Download - Vietnam Business Case Final 04-06-2016
Vietnam Business Case
With attractive labour rates, free trade, and more… Vietnam is a viable manufacturing option.
Paul Stepanek, President
Complete Manufacturing and Distribution
www.completeMAD.com 2
Executive Summary
The Challenge
With labour costs, overhead, and taxes on the rise in major Asian
manufacturing hubs, companies are on the hunt for alternatives.
The Opportunity
Today Vietnam is an aggressive competitor on the global stage of
manufacturing and development, leading JLL’s “Global top 20 City
Momentum Index” to rank Ho Chi Minh City sixth in the world for economy,
corporate activity, construction, and more.1 Having developed the
Chinese market for many manufacturers, the CMD team observes that
opportunities in Vietnam today resemble those found in China 20 to 30
years ago. Get in now. Build for growth. Reap the rewards for decades.
Takeaways
This briefing summarizes five pillars of a business case for Vietnam as a
viable manufacturing option. Highlights:
50% lower labour rates and lower overhead
Free trade: duty-light and increasingly duty-free
Vertical integration: 225+ industrial parks covering dozens of industries
Large multinational investors: Samsung is in for $20B by 2020
Tax rates: 20%+ lower than competing countries
The Bottom Line
Early movers who execute in the next 24 months will harvest the upside
for decades. Few other Asian countries offer a triple win, with access to
low-cost labour, trade routes, and free-trade regional suppliers.
Manufacturers can start with Vietnamese labour and imported
components, and over time blend local and regional sourcing – as options
grow.
“Helped by low
costs and an eager
government,
Vietnam is taking
over China's role
as Asia's hotspot
for foreign
investment in
manufacturing.”
The Street, January 2015
www.completeMAD.com 3
Low Labour and Overhead
Vietnam offers the advantages of low labour rates, overhead, and
management costs.2
Country Annual Minimum Wage (US$)
Wage + Social Welfare Costs
% Difference Compared to Vietnam
Malaysia $3,107 $3,534 224%
China $ 2,472 $ 3,337 211%
Thailand $ 3,012 $ 3,169 200%
Philippines $ 1,515 $ 1,648 104%
Vietnam $ 1,296 $ 1,581 100%
Indonesia $1,087 $1,187 75%
Overhead
As Asian strategies are crafted, overhead is often overlooked. Costs for
all of the following are on the rise in China: factory administration
expenses, indirect labour, supervisory wages, indirect materials/supplies,
employee benefits, rents, and utility costs.
A significant contributor of overhead in China is mandatory welfare.(Ibid)
Manufacturers in China pay about 2 times more in mandatory welfare
than others in the region.
“In Vietnam,
manufacturers are
gaining
unprecedented
flexibility to
leverage low-cost
labour and source
lost-cost parts
across Asia like
never before.”
Paul Stepanek, President CMD
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
China Malaysia Thailand Vietnam Philippines Indonesia
Social Welfare Annual Minimum Wage (US$)
www.completeMAD.com 4
Free Trade
Pick a topic: import duties, corporate tax rates, licensing, regulations,
export duties, and more – the Vietnamese government has sharpened its
pencil in order to make doing business in Vietnam attractive.
As seen in Appendix 1, Vietnam is engaged in all of the top trade deals in
Asia. Manufacturers gain flexibility to source parts anywhere it makes
cost-effective sense to do so, bring them to Vietnam, and export finished
goods to many countries around the world: duty-light or duty-free.
