Considering manufacturing in Vietnam? We offer some tips

Much has been spoken about manufacturing in Vietnam, especially after the recent trade tensions between China & US. Many businesses around the world has started looking for secondary supply chain sourcing other than China.

But WHY Vietnam? Being in Vietnam for the past 13 years +, we share our experiences and thoughts on Vietnam as a manufacturing hub. Whether you are looking to set up a manufacturing hub, sourcing office or a contract manufacturer – we hope our share of experiences can help you!

1. Labour force

The state of manufacturing in Vietnam today closely parallels that of China a decade ago. Competitive wages and the availability of mid-skill labour are highly attractive for production activities with huge labour requirements. As China moves further up the value chain in manufacturing, Vietnam is well-poised to attract more MNCs. Vietnam’s proximity to China also makes it easier to integrate into existing supply chains.

The government has taken steps to increase vocational and technical training to ensure the people fit in a competitive labour market. In March 2018, the government introduced Decree No. 49/2018/ND-CP that provides for the accreditation of vocational education. As of February 2018, there are more than 1,900 vocational training centers across Vietnam, including 395 colleges and 545 vocational schools. The government aims to provide vocational training to 2.2 million people in 2018.

Nevertheless, be prepared to continue human capital development by providing training to the workforce – this strategy is by far the best way to attract and retain the best talents in the industry. Wage inflation is real and expect poaching from competition. Therefore, a structured approach to human capital development is necessary.

2. Incentives & Encouragement for foreign investor by Vietnam Government

Vietnamese government continues to improve business conditions through reform and have included tax incentives in recent legislative updates – most notably Vietnam’s Law on Investment – to lower the cost of doing business within the country. Foreign investors, particularly those involved in slightly higher value-add production, should be able to use incentives to offset their temporary costs until regulatory reforms take hold, and to position themselves ahead of their competitors in the years ahead.

Vietnam extends investment incentives to a number of industries and projects that it has identified to be of strategic importance for the country. Vietnamese policy in recent years has broadly promoted projects in high tech industries, large capital, or labor-intensive investments, and projects that are expected to have a tangible impact on social conditions, such as education or healthcare.

Vietnam has encouraged the establishment of economic zones throughout the country. These zones provide increased access to infrastructure, pools of talent, and networks of suppliers. Foreign investors in these zones also benefit from tax incentives extended by the Vietnamese government.

Most economic zones will qualify an investor for tax holiday incentives. In limited cases, where the zone is located in a disadvantaged area, a preferential rate of corporate income tax will also apply. Foreign investors must set up their operations inside of a zone that offers incentives in order to qualify for preferential treatment or tax holidays.

We recommend getting the best advise from a reputable advisory firm – especially in matters relating to legal set up, tax and customs as the regulation may differ significantly with your home country. Compliance is extremely important and a compliance-based mindset should be deployed while making decisions in Vietnam.

3. Free Trade Agreements (FTAs)

Vietnam has a range of free trade agreements (FTAs) in place, and is in the process of negotiating and ratifying more. Notable ones include the Vietnam-European Union FTA and the Regional Comprehensive Economic Partnership. Manufacturers which venture into Vietnam will enjoy low tariffs, boosting their exports to top markets such as the EU, US, Japan and Australia – an advantage which cements Vietnam’s position as a rising manufacturing hub.

On 30th June 2019, The European Union signed a landmark free trade deal with Vietnam on Sunday, the first of its kind with a developing country in Asia, paving the way for tariff reductions on 99% of goods between the trading bloc and the Southeast Asian country.

Vietnamese exports will be freely accessible to many of the world’s largest markets with few tariffs or restrictions.

The agreement will boost Vietnam’s gross domestic product by 2.18%-3.25% annually by 2023 and by 4.57%-5.30% annually between 2024-2028, the government said.

4. Location for supply chain network

Located in the heart of South East Asia and along the coastline of the Pacific Ocean, Vietnam offers numerous advantages in providing access to the world’s major trade routes. Vietnam is well connected to existing consumer and manufacturing hubs in Asia (China, Taiwan, Thailand & Malaysia). This makes it attractive for manufacturers to integrate Vietnam into its existing supply chains. For example, Samsung has established a strong presence in Vietnam’s Bac Ninh and Thai Nguyen provinces for their proximity to its 13 plants and seven research laboratories in China. With the upcoming ratification of various trade agreements, manufacturers will also be keen to tap Vietnam’s export quotas.

5. Communication

The national language is Vietnamese, which is widely spoken throughout the country by all ethnic groups. More than 90% of the Vietnamese population aged 15 and older is literate, as a result of the Government’s continued efforts to prioritise development of a quality training and educational system.

English is the most popular foreign language and is commonly used in major urban areas. English study is obligatory in most schools. Other common foreign languages are French, Chinese and Japanese. Communication with local staff will still be largely require the Vietnamese language.