Manufacturers accelerate 'de-China' layout, Vietnam becomes new hotspot for investment

In September 2023, U.S. President Joe Biden convened executives from Google, Amkor Technology, Intel, Marvell Technology, GlobalFoundries, and Boeing for a meeting with Vietnamese Prime Minister Pham Minh Chinh. This meeting was regarded as one of the most important high-level contacts between the U.S. and Vietnam in economic and trade relations in recent years.

For a long time, China has been the preferred destination for Asian contract manufacturing, thanks to its vast labor resources, ample supply of raw materials, and well-developed logistics systems. However, as U.S.-China trade relations remain tense, American companies and the Biden administration have begun seeking more friendly business partners, bringing Vietnam into view.

Vietnam has made attracting semiconductors and advanced electronics manufacturing a priority and has successfully brought in several global giants. In October 2023, chip packaging manufacturer Amkor Technology announced the opening of its first factory in Vietnam, with an investment of $1.6 billion, expected to become the company's largest production base to date. Google announced plans in September 2022 to produce Pixel smartphones in Vietnam; semiconductor developer Marvell Technology announced in May 2023 that it would establish a design center in Ho Chi Minh City.

Alongside the U.S.-Vietnam Business Roundtable, in September 2023 the two countries signed a new Comprehensive Strategic Partnership—which, according to the White House, is the highest level of economic partnership Vietnam has with any country—aimed at building a resilient semiconductor supply chain to support U.S. industry.

According to data from Vietnam's Ministry of Planning and Investment, in October 2023, foreign direct investment absorbed by Vietnam increased 54% year-on-year to $15.3 billion, with investment in processing and manufacturing accounting for nearly 75%.

Rajiv Biswas, Chief Economist for Asia-Pacific at S&P Global Market Intelligence, said: "The U.S. government has recognized Vietnam's growing importance as a manufacturing hub for U.S. multinationals, hoping to leverage Vietnam's capacity to integrate it into U.S. supply chains and electronics manufacturing."

While U.S. manufacturers turn their attention to Vietnam, Vietnam is also actively promoting long-term growth of its own industries and economy.

The rise of Vietnam's manufacturing sector

The first foreign company to undertake large-scale semiconductor-related manufacturing operations in Vietnam was Intel, which opened a $1 billion chip assembly and test factory in Ho Chi Minh City in 2010. Biswas noted that the completion of this factory demonstrated Vietnam's advantages as a manufacturing base for the advanced electronics industry.

He said: "Since then, Vietnam's electronics industry has truly developed from weak to strong."

In the 13 years since Intel's arrival, Vietnam has successfully attracted investment from global electronics giants, including South Korea's LG and Samsung, as well as America's Amkor Technology. One of the key factors has been generous tax incentives for foreign investors.

Vietnam offers three main types of foreign investment incentives, covering corporate income tax, import duties, and land rent. According to Vietnam Briefing, Vietnam has also established economic zones to "provide better infrastructure, talent pools, and supplier networks."

Vietnam's labor costs remain lower than China's: as of 2023, Vietnam's labor costs were approximately $2.99 per hour, compared to $6.50 per hour in China.

Furthermore, Vietnam has actively joined free trade agreements, making it a more attractive trading partner for U.S. companies with global supply chains. Vietnam signed a free trade agreement with the EU in 2019, reached an agreement with the UK in 2020, and joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2018.

Vietnam is also a member of ASEAN, whose members include Brunei Darussalam, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, and Thailand. As a group, the organization is the fourth-largest trading partner of the United States.

Biswas said: "ASEAN has signed a large number of bilateral free trade agreements with other countries, which helps lower tariff barriers for Vietnam's imports and exports, and is very important for developing the export sector and obtaining competitive import costs."

Over the past decade, U.S. dependence on Vietnamese goods has risen significantly. According to data from the Office of the U.S. Trade Representative, the total value of U.S. imports from Vietnam in 2022 reached $127.5 billion, up 25.1% from 2021 and a substantial increase of 529% from 2012.

Vietnam focuses on "supporting industries"

Vietnam has set ambitious goals for manufacturing growth: manufacturing to account for 30% of GDP by 2030, with the sector contributing an average annual growth rate of 8.5%, according to McKinsey data.

Vietnamese officials are well aware that they must build sustainable domestic industries to support the country's future development, said Arian Ebrahimi, author of the Chip Capitols newsletter and former policy assistant at the Semiconductor Industry Association.

Ebrahimi said: "Vietnam seems to be trying to follow the path Taiwan took: entering at the lower value-added segments of the chip industry, and gradually moving up the value chain by attracting investment and talent."

This strategy aims to lay the foundation for Vietnam to take on other industries in the future. Ebrahimi added: "They are taking a long-term industrial strategy, unwilling to hand out government funds to just any manufacturer for short-term job and GDP gains."

Vietnam has been focusing on developing "supporting industries," which are enterprises that produce raw materials, components, and spare parts used to assemble finished products. According to Vietnam Briefing, this move aims to enhance Vietnam's manufacturing capabilities in key sectors such as semiconductors, electronics, and automobiles. In 2021, Vietnam's industrial parks attracted $1.1 billion in supporting industry investment.

Ebrahimi emphasized: "Even if the companies entering Vietnam are mainly upstream semiconductor equipment or material suppliers, they will still pay attention to what other areas this technology can support in the future."

"The U.S. government has recognized Vietnam's growing importance as a manufacturing hub for U.S. multinationals."

— Rajiv Biswas, Chief Economist for Asia-Pacific at S&P Global Market Intelligence

Vietnam's future direction

Vietnam is one of the countries benefiting from the wave of global supply chain shifts, along with Mexico and India. In the coming years, where will Vietnam's manufacturing sector head?

Biswas said: "We expect Vietnam's economy to grow substantially over the next decade, which means the domestic consumer market will expand significantly."

As the domestic market expands, Biswas noted that more multinational companies may enter Vietnam, not only to utilize its manufacturing but also to target its consumption potential. Vietnam's GDP was $410 billion in 2022, and S&P Global Market Intelligence projects it will grow to $750 billion by 2030.

Given Vietnam's increasingly friendly trade relations with the United States, along with a relatively stable economic, political landscape, and labor wage market, this economist believes Vietnam's relationship with foreign investors is expected to deepen further.

Biswas said: "I think more and more U.S. electronics companies will place at least part of their supply chains in Vietnam as part of a diversified global supply chain system. Vietnam still has at least 10 to 20 years of low-cost manufacturing competitiveness."