Amid the Wave of Supply Chain Restructuring, Why Has Vietnam Become a New Hotspot for Manufacturing Investment?
As trade tensions between China and the United States persist, Vietnam, leveraging advantages such as labor costs, tax incentives, and free trade agreements, is attracting global semiconductor and electronics manufacturing giants to accelerate their expansion.
In September 2023, U.S. President Joe Biden convened executives from Google, Amkor Technology, Intel, Marvell Technology, GlobalFoundries, and Boeing for a meeting with Vietnamese Prime Minister Pham Minh Chinh. The meeting was seen as one of the most iconic high-level interactions between the U.S. and Vietnam in economic and trade relations in recent years.
For a long time, China has been a popular choice for contract manufacturing in Asia due to its vast labor pool, abundant raw material supply, and mature logistics ecosystem. However, as U.S.-China trade tensions persist, American companies and the Biden administration are actively seeking friendlier business partners, bringing Vietnam into the core spotlight.
Vietnam has prioritized attracting semiconductor and advanced electronics manufacturing and has successfully brought in several global giants.
In October 2023, chip packaging manufacturer Amkor Technology announced the construction of its first factory in Vietnam with an investment of $1.6 billion, expected to become its largest production base to date. In September 2022, Google announced plans to produce Pixel smartphones in Vietnam. In May of the same year, semiconductor developer Marvell Technology announced it would establish a world-class chip design center in Ho Chi Minh City.
Alongside the U.S.-Vietnam Business Roundtable, in September 2023 the two countries signed a new Comprehensive Strategic Partnership—which, according to the White House, is the highest-level economic partnership Vietnam has established with any country—aimed at building resilient semiconductor supply chains to support U.S. industry.
According to Vietnam's Ministry of Planning and Investment, foreign direct investment in Vietnam rose 54% year-over-year in October 2023 to $15.3 billion, with processing and manufacturing accounting for nearly 75% of investment.
Rajiv Biswas, Chief Economist for Asia-Pacific at S&P Global Market Intelligence, said: "At the U.S. government level, there is recognition of Vietnam's growing importance as a manufacturing hub for U.S. multinationals. They want to leverage Vietnam's capacity to make it part of the U.S. supply chain and electronics manufacturing."
As U.S. manufacturers turn their attention to Vietnam, the country is working to ensure its industry and economy have a foundation for long-term growth.
The Rise of Vietnam's Manufacturing Sector
The first major foreign semiconductor-related manufacturer to operate in Vietnam was Intel, which opened a $1 billion chip assembly and test facility in Ho Chi Minh City in 2010. Biswas noted that the plant's launch showcased Vietnam's advantages as a base for advanced electronics manufacturing.
"Since then, Vietnam's development in the electronics industry has been booming," he said.
In the 13 years since Intel's arrival, Vietnam has successfully attracted investment from global electronics giants, including South Korea's LG and Samsung, as well as U.S. companies like Amkor Technology. One key to its success is offering highly attractive tax incentives to foreign investors.
Vietnam offers three main types of foreign investment incentives, covering corporate income tax, import duties, and land rent. According to Vietnam Briefing, Vietnam has also established economic zones to "provide better infrastructure, talent pools, and supplier networks."
Vietnam's labor costs are also lower than China's: as of last year, Vietnam's labor costs were about $2.99 per hour, compared to $6.50 per hour in China.
Additionally, Vietnam has actively signed free trade agreements, making it a more attractive trading partner for U.S. companies with global supply chains. The country signed a free trade agreement with the EU in 2019, reached a deal with the UK in 2020, and joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2018.
Vietnam is also a member of the Association of Southeast Asian Nations, whose other members include Brunei Darussalam, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, and Thailand. The bloc as a whole is the fourth-largest trading partner of the United States.
Biswas said: "ASEAN has signed a large number of bilateral free trade agreements with other countries, which helps reduce tariff barriers for Vietnam's import and export trade. This is very important for developing export industries and obtaining competitive import costs."
Over the past decade, U.S. dependence on Vietnamese goods has risen significantly. According to the Office of the U.S. Trade Representative, U.S. imports of goods from Vietnam reached $127.5 billion in 2022, up 25.1% from 2021 and a substantial 529% increase from 2012.
Vietnam Focuses on "Supporting Industries"
Vietnam has set ambitious goals for its manufacturing growth. According to McKinsey data, the country aims for manufacturing to account for 30% of GDP by 2030, with the sector contributing annual growth of 8.5%.
Vietnamese officials are keenly aware of the need to ensure the country builds lasting domestic industries that can support future development, said Arian Ebrahimi, author of Chip Capitols and former policy assistant at the Semiconductor Industry Association.
Ebrahimi said: "Vietnam seems to be trying to follow a development path similar to what Taiwan once took—starting with lower value-added segments of the chip industry and gradually moving up the value chain by attracting investment and talent."
This strategy aims to lay the foundation for Vietnam to take on other industries in the future.
Ebrahimi said: "They are taking a long-term industrial strategy. They don't want to simply hand out state funds to any manufacturer that can bring jobs and short-term GDP growth."
Vietnam has been working to develop its "supporting industries," which are enterprises that produce raw materials, components, and spare parts used to assemble finished products. According to Vietnam Briefing, this move aims to enhance the country's manufacturing capabilities in key sectors such as semiconductors, electronics, and automobiles. In 2021, Vietnam's industrial parks attracted $1.1 billion in investment for supporting industries.
Ebrahimi emphasized: "Even if the companies coming in are mainly upstream semiconductor equipment or material suppliers, they still want to know what other technologies that company can support in the future."
"At the U.S. government level, there is recognition of Vietnam's growing importance as a manufacturing hub for U.S. multinationals."
Rajiv Biswas
Chief Economist, Asia-Pacific, S&P Global Market Intelligence
What's Next for Vietnam?
Vietnam is one of several countries benefiting from the wave of global supply chain shifts, along with Mexico and India. So what will the country's manufacturing landscape look like in the coming years?
Biswas said: "We expect Vietnam's economy to grow significantly in scale over the next decade. This means the domestic consumer market will expand considerably."
As the domestic market grows, Biswas noted that more multinationals may enter Vietnam not only to leverage its manufacturing but also to capture its consumption potential. Vietnam's GDP was $410 billion in 2022, and S&P Global Market Intelligence projects it will grow to $750 billion by 2030.
Given Vietnam's increasingly friendly trade relations with the United States, along with its relatively stable economic, political landscape, and labor wage market, the economist noted that Vietnam's relationship with foreign investors is expected to deepen further.
Biswas said: "I think we will increasingly see U.S. electronics companies locate at least part of their supply chains in Vietnam as part of a diversified global supply chain system. Vietnam's competitiveness in low-cost manufacturing will last at least another 10 to 20 years."