12:41 (GMT +7) - Sunday 23/04/2017

Business

Work to do

Released at: 11:26, 20/03/2017

Work to do

Photo: Viet Tuan

Low labor costs won’t serve Vietnam’s development indefinitely.

by Quynh Nguyen & Do Huong

Since China faced a decline in its role in manufacturing, Vietnam has become an emerging market for investors. Over the last decade the country’s processing and manufacturing sector has attracted thousands of foreign direct investment (FDI) projects thanks to its cheap labor and infrastructure costs. Trade has increased three-fold since 2007, reaching $350.7 billion, according to the General Department of Vietnam Customs. The country’s abundant, cheap labor has played an increasingly pivotal role in wooing foreign investors looking to set up overseas manufacturing operations.

Competitive advantage

Vietnam’s low labor costs have transformed the country into a key Asian electronics manufacturing hub and lured production away from China. At 6.3 per cent of GDP, it has attracted more than five times the FDI going to China or India over the last five years. Huge investments are anticipated over the coming decade in next-generation manufacturing across a wide range of industries. Labor costs are considered a decisive competitive advantage, followed by the tremendous opportunities from market reforms to unlock potential and drive the industry forward.
A recent report from the Japan External Trade Organization (JETRO) showed that abundant and low-cost labor ranks in the Top 5 advantages in Vietnam’s business climate, as identified by 54.1 of the Japanese enterprises in Vietnam surveyed. “Vietnamese are viewed as hard working and dedicated,” Mr. Atsusuke Kawada, Chief Representative of JETRO in Hanoi, said. “While Japan’s workforce is aging, Vietnam population structure is in a golden era.” 

Vietnam’s abundant and low-cost labor, according to Ms. Phan Thanh Xuan, General Secretary of the Vietnam Leather, Footwear and Handbag Association (Lefaso), has been behind the large number of foreign-invested enterprises (FIEs) entering its processing and manufacturing sector over the last 20 years. China, meanwhile, has seen incomes rise in the sector and cut incentives to FIEs in recent years, which encouraged investors to shift their factories to Vietnam. 

Textiles and garments have also benefited from abundant, cheap labor. The sector is Vietnam’s largest industrial employer, with more than 2.5 million workers, accounting for 25 per cent of the total workforce in the industrial sector and generating 17 per cent of Vietnam’s export revenue ($27.2 billion in 2015), according to the Vietnam National Textile and Garment Group (Vinatex). The industry specializes in the lowest value-added segment in the middle of the global supply chain. Workers from rural areas are trained to specialize in cutting, trimming and making garments, which accounts for 78 per cent of textile and garment exports. 

Labor productivity remains the dominant element in the development of the textile industry, according to Mr. Le Tien Truong, CEO of Vinatex. A value chain in the textile and garment industry starts with creating fabric, cutting and sewing, then moves on to distribution of final products. “At present, 85 per cent of Vietnamese enterprises focus on cutting and sewing, which are labor-intensive,” he said. “To meet growing demand for textile products from other markets in free trade agreements, the only way is to increase labor productivity, because a worker cannot operate two sewing machines simultaneously.”

Vietnam has made remarkable progress in its gender equality initiatives, which is crucial to the expansion of the country’s workforce and improving labor productivity - two imperatives needed for its economy to sustain steady growth as its manufacturing industry develops. Samsung’s recruitment strategy looks to take advantage of this trend and it predominantly employs female factory workers. 

Growth in labor productivity per person employed

Source: The Conference Board Total Economy Database, 2016

Though Samsung constitutes the largest FDI in Vietnam, recently increasing this by around 40 per cent to $12 billion, the company is not the only high-tech com