needs of manufacturers in Vietnam, including 327,000 in Dong
Nai, 120,000 in Ho Chi Minh City, 95,000 in Hai Duong and
68,000 in Binh Duong. Unsurprisingly, such labor competition in
those locations has allowed the Government to raise dollar-term
minimum wages there 56% since 2008.
In addition to labor issues, Vietnam’s concentrated FDI glut
has allowed local authorities to become more selective about the
projects which qualify for investment incentives. Garment and
food processing investments that were once welcomed with long
tax holidays have recently been shunned in favor of higher value-added electronics and R&D.
Opportunity Lies Further Afield
I'm not saying there aren’t greener paddies. Just beyond the KERs
lies considerable opportunity for labor intensive industries. Outside
of the KERs, 63 percent of the labor force is employed in agriculture. Vietnam actually exports manpower to other Asian countries,
including 63,000 to South Korea. Abundant labor does exist. It’s
just a matter of finding it.
Take for example the Mekong River Delta. Once a quiet backwater, tri-annual harvests and high crop yields have made the
region the most densely populated rural area in the world. The
Delta’s main thoroughfares beep and buzz with Honda Waves and
container trucks. In fact, from the shop-lined roads, Can Tho is
hardly distinguishable from the outer districts of Ho Chi Minh
City. The Red River Delta and certain provinces in central Vietnam
also have population densities well above the country average, key
in supporting labor intensive industries.
Labor costs drop sharply just beyond main urban areas.
Minimum wages in Vietnam are implemented at the sub-provin-cial level and categorized into four Regions: Region I includes
districts of Vietnam’s three largest cities and the most expensive
districts of the SKER; Region II covers the majority of the KERs
and urban districts of other provinces; Regions III and IV cover the
less developed areas of the country. While the monthly minimum
wage in Region I has reached VND 2,000,000 (US$ 96) in 2011,
Region IV lags behind at VND 1,400,000 (US$ 67).
Foreign investment in low value-added industries has been
steered away from the areas bordering Hanoi and Ho Chi Minh
City, but the Ministry of Planning and Investment offers strong
incentives to commit to poorer areas. Investors can expect corporate income tax holidays of up to four years, a 5 percent rate
for the following nine years, and a 10 percent rate for two more
years. In KER industrial parks that would consider such an investment, companies may be subject to the standard rate of 25 percent.
Local authorities in rural areas are also more willing to offer non-monetary incentives including support for recruiting, training and
certain infrastructure projects. Incentives depend on a company’s
ability to negotiate with the local government, a much easier task
in less developed provinces where a foreign company may bring
wealth, infrastructure and employment in tow.
Bridging the Gap
The availability of lower-cost labor and more generous fiscal
incentives appear at odds with investors’ historical reluctance to
base manufacturing in the outlying provinces.
For many years the missing link was infrastructure. Industrial
parks radiated out from the main cities. Crumbling roads and rusty
river ferries made inland transportation slow and costly. Blackouts
and telecom outages kept the provinces in a state of sleepy isolation.
No One Size Fits All Solution
There is no uniformly optimal location for manufacturers in
Vietnam. Different regions—and the provinces within them—may
prove the most competitive for different industries.
The Red River Delta lends itself to electronics assembly, as
high-tech components can be trucked across the border from suppliers in southern China. Coffee and cashew growing in central
Vietnam makes the Central Highlands region attractive for food
processing. With the lowest labor costs in Vietnam, garment and
footwear manufacturers are increasingly choosing the Mekong
Delta. Any high tech R&D must be conducted within recruiting distance of the universities of Ho Chi Minh City, Hanoi and
Vietnam is comprised of six distinct regions, 63 provinces and
690 districts within them. Finding the optimal location within the
country can become a dizzying endeavor. Yet, one basic principle
should guide the search: look beyond the twin cities and their key
economic regions to find the most competitive long-term production base.