Global Tech Manufacturing

Electronics Manufacturers Bet Big on Vietnam

manufacturers-vietnamAttracted by low labor costs and other advantages, global electronics manufacturers invested billions in Vietnam over the past few years. As they continue to build new factories in 2014, Vietnam’s economy will benefit from the influx of foreign capital, talent, and technology.

A small player in the global electronics supply chain just a decade ago, Vietnam exported $38 billion in devices and components last year, according to data from the International Trade Center. Although this pales next to the $560 billion shipped by China, the world’s leading producer of electronics, Vietnam now ranks as the 12th largest electronics exporter in the world. (The country also has a fast-growing IT services sector, which Techonomy surveyed last month.)

Many manufacturers came to Vietnam, in fact, because of challenging macroeconomic conditions in China. There, an aging workforce, rising wages, and other trends make low-cost production increasingly untenable in many industries. China will remain the world’s leading production zone for years to come, but its competitive advantage in low-end manufacturing and assembly work is waning.

This trend benefits several Southeast Asian countries, including Vietnam, Indonesia, Thailand, and the Philippines. They all have large pools of low-cost labor that are ready and willing to pick up China’s slack. Global electronics manufacturers moved into all these markets over the past few years, but expanded most aggressively in Vietnam, where electronics exports grew at some of the fastest rates in the world.

Samsung has made the biggest commitment of the many major multinationals manufacturing electronic devices and components. It has invested billions of dollars in a cluster of factories that will produce a large percentage of the company’s smartphone handsets in coming years. Intel and LG each also plunked down over $1 billion each, while dozens of other companies have made nine- and eight-figure investments.

Why Vietnam? Geography plays an important role. Unlike Indonesia or the Philippines, which are both archipelago nations on the outer boundaries of Southeast Asia, Vietnam’s proximity to China makes it easier to integrate into existing supply chains. Vietnam also faces fewer natural disasters than other countries in the region, which are generally more prone to floods, earthquakes, and typhoons.

Growing domestic demand also entices manufacturers. “Many electronics manufacturers seek more than low-cost labor when they choose a location for production,” said Glenn Maguire, chief economist for the Asia-Pacific region at ANZ Bank. “They also look for countries that can emerge as large domestic markets. Vietnam seems to have all the right ingredients for that to happen.”

Maguire believes that Vietnam offers other advantages as well, including a good electrical supply and improving transport infrastructure. The country also appears stable politically. The recent spate of anti-China riots generated dramatic headlines and caused concerns among many investors, but their actual impact was limited and the situation cooled down quickly.

Cheap workers, however, remain the primary attraction for many electronics manufacturers. Those in Vietnam command some of the lowest wages in the region. Only people in Cambodia, Laos, and Myanmar earn less, but those countries lack many of Vietnam’s other advantages.

Booming electronics production will help lift Vietnam’s economy, but questions remain about how evenly benefits will be spread. Right now, most factories focus on relatively low-value production and assembly work. Although setting up and running those factories requires skilled managers, technicians, and engineers, most workers will be stuck on an assembly line screwing things together for the foreseeable future.

Long-term growth depends on whether Vietnam can ultimately move up the productivity value chain and create more skilled jobs. The influx of foreign electronics manufacturers gives the country a unique opportunity to absorb foreign technology and expertise. It also provides capital to fund much-needed improvements in infrastructure and education.

Some companies appear keen to help develop local tech talent. When Intel first tried to hire local staff for the $1 billion testing and assembly plant it built in 2010, it had difficulty finding qualified engineers. To build its talent pipeline, the company created a special study-abroad program to train engineers for its facility, spending $7 million to send 73 students to Portland State University in Oregon.

If Vietnam can continue to develop its tech talent at home, a new generation of skilled workers will allow the country to export progressively higher-value products. It will also expand the base of high-income professionals, fueling greater demand at home for those same goods. If that doesn’t happen, however, the country will probably attract new investments only until cheaper locations emerge somewhere else.

Will Greene is Director of Research at BDG Asia, an advisory firm that helps international companies do business in Southeast Asia. He is currently based in Ho Chi Minh City, Vietnam. 

