US chipmakers march south as Vietnam subsidizes its tech future
Just as Vietnam comes into its unique role in China-U.S. relations, Hanoi’s policymakers are trying to find their niche in the global semiconductor industry.
President Joe Biden’s visit to Hanoi on September 10 inaugurated deeper ties across the board between the United States and Vietnam, but nowhere did the two countries have more concrete successes to laud than in the semiconductor industry. American chip executives looked on as Biden announced AI projects by Nvidia and Microsoft, new semiconductor design centers in Ho Chi Minh City by Synopsys and Marvell, the October opening of a $1.6 billion Amkor chip packaging facility near Hanoi, and a new U.S.-Vietnam chip partnership to “support resilient semiconductor supply chains.”
Many of these expansions continue a trend of American and other leading chip companies diversifying their supply chains away from China. While Vietnamese leaders certainly recognize this trend, it would be hasty to deem Vietnam as exploiting China-U.S. decoupling. It would also be hasty to paint Vietnam as blindly doling out subsidies to attract whatever low-level manufacturing foreign chipmakers hope to outsource.
As Hanoi policymakers spend billions of dollars in subsidies to upgrade the country’s economy, they are strategically building foundational supply chains and infrastructure. They hope that these foundational investments will facilitate Vietnam’s rise to higher value chipmaking and beyond. Just as Vietnam comes into its unique role in China-U.S. relations, the country’s policymakers are also discerning the niche it will fill in the global semiconductor industry.
Bouncing Back
Vietnam’s chip industry dates to 1979, when the government established the Vietnam Semiconductor Z181 Factory. Spun off from a physics lab of Vietnam’s Military Technical Institute, this state-owned facility produced two product lines: 1) chip components like transistors, diodes, and sensors; and 2) equipment to manufacture semiconductor materials.
Though relatively behind in its technological capabilities, the Z181 Factory was a microcosm of the Cold War semiconductor race between the Soviet Union and the United States, best recounted in Chris Miller’s book “Chip War.” Its raison d’être was in part to provide equipment and components to Soviet facilities in Czechoslovakia and Poland between 1979 and 1989. Just as the Cold War led to Z181’s rise, however, it also spelled the factory’s fall. The collapse of the Soviet Union and American economic sanctions cut off Z181’s key customers, ending Vietnam’s first foray into the semiconductor industry by the early 1990s.
After a two decade gap, Vietnam stepped back into the global chip industry, with FPT Semiconductor providing VLSI services in 2014 and the Viettel IC Design Center opening in 2017. These two firms, however, only conduct design and production work for a limited set of telecommunications and medical device use-cases, and no combination of purely Vietnamese groups is yet capable of conceiving and producing a finished chip.
The rise of Vietnam’s digital industry owes its success greatly to the over 30 foreign companies carrying out IC design, assembly, and testing in the country. To Vietnamese policymakers’ concern, these foreign chipmakers have a hand in almost all of the semiconductors that enter finished Vietnamese electronics exports, a sector that accounts for one-third of the country’s total trade volume.
Biden’s visit to Hanoi underscored the uncomfortable reality that foreign companies hold most of the keys to Vietnam’s chip industry. From the United States, Intel is set to expand its already massive chip assembly, testing, and packing (ATP) site. Amkor will also expand its existing ATP facility, and Synopsys is shifting EDA design activity from China to Vietnam. From South Korea, Samsung invested nearly $1 billion in a semiconductor components facility in 2022, and it plans to expand this Thai Nguyen province facility to produce completed chips by 2023. Lastly, dozens of Dutch suppliers to ASML have been courting Vietnam as a place to shift production toward from China.
Many push and pull factors have inspired the rise of foreign chipmaking in Vietnam. Following China’s harsh COVID-19 lockdowns and the worsening of China-U.S. relations, companies increasingly pursue “China plus one” strategies that hope to diversify manufacturing to locations like Vietnam that are near but politically separate from China. Foreign governments often encourage this shift as a way of reducing national reliance on Chinese manufacturing; U.S. Treasury Secretary Janet Yellen’s suggestion that Vietnam could benefit from the CHIPS and Science Act’s $500 million international supply chain security fund is testament to this. Lastly, the Vietnamese government has itself spent heavily to attract foreign investment, but Hanoi policymakers want to ensure foreign companies bolster Vietnam’s domestic technological capabilities.
Building Blocks
The biggest challenge Vietnam has had to overcome over the past decade is that it lacks semiconductor clusters. The biggest value of having clusters of commercial and academic facilities in a small geographic area is that newcomers can leverage existing infrastructure and talent, rather than expensively building a chip industry from scratch.
