Vietnam: The Asian Alternative To China

Vietnam attracted more than $10.2 billion in registered capital to carry out foreign investment projects in 2006.

Vietnam has quickly become a leading recipient of foreign investment by U.S. companies. As a result of favorable governmental policies, a well-educated workforce and concern about China's rising costs, Vietnam has experienced a significant rise in direct foreign investment. These companies view Vietnam as a real alternative for establishing manufacturing and distribution centers, primarily for export.

Recent investments include Intel's project in Ho Chi Minh City with a total investment of $1 billion. This investment is being followed by other hi-tech investments as well as prospective Intel suppliers.

Vietnam attracted more than $10.2 billion in registered capital to carry out foreign investment projects in 2006 -- nearly $8 billion went toward 800 new projects and more than $2.2 billion to 440 applications for capital expansion of existing projects.

During the last 2 years, Vietnam has yielded robust economic results and showed up strongly on investors' radars following WTO entry, hosting of the APEC meeting and the U.S. government's approval of permanent normal trade relations.

Characteristics Of The Vietnamese Market

While there are many issues foreign investors must examine, this article discusses 6 key points for manufacturers considering establishing businesses in Vietnam.

Labor Rates And Workforce

In comparison to many of its Asian neighbors, Vietnam has a relatively inexpensive labor rate. For factory operators, the average salary is $200.00/month while key managers and senior engineers are paid $1,500.00/month. Vietnam has a 48 hour work week and the government-mandated social programs are approximately 25% of the salary costs. In comparison, China has a 40 hour work week and social costs are 50-60% of the operator's salary.

The Vietnamese workforce is well-educated and hungry. The average age of an operator is 24 and a growing percentage of the workforce has a comfort zone with English as a second language due in large part to the availability of English language centers.

Tax Incentives

In terms of economic development, Vietnam is now where China was 10-12 years ago, with the noted exception that policy makers in Hanoi have learned valuable lessons from the Chinese model.

The government has implemented an aggressive program of corporate income tax incentives. This program involves up to 4 years of tax holiday following (and including) the first year of 'carried forward' profitability. Thereafter, the tax rate is 1/2 of the nominal tax rate for a period of up to 7 years, with a total application period of up to 15 years. The nominal tax rate can be 10%, 15%, or 20% -- depending on the industry sector, investment classification and location. The standard tax rate is 28%.

When a company is selecting the site for their investment, the various business parks should be visited and tax incentives of each discussed, as well as the criteria for obtaining preferential tax treatment. There are also duty free programs for the importation of capital goods (new and refurbished).

"The Vietnamese government's tax incentives are among the best in Asia and companies recognize the financial impact these incentives will have to their bottom line revenue", says Mr. Charlie Blocker, managing director, Gannon Pacific Group.

Infrastructure

Vietnam's infrastructure is developing rapidly to meet this new influx of foreign direct investment. While behind China, the Vietnamese government is committed to developing infrastructural balance, especially electricity and water supply, seaport services and telecom. Bilateral lenders and grants continue to be plentiful.

In the last 2 years, Vietnam has invested some 10% of GDP into its infrastructure. By 2012, Vietnam will have completed a major logistical milestone via deep water ports and surface transport -- this development will give Vietnam a huge competitive advantage and allow them to further support investors supply chain initiatives and exports to ASEAN, China and North America.

Intellectual Property And Legal Infrastructure

In addition to meeting IP and legal requirements for WTO admission, the Vietnamese government has taken steps to protect IP and enacted laws providing specific protection for investors. The judicial system of laws affecting foreign investment has continued to see improvement, creating a more transparent and open legal framework for investment activities.

Last year, the government issued decrees to guide the implementation of the Investment Law and the Procurement Law. The National Assembly also approved new laws to make the legal framework more synchronic to investors: the Securities Law, the Technology Transfer Law, the Intellectual Property Law, and an amended Labor Code, which has new stipulations on strike issues.

Availability Of Existing Manufacturing Facilities

Vietnam has developed a relatively large number of Business Parks. The lease rates for land are generally less expensive than China, averaging $20-25 per square meter for a 50 year lease. Lease rates in existing, more established parks are more expensive and are approximately $40 per square meter.

Statistics from the Industrial Zone (IZ) and Export-Processing Zone (EPZ) Management Department of the Ministry of Planning and Investment show that in 2006, $5.68 billion went to IZs and EPZs. This investment was for new projects and capital increases in present projects and was nearly twice the inflow in 2005.

Ba Ria-Vung Tau, Binh Duong, Dong Nai and Ho Chi Minh City were most attractive to investors with 213 projects and total registered capital of nearly $2.58 billion -- approximately 60% of the total FDI in IZs and EPZs.

One of our clients, a U.S. metal fabricator, wanted to establish a manufacturing facility near Ho Chi Minh City in order to take advantage of the seaport and ease of customs. Of the approximately 55 Business Parks located in the area, we narrowed the list to 3 qualified sites which met the client's needs. These parks were competitive in their services and are a good place for companies establishing business entities.

Vietnam offers investors great economic potential and is a leading alternative for companies wanting to diversify their Asian investments. With an inexpensive labor force, exceptional tax incentives and a growing infrastructure, Vietnam will continue to offer investment opportunities for U.S. companies.

East West Associates is headquartered in Charlotte, NC with offices in Chicago and Shanghai, PRC. EWA's mission is to assist manufacturers in establishing operations in Asia, including Contract Manufacturing, Joint Venture and Wholly-Owned. EWA Principals and Consultants have a combined 250 years of successful experience leading manufacturing operations for Fortune 100 companies, with over 50 years of direct experience in establishing and managing manufacturing facilities in Asia. www.eastwestassoc.com

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