SOURCING IN VIETNAM 2018

  1. Introduction

As China, Vietnam’s neighbour, faces the impact of rising business costs, investors are now starting to look for alternative destinations that can accommodate their manufacturing and sourcing activities. Vietnam, is considered as one of the top alternative choices.

With various business structures available, in Vietnam, companies are able to choose the most suitable one for their business needs. Due to the industry and market development, labour sourcing is the perfect choice for companies, who prioritise low-cost production, such as toy and clothing manufacturers. Multinational corporations, on the other hand, may find setting up production bases in Vietnam more beneficial because of the opportunity to expand into Vietnamese market and because of the tariff benefits afforded by Vietnam’s major free trade agreements (FTA’s).

  1. Why Vietnam?

As an emerging industrial economy, Vietnam possesses a number of features that are particularly appealing to investors. The most important ones being young labour force, low general costs, supportive policies, and FTA’s

  1. Labour force

Vietnam has a population approaching 100 million people, more than 60% of who are under the age of 35. So, Vietnam is capable of providing a young, abundant and quality work force at competitive cost[1].

The labour cost in Vietnam are competitive compared not only to China, but also to other manufacturing hubs in South East Asia. Vietnam’s minimum wage was recorded at 114.29 USD/month in 2017, being one third the figure for China and one of the lowest in the region. In 2018 this figure rose slightly to 122.27 USD/month, while those of Thailand and China are 293 USD/month and 348.88 USD/month respectively [2].

Minimum wages comparison for Vietnam and China and other countries in Southeast Asia

 

  1. General costs

Vietnam’s government is seeking to offer investors a robust business environment in order to be attractive for investment When investing in Vietnam, investors are entitled to different financial incentives, which can be summarised  in four different forms: lower tax rates for the whole duration of investment term or part thereof; exemption from and reduction of tax rates; import duty exemption for fixed assets; and reduction/exemption of land rental. These incentives are applicable to[3]:

–          Projects in certain business lines; including IT, healthcare, finance, education, energy, agriculture, electronics, infrastructure, transportation.

–          Projects located in: administrative divisions in disadvantaged areas / extremely disadvantaged areas; industrial parks, export-processing zones, hi-tech zones, economic zones.

–          Projects whose capital investment is VND 6,000 billion or more, and the minimum amount of at least VND 6,000 billion is disbursed within 03 years from the day on which the investment registration certificate or decision on investment policies is issued.

–          Projects located in a rural area that employs at least 500 workers.

–          High-tech companies, science and technology companies, and science and technology organizations.

Additionally, there are also other financial advantages that Vietnam can offer including abundant supplies of natural resources for manufacturing demands and comparatively low costs of doing business (rent and utilities) compared to those of neighbouring countries.

 

  1. Free Trade Agreements

After Vietnam opened the market, the country has been an active member in two large global economic organisations, namely the World Trade Organisation (WTO) and the ASEAN Economic Community. Besides that, Vietnam is committed to 12 free trade agreements (FTA) with various countries, 10 of which are already in effect[4]:

–          Vietnam – ASEAN FTA,

–          ASEAN – China FTA,

–          ASEAN – Korea FTA,

–          ASEAN – Japan FTA,

–          ASEAN – India FTA,

–          ASEAN – Australia – New Zealand FTA,

–          Vietnam – Japan Economic Partnership Agreement,

–          Vietnam – Chile Bilateral FTA,

–          Vietnam – Korea FTA,

–          Vietnam – Eurasian Economic Union FTA,

–          Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP

The Vietnam – EU FTA, to which the UK is party, is awaiting full ratification. 

The participation in multinational economic organisations has positively impacted the country’s market and economy including reduction of import duties and liberalisation of Vietnam’s service market. Meanwhile, free trade agreements, especially those of Vietnam with ASEAN and ASEAN with China or ASEAN with India, are of interest to companies due to the opportunities to export products manufactured in Vietnam to given markets duty free. With the expected conclusion of the Vietnam-EU FTA Vietnam will benefit from tariff free access to some of the largest markets in the world.

  • What are the challenges?
  1. Skilled workforce

Compared to Vietnam and other emerging manufacturing hubs, China still exceeds in certain fields, one of which is labour force’s quality. This advantage saves outsourcers and investors a considerable amount of time and money and also other resources from possible re-training and management identification, which in turns helps to maximise their productivity. Doubt has been casted on whether Vietnam could really become the “next China” due to this particular reason – labour instability and labour quality.[5]

  1. Infrastructure and supply chain

Another obstacle discouraging manufacturers from outsourcing in Vietnam is its infrastructure which is fundamental to the transportation of goods and smooth running of operations. Even though the Vietnamese government has taken considerable effort and made progress, the country still lags behind China in terms of infrastructure.

