Cheaper than China: Samsung boosts investment in Vietnam manufacturing

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Soccer ball = tax concessions
Soccer ball = tax concessions

Samsung shares may be slumping on lower sales forecasts for its flagship Galaxy 4 smartphone, but the company is barrelling ahead with its investments in Vietnam, where it now makes most of its handsets and other electronics.

The South Korean electronics giant will raise its investment in northern Bac Ninh Province by two-thirds, to $2.5 billion, according to a report by the Vietnam News Service. It is also building a $2 billion-plus factory in Thai Nguyen province near Hanoi to make mobile phones, cameras,  and laptops—the first of two plants that will eventually make up a $3.2 billion manufacturing complex.

Samsung is moving much of its manufacturing base to Vietnam because of increasing difficulties finding cheap labor in China, which is pricing itself out of low-cost electronics assembly. Vietnam offers huge tax breaks—Samsung will pay 10% corporate income tax versus a standard 25% rate—relative political stability, and a young and increasingly well-educated workforce. (A recent trip to the country by a Google engineer revealed that students begin to learn computer science in the second grade.)

While Vietnam is obviously eager to make Samsung feel welcome—the plants already provide work for an estimated 24,000 people, and have created an ecosystem of suppliers and subcontractors who employ another 50,000—the constraints of low-value manufacturing are hard to escape.

Much as Foxconn builds Apple’s iPhones for a tiny share of the overall profits, Samsung isn’t adding much value at its Vietnam factories, crucial as they may be. In 2012 the company imported $11.3 billion worth of goods into Vietnam and exported $12.5 billion. Its combined import-export numbers will surely climb in the coming years—at least until Vietnam finds a way to move up the value chain, and Samsung has to look elsewhere for a cheap manufacturing base.