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Global manufacturers are flocking to Vietnam. Is it ready?

Three years ago, Jack O’Sullivan went to Vietnam to build high quality electric bikes, but factory by factory he said he couldn’t make the parts he needed. So he went for an unorthodox way of bringing them up to date.

The Irishman started sending employees from Modmo, the bicycle exporter he founded in 2017, to work with local suppliers. Today Modmo sources around 50 percent of its components from Vietnam. A number of claims from Mr. O’Sullivan will go up to replace more expensive parts from China and Taiwan.

“We’re still working on it,” he said.

Vietnam too.

The communist country is seeing an influx of foreign manufacturers, a trend that began after 2007 when low-end apparel and shoe factories began to leave China and its soaring costs. Now Vietnam hopes to become a major hub for high-tech manufacturing as U.S. pressure on China forces a realignment of the supply chain that supports the computer, smartphone and telecommunications industries. Samsung alone already accounts for a quarter of Vietnamese exports, while Intel selected the country as the world’s largest chip assembly plant.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, business, economics and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section extensively delves into 300 of the largest and fastest growing public companies from 11 economies outside of Japan.

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For global manufacturers of all kinds, the over-reliance on China has become more precarious as a result of the US trade war, pandemic supply chain disruptions, and higher costs. Her move next door helped fuel growth in Vietnam’s manufacturing sector, which rose 21 percent on an annualized basis at its peak in February before the Covid lockdown began.

With investments this year from companies like South Korean electronics giant LG and German tape maker Tesa, Vietnam is well on its way to becoming the world’s fastest growing economy in 2020.

However, this shift has put additional strain on the workforce, suppliers and the land available for industry. Vietnam is hoping to lead a wave of investment into higher growth, but it risks being overwhelmed.

The effects of all new procurement demand are evident in the country of 100 million people, from the stuffed shipping containers to the roaring factories. According to real estate company Savills, occupancy in most industrial areas has risen sharply in the past two years and now averages 74 percent nationwide. Utilization is even higher near cities, including 99 percent in Binh Duong and 94 percent in Dong Nai, both provinces on the outskirts of Ho Chi Minh City.

Manufacturing eagles are flocking to Vietnam, so prepare accordingly, said Nguyen Thanh Binh, director of business information at the Vietnam Chamber of Commerce and Industry.

“Build the nest to welcome the eagles,” he said to Nikkei, using an increasingly popular language.

A large part of the new investments will be in the technology sector, for example in the manufacture of headphones for Apple and liquid crystal displays for Sharp. This is in line with Hanoi’s goal of improving the value chain and moving to a more highly skilled workforce. However, there remains a lack of expertise to develop more advanced products like Modmos motorcycles, which are equipped with electric motors, touchscreens, and bluetooth and sell for $ 2,400.

According to Navigos Group, the owner of Vietnam’s largest construction site, 71 percent of tech companies said the lack of IT talent was their biggest challenge. This far exceeded the salary costs, legal issues, and other challenges identified in the survey published in April. Similarly, employers report difficulty filling middle manager roles in a variety of industries.

The availability of “skilled workers in Vietnam is clearly not enough to meet demand,” said Thinh Nguyen, managing director of software consultancy Zien Solutions.

Another challenge is the lack of local suppliers, which forces Vietnam to source materials from China, its largest import source. In a supply chain localization study, Vietnam adds an average of 55 percent to the value of a product before it is exported. This is the lowest proportion among eight Asian countries that Harvard University assessed in March.

Suppliers are working to meet this demand with overseas partnerships, training programs, and new factories, which further add to property costs.

However, VinaCapital’s chief economist Michael Kokalari rejects the notion that the factories and warehouses in Vietnam could be near full.

“Maybe it’s full if you’re that cost-conscious,” he said in an interview. “But if you make electronics and other higher value products, we’re not full.”

VinaCapital calculated in a 2019 report that Vietnam has enough developed land for foreign companies to double the size of their investments by that time. The 20 percent share of the manufacturing sector in the Vietnamese economy is still well below the 30 percent share of the Asian “tiger economies,” which leaves plenty of room for growth, the report said.

In order to keep pace, further industrial parks are in the works in Vietnam, of which at least 17 are due to open in the next few years, according to Savills. The training of employees and suppliers also has to keep pace, say companies. Mr O’Sullivan said he hoped to source more bicycle components from Vietnam as domestic expertise increases.

“It’s lower than where it should be,” he said of the local capacity, “because it has so much potential.”

A version of this article was first published by Nikkei Asia on November 11, 2020. © 2020 Nikkei Inc. All rights reserved

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