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/