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Vietnam: Chip Daydreamer or Semiconductor Star?

Vietnam has a booming "low-end" electronics manufacturing sector and now has its sights on a new challenge of carving out a niche in the fiercely competitive and capital-intensive global semiconductor industry. Vietnam currently lacks domestic fabrication capabilities and faces a tenfold deficit in semiconductor engineers. Its current strategy hinges on attracting foreign investment like the $1 billion Bac Gian fab, but questions linger about long-term sustainability compared to nations like the US (investing $52.7 billion through the CHIPS Act), China (over $100 billion), and Europe (pledging €43 billion). The coming years are critical for Vietnam, once the global semiconductor supply chains are resettled there won't be much room for upstarts to wedge their way in.

vietnamese looking at semiconductor with mask

Vietnam is already a powerhouse in electronic manufacturing largely due to its proximity to China and low labor costs. Its people are industrious and eager to trade their efforts for money. The country has a high 70% rate of urbanization making it easy to mobilize workers at scale, and it's a young country with 64% of the population being under 35. Favorable demographics give an edge in current and future workforce numbers, a stark contrast to a world that is otherwise mostly aging. The communist government has fostered a relatively business-friendly environment taking a proactive approach to attracting foreign investment. Vietnam ranks 70th out of 190 countries in the World Bank's Ease of Doing Business report so there are worse places to do business.

Between 50% and 70% of Vietnamese manufacturing output can be considered "low-end" manufacturing. China is running out of people to do this type of manufacturing and when they are available the costs are too high, coming in at nearly double the rates in Vietnam. Engaging in basic manufacturing is a better alternative for the average Vietnamese person than the alternative which is tropical agriculture in hot, moist, sweaty, and insect-laden environments. It remains a poor country with a population of 101 million living off an estimated per capita income of $4,600.

Vietnam's government is attempting to position the country to win global semiconductor manufacturing market share. Vietnam exported $600 million of packaged and tested semiconductors in 2022, primarily through facilities operated by foreign companies. The government projects that by 2030 the industry in Vietnam will be worth between $20 and $30 billion. It's important to highlight that no semiconductor manufacturing occurs in Vietnam, only packaging and testing which are run and controlled by foreign firms such as Intel and Amkor. Its two main local companies attempting to break into the sector are FPT and Viettel.

The most tangible semiconductor win for Vietnam has been South Korea's Hana Micron Vina Ltd's investment of around $1 billion to build the Bac Gian Semiconductor fab in the north of the country. The facility is slated to open in 2024 and perform packaging and testing functions so won't be directly involved in the fabrication, but rather in the final more labor-intensive steps required before the chips go to market. The chips anticipated to be packaged and tested at Bac Gian will be mid-range chips used in automobiles and smart devices, not the more advanced chips under 5 nanometers. The latter is really what the world is after and where the margins and high-paying jobs sit.

Significant roadblocks face Vietnam in its attempt to meaningfully participate in the global semiconductor supply chain. While the nation does have impressive STEM graduate rates of 52%, it needs at least 10 times the present number of semiconductor integrated circuit engineers. 35 universities in Vietnam offer courses in semiconductor engineering with plans to enroll 1,000 students in those courses in 2024, a 30% increase from 2023. Skeptics point out that the engineers will take at least four years to train. If the jobs aren't there for the graduates they will do something else and future students will avoid the career path, but without the graduates, large-scale semiconductor investments are unlikely to materialize. A classic chicken or egg scenario.

Governments that have been successful in securing semiconductor manufacturing have made large internal investments. The advanced semiconductor supply chain is a pay-to-play situation. The United States has put $52.7 billion on the table through the CHIPS Act of 2022. China has invested more than $100 billion over the years. The Europeans mirrored the Americans' CHIPS Act and have committed €43 billion to increase chip production capacity and research in Europe. Japan and India have each committed over $7 billion, and South Korea through its K-semiconductor initiative almost $50 billion.

Vietnam's strategy so far has been to entice other nations and companies to invest and take the risk to build its domestic semiconductor manufacturing sector. Skeptics point out that this approach is unlikely to bear fruit given the competitive nature of the industry, reliance on cutting-edge technology, and the large sums of capital required to participate. Vietnam should be commended for its efforts and ability to get the word out about its ambitions in the sector, but investors ought to proceed with caution. The coming years are critical for Vietnam, once the global semiconductor supply chains are resettled there won't be much room for upstarts to wedge their way in.




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