Free-trade agreements (FTA) in which Vietnam is involved include:
FTA Deals Status Business Case Significance
ASEAN
Association of SE Asian Nations
Established in 1967
Established the ASEAN Free Trade Area (AFTA)
Significantly reduced or eliminated import and export tariffs
APEC Asia-Pacific Economic Corporation
Established in 1989
Promotes free trade amongst 21 member countries
Exports/imports are streamlined with one set of standards
Vietnam will host APEC in 2017 - 10,000 delegates
RCEP Regional Comprehensive Economic Partnership
Pending Response by those not in the TPP
Helps ASEAN members + 6 other regional partners cooperate
TPP Trans-Pacific Partnership
Pending Largest regional trade deal in US history
Ink expected in 2016; next step: approval by Congress
Eliminates 18,000 taxes on US exports
Significantly reduces or eliminates tariffs on imports and exports
EU FTA/Vietnam European Union Free Trade Agreement
Pending Negotiations completed December 2015
Next step: legal review and approval
Highlights: Impact of the TPP
“The TPP eliminates or reduces tariff and non-tariff barriers across
substantially all trade in goods and services and covers the full spectrum
of trade, including goods and services trade and investment, so as to
create new opportunities and benefits for our businesses, workers, and
consumers.”3 The impact of the TPP on the Vietnamese economy is
expected to be massive. “With participation in the TPP, Vietnam’s GDP
can increase by $23.5 billion in 2020, $33.5 billion in 2025, and $68 billion
for export turnover in 2025.”4
TPP MEMBERS
Australia
Brunei
Canada
Chile
Japan
Malaysia
Mexico
New Zealand
Peru
Singapore
USA
Vietnam
www.completeMAD.com 5
Vertical Integration
Vietnam is home to 225+ industrial parks. Many are clustered in the
northern, central, and southern coastal areas. Vietnam’s geographic
position and extensive coastline make the country an ideal base for
reaching suppliers and customers across Asia.
The growing number of multinational companies in Vietnam has produced
regional demand for strategic suppliers. Skilled trades on the rise include:
Electronic assemblies
Machining, stamping, welding, tool & die
Plastic injection moulding
And much more
Locating near clusters of industry-related economic activity yields
opportunities for streamlined regional sourcing. For a list of the top
industries and export values, see Appendix 2.
Over the past few years, clients of CMD report Vietnam’s suppliers as
having high-quality, on-time delivery, and attractive pricing.
Cheap Land
In 2014 Vietnam's real estate market was valued at just $21 billion,
compared to Thailand's $89 billion and Singapore's $241 billion; leading
analysts to believe there is plenty of room for growth.5
Land prices are up in 70 major Chinese cities, up 8% between November
2014-2015.6 In contrast, Asean Investment Management (AIM)’s Chief
Investment Officer believes “Vietnam's land prices can rise as much as
600 percent over the next few years.”7
Vietnam is home to 225+ Industrial parks
Source: Google Maps
www.completeMAD.com 6
Large Multinational Investors
Pioneers
Leaders have paved the way in Vietnam for over a decade. Seeking
alternatives over rising costs and regulations elsewhere in Asia, many
established a footing in Vietnam, including Nokia, LG, Panasonic,
Toshiba, Microsoft, Intel, Rockwell Automation, Sony, and Samsung.8
Samsung’s investment in Vietnam is $12 billion9 and is expected to grow
to $20 billion by 2020. In 2015, revenue from industrial and economic
zones exceeded $110 billion – a 90% increase over 2014.10 A roundup:
Samsung - $12 billion ($20 billion by 2020)
Intel - $1 billion11
Coca-Cola - $500 million
Proctor & Gamble - $300 million
Microsoft mobile phones - $300 million12
According to a BBC report, Ho Chi Minh City is aspiring to be the “Saigon
Silicon” Valley of the East. Among the more recent entrants, Google has
committed to training 1,400 Vietnamese IT engineers.13
The American Chamber of Commerce in Singapore polled just under 600
firms and found Vietnam ranks #2 as a priority market for business
expansion (after #1 ranked Indonesia).14 For a listing of top industries
and contributions to GDP, see Appendix 2.
Growth of Local Sourcing
Demand for quality is intensifying, fuelled by increased competition from
free trade agreements. Strategic suppliers are increasingly promoting ISO
certifications. There is plenty of opportunity for growth; today just 4% of
Vietnam’s businesses are classified as medium-or large in size.15 As a
result, foreign and larger state-owned enterprises are typically prioritized
for local sourcing.
Samsung’s
investment of $12
billion in Vietnam is
expected to grow
to $20 billion by
2020.
Reuters
IMF
www.completeMAD.com 7
Growing Workforce, Growing Consumers
Vietnam’s growing workforce with disposable income is fuelling an
expanding consumer economy and opportunities for manufacturers to sell
locally. Vietnam’s middle class is expected to more than double from 12
million to 33 million by 2020,16 and domestic consumption is expected to
grow at 20% per year.17 Vietnam is a price-sensitive market; retailers with
price flexibility will be well positioned to grow share.
Vietnam’s workforce is young; the average age of the entire population is
29.2 years.18 66% of the population is under 40.19 Vietnam’s literacy rate
of 93.2% tracks China’s rate of 96.4%. Literacy rates for Vietnamese
youth 15-24 is even higher, at 96.9%.20
Vietnam’s middle
class will double by
2020.
