Vietnam arms itself for service in US chip war against China – Asia Times
Samsung Electronics CEO met with Vietnamese Prime Minister Pham Minh Chinh and announcement a $850 million investment to manufacture semiconductor components in Thai Nguyen province on August 5, 2022.
The investment will make Vietnam one of only four countries – alongside South Korea, China and the United States – to produce semiconductors for the world’s largest memory chip maker. Vietnam’s selection of more developed locations speaks volumes about the country’s growing importance in the semiconductor value chain.
Vietnam is not new to the semiconductor industry. The country’s first semiconductor factory, Z181, was established in 1979 to produce and export semiconductor components to the Eastern Bloc during the Cold War.
The collapse of the Soviet Union and subsequent trade embargo ended the country’s first attempt to develop semiconductor capabilities. Yet the desire to enter the global semiconductor value chain persists. For Vietnamese leaders, semiconductors represent both economic opportunities and national security interests.
Entering the semiconductor value chain means operating a global market is expected to reach US$1.4 trillion by 2029 with a compound annual growth rate of 12%. It also strengthens local skills and expertise, promotes the development of associated high-tech industries and increases national added value in electronics production.
Semiconductors are also a matter of national security. Reliance on imported chips makes the country’s critical infrastructure vulnerable to supply chain disruptions and hidden malware risks. The sweep of the United States ban on exporting chips over China raises concerns in Vietnam about whether its political differences with the West could lead to a similar fate in the future.
Hanoi has adopted a two-pronged strategy to reduce its vulnerability to these external threats. It maintains diplomatic neutrality amid geopolitical conflicts while gradually building national capabilities in all three stages of the semiconductor value chain – chip design, front-end manufacturing, and back-end assembly and testing.
Vietnam’s industrial and technological policies have always accorded the highest incentives for high-tech projects, including reduction of corporate tax and exemption from sales tax and land rent.
In 2020, as tech companies continued to exit ChinaVietnam has established a special working group woo high-tech investments by offering tailored incentives beyond those specified by existing laws. Various Vietnamese prime ministers have met with leaders of global tech giants to encourage investments in semiconductors.
Generous incentives aren’t the only reason multinationals are pumping billions of dollars into Vietnam’s semiconductor ecosystem. One of Vietnam’s advantages over its regional neighbors is its pool of young engineering talent at a relatively lower cost.
As the risks to put all its eggs in the basket of China increase, semiconductor companies see Vietnam as a promising option for their “China Plus One” strategy. The manufacturing cluster in the north of the country is only a 12-hour drive from Shenzhen, the manufacturing hub of China. This ensures minimal supply chain disruptions for those looking to diversify.
Vietnam also boasts one of the most open world economies, with 15 free trade agreements, a working environment and a relatively stable government with clear socio-economic development plans. The country’s geopolitical neutrality is another plus for tech companies looking for a low-risk location to produce and export.
The Vietnamese semiconductor scene is rapidly evolving at all stages of the value chain. Synopsys — a leader in chip design software — is changing its investment and engineering training from China to Vietnam. South Korean tech giant, Amkor Technology, signed an agreement in 2021 to establish a $1.6 billion semiconductor manufacturing plant in Bac Ninh province.
Intel recently channeled a an additional $475 million in its assembly and test plant in Vietnam which produces basic processors. Local tech companies have also spear their own ranges of low-end semiconductors for a wide range of applications. Such projects lay the groundwork for even more investments to come.
The next step for Vietnam is to go beyond attract foreign direct investment to integrate multinationals into its economy. Weaknesses in the country’s investment climate – including backward infrastructure, weak enforcement of intellectual property rights, cumbersome procedures, underdeveloped supplier networks and shortage of local skills – urgently need to be addressed.
Vietnam should leverage the resources and expertise of foreign investors to catalyze improvements in its semiconductor ecosystem. The recent training in chip design OK between Synopsys and Saigon Hi-Tech Park is a welcome step in this direction.
Another example is Samsung’s domestic supplier development program — run jointly with the Ministry of Industry and Trade — enabling many domestic suppliers to become internationally competitive.
What Vietnam shouldn’t do is try to pick winners to win sovereign capacity in semiconductors. Protecting local companies – especially public ones – from foreign competition while subsidizing their operations only perpetuates the inefficient use of national resources.
The policy should focus on creating a business environment that allows all potential winners, foreign and local, to thrive.
Phan Le and Hai Thanh Nguyen are economists at Vietnam’s Central Institute of Economic Management (CIEM).
This articlerepublished with permission, was first published by East Asia Forumwhich is based on the Crawford School of Public Policy within the College of Asia and the Pacific to Australian National University.