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Vietnam Cranks Up Electronics Production Rivalry With China

Vietnam, with a population the size of Germany’s but wages lower than China’s, enters 2011 with what appears to be an aggressive plan to draw electronics firms from elsewhere in Asia. The Journal of Commerce, the shipping industry’s paper of record, is reporting that Vietnam is expected to increase its electronics shipments to the US this year by more than 40 percent over 2009.

This is partly because {complink 2657|Intel Corp.} is opening a huge plant near Ho Chi Minh City in early 2011.

This represents a sea change in how US electronics manufacturers source manufacturing and suggests a big change in volume. The trend has been visible for the past year but appears to be accelerating. Vietnam Business, a Vietnamese English-language commercial paper, took note of the electronics trend as far back as last June when it said: “The shipping and logistics industry magazine takes particular note of a 41 percent jump in Vietnam’s electronics exports in the first four months of 2010 and the pending start-up of Intel’s huge HCM City plant.”

The paper quotes an expert as saying that “we are seeing a very fast transformation of Vietnam’s light industrial base. The big shift in the last two years is the rise of electronics.”

In the past two weeks, the city government in Ho Chi Minh City approved construction of the Southeast Asian nation’s first locally owned (which is to say government-owned) microchip processing plant. The facility is expected to cost $200 million, according to VietnamNet, a local news portal. It will produce chips in the 130 to 250 nanometer range, said the report.

Vietnam already exported $1.3 billion in chips last year, via foreign-owned manufacturers. That’s impressive, but it shows how far the smaller nation would have to go to surpass Chinese production: A single Intel plant that recently opened in China’s Liaonong province cost double that — $2.5 billion — just to build the factory. And it will produce the more advanced 65nm chips, suitable for laptops and smart devices. Vietnam’s plant isn’t expected to come online for another two to four years, and it will produce chips appropriate for less advanced applications, like household appliances.

The shift to Vietnam has received attention after last summer’s scandals at {complink 2125|Foxconn Electronics Inc.}, an EMS giant with a large China presence, which went reeling after at least 11 employees committed suicide, several at the company’s Shenzhen facility. Foxconn, which makes the iPhone for {complink 379|Apple Inc.} among other products, doubled salaries after the news broke.

Less than half a year later, Foxconn appears to be unable to handle the massive wage increase and is looking for ways to cut expenses: Its move into Vietnam represents a huge savings in labor costs. Among those following the story, Boston Consulting’s Joe Manget and Pierre Mercier, writing in Oxtones , an Asian emerging markets newsletter, argued that wages had leapt between a fifth and a third in at least 20 Chinese provinces post-Foxconn.

“With living standards rising across China,” the analysts wrote in December, “fewer of today's rural youth will want to go to coastal regions to toil for 60 hours a week on an assembly line and live in a cramped dormitory.” They cautioned that in Vietnam, where labor is about 30 percent cheaper than in China, workers will eventually demand higher wages. But that isn’t happening yet.

It could soon, though, owing to what appears to be Vietnam’s greatest issue: labor shortages. Vietnam's own labor statistics show its fast-growing southern region is already 30,000 workers short of capacity in the electronics sector. Foxconn's post-scandal move from China found the country able to staff only 60 percent of the assembly line jobs it needs — 3,000 out of 5,000 — after arriving in Vietnam. Japan’s {complink 934|Canon Inc.}, the camera and copier manufacturer, moved to Thailand rather than face a hunt for trained labor in Vietnam, according to a report in Vietnam Economy News.

A former Canon worker who talked for that report, Nguyen Thu Thuy, said she was making more after moving back to fieldwork. “I could hardly save any money during working at FIEs [foreign-invested enterprises]. Sometimes, I had to borrow money from my friends for sudden expenses.” Now, doing farm work in her hometown in Phu Tho province, Thuy can earn the same amount each month but does not have to pay for housing.

If farming rice in the provinces is a better deal than making cameras in Hanoi, Vietnam isn’t going to be a better deal than China for long either.

6 comments on “Vietnam Cranks Up Electronics Production Rivalry With China

  1. mfbertozzi
    January 6, 2011

     

    Fascinating article as usual from you Marc.
    Reading between the lines, it gives light to one of the key topics that Govs all together have to share and discuss, in my view. As reported within the article, cranking up is especially because of cheapest labor's costs and in parallel cheapest way to live, there. What will happen once Vietnam society is full integrated with economic system from West (i.e. how much for a drink bottle there and same drink in West?) It's a point quite similar to EU is facing now. Several countries in Eastern Region are trying to postpone Euro adoption, just for that motivation.

  2. Marc Herman
    January 7, 2011

    Thanks for the kind words. It seems like Vietnam is indeed an unusual case in a lot of ways, not only because of state-run industries, but because its labor costs result from such a different set of forces than those of the surrounding countries.

  3. t.alex
    January 8, 2011

    I think the Vietnam governemnt can do better by building more infrastructure and cutting on red-tape. Neighbouring countries (Thailand, Malaysia, Singapore..) seem to be better in terms of these.

  4. Anna Young
    January 9, 2011

    Quite interesting article Marc, however my question is for how long will Western companies continue to seek cheap labour in Asia without the realisation that their investment is likely to be short term.  

  5. Anand
    January 16, 2011

    Nice article Marc,

      This article shows the hidden truth behind the reality. Interesting to know that farming is profitable than working in MNC.  This article cleary shows there is no win-win situation here. Multinational companies are getting profit at the cost of exploited labourers.

  6. hwong
    January 22, 2011

    Anna – Unfortunately that's how it works. All companies want to lower cost  and improve profits quarter after quarter. And the only way to do that is to go to cheaper labor countries and produce there. Even after the logistics and transportation fees, it is still much better deal and will earn the companies more profits. So long as there will be shareholders for these public companies there will be plans to invest offshore. A better question is, why are shareholders and executives so greedy to expect so much. Why can't we hire our own people to do the work so people in the states can afford a home and living.

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