After thirty years of economic reforms, Viet Nam is setting new standards in export led growth. Even in trade friendly East Asia, Viet Nam is embracing trade and investment openness, and the dividends are paying out big. In the next �ve years Viet Nam’s reputation as purely a low-end manufacturer will change. Since the close of the Global Financial Crisis, Viet Nam is now targeting higher-end manu-facturing by becoming a lynchpin producer of electronics. The growth in this sector is unprecedent-ed. Even faster than Viet Nam meteoric rise in textiles. In 2009, Viet Nam exported €3.5bn electronics, and by 2013 Viet Nam exported €30bn, the sector grew by 750%! The key driver of growth is companies upscaling pilot projects into anchor facilities of global supply chains. Major manufactures, ranging from Samsung to Intel to Nokia, are intensifying their presence in Viet Nam. Dou-bling down on Viet Nam’s pro-investment policy environment, ideal geographic location, and ambitious, young, hard working population.

In addition, many companies are looking to get ahead of the looming Third Wave of trade deals that will solidify Viet Nam as a global manufacturing hub. The two key deals are a Free Trade Agreement with the European Union and Viet Nam’s membership in the exclusive twelve nation Trans-Paci�c Partner-ship—the lowest income country in the negotiations. Viet Nam’s leadership is building o� what works. Knowing that to be competitive in the coming century, the country must �nd new means to attract investment, and build long-lasting partnerships with foreign inves-tors. The National Assembly rati�ed a new Investment Law in 2014, and with these new trade pacts will create the highest quality institutions to support foreign investors. Viet Nam is in the unique position of being the cost competitive, labor intensive, high quality manufactured goods producer of the 21st century. The opportunity in Viet Nam is just beginning.

Viet Nam: Lift O� ElectronicsOpportunities in the Electronics Sector

US BTA WTO GF Crisis

Growth Potential

Chances are, if you were to look at your shoes, a t-shirt, any athletic apparel, it will be have a tag that says “made in Viet Nam.” Same for most cups of co�ee, and certainly that shaker of black pepper. However, the prevalence of Viet Nam's exports can create a false impression of the country’s status. The reality is that only after the Global Financial Crisis has Viet Nam become a true player in global manufacturing. Today is the dawn of Viet Namese manufactured exports. Since 2001, Viet Nam has continued to build an open, outward looking economy focused on investment, exports and increased integration. This period kicked o� with the US BTA in 2001, which led right into Viet Nam's WTO accession in late 2006. The Global Financial Crisis (GFC) stalled this progress, but by 2009 export growth hit an incredible speed. After the �nancial crisis foreign investment intensi�ed in manufacturing—a 17% concentrat-ed increase in FDI from 2009-13 that fueled Viet Nam’s electronics exports to lift-o� from the launch pad. As global markets recovered, manufactured exports in Viet Nam accelerated at warp speed. Garments and footwear did well, but the electronics sector was the star. Coming from nowhere, Viet Nam found massive capital stock from post WTO investments. Top-end facilities operated by Samsung, Intel, LG, Cannon and others with a trained workforce and a restored overseas demand. Electronics increased by over 750% from 2009 to 2013.

In the decade ending in 2013, Viet Nam increased manufactured exports by 420% (€13bn to €83bn). Electronics exports took o� in 2010, averaging 65% growth for the next three years. The result is Viet Nam climbed from the 7th largest exporter in ASEAN to the 4th. Among electronics export-ers in ASEAN, Viet Nam leaped from 7th to 3rd behind only Malaysia and Singapore. Viet Nam is on track to export over €200bn by 2020, making the country the 2nd largest non-oil exporter in Southeast Asia.

Exporting in Viet Nam

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Geography

Workforce

Basic Education Stats

Secondary Education Enrollment (% of Pop) 75 Tertiary Education Enrollment (% of Pop) 25 Rankings out of 144 countries

Internet Access in Schools 47 Pay and Productivity 23 Cooperation in labor-employer relations 79 Flexibility of wages 60 Hiring and Firing practices 65 Women in the Workforce 23

Source: World Economic Forum 2014

Overall Heath and Primary Education 61

Primary Education (% of Pop) 98

Endowments

With a long coast and easy access to China and the ASEAN region, Viet Nam’s location and geography are hugely bene�-cial. For most parts of the country, a water port is only a few hours away, accessible by road, rail or river. The country has several natural deep water ports and is building out more to promote development (listed on the map). Several areas are attracting clusters of electronics investment, in particular the suburbs of Ha Noi, Ho Chi Minh City, and Bac Ninh.

