How Supporting Industries Can Benefit from Adding Vietnam to Their China+1 Strategy

China plus-one strategies that include Vietnam don’t have to be limited to larger multinationals. Small and medium enterprises in supporting industries can benefit too, writes Filippo Bortoletti, Country Director, Dezan Shira & Associates Vietnam.

Since 2008 we at Dezan Shira and Associates have been at the coalface of foreign direct investment in Vietnam. In the past 15 years we’ve seen lots of change, from the manufacturing boom through the early part of the 21st century, through to watching a vibrant emerging start-up sector gain its legs.

One thing, however, that stands out above all else is the emergence of the China plus-one paradigm, particularly as trade conflicts between China and some of its major trading partners have intensified. This has seen supply chain restructuring and risk diversification strategies implemented at large. Meanwhile, Vietnam has also opened up to greater foreign investment, thereby taking advantage of these trends to transform into a regional manufacturing hub.

While the “China plus-one” trend has prompted large corporations like Samsung and Nike to relocate their operations to Vietnam, the move of small to medium sized enterprises (SMEs) has been less widely recognized.

Often following their leading multinational customers, these SMEs have also been drawn to Vietnam due to the country’s favorable business environment and economies of scale.

Although these SMEs may not operate in as glamorous industries as mobile phones and laptops, they play a crucial role in any economy, including Vietnam’s. In fact, SMEs in Vietnam facilitate technology transfers and provide skills training that can be even broader than that offered by larger organizations, highlighting their importance to the country’s economic development.

In contrast to large multinationals where employees may be limited to performing a single mechanical task, supporting industries often offer greater opportunities for employees to move horizontally within the organization, allowing them to develop a broader range of skills. This can be particularly beneficial for employees looking to advance their careers, as well as for the companies themselves, as they benefit from having a more versatile and adaptable workforce.

Moreover, Vietnamese workers, as many a market entrant will attest, are keen to learn and grow their skill sets. Broadly, their drive and commitment and work are often not just about the money. Vietnamese are fiercely loyal to their families and their friends. They highly value their relationships with the people around them, and this is a trait well suited to SMEs in the manufacturing sector.

As smaller operations, SMEs are usually more personal. Organizational structures are often flatter and the distance between upper management and the factory floor is often much shorter than in bigger firms. This means that those relationships can be developed and harnessed to improve productivity – an SME that truly cares about the welfare of its employees can benefit greatly from increased output and loyalty.

But establishing an SME in Vietnam comes with benefits above and beyond labor.

SMEs often operate in a sector of the manufacturing industry crucial for the sustainable development of Vietnam’s manufacturing sector: supporting industries.

Vietnam has acknowledged in recent years the importance of being not just one part of the global supply chain but rather of being a key part of these increasingly complex structures.

In this light, the government has instituted tax breaks and incentives for supporting industries looking to establish themselves in Vietnam.

Decree 57, for example, forms the backbone of Vietnam’s push into the supporting industries sector. It offers incentives from a four-year corporate income tax exemption to a 10 percent preferential tax rate for the first 15 years on income stemming from new projects in the field.

SMEs, whether they are new to the region or following the well-trodden path from China into Vietnam, stand to benefit significantly from utilizing these incentives.

That said, Vietnam’s headway into developing supporting industries and longer in-country supply chains has been slow.

In 2022, Vietnam’s localization rate was only around 36 percent. This is a fraction of its key competitors India and China. In this vein, there were only about 500 firms in Vietnam in supporting industries, less than a quarter of a percent of the one million enterprises currently doing business in the country.

But for small and medium enterprises looking to diversify into Vietnam this is only a minor challenge.

Vietnam has become a highly integrated player within Asia in recent years, thanks in part to its participation in various free trade agreements. The country has signed agreements with its Southeast Asian neighbors as well as bilateral and multilateral deals with countries around the world, helping to facilitate trade and investment flows across the region and beyond.

As a result, sourcing components and shipping them to Vietnam for assembly, or shipping parts and components from Vietnam elsewhere for assembly, is increasingly becoming cheaper and easier.

Furthermore, there is impetus for change across the economy.

Forums and seminars promoting Vietnam as a supporting industry destination are becoming more and more commonplace. The issues facing development of Vietnam’s supporting industries are also front and center at these events and are clearly on the minds of Vietnam’s lawmakers and key opinion leaders.

This bodes well for SMEs operating in supporting industries as the government and private sector appear to be supportive. Through better access to incentives and programs aimed at encouraging investment and expansion in the manufacturing sector, authorities are also making it easier for SMEs to establish new factories and plants in the country.

This has not gone unnoticed – a number of big manufacturers are expanding the footprint of their supporting industries in Vietnam.

Samsung, for example, has opened a US$200 million research and development center in Hanoi. There has also been talk recently of China’s Sunny Optical investing US$2.5 billion in developing facilities in its Southeast Asian neighbor.

Though Sunny Optical has not said what lines will be developed in Vietnam, in general it produces a range of products from lenses to camera components to headlights to name a few.

But it’s not just incentives driving investment in supporting industries.

SMEs should not overlook Vietnam’s location.

With a vast coastline connecting the burgeoning nation via a series of ports to the rest of the world, Vietnam is in a very convenient location. It’s not just the Pacific access either.

As one of China’s southern neighbors, with whom it shares deep cultural and political ties, Vietnam as a China plus-one destination is a great option. Components and parts for a broad range of manufacturers are already crossing the border, in both directions, every day to the tune of hundreds of millions of dollars.

The point being, that the path between the two in terms of trade and diversified supply chains is well established and with the right guidance, firms entering the market can do so with relative ease… at least compared to when Dezan Shira and Associates first arrived 13 years ago.

Over time, we have witnessed many changes and watched a myriad of opportunities come and go. Right now, there is tremendous potential for SMEs in supporting industries, particularly in Vietnam. This presents an excellent opportunity for SME businesses in supporting industries to shift their enterprises to Vietnam.

With our extensive experience and expertise in the region, the team at Dezan Shira and Associates is well-equipped to assist SMEs in navigating the Vietnamese market and making the most of the opportunities available. So if you’re an SME in a supporting industry looking to shift your enterprise to Vietnam, we are ready and eager to help you succeed.

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