LG to Invest US $1.5 Billion in Vietnamese Electronics Production

By: Aysha Nesbitt

On ­­­­May 6, LG Display Group, a subsidiary of South Korea’s LG Electronics, pledged US $1.5 billion to establish a screen factory in Hai Phong. Launching next year, the factory will produce high-tech digital displays using LG’s organic light emitting diodes. This investment comes just a year after LG  opened a US $1.5 billion factory in Hai Phong and follows similar investments from the likes of Samsung and Nokia.

Over the past four years, Vietnam’s electronics sector has grown by 78 percent, becoming the country’s number one export in 2013. With pro-foreign investment policies and a competitive labor force, Vietnamese electronics production has also quickly surpassed regional rivals such as Thailand and the Philippines and is expected to grow at a modest five percent over the next two years, positioning Vietnam to surpass Singapore as the region’s fifth largest electronics exporter.

RELATED: Dezan Shira & Associates’ Corporate Establishment Services

A primary catalyst of Vietnam’s growing stature in the electronics supply chains has been the emergence of China plus one production models. Since 2010, many companies have chosen to relocate production to Vietnam because of its lowered labor costs which average US $174 per month – almost three times lower than going rates in China.  In addition to lowering costs and helping investors to hedge against international demand volatility, Vietnam is also perfectly positioned for smooth integration into existing china based supply chains.

As a result, electronics giants, such as Intel, Samsung, and Japan’s Panasonic are some of many that have turned to Vietnam to manufacture their products. In the past five years alone, Vietnam has experienced substantial inflows of FDI, which reached an all-time high of 17.5 percent in 2015. In the past year there has been a notable increase in capital originating from within ASEAN, due to the TPP and ASEAN’s Economic Community (AEC), while in the short-to-medium term, investors from India and the EU are expected to become more prominent.

While agreements such as the TPP bring with them tariff reductions for specific nations, all companies operating in Vietnam will also benefit from state level reform commitments. Upon implementation of the TPP, Vietnam will be required to adhere to structural adjustments, such as enhancing transportation, labor standards, and establishing a more competitive environment for state-owned businesses. With these adjustments in place, the country’s exports are predicted to grow by 37 percent by 2025. 

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Independent of international commitments, the Vietnamese government has also established a pro-foreign investment stance and has been working to improve its legal framework. With regard to electronics, those companies who invest in software manufacturing or high technology factories will qualify for reduced corporate tax rates of 17 percent – down from the standard rate of 20 percent.

Although the benefits of doing business in Vietnam are considerable, companies are likely to face issues relating to poor infrastructure and workforce inefficiency if investments are carried out without proper planning. These challenges can present a barrier to entry and limit otherwise competitive aspects of Vietnam’s investment environment. To confront these challenges, companies should be sure to conduct thorough due diligence of investment locations and select production sites that are well equipped to meet the needs of their operations.

In addition to infrastructure and labor productivity, the level of bureaucracy in Vietnam may also slow down production and cause general challenges to doing business. This obstacle can be confronted with a well-rounded understanding of local regulations. Such an understanding will help in the navigation of Vietnam’s laws which continue to evolve and often create difficulty for those unfamiliar with their interpretation and application.

Dezan Shira & Associates provides accounting and tax compliance services to companies investing in Vietnam. The firm can help companies establish an online presence and direct office in the country and can guide them through the affiliated accounting, tax, legal and HR issues that come with doing so. To arrange a free consultation, please contact us at: vietnam@dezshira.com

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