A principle draw for foreign investment in Viet Nam is the young, energetic work-force. The post-war baby boom means the majority of the population is under 35 years old. Investment in schools during the 90's created an environment with high levels of education relative to GDP per capita. Viet Nam has a 95% literacy level and scored a 16th on an OECD study of student math scores. A country with an average annual income of US$1000 per year scored better on math education than France, the UK, and USA (PISA OECD 2012). Given Viet Nam’s low level of develop-ment, the country scores middle of the pack on most indicators on education (see table). Where the country excels are mea-sures of pay and productivity, scoring 29 out of 144 countries in the WEF annual study. Viet Nam’s “basic unskilled worker wages of $130-150 a month are around half of what they have to pay in China.” (Financial Times May 2014). How much investment can Viet Nam’s labor pool absorb? An easy answer. Current employment in the electronics sector, 250,000 workers (MoLISA). Viet Nam’s new entrants to the workforce: 1,000,000 new workers, every year.

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Cái Lân, Quảng Ninh

Lạch Huyện, Đình Vũ, Hải Phòng

Nghi Sơn, Thanh Hóa

Cửa Lò, Nghệ An

Sơn Dương, Vũng Áng, Hà Tĩnh

Tiên Sa, Sơn Trà, Liên Chiểu, Đà Nẵng

Dung Quất, Quảng Ngãi

Quy Nhơn, Bình Định

Vân Phong, Khánh Hòa

Nha Trang, Ba Ngòi, Khánh Hòa

Cái Mép, Long Sơn Bà Rịa-Vũng Tàu

Long Sơn, Đồng NaiCần Thơ

Hiệp Phước,TPHCM

Hoang SaParacel Islands

Truong SaSpratlyIslands

Deep Water Ports (World Bank VDR 2012)

Key Expressway ProjectsProject/Location Amount Duration/Status

GMS Kunming–Haiphong Transport Corridor: Noi Bai–Lao Cai Highway

$1,096 million

2008–2014 (Finished)

Ho Chi Minh–Long Thanh–Dau Giay Expressway (co-financed with JICA)

$410 mil-lion

2008–2015 (Finished)

Northern Delta Transport Infra-structure Improvement

$170 mil-lion

2008–2014 (Finished)

Saigon East–West Highway ¥55.0 bil-lion

2008–2012 (Finished)

GMS: Ben Luc–Long Thanh Ex-pressway

$636 mil-lion

2011–2017 (Under con-struction

Second Northern GMS Transport Network

$75 million 2011–2016 (Under con-struction)

InfrastructureViet Nam’s Big Infrastructure Push

Road Transportation

Power

Ports

The Global Financial Crisis caused a slump in GDP growth, from over 7% to 5%. In response the government launched a �scal stimulus, raising infrastructure investment from 9% to 11% of GDP—a higher rate of expenditure than any country in East Asia (Thanh & Pincus 2011).

According the World Bank Viet Nam is on track to have “the highest number of deep sea ports, international airports and industrial parks in the world relative to the size of the econo-my.” (VDR 2012 pg. 57). The country has 24 deep sea ports more on the way (see map on previous page).

Viet Nam made substantial progress in the last �ve years on road infrastructure with major expressway projects. In addition, the country has public transportation projects in all key cities, such as high speed bus transit in Ho Chi Minh City and Ha Noi, and light rail around the southern com-mercial hub.

Industrial and Economic ZonesViet Nam currently has 290 industrial zones and about 200 more approved to be built over the next decade. In addition, the country has 15 economic zones—essentially more developed, larger indus-trial parks for heavy industry. Many hi-tech parks are around Ho Chi Minh City with substantial investment in this sector since 2009.

Viet Nam’s power supply is a known bottleneck on growth, but the country is responding with full force. EVN, the country’s biggest power corporation, will invest $50bn in production and improved trans-mission from 2010 to 2020 and plans another $75bn from 2021 until 2030. The plans call for a “55 GW build-out between 2014 and 2030, with 29.5 GW of [additional] coal-�red generation targeted by 2020 alone.” (Financial Times 27/11/2014). Most power production is focused on coal and hydro. Gas, nuclear and renewable energy (principally wind) coming to the fore over the next decade. Ironically, perhaps the biggest problem in Viet Nam’s power grid is the easiest to �x. The sin-gle buyer model under EVN tends to deter most private investment, although several inde-pendent producers exist, due to a below cost �xed price (part of a pro-growth subsidy program). This system is under constant revision and once the system is �nalized, there will be a surge in domestic and foreign investment in the sector. It is age old case of crisis being opportunity in disguise. Thankfully, one that will soon be remedied by the stroke of a pen when the new system is rati�ed. Power supply might be a problem in Viet Nam today, but a problem only because of the country’s hyper growing demand and booming manufacturing.

