Vietnam: Biden Anoints a New Trusted Tech Partner
The United States secured another manufacturing hub in its efforts to diversify supply chains by adding Vietnam as a trusted and reliable partner. Perhaps the most strategic announcement from President Biden’s trip from September 10–11 was centered around scaling up Vietnam’s semiconductor capabilities and a skilled workforce. This builds on Vietnam’s capacity in semiconductors, including on packaging and testing, and looks to add to its capacity by providing educational resources to boost its cadre of engineers. However, these efforts may not be enough to ensure that Vietnam can match U.S. expectations to create secure supply chains.
An Eye on Tech
President Biden’s historic September trip to Vietnam demonstrated the strategic importance of the Southeast Asian country as evidenced through several economics and diplomatic announcements. President Biden and General Secretary Nguyen Phu Trong announced the U.S.-Vietnam Comprehensive Strategic Partnership, which is intended to encourage bilateral and regional cooperation on critical and emerging technologies.
Both countries pledged to support the “rapid development of Vietnam’s semiconductor ecosystem and to work together energetically to improve Vietnam’s position in the global semiconductor supply chain.” To that end, the leaders launched semiconductor workforce development initiatives with an initial $2 million in funding from the United States. The United States and Vietnam also intend to launch a network of regional governments and industry stakeholders to foster collaboration among like-minded partners to build resilient technology supply chains. The Developing Electronics & Leading Technology Advancement Partnerships network will be geared toward developing “talent cultivation, policy coordination, and sector efficiencies in the manufacture of electronic components.” Lastly, the United States and Vietnam mean to foster deeper joint research collaboration in critical areas such as artificial intelligence, research and development (R&D) and governance, health and medical science, climate science, biotechnology, and conservation through the Vietnam-U.S. Science and Technology Agreement for Research.
Building a Trusted Network
Vietnam’s ability to scale its manufacturing capacity, educated workforce, tepid relationship with China (due to disputed territorial claims in the South China Sea), and desire to lessen its economic dependence on the People’s Republic of China (PRC) make it an ideal partner for building a more trusted supply chain for semiconductors. The PRC is dominant in semiconductor assembly, packaging, and testing, holding almost 40 percent of the global market share against the United States’ 5 percent. When it comes to wafer fabrication, it is also the world’s largest producer, having the equivalent of twice the U.S. capacity.
According to Technavio, the semiconductors market in Vietnam is estimated to grow at a compound annual growth rate of 6.12 percent between 2022–2027, or $1.65 billion. Vietnam has a young and educated workforce at a lower cost than its neighbors and is increasingly viewed as an alternative for companies relocating from China. Moreover, its industry has been boosted by significant investments from large multinational companies. As CSIS has previously written, the Vietnamese government offers incentives for high-tech projects, such as reductions in corporate taxes. When some technology firms exited China at the pandemic’s outset, the Vietnamese government created a working group to attract tech investments through customized incentive offers to foreign investors. Tech giants including Dell, Google, Microsoft, and Apple have all shifted parts of their supply chains to Vietnam in recent years.
Semiconductor manufacturers have followed suit. Intel started operations in 2006 and has a $1.5 billion factory, the biggest in its global network, with plans to expand in southern Vietnam for assembling, packaging and testing chips. Samsung Electronics Co. Ltd. in 2022 announced a total investment plan of $2.27 billion to expand its next-generation semiconductor substrate business into Vietnam. South Korea’s Hanmi Semiconductor, a global leader in semiconductor manufacturing equipment, announced in May that its branch in the northern province of Bac Ninh was officially operating. Infineon Technologies AG, Germany’s largest company specializing in power and internet of things systems, announced in June the expansion of its operation in Vietnam and a chip development team based in Hanoi. Also in June, SKC Co., a South Korean manufacturer of advanced materials, signed a preliminary agreement with Vietnam's Hai Phong City to explore investment in advanced materials for semiconductors, secondary batteries, and other green sectors. The White House announced Amkor Technology, a packaging and testing services provider headquartered in Arizona, has so far invested $1.6 billion and is preparing to open its factory in Vietnam at the end of this year.
Obstacles Could Undermine Goals
Nevertheless, Vietnam’s semiconductor industry is facing challenges, chief among them a chronic shortage of engineers. The country of 100 million has only 5,000 to 6,000 trained hardware engineers for the chip sector, against expected demand of 20,000 in five years and 50,000 in a decade, according to head of the US-ASEAN Business Council’s Vietnam office Vu Tu Thanh. Likewise, there is a risk of an inadequate supply of trained chip software engineers.
Vietnam has mostly specialized in the assembly, testing, and packaging stage of the semiconductor production process, indicating that it will still require additional capacity building through capital investments, enhanced R&D capabilities, and more specialized production equipment to meet demand outlined in the leaders’ joint statement.
Another important issue is power generation. The country has struggled to upgrade its grids to support stable and consistent electricity for both its population and the manufacturers operating there. Climate-related issues such as heat waves and lack of rain, as well as increased usage, have compounded the problem. According to a Reuters interview with Hong Sun, chairman of the Korean Chamber of Commerce in Vietnam, regular, severe power cuts have cause multiple factories to suspend production. “This is a very serious problem for South Korean companies operating in Vietnam,” he said.
U.S. Offers Minimal Solutions
Building up its workforce, addressing energy woes, and convincing the private sector to shift manufacturing to the country will take a lot of time and money, two items in short supply. Congress has not allocated or appropriated new funding to support these announcements, meaning most of the funding is coming from current budgets and programming that are likely stretched thin.
As announced by the leaders, the United States will utilize funding from the International Technology Security and Innovation (ITSI) Fund, a CHIPS Act allocation totaling $500 million, or $100 million annually over five years, to further develop Vietnam’s current semiconductor ecosystem, regulatory framework, and workforce and infrastructure needs. For something like ITSI to work, it needs to focus on select countries, such as Vietnam, or specific pieces of the ICT sectors, to be effective. The demand pull for ITSI Fund money is immense (as is its mandate to protect, promote, and secure digital networks and semiconductor supply chains), meaning there will not be adequate funding to address those key issues.
There also appears to be an overreliance on the private sector's ability to effectively mobilize capital into the country. The United States announced that the $2 million provided to launch the workforce development initiatives was “seed funding,” suggesting that Vietnam or companies will be expected to pony up any additional funding. Also, language around “partnering” and “work together” stops short of words like “commitment” and “allocated funding” that would give confidence that these initiatives will be undertaken.
The United States has been working on Vietnam’s energy security, primarily in the renewable energy and battery storage spaces and regulatory framework. This is not enough to address the power generation issues, meaning that Vietnam will have to rely on coal usage to effectively support its manufacturers, which both undermines its climate and energy transition efforts and does not adequately address the necessary grid upgrade and regulatory framework needs.
Vietnam has the right building blocks to meet the United States and partners’ needs to add new links to the semiconductor supply chain. However, the United States will have to step up in terms of dedicated and consistent funding as well as personnel to appropriately augment Vietnam’s workforce and manufacturing capabilities. The United States should also look to the enabling environment to achieve its capacity-building goals, including its regulatory and investment framework that attracts foreign direct investment and boosts domestic capacity, especially in the tax and electricity sectors.
Erin Murphy is a deputy director and senior fellow for the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Thibault Denamiel is a research associate with the Scholl Chair in International Business at CSIS.