Vietnam is experiencing continued and unprecedented growth relative to other low-cost countries. Foreign investors are increasingly choosing Vietnam as a China plus one destination to combat rising costs in China and other unpredictable scenarios, such as trade shocks.
In this context, foreign investors are choosing to supplement Chinese operations with low-cost inputs sourced from production facilities in alternate markets, such as Vietnam. In addition to its geographic proximity to China, Vietnam offers several advantages for manufacturers planning to move outside China.
Choosing Your China+1 Location
Countries like Vietnam are not without their share of challenges. In the short term, manufacturers may find the production shift daunting as supply chains have to realign. Companies often struggle to decide what to relocate, how they plan to enter the Vietnamese market, and where they will establish operations within the country.
Choosing a location can be particularly challenging as the factors affecting site selection are rapidly changing. Everything from labor costs, logistics, customs practices, and infrastructure in emerging markets such as Vietnam is constantly evolving.
Location analysis and a strategic site selection plan can have a major impact on the success of a business, affecting production, operations, and sales. Companies must take steps to ensure they have the right information before committing time and money.
For example, Vietnam enjoys a high degree of regional diversity, and the North, Center, and South all have particular competitive advantages for different industries and types of businesses. In the Ho Chi Minh City area, a prospective investor will find a vibrant commercial center with a deep and diversified supply chain, whereas the Center of the country can provide cost advantages unmatched by either the North or the South.
Vietnam’s northern provinces are well-positioned as a destination for China+1 manufacturing and oil and gas, and more recently for high-end manufacturing processes, such as auto manufacturing.
Besides, Vietnam’s business and political environment is stable being a socialist republic with only one party. The government provides strategic direction and decides on all major policy issues. Vietnam’s greatest challenge is to manage its growth responsibly.
Further, Vietnam has set up several industrial zones that are popular with foreign investors due to their competitive facilities, infrastructure, government incentives, and logistics.
In the current framework, as countries such as Vietnam develop into a prominent regional manufacturing hub, companies entering the market need to consider workforce availability and implement appropriate HR strategies to source an appropriate workforce as well as attract and retain the best talent.
Vietnam has a population of over 97 million people spread over 330,000 square kilometers. The country is still predominately rural, with urban centers providing a home for just 35 percent of the population. Companies entering Vietnam for the first time often fail to account for regional variation in the labor market and invest in locations ill-suited to their industry.
Investors that take the time to explore Vietnam’s provinces will find opportunities to manage costs while maintaining productivity. Executives will benefit from understanding the cost differential between different provinces in Vietnam, but the real beneficiaries of a regional approach will be HR departments and hiring managers. HR departments that understand what Vietnam has to offer will be much better positioned to recruit, onboard, and, where necessary, train new workers.
Vietnam’s southern labor pools are more diversified than their northern counterparts. Investment in services and a wider range of manufacturing provides access to more niche talents than in the north. Competition and recruitment demand in southern provinces are higher when compared to the northern and central provinces.
The regulatory environment encompasses several factors: political environment, policies, environment laws, the complexity of regulations, etc. Depending on the industry this can range from administrative procedures, permits, fees, taxes, and time needed to set up a factory.
While Vietnam’s gradually improving regulatory environment has made operating businesses easier, Vietnam is not without its share of challenges. Vietnam’s regulatory regimes and commercial law, and the overlapping jurisdictions of some government ministries, can result in a lack of consistency in government policies. There are also poor corporate disclosure standards and a lack of financial transparency, which can add to due diligence and KYC challenges.
Vietnam’s Free Trade Agreements
Vietnam is a party to 13 FTAs with the European Union Vietnam Free Trade Agreement (EVFTA) which came into effect recently. Vietnam’s Ministry of Planning and Investment forecast that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could increase Vietnam’s GDP by 1.3 percentage points by 2035, while the EVFTA could boost GDP by 15 percent. These trade deals along with already signed and upcoming FTAs are likely to ensure that Vietnam remains competitive in the long term.
Entering the Vietnamese Market
There are several ways you can enter the Vietnam market. One of the factors that an investor should consider is location. Vietnam’s regions vary and the North, Center, and South, have particular advantages for different industries and types of businesses depending on the investors’ business. For example, the North is good for companies relocating from China but may have higher labor costs. The South is the economic center of the country and may have more opportunities as it has a large consumer base. The center is comparatively less competitive and is a low-cost destination but may be ripe for investment due to several government incentives in cities such as Da Nang.
While there are several office structures to enter the Vietnamese market, in our experience the representative office (RO) and the foreign-invested entity (FIE) are the most popular investment vehicles in Vietnam.