Vietnam has quickly become an El Dorado for companies wishing to optimise their production costs and guarantee diversity in their supply chain.
Many companies have already taken the plunge and set up operations here. In this regard, it is important to complete due diligence and identify any potential risks involved in setting up operations abroad. A prime example of Vietnam’s production capabilities is Nike, which has been operating in Vietnam since 1995. Today, over half of Nike’s production line operates in Vietnam, whereas only 31% of it is in China. Adidas, Nike’s main competitor, is adapting the same strategy.
In this ever-evolving corporate landscape, there are a plethora of factors that can bring both advantages and disadvantages to your business. These factors depend on your company’s size, its sector, and Vietnam’s economy.
This article covers the main points to consider when setting up in Vietnam as well as recommendations for a successful establishment.
In order to produce in Vietnam, what should you know?
Evaluate the capacity of suppliers for your needs
The first step is to know whether local suppliers can provide you with the right materials for your venture.
Vietnam is rapidly catching up to China in terms of the diversity of suppliers. In the country, there is still room to grow. It’s, therefore, necessary to research in advance whether it would be possible to source raw materials directly from within the country. As a comparison, China has online search engines like Alibaba and Made in China, which offer a wide diversity of products across a range of sectors.
Nevertheless, Vietnam still has a higher level of industrial diversity than other players in the region such as Cambodia or Bangladesh.
Imported material and component costs
Like other countries, sourcing supplies in Vietnam can be difficult. And even if a supplier is found, costs can be a major topic to concern. That’s why the majority of the components needed in the Vietnamese industries are still imported. It can be said that there is a high dependency for manufacturers.
- Textile in the garment industry → 70-80% from China.
- Electronics industry → imports 77% of total product value
- Pharmaceutical industry → imports 85 to 90% of materials
- Plastics industry → imports 70-80% of the total value of the production cost
At first sight, importing materials may seem expensive because of customs fees, tariffs… However, Vietnam benefits from many trade agreements that drastically reduce customs fees and a great location as it shares a border with China. This is a significant advantage in the region compared to other regional countries (Malaysia, Indonesia, Philippines,..) and this is undeniably part of China’s Plus One strategy.
Finding skilled people
After finding suppliers, it is imperative to find labour. Labour itself is not difficult to find in Vietnam, but finding the right workers for the job may be a challenge. Even though Vietnam offers a very adaptable workforce, the more niche industries such as the aerospace industry will have trouble finding suitable workers for their ventures. Nevertheless, in general, there is a clear improvement in the Vietnamese workforce due to the quality of the country’s education and universities.
Control labour costs
The minimum wage in Vietnam ranges from USD 125 to USD 180 per month. Unsurprisingly, the Vietnamese wage is one of the reasons why manufacturers want to relocate their supply chains.
On one hand, Vietnam has an abundant and increasingly sophisticated workforce in technical industries. But in the other hand, it can be seen to be experiencing shortages, and for good reason: it is over-subscribed. Indeed, many facts such as the trade war between China and the USA make the Vietnamese workforce more in demand.
Rising prices due to a decreasing supply
In addition to labour costs, relocation and facility development costs must be considered as well. Relocating to Vietnam should be perceived as an investment : it is a win-win operation in the medium term.
You should be fully aware that costs, such as industrial leases, have started to skyrocket in Vietnam. The reason is that demand for industrial spaces is getting bigger and bigger, while the supply is decreasing. Companies have understood the importance of diversifying, which comes for many of them in the form of foreign investment.
Quality control costs in Vietnam
Quality control is a crucial stage in production. Moreover, the price in Vietnam is quite expensive (around 300$ per day). If the quality control service provider is not always on the site of production, then the costs will increase. The following breaks down how:
- Higher travel expenses for inspectors needing to travel a longer distance to the inspection site
- Longer lead times for scheduling inspection
- Integrity concerns due to a lack of centralised ethical and operational policies
In addition, it is imperative to carry out good quality control. Indeed, neglecting this step can lead to poor quality mass production and consequent losses. This is an important point not to be taken lightly, and that would ensure a smoother transition when moving operations into Vietnam.