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Viet Nam—21st Century Manufacturing Hub

Key Current and Pending Trade Deals

Beyond WTO: The Third Wave of Trade Deals

Each trade deal creates a major change in Viet Nam’s economy. Normali-zation with the US kicked-o� agri-culture in the 90’s. The US BTA in 2001 ignited the country’s garment and foot-wear. And the WTO acces-sion in 2007, produced a take-o� in electronics. For the most part, the accession to WTO leveled most barriers in the goods trade. However, this is not the end of the integration process. The two key deals in negotiations are the Trans Paci�c Partnership (TPP) and the Viet Nam - European Union Free Trade Agreement (FTA). Expectations from these are: Improved foreign investor’s rights Better protection of intel-lectual property Arbitration system for disputes Incentives for higher rates of localization. While previous deals Opened markets, the ’third wave’ of trade deals are about intensifying investment in Viet Nam. In the case of TPP, Viet Nam, as the least developed country in the negotiations, will be pulled by the other eleven members toward even faster growth. Furthermore, Viet Nam is intentionally layering trade deals to take advantage of commutative bene�ts. Trade deals between the Europe and Viet Nam and Viet Nam and the US (or other TPP coun-tries) equals European deals with the US. For example, a European investor in Viet Nam would have the privileges of the TPP deal when exporting to TPP countries, or the customs Union with Russia (and other CU members). It is this aggregate trade regime that will establish Viet Nam as a hub for global manufacturing.

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Opportunities in the Electronics Sector

Viet Nam’s Big Electronics

Several key projects typify Viet Nam’s electronics sector boom: Samsung has committed a total investment of $11.2bn in Viet Nam, including three plants in Bac Ninh province ($2.5bn, $123 million and $1bn in scales), two plants in Thai Nguyen ($2bn and $1.23bn), and two plants in Ho Chi Minh City ($1.4bn each). Nokia’s $300m plant in Bac Ninh province has 39 separate production lines, produces version of the entire company’s product line and will soon be taking over all the company’s production from China. (Thanh Nien 2014). LG Electronics invests $1.5 billion in its electronics complex in Hai Phong. Intel’s largest single manufactures of processors is a $1bn facility outside of Ho Chi Minh City coming online.These are just a handful of projects developed in the wake of either Viet Nam’s WTO accession or the �nancial crisis. For all of these plants, there were major complementary improvements in surrounding infrastructure, ports, and industrial zones. Policy adaptations by government, such as allowing onsite customs clearance. The leveling-up of Viet Nam’s manufacturing is not just a switch from one product to another, it is evolution. Viet Nam’s economy teleporting from pre-industrial to post-industrial modernity in the blink of an eye.

The three year hyper growth of Viet Nam’s electronics exports is wake-up call about the potential of the country’s workforce. Traditionally sidelined as the bottom-end manufacturing, capable of only simple tasks with minimal value added, Viet Nam’s workforce is proving the consensus wrong. In 2013 “exports of mobile phones jumped by 69 percent last year to $21bn” (Financial Times May 2014). Growth rates across the top �ve exports (4 digit HS6) were well above 100% that year. The two top categories of electronics exports well exceeded those �gures, hitting shockingly high numbers. Over �ve years the numbers get massive. From 2009 to 2013, mobile phone exports grew by 3742%, integrated circuits by 2633%. This is a phenomenal achievement during sluggish global demand in the wake of the global �nancial crisis.

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Investment Incentives

Critical Mass for Clustering

The electronics sector is clustering in Viet Nam. The huge projects mentioned on the opposite page are draw-ing in their suppliers. In key areas such as, Bac Ninh, Ho Chi Minh City, Thai Nguyen, Vinh Phuc, and Hai Phong, we’re seeing an increase in both project development and interest. The intensity of this change is unprecedented for Viet Nam. The balance of trade in the electronics sector reverted in 2013, going from –€2bn in 2009 to a €8bn surplus. This shift to net exporter is a sign of how well the country’s workforce has adapted to modern production and a harbinger for future development in the sector. Suppliers to the major manufacturers are clustering not only to reduce transportation costs and take advantage of the workforce, but also thanks to a pro-investment business environment. The policy regime promotes localization and rewards it with incentives. Tax breaks and preferen-tial leases carry the investment until the labor is ready. Once the workforce is trained and the cost bene�ts kick in, most investors are adding more to the project. The result is mass escalation in the scale of investment, with Samsung expanding a project in late 2014 from $2bn to $5bn. (15/11/14 Bloomberg).

