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Electronics players attracted to Vietnam. |
With cost advantages in China seemingly reduced due to recent labour unrest and rising wages, Vietnam sees itself as having an opportunity to become a low cost alternative for manufacturing. But Vietnam is also in fierce competition with other South East Asian nations for such external investment.
The Taiwan Electrical and Electronic Manufacturers' Association (TEEMA) encouraged its members to follow Foxconn and Compal, respectively the world's leading mobile handset and notebook outsourcing manufacturers, to set up production projects in Vietnam.
This would mean a major shift for production of global brands produced by those companies' clients such as Dell, Hewlett-Packard, Apple and Nokia.
The encouragement was amplified after Foxconn recently announced a hike in wages at its factories in China by nearly 100%.
The President of TEEMA said the association was promoting a southward strategy with a view to relocating also to India and Indonesia.
Japanese companies Toyota and Honda temporarily closed manufacturing lines on the Chinese mainland when workers at their part supplier Denso demanded higher wages, suggesting that these companies may also be actively searching for alternative manufacturing locations.
"Foreign investors, including Japanese companies, will be forced to rethink and modify their portfolios of investment because of the recent rise in wages and frequent strikes in China," said the Chairman of the Japan Business Association in Vietnam.
Pole position for investment
Vietnam sees itself in pole position to attract such investment, given its economic growth, generally young population, stable social conditions and high standards of education.
Despite the Vietnamese government's move to raise minimum salaries, labour costs in Vietnam are expected to remain relatively lower than China.
Most firms in the fields of manufacturing, wholesale and retail, construction, transport and banking, showed that the average salaries for a manufacturing sector worker in Vietnam was US$101 per month, while in China it was US$217.
Vietnam has been considered an alternative place for low cost manufacturing in recent years and attracted many international manufacturers.
Intel, the world's largest chip maker, will start production at its US$1 billion manufacturing factory in Ho Chi Minh City this autumn. It's been developing its production since 2006 to take the advantage of lower labour costs.
Shiseido also completed a US$42 million manufacturing factory in southern Dong Nai province. The Japanese company announced that a young and cheap workforce was one of the main reasons for establishing its factory.
Japan-based Mitsubishi Heavy Industries Ltd two years ago decided to build an aircraft components manufacturing factory in Vietnam to take the advantage of low cost labour.
Statistics from the Ministry of Planning and Investment showed that as of July 31 2010, foreign investors have committed to invest US$93.2 billion into 7,101 manufacturing projects in Vietnam, accounting for 50% of the country's total registered foreign direct investment capital.
Competing with other South East Asian countries
Vietnam has its own challenges to overcome such as inadequate infrastructure, power shortages, a lack of clustered related industries and an underdeveloped legal system. And like China, Vietnamese workers are now asking for higher wages.
While Vietnam has been considered for expansion plans, Thailand is said to possess better supporting industries, export-friendly policies and infrastructure systems.
The Indonesia Footwear Association (Aprisindo) last month announced that six South Korean and Taiwan-based footwear manufacturers outsourcing shoes and products for world's famous brands like Nike, Adidas, Reebok and Geox, have relocated their plants there from China and Vietnam.
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| Vietnam faces competition.* |
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In fact, Vietnam lags behind China and more developed South East Asian nations like Thailand and Indonesia in terms of infrastructure and supporting industries.
Enterprises operating in Vietnam are now seriously affected by electricity shortages, while the lack of large seaports is pushing transportation costs from the country to export markets.
Vietnam ranked behind Asian countries including China, Thailand, India, Indonesia, Malaysia and Singapore by World Bank indicators, in terms of lacking clustering or development of related industries and behind India in terms of inadequate infrastructure.
Vietnam also ranks behind most Asian economies in terms of logistics development.
The Vietnam Business Forum infrastructure working group reported companies in Vietnam have to pay approximately US$1.7 billion in logistics costs each year because they transship cargo via Hong Kong and Singapore due to lack of large, deep seaports.
Additionally, the country ranks second in terms of an underdeveloped legal system after China.
However, the development of infrastructure and related industries "has made gradual improvements in the past four years".
According to a recent World Bank report, Investing Across Borders, administrative procedures to establish a foreign-owned limited liability company in Vietnam are complicated.
Foreign investors need to prepare 12 procedures and wait 94 days to establish a foreign-owned limited liability company in Vietnam, according to the report. This is slower than 14 days in Malaysia, 34 days in Thailand, 46 days in India and 86 days in Indonesia.
HSBC expects Vietnam to attract between US$10 and US$15 billion in FDI per year over the next few years versus between US$7 and US$9 billion in the past two years.
from Nguyen Quoc Uy, Ho Chi Minh City Office
Image courtesy of:
* ©iStockphoto.com/bsimsek)
