Ever since 2018 and the deterioration in the trade relations between the US and China, various electronic manufacturers are moving production away to Vietnam. Samsung closed its mobile phone manufacturing facilities in Shenzhen and Tianjin in 2018 while expanded investment to Vietnam. Soon, we also saw Nintendo asking Foxconn to move a part of the production of the Switch to Vietnam. Foxconn is also considering moving part of iPhone production lines to Vietnam, and its subsidiary Sharp is planning to move PC production to Taiwan and Vietnam.
The reason for the shift outside China varies for different companies. But largely it is the fear of tariff hikes by the US due to its trade tensions with China that have resulted in companies’ decision to relocate factories. In all of this, Vietnam is gaining. As of Q1 2019, FDI (Foreign Direct Investment) into Vietnam reached US$10.8 billion, up 86.2% year-on-year (YoY). Also, the value of Vietnam’s exports to the US grew by 26% YoY to US$13 billion.
So why are companies picking Vietnam as the manufacturing alternative for China? Will Vietnam be able to challenge China’s manufacturing leadership in the global electronics industry? Below is our analysis which answers these questions.
There are several reasons why Vietnam is an attractive destination for global electronics manufacturers. Lower trade tariffs, lower CIT (Corporate Income Tax), labor dividend, and lower manufacturing wages are some of its strengths when it comes to attracting investments.
In terms of trade tariffs, Vietnam has already signed around a dozen free-trade pacts with several countries and economic blocs. The US, EU (Europe Union) and various other countries have a much more favorable tariff policy on exports from Vietnam as compared to those from China.
Secondly, while the standard CIT in mainland China is 25%, it is only 20% in Vietnam. Besides, the government also offers various tax incentives to attract foreign investments to Vietnam.
Further, as of April 2019, Vietnam’s population has exceeded 96 million and as much as 44% of the total Vietnamese population is younger than 25. The abundant young population creates a competitive labor dividend for the development of the manufacturing industry.
Even in terms of wages, Vietnam is much more competitive than other countries in the region. According to data from Bloomberg and Japan External Trade Organization, Vietnam’s manufacturing wages are among the lowest in Asia.
Despite the benefits, there are risks and challenges that manufacturers need to aware while moving factories to Vietnam. For the detailed analysis and supporting data on the strengths, risks and challenges of manufacturing in Vietnam, as well as the comparison on Vietnam versus China, please refer to the full report at this link.