Most manufacturing classi�ed in the electronics sectors quali�es for investment incentives, (detailed list available at http://www.�a.mpi.gov.vn/home/en). The following are brief descrip-tion not to be taken as legal advice. Tax incentives-Viet Nam has a at corporate income tax (CIT) of 22%, which will be reduced to 20% from 1st January 2016. Other than the standard rate, preferential rates of 20%, which will be reduced to 17% from 1st January 2016, and 10% apply to a number of projects which satisfy certain conditions such as investment in certain �elds of business and/or encouraged geographical locations. In addition to preferential rates, companies may enjoy CIT exemption between 2 to 4 years and a 50% reduction in CIT between 4 to 9 years subsequently. Capital investment and Technology Transfer-Approved investors are exempt import duties on equipment, materials, and means of transportation. In addition, income related to technol-ogy transfer can be exempt from income tax.Carrying forward losses-Foreign investors can carry forward initial investment losses for up to 5 years.Depreciation of �xed assets—Select projects are eligible to apply an accelerated deprecia-tion of �xed assets.Incentives of land use—Select projects can extend land use terms (from 50 to 70 years), receive automated renewal, payment exceptions or exemption or reductions on land use fees.

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CONTACTS

European Trade Policy and Investment Support Project (EU - MUTRAP)Room 1203, Floor 12, O�ce Building, Ha Noi Tower, 49 Hai Ba Trung street, Hoan Kiem district, Ha Noi, Viet Nam Tel: +84 4 393 78472 | Fax: +84 4 393 78476http://mutrap.org.vn/index.php/en/homeEmail: mutrap@mutrap.org.vn

Foreign Investment Agency (FIA)Ministry of Planning and Investment6B Hoang Dieu street, Ba Dinh district, Ha Noi, Viet NamTel: +84 80 48461 Fax: +84 4 3734 3769Email: �avietnam@mpi.gov.vnhttp://�a.mpi.gov.vn

(FIA) Investment Promotion Center – Central Viet Nam103 Le Sat, Da NangTel: +84 511 3797 669/689/738/699 Fax: +84 511 379 7679Email: ipcmientrung@gmail.comhttp://centralinvest.mpi.gov.vn

(FIA) Investment Promotion Center – Southern Viet Nam178 Nguyen Dinh Chieu, Ho Chi Minh City Tel: +84 8 3930 6671 | Fax: +84 8 3930 5413Email: bbt@ipcs.vnhttp://ipcs.vn/en

(FIA) Investment Promotion Center – Northern Viet Nam65 Van Mieu Street, Ha Noi.Tel: +84 4 3747 5998 | Fax: +84 4 3843 7927Email: ipcn@mpi.gov.vnhttp://ipcn.mpi.gov.vn

Much as Viet Nam’s aggressive development of its trade regime spurred the change from agriculture to textiles (BTA) to electronics (WTO) the returns from the next round of trade agreements show every indication of repeating the success. The closed negotiations on the Trans-Paci�c Partnership (TPP) and EU FTA as of writing means we don’t yet know the full details of the deal, but the key area of interest is the increased regulations on local content requirements and greater investor protection. Viet Nam’s growing but immature electronics sector is dependent on substantial imported components. Even though Viet Nam’s electronics trade line showed a positive swing from €1bn in de�cit to an €8bn surplus from 2012 to 2013, the �gure is quite low compared to total exports (€28bn) and not inclusive of all the components in the production process. The parts suppliers are where we expect to see investment opportunities over the next decades. With so many major producers shifting half or more of their production to Viet Nam, expect these feeder companies to school around the big �sh. Proven productivity, proven pro-business climate, Viet Nam is the premier destination for electronics manufacturing in the 21st century.

The Investment Case for the Viet Nam’s Electronics Sector

Note on Data: All data not indicated from the General Statistics O�ce of Viet Nam or the World Bank development Indicators. All trade data used in graphs from ITC (http://www.intracen.org/)

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