Dezan Shira & Associates
www.completeMAD.com 8
Tax Rates and Incentives
2016 corporate tax rates in Vietnam are also attractive compared to
regional peers.21
Country Corporate Tax Rate
Vietnam 20%
Bangladesh 25% (publically traded companies) 35% (private)
China 25%
India 30%
Indonesia 25%
Japan 23.9%
Incentive Roundup in Vietnam
Incentive tax rates of 10% for 15 years and 20% for 10 years are being offered for certain investment projects and regions.
“A tax holiday of up to four years and a 50% tax reduction for up to nine years are available from the first profit-making year or the fourth revenue generation year, whichever comes first.” 22
Current taxpayers with new projects may also qualify for certain incentives.
Investment is also encouraged in informatics, biotechnology, new materials and automation. “Companies investing in research and development will be entitled to the highest tax incentives and may be eligible for funding from the National High-Tech Development Program,” according to the US Department of State.23
“Vietnam has 15 ‘Coastal Economic Zones’ and 28 ‘Border Economic Zones’. Manufacturers choosing these areas benefit from lower taxes as well as exemption from import duties.24
Finally, Vietnam has industrial parks in Special Economic Zones or Export
Processing Zones (EPZ). Today there are four export processing zones,
offering investors reduced export and tariff regulations.
Vietnam’s low tax
rate of 22% will
drop to 20% in
2016.
Deloitte
www.completeMAD.com 9
Challenges
A briefing would not be complete without a review of Vietnam’s
challenges, of which the top two take centre stage: 25
Financial instability
Corruption
Weak legal infrastructure
Inadequate training and education systems
Conflicting and detrimental bureaucratic decision-making
Financial Instability
“A lack of transparency and noncompliance with internationally accepted
accounting standards” are among the top issues for investors, making it
difficult to raise capital domestically.26 As a result, the Vietnamese
government continues to push forward with initiatives to address the high-
level of non-performing loans. Reforms are also underway to improve
efficiency and other structural problems in the banking sector.
As published in a 2015 World Bank report, “Banking sector reforms
continued during the first half of 2015, with a number of acquisitions of
smaller banks by major state-owned commercial banks,” said Sandeep
Mahajan, Lead Economist for the World Bank in Vietnam. “However, the
lack of an appropriate legal framework, limited capital base, and
operational capacity remain constraining factors for resolving bad debts.”27
Corruption
The Vietnamese government is well aware that corruption stands in the
way of progress and in 2008 launched the “National Strategy for
Preventing and Combating Corruption Towards 2020.”28 Enforcement
continues to be an issue due to “low pay for government officials and
inadequate systems for holding officials accountable for their actions.”29
“Banking sector
reforms continued
during the first
half of 2015.”
Sandeep Mahajan, Lead Economist for the World Bank in Vietnam
www.completeMAD.com 10
Appendix 1: FTAs Reduce Cost
Today Vietnam is well positioned with Free Trade Agreements (FTAs).
Vietnam along with Malaysia, Singapore, and Brunei -- are the only four
countries in Asia with as many approved and pending trade deals.
What this means to your business: goods flow in and out of these
countries with fewer duties (and increasingly zero duties), smoother
logistics, and less regulatory red tape.
APEC (Approved)
TPP (Pending)
RCEP (Pending)
ASEAN (Approved)
Vietnam x X x x
Malaysia x x x x
Singapore x x x x
Brunei x x x x
New Zealand x x x
Japan x x x
Australia x x x
Indonesia x x x
Thailand x x x
Philippines x x x
China x x
Korea x x
Taiwan x
Russia x
Hong Kong x
Canada x x
USA x x
Chile x x
Peru x x
Mexico x x
New Guinea x
Cambodia x x
Laos x x
Myanmar x x
India x
Source: WTO
.
www.completeMAD.com 11
Appendix 2: Industries in Vietnam
Vietnam’s economy is growing rapidly. By November 2015, Vietnam’s
exports were $140.87 billion, and imports were $144.73 billion. 30 Trade
with the USA alone is expected to grow to $57 billion by 2020.