As they set out to incentivize semiconductor and other technology industries in the early 2010s, Vietnamese businesspeople and officials recognized that they must first develop the “supporting industries” that manufacture materials and components for other finished goods. Critically, officials view success in the chip industry not as an end in itself, but as the “support” for development of Vietnam’s electronics industry writ large. The country’s leaders hope to follow the path of other East Asian tigers in attracting lower value manufacturing with an eye toward an advanced technological future.
After identifying “electronic microchips” as one of the country’s nine industrial priorities in 2010, Vietnam passed two major tax incentives for investments in high-technology industries in a 2015 decree. (As a baseline, Vietnam’s standard corporate income tax rate is 20 percent, and property taxes range from 0.03 percent to 0.15 percent.)
First, Vietnam offers a preferential corporate income tax rate of 10 percent for 15 years. This incentive applies to investments in both research and the construction of facilities for high technology fields, with semiconductors being a priority industry. It also seeks to lower the cost of financing for budding Vietnamese businesses by allowing venture capital firms investing in high technology fields to qualify.
Second, Vietnam provides an exemption or reduction of the property tax (land rent). Companies and research organizations that build scientific research facilities are exempt from property taxes for their full land lease term if the facilities are used for research, business incubation, or prototyping.
Vietnam’s biggest city, Ho Chi Minh City, has an additional program where it subsidizes part or all of the interest on loans for particular investment projects. It will subsidize 50 percent of the interest on R&D facilities for “support industries,” 70 percent of the interest on basic manufacturing activities, and 85 percent of the interest on technology and advanced equipment purchases – for a total of up to $8.8 million per project. This program helps serve the city’s Microchip Industry Development Program.
To encourage companies to hire Vietnamese engineers, the standard value-added tax (VAT) of 10 percent for services is reduced to a 5 percent VAT for scientific activities in high-technology fields, like semiconductors. Eligible activities range from research to technology transfer consulting and technical training.
Additionally, Vietnamese economists have lamented that even as foreign high-tech investment grows, Vietnam only captures a small share of global technology supply chains’ total value added. The country’s leaders want to upgrade their technical capacity to grab a larger share of the profit from final products Vietnam produces for firms like Samsung and Canon. To that end, the Ministry of Industry and Trade encourages foreign firms – especially those receiving government subsidies – to set up joint research programs with local institutions.
Shining examples of this are the chip design training agreement between Synopsys and Saigon Hi-Tech Park and Samsung and the Ministry of Industry and Trade’s domestic supplier development program. State-backed venture funds like the National Technology Innovation Fund and the Vietnam-Korea IT Incubator further serve Vietnam’s effort to transition toward higher value contributions to global chip supply chains.
When developing economies engage in industrial policy, they often deploy import substitution programs to discourage imports that compete with more expensive domestic alternatives. While these policies do support domestic suppliers of less advanced goods, they also make higher value downstream activities more expensive.
Vietnamese policymakers recognized the adverse downstream effect of import substitution, as well as the fact that chipmakers in Vietnam need materials and equipment that domestic suppliers cannot cost-efficiently provide. Rather than cave in to the impulse to protect their domestic input suppliers, they have astutely prioritized lowering the cost of inputs for science and technology enterprises. Specifically, under Clause 13, Article 16 of the Law on Export Tax and Import Tax, such firms have a five-year exemption from import taxes on materialized, specialized equipment, and scientific reference materials for which there is no viable domestic alternative.
A Sovereign Vietnam in a Multipolar World
As foreign chip companies increase their presence in Vietnam and the government itself subsidizes these newcomers, Hanoi is fulfilling a two-pronged, long-term strategy: maintaining technological sovereignty and finding its niche in global tech supply chains.
Even though Vietnam has opened its doors to investment from the United States, South Korea, and other advanced Western economies, the communist country remains concerned that it could one day face U.S. trade restrictions similar to those currently hindering Chinese tech firms. Though Vietnam maintains a certain ambivalence toward China, Hanoi policymakers want to hedge their bets by reducing their reliance on imported chips for Vietnam’s electronics exports.
Vietnam is also aware that it not only has a nascent chip industry but that it is also at most a middle power on the global stage. A senior official at the Ministry of Information and Communications acknowledged that Vietnam is unlikely to develop cutting-edge chips at a commercial scale like Taiwan or South Korea, so it should find niches in supporting specific product lines like power management chips, analog chips for Internet of Things use cases, and system on a chip applications. This sort of strategy is similar to that of other middle powers, like France, which recognize niches where they can be globally competitive with the help of modest industrial policy.
Vietnam has a long way to becoming an advanced chip-making economy, but its policymakers are smartly leveraging its geopolitical independence and foreign investment to build the foundations for a technological powerhouse. It’s well worth keeping an eye on Vietnam in general, and its semiconductor industry in particular, to see how it rises in the multipolar world to come.
By Arrian Ebrahimi – The Diplomat – Sempember 18, 2023