The Guide to Understanding Vietnam’s Industrial Zones
August 8, 2017
The number of industrial parks in Vietnam continues to rise as foreign investment pours in. As of September 2016, there were 325 industrial zones set up nationwide, with 220 already in operation on a total of 60,900 ha. In 2017, the government plans to open three special economic zones in the Northern, Central and Southern key economic zones. The parks occupy a natural land area of almost 85 thousand hectares, with about 66 percent of the total land area designated as industrial land for leasing. Occupancy reached 51.5 per cent overall, and 73 percent at operating industrial parks.
FDI in IZs stats
Until mid-2016, the 220 operational industrial zones and 16 economic zones have together attracted foreign investment amounting to some US$150 billion, accounting for about half of the total cumulative FDI inflows into the country.
Investment in industrial parks (IP) and export processing zones (EPZ) rose more than 39 per cent year-on-year in the first half of 2017 to US$ 384.3 million. In the same period, FDI accounted for US$ 159 million, a year-on-year increase of 24 percent. Domestic investments rose by 52.7 percent to US$ 224.34 million. South Korea was the largest investor, accounting for 55 per cent of the investment, followed by Taiwan and Japan.
In deciding which industrial park to locate operations for a FIE in Vietnam, there are several factors that must be considered; including geographic location, land, labor, infrastructure, industry, business environment and incentives.
FIEs should first consider geographic location. This involves research into the advantages and disadvantages of locations of industrial parks considered. According to the 2016 Provincial Competitiveness Index, the top ranked provinces in 2016 were Da Nang, Quang Ninh, Dong Thap, Binh Duong, and Lao Cai; representative of all different regions of Vietnam.
Options can be narrowed down by geographical concentration of industries as some regions host more enterprises from a specific industry than others do. Representing some of Vietnam’s main export sectors, garment and textile manufacturing are concentrated in both North and South Vietnam while footwear and furniture manufacturing are both concentrated in South Vietnam. The North is arguably the better choice for an enterprise importing input goods from China while the South has the advantage of being near the largest commercial port in Vietnam. Proximity to key destinations such as airports, seaports, major cities, main highways, and borders are also important.
Industrial parks possess land use rights from the government and essentially sublease their land and existing factories to tenants for a period of up to fifty years, depending on when the industrial park was established. Prices vary considerably and depend on a number of factors that influence demand, including the location and quality of the industrial park.
Vietnam’s key attraction to foreign investors is the low cost of labor. Vietnam’s minimum wage is a tiered system ranging from US$ 100 to US$ 128 per month, based on the region. Areas such as Hanoi and HCMC command a higher minimum wage while VinhPhuc, PhuTho, and BacGiang have lesser minimum wage levels.
Average salary can vary from US$ 121 to US$ 810 for industrial workers and managers, depending on the industry and skill level. Overtime, overtime wages and social insurance should also be taken into consideration. As of 2017, there are over 285,900 workers in Industrial Parks and EPZs, including 2,660 foreign workers.
Infrastructure is often a deciding factor with regard to the success of an industrial park. Industrial parks that have failed to attract enterprises in the past often lacked good infrastructure and management as the country’s infrastructure was slow to develop amidst rapid industrialization. As Vietnam continues to attract FDI, industrial parks have been improving their infrastructure to meet international standards. Improvements include higher quality industrial parks in general, quality factory buildings and warehouses, stable sources of electricity and water, wastewater treatment plants, garbage disposals, fire prevention systems, improved telecommunications, access to a banks and post offices, logistics services and accessible internal roads. Many industrial parks are located near national highways that lead to airports, seaports, and rail stations for easy transport among other conveniences.
According to the 2016 Provincial Competitiveness Index, Binh Duong, Da Nang, Ba Ria Vung Tau, Dong Nai, and Vinh Phuc were the five provinces that were rated as having the best infrastructure.
Types of Industries
The Northern Key Economic Zone consists of eight municipalities and provinces focusing mainly on agricultural products and includes Hanoi, Hai Phong City and the provinces of Bac Ninh, Ha Tay, Hai Duong and Hung Yen. The Central Key Economic Zone has been known for its marine economy. Over the next few years, the area aims to increase development in sectors such as oil and gas, shipbuilding, logistics, and other high-tech industries. It includes Da Nang City and the provinces of Binh Dinh, Thua Thien Hue, Quang Nam and Quang Ngai. The Southern Key Economic Zone is dedicated to the development of commerce, exports, technology, services, and telecommunications. Its areas include Ho Chi Minh City and the provinces of Binh Duong, Ba Ria-Vung Tau, Dong Nai, Tay Ninh and Binh Phoc.
FIEs looking to establish operations in an industrial park should consider the types of industries already represented by existing tenants and the supporting industries to understand the potential benefits to their own operations. For instance, it would be difficult for a low-end manufacturing company to minimize labor costs in an area with many hi-tech firms.
Vietnam has a series of incentives in place that encourage both domestic and foreign investment. Tax incentives include exemptions or reductions of Corporate Income Tax (CIT), Value-Added Tax (VAT) and import tariffs for specific periods, and are granted based on the business lines and location of the FIE. Regulated encouraged sectors include education, healthcare, sports, culture, high technology, environmental protection, scientific research, infrastructural development, and software manufacturing. Administrative divisions or locations with investment incentives include disadvantaged or extremely disadvantaged areas, industrial parks, export-processing zones, hi-tech zones, and economic zones.
Corporate income tax (CIT) rates were reduced to 20 percent as of 1 January 2016. Preferential CIT has been set at 10 percent for a 15-year period for new investment projects in areas with difficult socio-economic conditions, in economic zones, and in high-tech zones. The preferential CIT is applicable for the entire operational period for companies operating in the sectors of education and training, occupational training, health care, culture, sport and the environment. Other reduced CIT slabs include 15 percent and 17 percent for enterprises involved in farming, breeding, processing of agriculture and aquaculture products. Large manufacturing projects with investment capital of VND 6,000 billion or more with minimum revenue of VND 10,000 billion per annum for at least 3 years after the first year of operations or employing at least 3,000 people after 3 years of operation, also qualify for CIT incentives.
Additionally, exemptions from import duty and incentives on land rental are also offered to investors. Such incentives and exemptions depend on the industry and the location of investment.