Ho Chi Minh City, Vietnam – In industrial parks set among the rolling hills and tea fields of northern Vietnam, legions of factory workers are busy making products for leading tech giants such as Apple, Samsung, LG Electronics and Microsoft.
Already hundreds of thousands strong, their ranks are swelling fast.
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Frustrated with China’s “zero-COVID” lockdowns halting production at a moment’s notice, manufacturers are seeking alternatives to the world’s biggest economy and No 1 manufacturing hub. Vietnam, with its cheap labour, geographic proximity to China and stable political environment, is a key beneficiary.
“For a lot of these companies, they withstood the trade war, they withstood rising labour costs in China, and then they withstood the breakdown of supply chains during COVID… [China’s] zero-COVID policy I think now is the straw that breaks 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 that multinationals are looking to diversify out 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 most important suppliers, are currently in talks to make Apple Watches and Macbooks in Vietnam for the first time. To support its Vietnam expansion, Taiwan-based Foxconn has announced plans to invest $300m in a new 50.5-hectare factory in Bac Giang, a northern province located about 50km (31 miles) from Hanoi.
Production of other Apple products in Vietnam is also expected to increase – 65 percent of AirPods, the firm’s signature wireless earphones, will be made there by 2025, according to an analysis by JP Morgan last month.
Google is set to begin manufacturing its Pixel smartphones in Vietnam from 2023, while Samsung plans to start making 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 lockdowns are so unpredictable and so frequent… Many factories are moving to Vietnam.”
Tan said that, with the right policies, Vietnam could become the “next powerhouse” in Asia for manufacturing.
“But it is a question of how fast Vietnam can pick up all these kinds of manufacturing from China and build up their own capabilities,” he said.
Vietnam was one of the poorest countries in the world before emerging as a tech manufacturing hub 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 shifted away from “zero-COVID” to living with the virus following the mass rollout of vaccines. The World Bank has projected the Southeast Asian economy to grow 7.2 percent this year – up from 2.6 percent growth last year – compared with 2.8 percent growth for China.
Much of that growth can be attributed to exports, which in the first six months of 2022 reached $186bn – a more than a 17 percent increase year on year.
While China’s COVID policies have sapped investor confidence, analysts trace Vietnam’s rising status to long before the pandemic.
“Vietnam has been getting a high volume of foreign direct investment since trade tensions with China flared and China’s factory labour costs started rising rapidly nearly 10 years ago,” David Dapice, economist with the Vietnam Program at Harvard’s Kennedy School, told Al Jazeera.
Policies encouraging investment and trade
Vietnam has made strides in opening up trade and encouraging investment in recent years, joining 15 free trade agreements, including six pacts with regional partners as part of the Association of Southeast Asian Nations.
“Vietnam signed a lot of FTAs with many countries so the customs are good,” Eddie Han, a senior analyst with Isaiah Research in Taiwan, told Al Jazeera. “Getting 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 through business-friendly policy choices and political stability.
“What Vietnam has done that puts it above those two competitors is it has increased the ease of doing business very purposefully,” he said. “If you’re a foreign investor and you sign a 30-year contract with Vietnam, you can be fairly sure that that contract will still be honoured 30 years from now. You can’t honestly 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.
Intel last year invested $475m in its largest chip assembly and testing site in Ho Chi Minh City. In August, Roh Tae-Moon, CEO of the Samsung Electronics mobile division, announced that the South Korean company would invest $3.3bn into producing semiconductor components at its Thai Nguyen factory by July 2023. Synopsys, a US chip design software company, announced the same month it would shift investment and engineer training to Vietnam.
“What’s interesting for me is this increase in value-added and the technology aspect of what Vietnam exports,” Craig Martin, chairman of Ho Chi Minh City-based asset management firm Dynam Capital, told Al Jazeera.
“The more complex and stickier that revenue is in your assembly process, the stickier that foreign direct investment is,” Martin said of Samsung’s move to manufacture semiconductor components in Vietnam. “This evolution in moving up the value chain of exports is good news.”
Still, some observers are doubtful of how far Vietnam can go as a high-tech manufacturing hub. Vietnam’s workforce is just a fraction of the size of China’s and less skilled than in Asian peers such as South Korea and Japan. Corruption, despite crackdowns by authorities and improving perceptions, remains widespread and severe.
“I don’t find the labour in Vietnam has a very good skill level in doing production. They need more training,” Le Cong Dinh, a lawyer and business adviser in Ho Chi Minh City, told Al Jazeera.
“Corruption may be another problem in doing business here. Most of the international companies like Apple, they never want to pay under the table to fulfil or facilitate their production,” he added. “Southeast Asian countries or India have the same problem but the level maybe is not [the same as] Vietnam.”
Dapice said that one of Vietnam’s primary draws – cheap labour – can only last so long. As the economy grows, wages are inevitably going to rise, too.
“I expect these longer-term trends will continue until Vietnam runs out of workers,” Dapice said of the manufacturing boom. “[This] could be in a few years when those in agriculture no longer want to move, even if their incomes are lower.”