Vietnam no longer a cheap manufacturing base: JBIC

Vietnam is no longer the “cheap manufacturing base” it used to be, but no trend of “moving to cheaper countries” away from the country has been seen to date.

This assessment is carried in a report titled “Investment in Vietnam is entering the Age of Co-Creation”, prepared by the Japan Bank for International Cooperation (JBIC).

The report says there might still be a deep-rooted image of Vietnam as one of ASEAN’s manufacturing hubs that wield inexpensive labor to its advantage. However, such preconceptions need to be drastically updated as Vietnam is changing in a big way.

The JBIC report says labor costs in Vietnam have begun to rise in parallel with the nation’s economic growth. The country’s economy grew 8% last year, the highest among ASEAN members.

It notes that Vietnamese people are passionate about investing in education for their children, indicating the emergence of a more skilled workforce. Hanoi, for instance, is home to more than half of Vietnam’s top 20 universities, making it easy to hire Vietnamese engineers and other executive candidates.

JBIC also says that Vietnam offers various other advantages to foreign investors.

For Japanese investors restructuring their supply chains, the advantage is that although labor costs are now higher than in Laos and Myanmar, the political system is more stable and reliable in Vietnam, the report quotes Wachi Satoru, deputy general director of Japan-invested Thang Long Industrial Park II and Thang Long Industrial Park III, as saying.

It also quotes Kojima Kazuto, representative director and president of printed wiring board manufacturer Kyosha Co. Ltd., as saying that expanding to Vietnam helps diversify risks. Kazuto adds that compared to Mexico, where exports are limited to the U.S., the attraction of Vietnam is not only its rapidly growing domestic market of 100 million people, but also its capacity to export products to Southeast Asia.

As a result, Japan’s direct investment in Vietnam, which used to focus on manufacturing and infrastructure-related sectors, has diversified in recent years into other sectors such as retail, consulting and information technology.

Meanwhile, the manufacturing industry is also following the trend to tape the “China plus one” advantage.

Reviewing FDI growth in Vietnam, the JBIC report notes three phases based on milestone developments: the launching of the Doi moi (open market) policy in 1986; the U.S. lifting economic sanctions in 1994; and Vietnam’s membership of the World Trade Organization (WTO) in 2007.

It can be said that the “fourth investment boom” is underway thanks to Vietnam’s economic partnership expansion, growing geopolitical role and the realignment of regional supply chains, the report says.

The fourth phase is also taking place as Vietnam pursues its ambition of becoming a developed country by 2045 and achieving net zero emissions (carbon neutrality) by 2050.

As of January this year, JBIC has provided financial assistance of JPY848.1 billion ($6.06 billion) for 315 projects in Vietnam. JBIC has financed projects that account for 13% of Vietnam’s total power generation. In line with Vietnam’s carbon neutrality target, areas of cooperation can expand to renewable energy, power grid, zero-emission thermal power generation, according to the report.

Do Nhat Hoang, headl of the Foreign Investment Agency (FIA), under the Ministry of Planning and Investment, says Vietnam aims to attract high-quality investments in high-tech electronics, renewable energy, biotechnology, and infrastructure projects with high added value. Projects related to semiconductor manufacturing and hydrogen production will receive priority, JBIC quoted Hoang as saying.

The Vietnamese economy expanded by 4.14% in the second quarter of this year from a year ago, amid slowing global demand for imports, the country's General Statistics Office (GSO) reported. The first quarter saw a slow growth rate of 3.31%. Overall, in the first half of 2023, the economy grew by 3.72% year-on-year.