Understand the logistics network
According to the World Bank’s 2018 Logistic Performance Index, Vietnam ranks 39th whereas its competitors (except China, 26th) are lower in the ranking : Indonesia (46th), Cambodia ( 98th) or India (44th). Therefore, Vietnam is currently one of the most infrastructure-rich countries in ASEAN, but this network can still be improved. Vietnam is committed to it and is ranking second among the countries in the region that invest the most in transport infrastructure.
As an example, Vietnam has recently introduced a $5 billion North-South expressway to further improve its infrastructure.
As you can see below on the chart, the country is striving to improve the national network via its expenses in infrastructure compared to the national GDP.
Source: PWC Vietnam
To benefit from the easiest access to any kind of infrastructure, your best option is to locate your business in an industrial park. It will simplify your logistics and streamline exchanges with your suppliers.
How to choose your IP location
Vietnam has 3 major economic zones : in the north, centre and south of the country. These zones are governed by specific laws enforced by the MPI (Ministry of Planning Investment), which aims to promote economic activities and business. These zones are more commonly known as the Economical Key Zone, or for example, North EKZ (NEKZ, Centre EKZ, South EKZ). Additionally, within these areas, there are industrial parks where you can establish your business.
Depending on your activity sector, one EKZ or IPs may be more attractive than the others. It is therefore crucial to study the opportunities offered by each of the economic zones and industrial parks to set up in the best location. You can read our another article about industrial zones here for more information.
Legal and juridical clarity
It should be a priority to be informed of the type of license the IP owner has.
This ensures a good implementation. It is important to be informed on the sector of activity to which the IP is attached, otherwise, it would be detrimental to the investment procedures. Environmental licences, noise regulations, and waste emissions of IPs must be valid because they are subject to government controls.
To put it bluntly, go over the juridical and legal aspect of an IP with great care because if this is not respected, the procedures could be blocked and your installation called into question.
Investment procedures
Most of the time investment procedures are the same for IPs.
However for some specific case there may be different procedures that are as described below:
Rental fees
Although for large companies renting land is not a problem, it can be for smaller companies. A good solution might be to rent a plot of land on a long-term basis with an annuity fixed in.
New companies in Vietnam should also pay attention to rental costs and check if they include: land rent, factory rent, management fees, electricity/water supply charges, wastewater treatment charges etc.
Here you will find a quick overview of leasing contracts and what you should know.
Final thoughts
To sum up, Vietnam is in the middle of an economic boom. The country is adopting and facilitating the arrival of companies via the FTAs, the industrial park or an advantageous tax policy. However, Vietnam still has room for improvement. For sure, the recurrence of economic activities in Vietnam highlights certain elements such as its logistics, its workforce, and its infrastructure. The country has not yet reached the level of China, but it is now identified as a non-negligible player in Southeast Asian trade.
What are you waiting for to set up your company? If you have any question, don’t hesitate to contact one of our many SOA experts to help you in your efforts.
Annex:
Below, you can see a table listing the investments companies have made into Vietnam, organized by region
| North | Centre | South |
| Kraft Vina: Invested USD661 million for a kraft packaging factory in Vinh Phuc
LG Group : Increased their investments in Hai Phong’s Industrial Park by over USD 2 billion to expand their production capabilities
Amkor Technology: Selected Bac Ninh for their factory expansion |
Xenia Tech: Business activity performing well, set up in Da Nang
BB Group/Quantum Group: Recently marked some recent massive project arrivals in Quang Tri |
Intel/Asus: Set up their factories in Ho Chi Minh City
Lego: Committed to a USD 1 billion project to build the first-ever carbon-neutral factory in Vietnam in Binh Duong |
