LG Electronics said this year it would cut smartphone production at home in South Korea and move it to Vietnam, according to Korean news reports. Meanwhile in Vietnam, the domestic conglomerate Vingroup is hawking its four Vsmart phone models to a growing domestic middle class, sending what the Vietnam Investment Review calls “ripples” through the market.
These vignettes suggest that Vietnam is no longer just a world-renowned hot spot for making shoes, garments and textiles for export. The Southeast Asian country that has attracted investment in export manufacturing because of cheap labor is shifting toward higher-value goods, a boon to the economy and a challenge to China’s status as the go-to country for making items such as consumer electronics.
“The structure of exports has already seen a big transformation in terms of value adding,” market research firm IHS Markit’s Asia-Pacific chief economist Rajiv Biswas said, comparing 2010 to 2019.
Investment in factories that make phones, computers and accessories such as earphones is leading Vietnam’s climb up the value chain, analysts say. Exports of phones, the top grossing export type, totaled $45.1 billion in 2017 and the category of computers plus other electronic goods took third place after textiles at $25.9 billion.
Electronics overall make up Vietnam’s top export category, business consultancy Dezan Shira & Associates says.
“There has already been a shift toward higher value adding in electronics,” Biswas said.
How Vietnam is adding value
When Vietnam joined the World Trade Organization in 2007, textiles, garments and footwear commanded the largest share of exports, said Maxfield Brown, senior associate with Dezan Shira & Associates in Ho Chi Minh City. But electronics began to take off around that time, he said.
Labor in Vietnam costs 50% of what employers pay in China, the consultancy says. That edge has helped Vietnam turn itself from a war-torn country in the 1970s to one of Asia’s fastest-growing economies today.
Universities and company training programs have raised the skills of Vietnamese workers to where they can make parts for electronics as well assemble finished goods, analysts in the country say. China traditionally leads in workforce education.
Now Vietnam is a “clear leader as an alternative” in electronics, Biswas said, especially as China loses competitiveness to the Sino-U.S. trade war.
Vietnam’s growing middle class helps it move up the value chain, too, he said. If per capita GDP, which was $2,587 last year, eventually reaches $5,000, automotive purchases will rise and attract automotive factories, Biswas said. Their cars could sell to some of Vietnam’s 95.5 million people as well as overseas. Investors that make automotive peripherals such as tires and leather seats would come in behind the manufacturers of vehicles, Biswas said.
One third of Vietnamese will be middle class or higher by next year, the Boston Consulting Group forecasts.
Who’s who in electronics
For now, analysts agree, electronics is the top source of higher-value exports in Vietnam.
“What I’m starting to see is a specialization between different countries in particular industries, and I think that Vietnam has now become pretty widely recognized as an electronics production hub, and I would imagine that in the coming years it will continue to double down on that industry so that local companies can participate more and more,” Brown said.
LG plans to move smartphone production to the Vietnamese port city of Haiphong after losing money for 15 straight quarters, Korean news outlet Hankyoreh said in April. LG declined comment for this report.
The electronics giant would follow Korean peer Samsung Electronics, which has allocated more than $17 billion to its Vietnam factories and R&D. Samsung is Vietnam’s largest exporter. It joins microprocessor developer Intel as one of the first major foreign tech firms to locate in Vietnam.
Vingroup started selling Vsmart phones in December and has earned a name for specs that are “quite good” compared to other low-end devices, said Thanh Vo, senior market analyst with the tech research firm IDC.
The tech sector still has room to grow into higher-end gear, Biswas said.
Government refocus
The Vietnamese government encourages foreign factory investment by working on its legal framework, improving infrastructure and developing a “quality” workforce, the state Foreign Investment Agency says on its website. In 2011 Vietnam began encouraging development of industries that support the tech sector.
But Vietnam is holding back incentives to lower-end manufacturers now, a sign that it prefers higher-value ones, said Frederick Burke, partner with the law firm Baker McKenzie in Ho Chi Minh City.
“They see the world beating a path to their door and they don’t have to give away the barn,” Burke said. “I think they’re not giving away a lot of incentives for lower-end manufacturing and that’s how they’re trying to boost in the higher-end area.”