  1. Economic uncertainties

As an emerging manufacturing hub that is still in its transition process, Vietnam has many development challenges ranging from confusing and non-transparent procedures (regulatory and financial) to slow issuance of investment licenses.

  1. External shocks

External forces are always inevitable but impactful, such as the withdrawal of the US from the now-defunct Trans-Pacific Partnership (TPP). TPP was replaced with the CPTPP, but without the participation of the largest economy in the world.

Additionally, geopolitical risks resulted from growing tensions over the South China Sea also act as a deterrent to potential outsourcing partners and investors in Vietnam.

  1. How to select suitable sourcing partners?

Before actually sourcing in Vietnam, businesses need to undertake important research about the potential partners within the country. This research should cover a number of aspects mentioned below.

Initially, it is recommended to create a list of potential partners. This step can be conducted with help of the internet, the commercial chambers of commerce, associations of planned products, professional sourcing agents, trade fairs, and industrial parks and economic zones. Once the list is complete, investors may choose to seek professional assistance from an agent to conduct field trips to selected companies in order to have a better outlook of their possible partners’ capabilities. A service firm or the BBGV possesses practical skills and know-how that can efficiently help foreign businesses to overcome the challenges when arriving in a new country, such as language barriers and local business etiquette. The result of this step is a shortlist of selective potential companies that are suitable for successful partnerships.

Another significant factor when choosing a partner is location. Since the country is divided into different areas with common business products (details in the map below), a careful study can identify the key areas for the appropriate business manufactures. Additionally, where industrial parks, high tech parks, and export processing zones are situated can be a significant factor in the performance of local factories.

 

 

Northern Key Economic Region

Central Key Economic Region

Southern Key Economic Region

·     Industry: Vehicle parts, Machining, Electronics, Pharma, Precision instruments, Mechanics, Logistics, Petrochem, Construction, materials

·     No. of Industrial Parks: 57

·     No. of High Tech Parks: 1

·     No. of Export Processing Zone: 2

·     Industry: Petrochem, Construction materials, Steel, Ship building

·     No. of Industrial Parks: 42

·     No. of High Tech Parks: 1

·     No. of Economic Zones: 9

·     Industry: Electronics, Software, BPO, Pharma, Autoparts, Garments, FMCG, Agricultural food, Seafood, Vehicle parts, Steel, F&B, Ceramics, Chemicals, Logistics, Shoes

·     No. of Industrial Parks: 128

·     No. of High Tech Parks: 1

·     No. of Export Processing Zones: 3

 

Key areas throughout the country for a variety of common business products.[6]

(Source: Dezan Shira and Associates)

 

[1] Doing Business in Vietnam 2017, (Ho Chi Minh city, PWC, 2017), 5.

[2] Koushan Das, “Vietnam: Minimum Wages on the Rise in 2018”, Vietnam Briefing, February 12 2018. https://www.vietnam-briefing.com/news/vietnam-minimum-wages-on-the-rise-in-2018.html/ 

[3] Ministry of Planning and Investment. FDI Incentives. Ha Noi: Ministry of Planning and Investment, 2011. http://fia.mpi.gov.vn/news/125/FDI-Incentives/en

[4] “Legal Framework Overview,” The Report Vietnam, 2017, 194

[5] S.C., “Is Vietnam the next China,” Economist, May 20th 2011

[6] Dezan Shira and Associates, “Developing Your Sourcing Strategy for Vietnam”, Vietnam Briefing, May 2014

References

Associates, D. S. (2014, May). Vietnam Briefing. Developing your Sourcing Strategy for Vietnam.

Das, K. (2018, 2 12). Vietnam Briefing. Retrieved from Vietnam: Minimum Wages on the Rise in 2018: https://www.vietnam-briefing.com/news/vietnam-minimum-wages-on-the-rise-in-2018.html/

Investment, M. o. (2011). fia.mpi.gov.vn. Retrieved from http://fia.mpi.gov.vn/news/125/FDI-Incentives/en

PWC. (2017, July). Doing Business in Vietnam.

S.C. (2011, May 20). Economist. Retrieved from https://www.economist.com/free-exchange/2011/05/20/is-vietnam-the-next-china

 

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