Business leaders internationalizing their operations must first examine where to locate new production facilities. China, the traditional hub for Asia-bound investment, is quickly shifting from a low-cost hub for manufacturing toward a high-end production destination with a thriving middle class.
Amid this shift, Vietnam has become the clear standout in the Association of Southeast Asian Nations (ASEAN). Between 2010 and 2016, the economy nearly doubled as more than US$86.7 billion was added to gross domestic product.
Foreign investors, however, will find that success in Vietnam is much more nuanced than growth figures let on. Foreign investment can quickly become a complicated process without proper market research and due diligence. Many investors will find that the selection of an optimal location in Vietnam is among the most important and time-consuming considerations, and a prerequisite to the implementation of financially sound operations.
To date, Vietnam has established four Key Economic Regions (KER) throughout the country. The following gives a brief overview of three of them, the advantages that each region provides and some of the constraints that investors may face when selecting this location for investment.
Vietnam’s Northern KER covers the provinces of Hanoi, Hai Phong and Quang Ninh, Hung Yen, Hai Duong, Bac Ninh and Vinh Phuc. Together these provinces account for roughly 16.2 percent of Vietnam’s total population and 4.7 of its land mass.
Vietnam’s Northern KER is best positioned as a hub for China-plus-one manufacturing — a process whereby existing manufacturing in China is supplemented by one or more low cost jurisdictions such as Vietnam. Many companies choose to invest in Northern Vietnam to take advantage of lower labor costs compared to China, while ensuring that facilities retain close proximity to Chinese supply chains.
As a direct result of their proximity to China, Northern Vietnamese cities such as Hanoi and Hai Phong have attracted major investment from the likes of Chevron, and Bridgestone — companies with existing operations in China. The influx of investments in heavy manufacturing and petrochemicals has also concentrated talent and infrastructure suited to heavy manufacturing within the north of the country.
Production in Vietnam’s Northern KER, while beneficial for specific industries, is primarily focused on heavy manufacturing set up as part of China-plus-one expansion. Investors in heavy manufacturing find the concentration of infrastructure and talent works to their advantage; investors in emergent sectors such as IT, on the other hand, may not realize benefits from these infrastructure networks, which causes infrastructure gaps.
Vietnam’s Central KER covers the cities Da Nang, Thua Thien-Hue, Quang Nam, Quang, and Binh Dinh. As of the latest census data taken on a regional level, the region accounted for roughly 7 percent of the national population.
The Central KER excels by providing investors with an investment environment with comparatively less competition than more explored investment hubs in the north and south of the country. In recent years, the region’s largest city of Da Nang has emerged as a hub for seafood, food processing, and manufacturing.
In addition to production, Da Nang in particular benefits from a greater degree of urban planning and development than many cities in Vietnam. Investors such as IBM, GE, and Cisco have become actively involved in the upgrading the cities’ telecommunications networks, and showcase the profitability of working with governmental authorities through public-private partnerships.
While enjoying the benefits of better organizational structure than other regions throughout the country, Da Nang is constrained by its population. The scalability of retail is a primary concern in this regard. While Da Nang and other cities within Vietnam’s central economic reg ion are likely to provide ripe opportunities for investors, the central KER is unlikely to provide the avenues to establish lasting brand identity.
Encompassing the provinces of Binh Duong, Binh Phuc, Long An, Ho Chi Minh City, Tay Ninh, Dong Nai, Vietnam’s Southern KER has attracted the most FDI projects to date in 2017, with 793 projected listed as of August 2017.
Vietnam’s Southern KER is economically diversified. As a result, businesses from more niche sectors are likely to find that the South provides a more suitable environment for investment. This is particularly true for Small and Medium Sized Enterprises (SME). SMEs are likely to benefit from a greater degree of balance between support for small and large-scale investment. In recent years, Ho Chi Minh City in particular has become a hub for startups and tech entrepreneurs for this exact reason.
Consumption is another major advantage for the Southern region. Investors seeking to establish brand identity with Vietnamese consumers are sure to find opportunities in the South, home to Ho Chi Minh City, the country’s largest metro area. For this reason, Ho Chi Minh City is the preferred destination for companies trialing food and beverage products, pharmaceuticals, and luxury goods.
Vietnam’s Southern KER lacks the proximity to China found in the north Vietnam. As a result, it is more time consuming for investors exploring China-plus-one expansion strategies to ship components between factories in China and assembly facilities in or around Ho Chi Minh City. Investors with time-sensitive production chains would be best served by considering locations in the North of the country.