Vietnam eyeing China’s tech crown as companies grow weary of ‘zero COVID’ | Business and economy

Ho Chi Minh City, Vietnam – In industrial parks set among the hills and tea fields of northern Vietnam, legions of factory workers are busy making products for major tech giants such as Apple, Samsung, LG Electronics and Microsoft .

Already hundreds of thousands strong, their ranks are growing rapidly.

Frustrated with China’s ‘zero-COVID’ lockdowns halting production at all times, manufacturers are looking for alternatives to the world’s largest economy and No. 1 manufacturing hub. Vietnam, with its labor force cheap labor, its geographic proximity to China and its stable political environment, is a key beneficiary.

“For a lot of these companies, they weathered the trade war, they weathered rising labor costs in China, and then they weathered the collapse of supply chains during COVID. . [China’s] I think zero COVID policy is now the straw that breaks the camel’s back,” Greg Poling, Southeast Asia Program Director at the Center for Strategic and International Studies (CSIS), told Al Jazeera.

“Vietnam is not the only place multinationals are looking to diversify outside of China, but Vietnam is probably the most successful.”

Apple, Google and Samsung are all pushing ahead with firsts in the Southeast Asian country.

Foxconn and Luxshare Precision Industry, two of Apple’s largest suppliers, are currently in talks to manufacture Apple Watches and Macbooks in Vietnam for the first time. To support its expansion in Vietnam, Taiwanese company Foxconn has announced plans to invest $300 million in a new 50.5-hectare factory in Bac Giang, a northern province about 50 km (31 miles) from Hanoi. .

Production of other Apple products in Vietnam is also expected to increase – 65% of AirPods, the company’s signature wireless headphones, will be made there by 2025, according to a JP Morgan analysis last month.

Google is expected to start manufacturing its Pixel smartphones in Vietnam from 2023, while Samsung plans to start manufacturing semiconductor components next summer at a sprawling factory in Thai Nguyen province.

“It’s just too expensive to be in China now,” Albert Tan, an associate professor at the Asian Institute of Management in Manila, Philippines, told Al Jazeera. “The problem is that the shutdowns are so unpredictable and so frequent… Many factories are moving to Vietnam.”

Tan said that with the right policies, Vietnam could become Asia’s “next powerhouse” for manufacturing.

“But it’s about how quickly Vietnam can pick up all these types of manufacturing from China and develop its own capabilities,” he said.

Vietnam was one of the poorest countries in the world before becoming a center of technological manufacturing following the implementation of liberal economic reforms known as Doi Moi in the late 1980s.

After strict COVID lockdowns inflicted the worst economic contraction in decades last year, Vietnam officially went from “zero-COVID” to life with the virus following the massive rollout of vaccines. The World Bank has forecast Southeast Asia’s economy to grow 7.2% this year, down from 2.6% last year, compared to 2.8% for China.

Much of this growth can be attributed to exports, which in the first six months of 2022 reached $186 billion, an increase of more than 17% year-over-year.

While China’s COVID policies have undermined investor confidence, analysts trace Vietnam’s rising status to long before the pandemic.

“Vietnam has been receiving a high volume of foreign direct investment since trade tensions with China erupted and labor costs in Chinese factories began to rise rapidly nearly 10 years ago,” he said. David Dapice, Vietnam program economist at Harvard’s Kennedy School, told Al Jazeera.

Policies encouraging investment and trade

Vietnam has made progress in opening up trade and encouraging investment in recent years, joining 15 free trade agreements, including six pacts with regional partners under the Association of Eastern European Nations. South East Asia.

“Vietnam has signed many FTAs ​​with many countries, so customs are good,” Eddie Han, senior analyst at Isaiah Research in Taiwan, told Al Jazeera. “Shipping components from mainland China to Vietnam is very easy. They can just use trucks and go on land.

Poling, the CSIS analyst, said Vietnam has been able to distinguish itself from competitors like Indonesia and the Philippines thanks to business-friendly policy choices and political stability.

“What Vietnam has done that puts it above these two competitors is it has increased the ease of doing business in a very targeted way,” he said. “If you are a foreign investor and you sign a 30-year contract with Vietnam, you can be pretty sure that this contract will still be honored in 30 years. You honestly can’t say that in Indonesia or the Philippines.

Beyond tech gadgets like iPhones, Vietnam is also becoming increasingly important in the semiconductor supply chain, which involves more complex production than other goods.

Last year, Intel invested $475 million in its largest chip assembly and testing site in Ho Chi Minh City. In August, Roh Tae-Moon, CEO of Samsung Electronics’ mobile division, announced that the South Korean company would invest $3.3 billion in the production of semiconductor components at its Thai Nguyen plant by July. 2023. Synopsys, an American chip design software company, announced the same month it would shift investment and engineering training to Vietnam.

“What interests me is this increase in value addition and the technological aspect of what Vietnam is exporting,” Craig Martin, chairman of asset management firm Dynam Capital, told Al Jazeera. Ho Chi Minh City.

“The more complex and sticky the revenue in your assembly process, the stickier the foreign direct investment,” Martin said of Samsung’s decision to manufacture semiconductor components in Vietnam. “This move up the export value chain is good news.”

Still, some observers doubt how far Vietnam can go as a high-tech manufacturing hub. Vietnam’s workforce is only a fraction of the size of China’s and is less skilled than that of its Asian peers such as South Korea and Japan. Corruption, despite repression by authorities and improving perceptions, remains widespread and serious.

“I don’t find that the workforce in Vietnam has a very good level of skills to do production. They need more training,” Le Cong Dinh, a lawyer and business adviser in Ho Chi Minh City, told Al Jazeera.

“Corruption can be another problem for doing business here. Most international companies like Apple never want to pay under the table to make or facilitate their production,” he added. “Southeast Asian countries or India have the same problem but the level may not be [the same as] Vietnam.

Dapice said one of Vietnam’s main draws – cheap labor – can only last for a while. As the economy grows, wages will inevitably rise as well.

“I expect these longer-term trends to continue until Vietnam runs out of workers,” Dapice said of the manufacturing boom. “[This] could be in a few years when farmers no longer want to move, even if their incomes are lower.