Greener Paddies
By Nick Carmichael, SIOR
Faced with rising labor and materials costs in China, manufacturers
have little choice but to explore other options for their next investment. Vietnam is often on the short-list of alternative destinations.
Since the economic reforms of the late 1980s, foreign companies
have poured US$ 34 billion of FDI into Vietnam’s manufacturing
sector, with foreign-invested output reaching nearly half of total
GDP. In the past decade, major international firms including Intel,
Canon, Samsung, Hanes Brands, Nokia and Unilever have all built
major plants in the areas surrounding Hanoi and Ho Chi Minh City.
Vietnam’s densely-settled population, low-cost labor force, and
tax holidays ensured a steady flow of FDI into the Key Economic
Regions (KERs) around Hanoi and Ho Chi Minh City. Recently,
however, manufacturers near the major urban areas have been
suffering from high turnover rates, rising input costs and waning
fiscal incentives.
Is this the end of Vietnam as a “China plus one” destination? Should foreign investors shift their gaze to the next cheap
labor pool?
The answer is not that simple. Vietnam’s geographic diversity
and decentralized government policy necessitate an understanding of the range of available options. The haste with which investors funneled investments towards Ho Chi Minh City and Hanoi
has resulted in a saturation of the top tier KERs. Yet, much of the
country remains ripe for investment, and foreign manufacturers
are finding that moving further afield can yield highly competitive
manufacturing locations.
A Tale of Two Cities
Vietnam is a country of two capitals. In the north, Hanoi is the
heart of the Red River Delta and home to the central government.
Ho Chi Minh City in the south is the country’s largest city and de
facto economic capital. After 35 years of war and another decade
of isolation, Vietnam opened its doors to foreign investment in
1986, and the two cities were natural gateways to the northern and
southern regions.
When industrial land in the cities became scarce, investment
spilled over to the bordering provinces. In the north, Hanoi and
the six surrounding provinces form the so-called Northern Key
Economic Region (NKER); Ho Chi Minh City in the south is
the core of the eight-province Southern Key Economic Region
(SKER). As of 2010, the two KERs accounted for 36 percent of
the country’s total accumulated FDI and 58 percent of GDP from
only 37 percent of the population and 14 percent of the land. An
area that was nearly all farmland and rubber plantations 20 years
ago now employs over 11. 2 million people in manufacturing.
Sustained levels of FDI dramatically altered the composition
of employment in the KERs, creating a yawning gap between
the share of labor employed in manufacturing versus agriculture.
Tourism, real estate and hospitality now offer additional competition for labor. Following complaints by companies in the area, the
Ministry of Labour, Invalids and Social Affairs reported in August
2011 that more than 1 million workers are required to meet the
