Northern Vietnam Industrial Parks: Benefits and Challenges
Utilizing industrial parks in northern Vietnam offers numerous benefits for foreign firms; however, there are also some challenges to consider. Here’s an overview of what to expect when establishing a manufacturing plant or factory in one of northern Vietnam’s industrial parks.
A broad range of tech firms and electronics manufacturers have signed contracts with industrial parks in northern Vietnam. This is due to its well-developed transportation network, strategic proximity to China, and its cost advantage with generally lower prices compared to the southern part of the country.
But for all its benefits, firms considering establishing their presence in northern Vietnam should also be aware of certain challenges. Bureaucratic hurdles and complex administrative procedures can pose difficulties when setting up a business in this region. Understanding these challenges can give firms an edge as they seek to make their market entry as seamless as possible.
Industrial real estate demand in northern Vietnam
Demand for land in industrial parks in northern Vietnam has been on an upward climb for the last several years. This once mostly agricultural part of Vietnam is now an industrial manufacturing hub with big names like Samsung and Honda calling the region home.
So, what’s driving the demand for industrial parks in northern Vietnam?
There are currently 13 highways, with a total length of 895.8km, connecting the northern provinces with Vietnam’s capital, Hanoi. This are also six railway lines, seven airports, three major seaports, as well as an inland waterway transport via the region’s many riverways–most notably the Red River. This makes it easy to move goods into and out of the region.
An advantageous location
China’s Southern Economic Corridor, which connects to northern Vietnam, includes places like Shanghai, Hong Kong, Fujian, and Guangdong. It also encompasses the corporate headquarters of major players in the manufacturing, biotechnology, commerce, and electronics and technology sectors. These firms often employ diversified supply chains, which can be easily integrated with the northern parts of Vietnam.
The average rental price of industrial land in the Northern Key Economic Region is US$112/m2. This is 42 percent less than the Southern Key Economic Region, which is US$159/m2, according to Cushman & Wakefield.
Currently, there are 14,200 acres available for leasing in northern Vietnam. There are also 2,750 million sq.m. of factories and 2,000 million sq.m. of warehouses that are ready to use.
The Northern Key Economic Region continues to attract waves of investment, particularly from the electronics and automotive industries, with a minor rise in occupancy of one percent quarter over quarter, or an absorption area of 81 hectares so far this year.
It is anticipated that an extra 670 hectares of industrial property will be supplied to the market between now and the end of 2023.
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Barriers to investment
Despite the many upsides to establishing a manufacturing plant or factory in northern Vietnam, there are still a number of challenges firms may face.
Lengthy customs procedures
The time it takes for goods to clear customs in Vietnam can sometimes be lengthy, as per the Head of the Research Department on Business Environment and Competitiveness, Thao Minh Nguyen. Nguyen told the Economic & Urban Newspaper that the management and inspection processes have been slow to reform proving costly for businesses.
There is also a stark contrast with its regional neighbors. Customs procedures in Vietnam take twice as long as they do in Thailand and three times as long as they do in Malaysia.
Burdensome, unnecessary regulations and rules
Regulations on how a building should be designed and how goods should be processed within facilities can be excessive and are not always necessary. For example, there are regulations on how much space there should be between stored goods in a warehouse or factory though the purpose of this regulation is unclear, according to Nguyen.
Complicated construction permit procedures
Although they have been revised many times, construction permit procedures are still complicated. In Hanoi, a company that wants to implement a project must submit its plans to the Department of Planning and Architecture for design approval, then to the Department of Planning and Investment for project approval, then to the Department of Natural Resources and Environment in order to be allocated the necessary land, and finally to the Department of Construction for approval. This can make it difficult and time-consuming for businesses.
Vietnam has many preferential tax policies for foreign investors. However, the application and implementation of some tax policies can be confusing. For example, VAT refunds in the wood industry are often complex. In order for a company to get a VAT refund, they must prove the provenance of the wood. This takes coordination between a number of departments including customs, local police, and the tax department which can be very time-consuming.
Another example is the confusion caused by Decree No. 15/2022/ND-CP outlining the VAT reduction rate of 2 percent in 2022. The policy does not stipulate the reduction of VAT for all goods and services but rather provides a list of dozens of pages for products and services that are not eligible for a reduction. Businesses as a result must check each and every item they sell against the list.
Furthermore, according to a study by NC network, the average time spent by foreign-invested enterprises in Vietnam to settle tax obligations was four times higher than the average in the East Asia and Pacific region.
In this situation, to streamline the fulfillment of their tax obligations, businesses should ensure their books are kept up to date and that they have access to expert tax advice.
The labor supply can be limited
After the COVID-19 pandemic, a lot of workers in manufacturing moved to other fields with higher salaries, causing many establishments to operate well below their capacity.
Though the labor market has largely recovered, a number of areas still face challenges. In Hai Duong, for example, several foreign firms have expressed their frustration at being unable to recruit enough staff.
This, however, can be overcome with a clear understanding of the needs and wants of Vietnamese workers.
New projects in northern Vietnam this year
Despite these challenges, northern Vietnam remains very popular among foreign enterprises. There has been a wave of investment in newly registered projects in the first half of 2023. These include:
Electronics manufacturing giant Foxconn, at the beginning of this year, signed a contract to lease a 45-hectare land plot in Quang Chau Industrial Park (Bac Giang). It will invest a total of about US$62.5 million with a lease that will last until February 2057.
A major partner in Apple’s supply chain, Goertek signed a Memorandum of Understanding to sublease 62.7 hectares in Nam Son – Hap Linh Industrial Park in Bac Ninh. Once realized this investment will total US$305 million.
Taiwan’s Pegatron is a key supplier of components to one of the world’s most well-known electric car companies, Tesla and it assembles iPhones for Apple. Pegatron is currently building a second factory in Dinh Vu Economic Zone in Hai Phong. This will be worth an estimated US$1 billion.
Vietnam’s northern industrial parks show great potential in attracting FDI with advantageous geographic locations and government support. However, there are barriers that investors should consider before entering the market and compute into their operating costs.
From administrative hurdles to the local labor supply, selecting the right location for a manufacturing plant or factory can make a big difference in how smoothly an operation runs. Firms looking for support in this area would do well to contact the team at Dezan Shira and Associates at: firstname.lastname@example.org
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Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. We maintain offices in Hanoi and Ho Chi Minh City, as well as throughout China, South-East Asia, India, and Russia. For assistance with investments into Vietnam please contact us at email@example.com or visit us at www.dezshira.com
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