VietNamNet Bridge - Will a low-cost labor force continue to help Vietnam attract FDI in the 4.0 industry revolution?

Low-cost labor force is one of Vietnam's biggest advantages

A Harvard University study notes that there are three stages of a national development process. The first is based on natural resources and low-cost labor force. The second relies on investments in manufacturing and services for export. The income in this stage is higher, but the national economy is vulnerable to shocks in the world market. In the third phase, new creative products and services will be the major resource of the economy.

Nguyen Quang Trung from RMIT Vietnam University said Vietnam’s economy is in the early days of the second development phase, relying on investments in manufacturing industries that make products for export.

However, Vietnam, which has an open economy, still has not joined the global value chain deeply, and can only gain the lowest value in the chain, thus staying at the bottom of the ‘smiling curve’.

As China has moved to another phase of development, its labor costs have increased, thus forcing multinationals to relocate their factories to countries with lower costs, such as Vietnam. 

Choi Woon Chul, CEO of KSD Vina, a manufacturer of components for Samsung, confirmed that the labor cost in Vietnam is cheaper than in China and South Korea.

With a population of nearly 100 million, Vietnam is an attractive market in the eyes of foreign investors, especially in terms of labor supply. This is a ‘magnet’ for foreign factories, which need high numbers of workers, while salaries to workers just account for 10-15 percent of total costs.

However, the rapid rise in the minimum monthly wage in Vietnam in recent years has worried foreign invested enterprises. The wage has increased by 3 percentage points more rapidly than China. 

This has raised a concern that Vietnam’s advantage of a cheap labor force will no longer exist and multinationals like Samsung will once again relocate to countries with lower labor costs, such as North Korea, as noted by Bloomberg.

However, analysts point out that a cheap labor force should not be the advantage for Vietnam for the long term. Unskilled laborers always mean low income, which must not be the goal an economy strives for, said Simon Matthews, CEO of ManpowerGroup Vietnam, Thailand and the Middle East.

A report shows that four Samsung factories in Vietnam gained profit of VND132 trillion, or $5.8 billion in 2017, which means that it made a profit of VND11 trillion a month, equal to the total profit of 40 of Vietnam’s largest listed companies.

However, Vietnamese enterprises pocketed only 7 percent of export turnover of foreign invested enterprises in 2016.

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