More foreign manufacturers are choosing ASEAN countries over China as investment destinations due to rising wages and geopolitical tensions.
Microsoft’s Nokia unit is expanding manufacturing in Vietnam, as it scales back work in China.
The tech giant plans to eliminate 12,500 factory and professional jobs in China next year.
“We plan to right-size our manufacturing operations to align with our new strategy and take advantage of integration opportunities," Stephen Elop, the chief of Microsoft’s device unit, wrote in an email to his employees.
"We expect to focus phone production mainly in Hanoi, while some production will continue in Beijing and Dongguan.”
Microsoft is one of many firms that plan to scale back their China operations and move major manufacturing to Vietnam to maintain profits.
Samsung, the world’s largest smartphone maker, invested $3.38 billion in Vietnam's Thai Nguyen Province, effectively transforming a poor tea-growing province into a manufacturing hub.
The growing difficulties of operating in China have coincided with the rise of Vietnam’s low-cost labor force.
Vietnam's generous tax benefits have also helped draw business south, Bloomberg quoted Lam Nguyen, Ho Chi Minh City-based country director at International Data Corp, as saying.
“They now see a lot of risk in China because they are competing with Chinese vendors that have become fierce competitors,” he said. “Vietnam is in a unique position. You have a motivated workforce and in terms of labor costs, you are cheaper than China, cheaper than Thailand.”
Gaurav Gupta, chairman of the American Chamber of Commerce in Vietnam (Amcham), said: “The transitions taking place in China - including rising labor costs and the shift toward an economic model that is less reliant on exports - are creating a window of opportunity for Vietnam to capture a greater share of global manufacturing, especially from multi-nationals that are seeking a lower cost base.”
Approximately two-thirds of Vietnam’s current exports and one-half of its industrial output come from foreign-invested factories or factories that manufacture for foreign brands. The average costs for factory labor in Vietnam is roughly one-quarter of the costs in China, he said.
Nguyen Mai, chairman of the Vietnam Association of Foreign Enterprises, said the shift to Vietnam will likely accelerate in the coming years. Political issues such as recent territorial tensions between Japan and China are diverting some Japanese investment to ASEAN countries like Vietnam.
Up to 75 percent of the 3,471 Japanese companies recently surveyed said they’re considering an expansion into Singapore, Thailand, Maylaysia, Indonesia, the Philippines and Vietnam, according to the Japan External Trade Organization (JETRO).
Only 56 percent of the survey's respondents gave the same answer in 2011.
The number of firms expressing their wish to expand investment in China fell to 57 percent last year from 68 percent two years ago, according to JETRO.
There are some caveats to this success.
While garment, shoe and cell phone manufacturers are shifting simple, labor-intensive operations from China to Vietnam, high-tech firms are not.
ANZ Banking Group Chief Executive Officer Mike Smith said more multi-national companies are looking at cheaper alternatives for their China operations.
Smith stressed that Vietnam needs to understand that it's now competing for capital with countries like Cambodia, Laos, Bangladesh, Myanmar and Philippines.
Many Japanese firms -- the biggest investors in Vietnam -- like Toyota and Mitsubishi are expanding investment in Indonesia, Myanmar, and Malaysia--but skipping Vietnam.
While Japanese investment in Vietnam has risen in recent years, those gains have proven modest compared to Thailand and Indonesia, Hirokazu Yamaoka of JETRO.
Complicated administrative procedures, corruption, weak supporting industries, and poor infrastructure are considered barriers to investors.
According to a report recently issued by auditing firm Grant Thornton Vietnam, corruption and government red tape remain the chief problems for private equity investors in Vietnam.
Corruption was identified as the most pressing obstacle in all of the firm's recent surveys.
Although a legal framework to improve the situation has been in place since the introduction of the Anti-corruption Law in 2005, the issue remains prevalent due to poor enforcement.
Complicated administrative procedures have provided cause for concern. According to the US Agency for International Development, Vietnam has made progress on reforming its tax procedures in recent years, but it still has a long way to go in order to match neighboring countries like Malaysia and Thailand.
While Vietnam demands that businesses submit value-added tax payments every month, Thailand allows businesses to make one annual payment. In Malaysia, businesses must fill out four forms to complete import procedures; Vietnam requires them to fill out eight.
Vietnam will miss opportunities to draw FDI from high-tech manufacturers moving out of China if these barriers aren't resolved, experts said.