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Ho Chi Minh City, Vietnam – In industrial parks in the hills and tea fields of northern Vietnam, legions of factory workers are busy producing products for famous tech giants like Apple, Samsung, LG Electronics and Microsoft.
Already hundreds of thousands of strength, their rank is rapidly swelling.
Frustrated by China’s “zero-covid” lockdowns that halted production almost immediately, manufacturers are looking for alternatives to the world’s largest economy and No. 1 manufacturing hub. Vietnam is a key beneficiary of cheap labor, geographic proximity to China, and a stable political environment.
For many of these companies, they have weathered trade wars, escalating labor costs in China, and supply chain disruptions during the COVID-19… [China’s] “I think the zero-covid policy is now the straw that broke the camel’s back,” Greg Poling, director of the Southeast Asia program at the Center for Strategic and International Studies (CSIS), told Al Jazeera.
“Vietnam is not the only place where citizens of many countries want to leave China, but Vietnam can be very successful.”
Apple, Google and Samsung are all pushing for their first positions in the Southeast Asian country.
Foxconn and Luxor Precision Industry, Apple’s most important suppliers, are currently in talks to make Apple Watches and MacBooks in Vietnam. To support its Vietnam expansion, Taiwan-based Foxconn has announced plans to invest $300m in Bac Giang, a northern province about 50km (31 miles) from Hanoi.
Production of other Apple products in Vietnam is also expected to increase – 65 percent of AirPods, the company’s signature wireless headphones, in 2018. It will be there by 2025, according to an analysis by JP Morgan last month.
Google plans to start manufacturing its Pixel smartphones in Vietnam from 2023, while Samsung plans to start manufacturing semiconductor components at a vast factory in Thai Nguyen province next summer.
“It’s very expensive to be in China right now,” Albert Tan, an associate professor at the Asian Institute of Management in Manila, Philippines, told Al Jazeera. The problem is that the lockouts are very unpredictable and very frequent… Many factories are moving to Vietnam.
According to Tan, with the right policies, Vietnam can become the “next powerhouse” for manufacturing in Asia.
“But the question is how quickly Vietnam can take all these types of manufacturing from China and build its own capacity,” he said.
Vietnam was one of the poorest countries in the world before emerging as a technology manufacturing hub following the liberal economic reforms known as Doi Moi in the late 1980s.
After strict Covid lockdowns led to its worst economic crisis in decades last year, Vietnam has officially moved from “zero-COVID” to living with the virus. The World Bank expects Southeast Asia’s economies to grow 7.2 percent this year — up from 2.6 percent last year — compared with China’s 2.8 percent growth.
Much of that growth can be attributed to exports, which reached $186 billion in the first six months of 2022 — up more than 17 percent year-on-year.
While China’s Covid policies have undermined investor confidence, analysts have been tracking Vietnam’s growth since long before the outbreak.
“Vietnam has been receiving significant foreign direct investment since trade tensions with China flared and Chinese factory labor costs began to rise rapidly 10 years ago,” David Dappis, an economist with the Vietnam Program at Harvard Kennedy School, told Al Jazeera.
Policies that encourage investment and trade
In recent years, Vietnam has joined 15 free trade agreements and six agreements with regional partners as part of the Association of Southeast Asian Nations to open up trade and encourage investment.
“Vietnam has signed many FTAs ​​with many countries, so customs are good,” Eddie Han, a senior analyst at Isaiah Research in Taiwan, told Al Jazeera. “It’s very easy to get parts from mainland China to Vietnam. You can use trucks and go by land.”
According to Poling, a CSIS analyst, Vietnam has been able to differentiate itself from competitors such as Indonesia and the Philippines through trade-friendly policy choices and political stability.
“What Vietnam has done is that it has put it above the other two competitors, it has made business easier,” he said. “If you are a foreign investor and sign a 30-year contract with Vietnam, you can be sure that this contract will be honored after 30 years. You can’t honestly say that in either Indonesia or the Philippines.
Beyond tech gadgets like the iPhone, Vietnam is becoming increasingly important in the semiconductor supply chain, which involves more complex production than other goods.
Intel invested $475 million in its largest chip assembly and testing facility in Ho Chi Minh City last year. In August, Roh Tae-moon, CEO of Samsung Electronics’ mobile division, announced that the South Korean company will invest $3.3 billion in the production of semiconductor components at its Nguyen plant in Thailand by July 2023. In the same month, investment and training of engineers will be transferred to Vietnam.
“What’s interesting to me is the added value and the technology aspect that Vietnam is exporting,” Craig Martin, chairman of Ho Chi Minh City-based asset management firm Dynam Capital, told Al Jazeera.
“The more complicated and the more sticky the revenue is in your assembly process, the more sticky FDI is,” Martin said of Samsung’s move to manufacture semiconductor components in Vietnam. “This is good news for exports moving up the value chain.”
Still, some observers are skeptical of how far Vietnam can go as a high-tech manufacturing hub. Vietnam’s workforce is smaller and less skilled than that of China’s Asian peers, such as South Korea and Japan. Corruption, although improving with the actions and awareness of the authorities, is still widespread and serious.
“I have not found the labor in Vietnam to have a very good skill level in manufacturing. They need more training, Le Cong Din, a lawyer and business consultant in Ho Chi Minh City, told Al Jazeera.
“Corruption can be another problem in this business. Most global companies like Apple don’t want to pay under the table to complement or optimize their products, he said. “Southeast Asian countries or India have the same problem, but it may not be the same [the same as] Vietnam.”
Dappis said one of Vietnam’s primary draws – cheap labor – would last only for so long. As the economy grows, wages inevitably rise.
“I expect these long-term trends to continue until Vietnam runs out of workers,” Dappis said of the manufacturing boom. “[This] It may be in a few years that people in agriculture do not want to move, even if their income is low.
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