January 27, 2023
Manufacturing -
5 Reasons to Relocate Your Supply Chain to Vietnam | OneLink Holdings
A great post on why you should relocate your supply chain to Vietnam. Learn the five reasons that make it a favourable choice for corporations looking to expand into Southeast Asia.
The global landscape of the supply chain industry is constantly shifting. Companies are always looking for new opportunities to streamline their processes, reduce costs, and increase efficiency. For many companies, relocating their supply chains is one way to achieve these goals. Vietnam is an emerging market that has a lot of potential as a destination for supply chain relocation. In this blog post, we’ll discuss five reasons why you should consider relocating your supply chain to Vietnam.
Top Industries relocating supply chains
Labour Availability and Cost
One of the major advantages of relocating your supply chain to Vietnam is the low cost of labour and the large pool of available workers. In July 2022, minimum wages increased an average of 6%. While still considered quite low compared to other countries, this was considered a significant increase. Minimum wages in Vietnam vary due to the location of the worker and whether the organisation is state-owned, with the government dividing the country into 4 regions. The first type of minimum wage is referred to as the ‘common minimum wage’ which is used for employees in state-owned organizations and enterprises. The wage is VND 1,490,000 (~US$64) per month.
The second type of minimum wage is used for non-state-owned organisations and enterprises. This minimum wage is based on zones as defined by the government. Workers in region 1; urban Ho Chi Minh City, receive the highest hourly and monthly salary of $US 0.97 per hour and US$ 202 per month whereas workers in region 4; the provincial cities and districts not mentioned in other regions receive $US 0.67 per hour and US$ 140 per month.
The labour availability is considered one of the largest in the ASEAN region, with 56 million people and a labour participation rate of 76%. Highly skilled employees can be difficult to find, with only 12% considered highly skilled. This will change, with the government setting a target of creating 1.3 million IT workers by 2025.
With its large population and low wages, Vietnam can provide much lower labour costs than other countries in the region—including China—making it an attractive option for businesses looking to cut costs.
Proximity To Major Markets:
Another benefit of relocating your supply chain to Vietnam is its proximity to some of the world’s largest markets, including India, Japan, South Korea and China. This allows businesses easy access to these lucrative markets when they are ready to export their goods or services. With China as a bordering country, Vietnam has access to the world’s largest consumer markets and top suppliers of intermediate inputs such as raw materials, without the expensive shipping needed to obtain these goods. Japan and Korea also make use of the convenient shipping, using Vietnam to outsource parts of their supply chain.
Vietnam is also a member of the World Trade Organisation, with 17 current free trade agreements (FTAs) in place, making it one of the most open economies in South East Asia. These bilateral and multilateral agreements connect Vietnam with many countries and regions including Australia, Brunei, Burma, Cambodia, Canada, China, Chile, Indonesia, Japan, Laos, Mexico, Malaysia, New Zealand, Philippines, South Korea, Singapore, Thailand, United Kingdom, European Union Countries and Eurasian Economic Union countries. By having access to Free Trade Agreements, Vietnam can gain knowledge and the technology needed through foreign firms to transition into higher value-added production capabilities.
Find out more about Vietnam’s Free Trade Agreements in our previous blog.
Favourable Tax System:
The Vietnamese government also offers favourable tax rates for businesses that relocate their operations there—including corporate income tax rates as low as 10%. Companies invested in high-tech sectors, particular industrial zones and the underdeveloped socio-economic regions can access these reduced tax rates, along with certain tax holidays. The government also provides incentives in regard to Project Size and investment. The industries which the Vietnam Government are encouraging with incentives include education, health care, sport, high technology, environmental protection, scientific research and technology development, infrastructural development, processing of agricultural and aquatic products, software production and renewable energy.
Foreign Firms that make new investments in technology-related sectors, garments, footwear, automobiles, as well as goods produced domestically and goods that meet the EU quality standard can be taxed at 10% for 15 years, which also includes a tax holiday for the first 4 years, and a 50% reduction in the tax rate for the nine subsequent years.
The Incentives for project size have two criteria, with either one needing to be fulfilled to obtain tax benefits. Companies that invest more than VND6 Trillion (US $261 million) in the first three years of being licensed OR companies that invest capital of more than VND12 trillion within the first 5 years of being licensed and by using prescribed high technology can qualify for a tax rate of 10% for 15 years, with a tax holiday for the first 4 years, followed by 50% tax reduction for the subsequent 9 years.
Along with the Corporate Tax rates, there are other benefits such as Land Rental incentives and Customs Duty incentives. This makes it a great option for businesses looking to save money on taxes while still doing business overseas.
Political Environment
Vietnam has a stable political and business environment; with the government promoting a friendly environment for foreign investors. This makes it easier for foreign businesses and investors who want to operate in the country without having to worry about navigating complex regulations or dealing with lengthy paperwork processes.
With political stability and strong leadership, Vietnam is an attractive destination for foreign companies looking to move operations. Its political climate is characterized by positive policy reforms and economic development initiatives as well as improved transparency and accountability standards, which ensure consistency for businesses investing in Vietnam. The government also places a strong emphasis on creating a dynamic business and investment environment through favourable tax laws and streamlined business regulations. With political stability at the forefront of this attractive environment, foreign companies can have confidence that their venture into the Vietnamese market will come with reliable returns and long-term rewards.
China +1 and a China alternative
Businesses who use China as a primary manufacturing country are increasingly choosing Vietnam to supplement China operations. This is due to the low-cost inputs that can be sourced from production facilities in Vietnam. The China +1 strategy involves investors shifting or expanding from China into Vietnam to increase market access and to mitigate vulnerabilities in existing supply chains. This has particularly been useful due to China COVID disruptions, that have continued to cause havoc with manufacturers in China.
The geopolitical tensions and higher costs in China have been pushing firms to move their supply chains into Vietnam completely. The US-China Trade war has significantly impacted the environment in China, with many US and EU firms opting to reduce or eliminate dealing with Chinese manufacturers altogether.
As you can see from this overview, there are several compelling reasons why you should consider relocating your supply chain operations from your current location into Vietnam if you haven’t already done so already! Keep in mind though that before making any decisions about where you should relocate your operations, it’s important that you do your own research into all potential options so that you make an informed decision based on all available information at hand!
Written By
OneLink Holdings team
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