According to Vietnam Customs, the country’s rapidly growing economy is
supported by a diverse base of industries:31
For a list of dozens of industries in specific industrial parks, visit:
http://www.vietnam.ahk.de/fileadmin/ahk_vietnam/Dokumente/Liste_Industriezonen_kombiniert.pdf
1.7 2
.57
2.5 2.8
3
2.7
8
3.6
7 4.7
7
3.9
7
7.8
3 9.9
8
2.1
3
2.8
8
2.9 3.4
8
3.5
5
4.0
3
4.6
1
4.8
5
9.3
8 11
.56
$US BILLIONS
First 6 months of 2013 First 6 months of 2014
www.completeMAD.com 12
About the Author
Having lived in, learned, and worked in Asia for nearly three decades,
Paul Stepanek is among the world’s experts on Asian business strategy.
Paul is President of Complete Manufacturing and Distribution, a company
that helps executives accelerate results with Asia initiatives. A frequent
speaker at international conferences, Paul is passionate about helping
executives around the world craft a vision, execute with agility, and drive
business performance. Paul serves as an advisor to the business
incubator Chinaccelerator. Paul enjoys the outdoors and also founded
BOHDI® ADVENTURES.
About CMD
Complete Manufacturing and Distribution (CMD) is trusted to drive
efficiencies, improve margins, and accelerate results. From ideation to
execution to operation, seasoned experts at CMD help reach goals faster
with a lasting competitive advantage. For more information, visit
www.completeMAD.com.
© April 2016, Complete Manufacturing and Distribution
All rights reserved.
www.completeMAD.com 13
End Notes
1 China60: From Fast Growth to Smart Growth: http://www.jll.com/china60/en-gb
2 July 2014 Dezan Shira & Associates China Briefing, July 2014. 3 https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership
4 “HCMC readies for opportunities and challenges,” Saigon-DPDaily, October 2015.
5 Nomura Research Institute, 2014. https://www.nri.com/
6 China Daily, January, 2016. http://www.chinadaily.com.cn/opinion/2010-12/21/content_11731226.htm
7 CNBC, October 2014. http://www.cnbc.com/2014/10/23/vietnam-property-no-mans-land-no-more.html
8 Retuers, December 2015. http://www.reuters.com/article/us-samsung-vietnam-idUSKBN0UC0XX20151229
9 Retuers, December 2015. http://www.reuters.com/article/us-samsung-vietnam-idUSKBN0UC0XX20151229
10 http://www.industrialzone.vn/default.aspx
11 The Street, January 2015. http://www.thestreet.com/story/13025186/1/vietnam-is-becoming-the-new-china-with-foreign-manufacturers.html
12 https://www.usasean.org/council-in-the-news/2015/06/18/us-firms-see-vietnam-investments-skyrocket
13 http://www.bbc.co.uk/news/business-35227626
14 2015 ASEAN Business Outlook Survey, https://www.uschamber.com/sites/default/files/asean_business_outlook_survey_2015.pdf
15 Vietnam Business Forum, February 2016
16 Dezan Shira & Associates, Vietnam Briefing, December 2014.
17 Dezan Shira & Associates, Vietnam Briefing, December 2014.
18 Index Mundi. http://www.indexmundi.com/vietnam/median_age.html
19 http://www.state.gov/documents/organization/242005.pdf
20 UNESCO. Adult literacy rate, China. UIS Data Centre. August 2015. 19 November 2015.
21 http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-corporate-tax-
rates.pdf 22 Business Development Group Vietnam http://bdg-vietnam.com/en/about/news/details/items/vietnam-has-a-variety-of-industrial-parks-on-offer/
23 http://www.state.gov/documents/organization/242005.pdf
24 Business Development Group Vietnam http://bdg-vietnam.com/en/about/news/details/items/vietnam-has-a-variety-of-industrial-parks-on-offer/
25 US Department of State, 2015: http://www.state.gov/documents/organization/242005.pdf
26 http://www.state.gov/documents/organization/242005.pdf
27 http://www.worldbank.org/en/news/press-release/2015/07/20/vietnams-growth-strengthens-despite-mixed-progress-on-structural-reforms
28 http://www.ngocentre.org.vn/webfm_send/20
29 http://www.state.gov/documents/organization/242005.pdf
30 Vietnam Breaking News, November 2015. http://www.vietnambreakingnews.com/2015/11/trade-deficit-hits-us3-86-billion/
31 http://atlas.media.mit.edu/en/profile/hs92/1201/