Betting on Vietnam: The Future of Southeast Asian Manufacturing

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By Hoang Thu Huyen and Edward Barbour-Lacey, Dezan Shira & Associates

HANOI – It has been remarkable to witness the rapid transformation of Vietnam into Asia-Pacific’s next manufacturing powerhouse over the past decade. While some analysts have been quick to point out several striking similarities between Vietnam and China’s economic rise, it must be appreciated that Vietnam is following its own unique roadmap for growth. In the past three years alone, a growing number of manufacturers have relocated their operations from China to Vietnam in an attempt to escape rising costs and an increasingly complex regulatory environment. In Dezan Shira’s Vietnam offices, we have witnessed this trend firsthand as a number of our clients have sought our assistance in transferring their manufacturing and sourcing operations to Vietnam in search of lower operational and labor costs in addition to a more investor friendly regulatory environment. Located in a strategic position for foreign companies with operations throughout Southeast Asia, Vietnam is also the ideal export hub for pursuing a China + 1 strategy to reach other ASEAN markets.

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Compared with other developing markets in the region, Vietnam is emerging as the clear leader in low cost manufacturing and sourcing, with the country’s manufacturing sector now accounting for 25 percent of Vietnam’s total GDP. Currently, labor costs in Vietnam are 50 percent of those in China and around 40 percent of those reported in Thailand and the Philippines. With the country’s workforce growing annually by around 1.5 million, Vietnamese workers are inexpensive, young, and, increasingly, highly skilled. Partly the result of Vietnamese government investment in education and training programs—often in conjunction with foreign multinationals— over the next decade the country’s workforce is set to compete fiercely with India and Singapore’s reputation for providing highly-skilled workers.

Another driving force behind Vietnam’s growing popularity is the country’s collection of free trade agreements (FTAs)—most notably, the soon-to-be-signed Trans-Pacific Partnership (TPP) and EU-Vietnam FTA. When these two agreements come into force, Vietnamese exports will be freely accessible to many of the world’s largest markets with few tariffs or restrictions. Vietnam’s participation in the ASEAN Economic Community—scheduled to be fully realized in late 2015—is another key factor drawing investors as the country prepares to secure tariff-free access to the entire ASEAN region. In terms of regulatory and financial incentives, Vietnam has become increasingly investor-friendly in recent years. Since the mid-2000s, the Vietnamese government has offered extremely competitive financial incentives to manufacturers seeking to set up operations in the country, in addition to a zero percent withholding tax on dividends remitted overseas and a low CIT rate of only 22 percent (set to drop to 20 percent in 2016). These advantages also enabled Vietnam to become a premier “sourcing economy” in the eyes of many companies. A prime example of this can be found in the textiles market, with 70 percent of Vietnam’s garment industry now dedicated to sourcing.

While still in a developmental stage, Vietnam is going to great lengths to ensure it continues to provide an attractive business environment to investors. Since 2010, the Vietnamese government has poured millions of dollars into upgrading the country’s infrastructure and is well on its way to crafting a world class network of roads, railways, and airports within an integrated national logistics system. For investors and companies keeping a close eye on global manufacturing trends and aspiring to take their manufacturing and sourcing operations to the next level, Vietnam is one jurisdiction that should not be overlooked.

This article is an excerpt from the July 2014 edition of Asia Briefing Magazine, titled “Manufacturing Hubs Across Emerging Asia.” In this issue, we explore several of the region’s most competitive and promising manufacturing locales including India, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. Exploring a wide variety of factors such as key industries, investment regulations, and labor, shipping, and operational costs, we delineate the cost competitiveness and ease of investment in each while highlighting Indonesia, Vietnam and India’s exceptional potential as the manufacturing leaders of the future.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email vietnam@dezshira.com or visit www.dezshira.com.

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