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Appealing alternative amid trade tensions

Released at: 08:37, 02/11/2019

Appealing alternative amid trade tensions

Photo: VET Magazine

Vietnam is in a handy position to attract large electronic and tech companies keen on relocating from elsewhere.

by Ngoc Lan

Google has begun shifting its Pixel smartphone production from China to Vietnam, seeking to build inexpensive supply chains in Southeast Asia and creating a springboard for its ambition of developing hardware, according to a Nikkei Asian Review report from late August. The global giant declined to confirm any moves with VET, but Mr. Nguyen Huu Quat, Standing Deputy Secretary of the Bac Ninh Provincial Party Committee, told local media that Google has decided on the northern province but is yet to complete the finer details. 

According to Nikkei, production lines in Vietnam would play an important role in Google’s growth efforts in the smartphone market, as the brand aims to produce 8 to 10 million units this year; double that of last year. Economist Le Dang Doanh told VET that Google is one of many major foreign electronic and technology companies moving to Vietnam. “This shift is part of their strategy based on Vietnam’s socio-political stability and economic growth compared to other countries in the region,” he said.

Shift to Vietnam 

Japanese electronics giant Sharp is also planning to build a new factory in Vietnam, near Ho Chi Minh City. Operations are to begin in fiscal year 2020 and it will assemble automotive LCD screens for export to the US. Sharp did not disclose the terms of the investment, but along with the US-bound LCD screens, which will incorporate LCD panels made in Japan, the factory will also make air purifiers and other electronics for sale in Vietnam.

Meanwhile, at a working session with leaders of the Quang Ninh Provincial People’s Committee in June, Apple’s largest supplier Foxconn expressed an interest in developing a TV assembly factory at the Dong Mai Industrial Park in the northern province, with investment of $40 million in just the first phase. Mr. Harry Zhuo, General Director of Foxconn Vietnam, told the meeting that Quang Ninh is a promising investment destination for numerous global groups due to its modern transport infrastructure and favorable investment environment.

In February, another project worth $260 million came from the Hong Kong-based GoerTek Inc. which registered to manufacture smart hardware system products, virtual and augmented reality (VR/AR) products, and precision components in Bac Ninh. At a meeting to seek investment opportunities with leaders of the Bac Giang Provincial People’s Committee in the same month, China’s multinational tech company Lenovo said it plans to build a production facility in the northern province. The facility is expected to cover an area of 20 to 30 ha and produce computer parts worth $3 billion annually for export to the US.

A report from real estate consultants Savills Vietnam released in September announced a list of foreign electronic and technology companies shifting their manufacturing factories to Vietnam this year. The report named Japan’s Nintendo as being scheduled to shift some production of its Switch console to Vietnam, while Japanese-based conglomerate Kyocera Group considers Vietnam as one of its two most important production hubs in Asia and plans to expand in the country. 

Main motivation

Vietnam has witnessed an increase in the number of foreign electronic and technology manufacturers shifting production to the country this year. Mr. John Campbell, Manager of Industrial Services at Savills Vietnam, told VET that ongoing trade tensions between the US and China is one of the drivers of the shift. “US-China tensions are driving companies to relocate or diversify their manufacturing to Vietnam, given the 25 per cent US tariffs already in place on $250 billion worth of Chinese imports and the possibility of an additional 10 per cent tariff on another $300 billion worth of goods,” he said. “Of course, this is bound to impact the number of electronic and technology companies considering Vietnam as an alternative manufacturing destination to China.”

Professor Nguyen Mai, Chairman of Vietnam’s Association of Foreign Invested Enterprises (VAFIE), said the relocations by electronic and technology companies is an inevitable trend. “Although these companies have invested in building huge factories in a huge country, they still always look for a third country to expand production and as a solution to problems like the US-China trade tension,” he told VET. “Vietnam is on the list of potential countries within the strategies of major groups.”

Likewise, Mr. Campbell also noted that it is important to remember that Vietnam was attracting large electronic and technology projects long before the trade tensions emerged. Samsung has invested over $17 billion in the country to date, giving rise to an electronics cluster in the north, while LG has also made significant investments and created a substantial number of jobs in the Hai Phong region, according to Savills. In the south, Intel invested $1 billion in a chip facility at Saigon Hi-Tech Park, where 80 per cent of their 4th generation CPU chips are produced. 

Foreign investors have no shortage of options when considering whether and where to move their production, including Indonesia, Malaysia and Thailand, where there is good infrastructure, highly-technical human resources, and a huge workforce. 

Professor Mai said Vietnam possesses many significant advantages, including its strategic location in Asia and its land border with China allowing for quick road transport. “Moreover, its industrial parks are located near the coast and main parks are connected to seaports by a growing network of major roads and highways,” he added. 

Vietnam’s attractiveness also comes from its signing of free trade agreements (FTAs), with the EU Vietnam Free Trade Agreement (EVFTA) signed in June and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) becoming official in January. Negotiations over the Regional Comprehensive and Economic Partnership (RCEP) are underway and are expected to be finalized by year’s end. The agreement will increase cooperation between ASEAN countries and the six Asia-Pacific states with existing free trade agreements. 

“Joining the CPTPP and signing the EVFTA and 14 other FTAs help Vietnam export more goods to foreign markets at low or zero tax rates, which is of interest to foreign companies,” said Mr. Doanh. “This also shows the strong commitment of the Vietnamese Government towards creating a good business environment and attracting foreign investment.”

In September, the U.S. News & World Report released its rankings of the best economies to invest in this year, with Vietnam surpassing Southeast Asian neighbors such as Malaysia, Indonesia, and Singapore to rank eighth; a massive rise from 23rd last year.

Looking ahead

Vietnam’s participation in global value chains is being led by multinational companies and the country will face risks if they choose to leave, as noted in an economic report from the Vietnam Institute for Economic and Policy Research (VEPR) released in June. The supply capacity of electronic products, components, and computers by local companies remains quite limited. Samsung had set out to recruit 250 domestic Level 1 suppliers of ancillary products, but the number of enterprises meeting its conditions are yet to reach 30. “Vietnam must therefore quickly elevate itself to become the point of governance in the entire chain, not merely a participate in a few stages,” VEPR’s report proposed.

Hi-tech and electronics are the type of investment Vietnam seeks and needs in order to move up the value chain, improve competitiveness, and ensure sustainable long-term growth in the industrial sector. Mr. Campbell said this shift is testament to Vietnam’s ongoing transition from low-skilled, labor-intensive, and high-volume manufacturing towards higher-value industries. “To successfully execute this, the government must continue to make key investments in infrastructure and improve the supply of higher skilled labor with a strong emphasis on education and proper training nationwide,” he said. “Overall, I believe Vietnam is on track and will continue to attract such projects, as more electronic and technology companies are not only realizing that they may be exposed in China but are also beginning to understand the unique value Vietnam has to offer as an alternative investment destination.” 

"Joining the CPTPP and signing the EVFTA and 14 other FTAs help Vietnam export more goods to foreign markets at low or zero tax rates, which is of interest to foreign companies. This also shows the strong commitment 
of the Vietnamese Government towards creating a good business environment and attracting foreign investment.”

Economist Le Dang Doanh

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