French cosmetics maker L’Oreal sees potential in investing in Vietnam given the country’s GDP growth over recent years and its own business performance and growth in consumer numbers. “The beauty market in Vietnam is growing strongly,” Mr Jochen Zaumseil, Managing Director Asia Pacific with L’Oreal, told VET during his two-day trip to the country in mid-October to meet with local authorities about business opportunities. “We believe in Vietnam’s market and are considering building a factory here.”

L’Oreal is just one of many foreign companies that consider Vietnam an especially attractive destination for a manufacturing base. Panasonic Vietnam also announced its long-term commitment to Vietnam recently, building a new electronic components plant and expanding its refrigerator assembly line at the Thang Long Industrial Park in Hanoi, and opening a new washing machine and home appliances research and development centre in Hung Yen next year. 

“With positive growth, political stability, and an increasingly capable and fast-learning workforce, Vietnam has potential and is a key focus in Panasonic’s worldwide strategy,” said Mr Shinichi Wakita, General Director of Panasonic Vietnam. Panasonic will invest an additional $84 million over a couple of years in Vietnam, bringing their total investment in the country to $224 million. 

In March Nokia also announced initial investment of about $280 million to build a new manufacturing base at the Vietnam Singapore Industrial Park (VSIP) in northern Bac Ninh province. Government representatives and Nokia signed a memorandum of understanding marking the beginning of a preparatory phase ahead of a targeted opening of the new plant in 2012. The site will further expand Nokia’s manufacturing network, which currently consists of ten major facilities in nine countries. 

Its position in growth economies is strong, largely thanks to its powerful range of feature phones. The new manufacturing site is being established to meet the growth in demand for such phones, as well as to help Nokia deliver a contemporary mobile experience to the next billion consumers all over the world. 

“I am extremely excited about this opportunity and about the support and commitment that Vietnam has offered to Nokia,” said Senior Vice President Juha Putkiranta. Vietnam has emerged as a country that has both the location and developing infrastructure that makes it a good choice for Nokia. It first began selling its products in Vietnam in 1996. 

Samsung Electronics Vietnam (SEV), meanwhile, will continue to pour capital into building a hi-tech complex called the “Samsung Complex”, which may cost as much as $1.5 billion during 2015-2020. SEV will put into operation the second mobile phone production line in September in an attempt to bring its total production capacity in Vietnam to 100 million products annually in 2012.

Vietnam has seen several other major commitments being made this year, such the US’s First Solar Inc investing $300 million to build a plant at the Dong Nam Industrial Park in Ho Chi Minh City to meet strong demand for its thin-film photovoltaic modules, and Japan’s Kyocera Mita outlaying an initial $187.5 million to build its biggest print and laser plant, at VSIP Hai Phong.

According to Mr Greg Ohan, National Head of Industrial & Logistics Services at CBRE (Vietnam), there are some general drivers behind the trend of foreign manufacturers considering Vietnam as the Number 1 location in Asia for a factory: its labour market, market potential and political stability.

Most important are workforce, construction costs, support services and incentives. “In terms of workforce, Vietnam has a rapidly urbanising and young workforce that major manufacturers find attractive, of which 60 per cent are under 30 years of age compared to competing markets such as China, which faces an aging population,” he said.

“Attractive labour costs are also a convincing factor for most. Labour costs are 35 - 45 per cent cheaper than second- and third-tier Chinese cites and 20 - 35 per cent cheaper than in Thailand. In terms of construction costs, if we compare regional costs to Ho Chi Minh City, they are almost 35 - 40 per cent cheaper than in Beijing and Shanghai and 30 - 35 per cent cheaper than in Guagzhou [a second-tier Chinese city].” 

In the meantime, regional instability and rising costs of doing business in neighbouring markets is fuelling what Vietnam sees as an industrial renaissance. Key contributors to its attractiveness as a regional manufacturing hub are driven by continuing instability in Thailand and rising labour costs.

The recent natural disaster in Japan has also created opportunities for greater investment in Vietnam as Japanese manufacturers seek stable and cost-effective alternatives. As at September 20, $8.23 billion had been pledged in 675 new projects in Vietnam this year. 

But what CBRE sees as the backbone of Vietnam’s industrial rise is the performance and rapid growth of China. “Rising labour costs in China are diluting the competitiveness of Chinese factories,” Mr Ohan said. “An appreciating currency and tightened labour regulations are putting pressure on manufacturers in China and forcing them to consider relocating. As inland China presents clear challenges such as access to skilled workers, seaports, international airports and infrastructure connectivity, Vietnam is emerging as a realistic option on paper and in effect.” 

According to CBRE, key sectors to watch for growth in 2011 and the years to come include the auto industry, Japanese investment, support industries, logistics, and high tech manufacturing. In terms of the auto industry there is strong interest from the auto/motorcycle industry, fuelled by proposed new incentives and foreign and domestic demand. Hyundai will increase production from 400,000 units to 600,000 for export by 2020, while Yamaha, Piaggio and Honda are also in expansion mode.

Vietnam’s effort to attract foreign direct investment in the high-tech sector took off when Intel opened its $1 billion chip assembly and testing plant last year. Since then there have been a number of other high-tech companies entering the market. Major multi-million and even billion-dollar investments this year in the high-tech sector have put the spotlight on the dawn of what could be a new era for the industrial sector in Vietnam.

Japan’s “post disaster” recovery has also created opportunities for Vietnam, as a safe, cost effective and stable production base. The key to continuing to attract Japanese investment lies in creating support industries and improving infrastructure. 

With increasing numbers of foreign manufacturers establishing production bases, support industries/suppliers must be created to ensure operational efficiency, as well as a rise in support services and government pledges to provide incentives in the sector for locally-made and supplied components/parts. These are essential for the successful operation of any major manufacturer. 

While Vietnam has its challenges as regards workforce, infrastructure, provincial competition and overly complex incentives and taxation procedures, for major multinationals with a long-term view the country is proving to be a viable regional alternative.