Demand for factory space soars in Vietnam as companies abandon China

Workers standing by the production line at a shoe factory on the outskirts of Hano. Photo by Reuters/Kham

Cheap labor costs and tax breaks are attracting foreign firms.

Last year, Microsoft closed two manufacturing facilities in China and transferred its production line to a plant in northern Vietnam.

The software-focused company’s phone manufacturing will be focused in Vietnam, Reuters quoted Stephen Elop, the former CEO of Nokia who now runs Microsoft's devices unit, as saying.

Microsoft is part of a rapidly growing number of global companies that view Vietnam as a new manufacturing power house.

The tide has changed

Labor costs in Vietnam are about half of those in southern China, with factories paying their workers about $4,000 per year. Meanwhile, the price in China is on the rise. Since 2001, hourly manufacturing wages in China have risen by an average of 12 percent a year, according to the Economist. By the end of last year, the average annual wage of a Chinese worker had reached $9,000.

Some believe this means that China’s days as the world’s manufacturing hub are numbered.

“We are aggressively looking for offshore production sites,” said Stanley Szeto, chief executive of Hong Kong-based Lever Style, which produces clothes for top brands like Armani, Calvin Klein and Ralph Lauren.

“Higher wages in China are making labor-intensive production in industries like our apparel manufacturing less competitive than before,” Stanley explained.

“Just about 18 months ago, we used to be 100 percent in China. Now 5 percent of our manufacturing is outside China. Hopefully within a year of two, we get to 20-25 percent outside China,” said Stanley in an interview

Cheap labor costs are not the only thing Vietnam has to offer, with the government offering incentives such as cutting corporate income tax rate and land rent.

Foreign companies are also being lured to the Southeast Asian country to take advantage of tariff incentives that Vietnam is expected to gain through new-generation free trade agreements such as the Trans-Pacific Partnership (TPP) and a pact with the European Union (EVFTA). For instance, the TPP will either cut or eliminate tariffs in various sectors for exports from Vietnam to other member countries.

Statistics show foreign-direct investment (FDI) into Vietnam has surged since the country concluded a number of free trade agreements last year.

The country has received an estimated $11.02 billion in actual foreign direct investment (FDI) from January to September, up 12.4 percent on-year and on the track to hit this year’s target of $15 billion, up from a record $14.5 billion received in 2015, government data shows.

Soaring demand for factory space

In the first half of the year, industrial parks in Vietnam expanded factory space for rent by 2 percent to 41,000 hectares. The occupancy rate during the period was estimated at 70 percent, Hanoi-based real estate agency Savills said in a new report.

According to the report, industrial parks in the southern provinces of Binh Duong and Dong Nai managed to attract approximately $1 billion from foreign manufacturers from January to June.

The high factory rental rate growth has shifted the attention of foreign property service providers to Vietnam.

Recently, Japan's Daiwa House, which is mainly involved in providing construction and real estate services, has announced plans to quadruple the floor space of the factories it operates in an industrial park near Ho Chi Minh City at a cost of $19.7 million.

In a survey conducted by the Japan External Trade Organization asking Japanese companies about which countries and regions they would like to expand their businesses, Vietnam ranked fourth behind China, Thailand and the United States.

By VnExpress