Background research contributed by Huyen Nghiem, Analyst at BDG Asia. 

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  • Destroy The Fake Communist

    we should not buy products which made by vietnamese communist slaves, feeding up a dictatorial regime is a criminal act.

  • Trang nguyen

    As working in FDI attracting
    industry, I understand the situation of Vietnam now, and agree with your ideas
    on the article.
    Yes, Vietnam attracts FDI first from
    low- cost strategy as we are from the point of a developing country. However, a
    big size of domestic market with increasing middle income and young generation
    is things that really encourage foreign investors.

    With human resource issue, we know that this is a resolvable matter. Our generation are dynamic, hardworking,
    and ready to learn new things will soon meet the highest requirement of
    employers. We might slower at the first step, but will move quickly when getting
    on track. Every year, a big number of Vietnamese students go abroad for
    studying.

    Giants like Intel, SamSung, or LG compare with its 1 Billion USD investment, 7 million USD on sending their
    employees for oversea training means nearly nothing. With those Giants, Vietnam
    Government offers them a lot of benefit compared with others (nearly zero at
    land leasing price, long term tax incentive, financial support on
    recruitment…), so that it makes improving quality of workforce to become their
    responsibility and commitment with Vietnam.

    Their positive effects on attracting those Giants for Vietnamese is not limited but includes technology transferring, and also the moving wave of those Giant’s suppliers to Vietnam,who may be smaller in size and capital contribution, but also create many jobsfor both qualified, skilled workers, but also ordinary workers. In our industrial park having a supplier of LG invest in, received normal investment
    incentive, they are just <50 million investment, but also willing to
    implement the same policy on HR training with those Giants.

    Supply chain is really an outstanding issue with foreign investors now in Vietnam. We will benefit only on monthly salary only if Vietnam supply chain cannot develop quickly to meet current requirements of foreign investors. Less than 10% of technology products’ value produced in Vietnam are domestically production. And as imported items, spare parts will get higher in their price compared with if produced domestically. I am hoping that will soon know your opinion on this issue through an article of you.

    • Will Greene

      Hi Trang – thanks for your thoughtful feedback. Good point about government incentives as a major driver of expansion for electronics manufacturers; this is a major part of the story that I didn’t explore in this article. I intend to write more on this soon.

  • http://www.linkedin.com/in/eddysmlee Eddy Lee

    As a supporter of emerging economies, I read your piece with great interest. I run an early stage VC fund, based out of the Silicon Valley, and is one of the few if not only that is investing in Southeast Asia. There’s a migrational trend in manufacturing and consumption from developed economies (eg USA) to new economies (eg China, India), and to emerging economies (eg Southeast Asia). Labor cost, and real estate cost will continue to be drivers of manufacturing locations, at least until the day the world reaches cost equilibrium.

    An important consideration in tech manufacturing is the intellectual property protection afforded by countries such as US or Singapore. As a comprise between cost and protection are options such as Johor Bahru or Batam, respectively cities in Malaysia and Indonesia which are 45 minutes from Singapore. In the near future, miniaturization of cell phones, smart contact lenses, or even implants that monitor vital signs will push components to become ever minuscule, and assembly increasing intricate. Robotic assembly will become a requirement, and be another driver that opposes locating due to labor cost.

    Even as the manufacturing cost benefit of emerging markets wears off, I’m betting that in the middle term, huge current population (600M), a rising middle class population, high birth rates, and sustained GDP growth 4-6% will turn Southeast Asia into a consumption driven market. Stay tuned.

    • Will Greene

      Hi Eddy – great points. Vietnam certainly has a relative disadvantage to more developed countries in terms of IP protection. I suspect that many companies intend to be very careful about IP security. The lack of it might lead them to import managers rather than develop local talent, or to limit in-country production of higher value-added products and focus more on components and assembly. Some higher-tech companies, such as those doing robotic assembly on miniaturized devices, might want to avoid the country altogether.

      As the electronics boom continues, Vietnam will surely benefit as technology and expertise gets transferred to the country, but a lack of strong IP protection regime will limit the upside.