel sector’s rapid development and growing significance to the nation’s economy.
The entire export value of Vietnam’s textiles and apparel was estimated at US$29 billion in the first nine months of 2021, up 13.2 percent from the same period in 2020, according to the Vietnam Textile and Apparel Association (VITAS).
As production progressively resumes regular operations, VITAS forecasts that the industry will achieve an export value between US$39 billion and US$42 billion in 2022.
After China, Vietnam is now the US’s second-largest footwear and apparel supplier. It is also one of Asia’s major centres for manufacturing, and it supplies goods to some of the top Western companies in sportswear, apparel, and technology.
For instance, Adidas has 76 facilities in Vietnam, which puts the country in second place globally in terms of Adidas factories, compared to Nike’s 200. According to statistics, Vietnam produces more of Nike’s and Adidas’ main items than China does.
The government has given this sector’s quick recovery additional attention since it was affected by COVID-19. The Ministry of Industry and Trade (MoIT) intends to remove bottlenecks and offer assistance to help manufacturers resume operations and take advantage of orders for the European and US markets in order to restore production.
Meanwhile, the MoIT is advising businesses to take other modes of transportation than road transportation, such as rail networks, in response to the current trade bottlenecks at the China-Vietnam border caused by China’s preventive actions.
To reduce congestion, they can examine ocean transportation and divert trade lines to other provinces. Additionally, MoIT will support the creation of a programme on sustainable development of the sectors until 2030 as well as the implementation of a development strategy for apparel, textiles, and footwear by 2030 with a focus on 2035.
Vietnam’s textile and apparel sector has several advantages over many rivals in terms of product quality, manufacturing methods, the ability to meet stringent labour requirements, and tariff preferences because of numerous FTAs. In general, the industry anticipates a lengthier but more steady recovery with plenty of chances for foreign investment in the medium future.
Electronic and electrical appliances
Vietnam’s electronics industry has made significant progress in recent years, but it is still behind the rest of the world in terms of technological advancement and competitiveness. The government, however, is eager to reverse this by luring high-tech businesses to advance and promote the sector.
The key indicator of progress in 2020–2021 was the draw of substantial investments from multinational businesses, particularly those from South Korea and Japan. With 33 electrical projects certified and a total registered capital of over US$1.7 billion, FDI projects in electronics manufacturing accounted for 95% of the industry’s export revenue in the first eight months of 2021.
In 2020, Foxconn, a significant Apple supplier, invested US$1.5 billion in Vietnam. In 2021, it increased that investment by US$700 million while hiring 10,000 more local people.
However, Vietnam now only does basic industrial processing and part assembly. Vietnam has not yet acquired the required resources and a competent work force to produce components or specialised devices.
Key locations for manufacturing
Four key economic regions (KERs), comprising the Northern, Central, Southern, and Mekong Delta areas, are where most of Vietnam’s manufacturing is concentrated. These areas draw various manufacturing industries and stand out in terms of their infrastructure, labour pools, and industrial mix.
Seven cities and provinces make up the Northern KER, including Hanoi, Hai Phong, Quang Ninh, Vinh Phuc, Bac Ninh, Hai Duong, and Hung Yen. More over 80% of the entire exports from the Northern KER are produced by FDI companies.
The area is well-known for its heavy manufacturing, oil and gas, and high-tech sectors like the car industry. Manufacturing of electronics is concentrated in the north, particularly along the Red River Delta.
Samsung concentrates on distributing mobile phones and tablets in the North and has one of the biggest production facilities in Vietnam. By moving its main R&D activities west of Hanoi in 2022, Samsung would make Vietnam the region with the most R&D centres in Southeast Asia.
For the marine economy and agriculture, the Central KER region, which includes Da Nang City, Thua Thien-Hue, Quang Nam, Quang Ngai, and Binh Dinh, is appealing. Compared to the North and South, this region is more heavily reliant on food, beverage, and feed industry. In fact, Da Nang has become a centre for manufacturing, IT, food processing, and fisheries in recent years.
In contrast, the Southern KER of Vietnam offers a greater variety of industries and services than the Northern region. Binh Duong, Tay Ninh, Long An, Dong Nai, Ba Ria-Vinh Tau, and Ho Chi Minh City are the cities in the region. One of the largest garment producers in the nation is located in Ho Chi Minh City, which is where the garment and textile industries are concentrated. Over 70% of the 6,000 factories in the country are in or close to Hanoi and Ho Chi Minh City.
Challenges and Opportunities
Vietnam continues to be recognised as a significant and expanding industrial base notwithstanding COVID-19, despite the disruption of the global supply chain.
There are still many difficulties for Vietnam. For instance, Vietnam has about 14 times less workers than China in terms of the size of its labour force, which numbers about 56 million.
Particularly for projects that are out-of-date and using antiquated technology, local authorities are known to scrutinise documentation, adding extra time for approvals. Land use restrictions and legal environmental requirements can also be onerous.
Before starting a manufacturing project, investors are urged to carefully research the local market, complete their due diligence, and consult a professional firm.