Manufacturing is the driving force for the growth of Vietnam

As global businesses seek to diversify and avoid relying too much on a single country, Vietnam has become a top destination for investment in manufacturing due to its strategic location and advantages in shipping, competitive labor, and production costs. Often known as the China plus one strategy, this has led to a booming increase of investment into Vietnam. In 2020, the manufacturing and processing sector continued to take the lead in the country’s foreign direct investment (FDI), making up 58.2 percent of the total. With its contribution, Vietnam’s economy is forecast to regain momentum and reach GDP growth of 6 to 6.5 percent in 2022.

With the pandemic of COVID-19 ravaging and dragging the growth of its economy, the manufacturing sector endured significant supply chain disruptions. Temporary business closures, transportation difficulties, and staff shortages all contributed to a reduction in manufacturing output in Vietnam in 2021. However, following the easing of lockdown restrictions, business activity in Vietnam has been busy again with consumer confidence gradually recovering. According to a report by IHS Markit, Vietnam’s manufacturing purchasing managers’ index (PMI) increased to 52.2 in November from 52.1 in October, attributed largely to higher new orders and government incentives. A score of 50 or more means an expansion in manufacturing.
 

The government recently issued Decree No. 57/2021/ND-CP (Decree 57), supporting industries related to supply of raw materials, spare parts, and components to manufacturing industries such as electronics and mechanical engineering industries, garment and textile, leather, and footwear industries, hi-tech industries, and the automotive industry.

The tax savings from the application of the Decree will provide financial support to enterprises in their business activities that have been impacted by the pandemic. It will also strengthen confidence in the government’s efforts to reform tax mechanisms and policies, thus promoting a more favorable business environment in Vietnam.

According to Resolution No.115/NQ-CP in 2020, the government set a target that by 2025 Vietnamese companies will be able to manufacture products in supporting industries that have a high level of competitiveness, satisfying 45 percent of the essential needs of domestic production and consumption.

Further Vietnam has issued several tax incentives and tax holidays for manufacturing projects in the form of corporate income tax (CIT), for large investment projects with capital of more than VND 6 trillion (US$264 million) as well as incentives in high-tech zones, certain industrial zones and difficult socio-economic areas.

In addition, incentives are also offered for the high-technology sector as well as textiles and garments, IT, automobiles assembly, and so on.

Despite COVID-19, Vietnam is still regarded as a key and growing manufacturing hub, surviving the global supply chain disruption.

Vietnam still faces numerous challenges. For example, regarding the size of its labor force of approximately 56 million people, Vietnam has almost 14 times less the number of workers compared to China.

Local authorities are also known to scrutinize documents resulting in additional time for approvals, particularly for projects that are outdated and use older technology. Further, legal environment laws can be cumbersome, along with land use limitations.

Investors should therefore study the local market carefully and are advised to do their due diligence and seek advice from a professional firm before undertaking a manufacturing project.