Gadget Manufacturer Hon Hai to Invest $5B in Vietnam

The Taiwanese firm Hon Hai Precision Industry -- the world's largest contract manufacturer of electronics, whose clients include HP (NYSE: HPQ) and Apple (Nasdaq: AAPL) -- reportedly plans to invest US$5 billion in Vietnam in the next five years.

Hon Hai previously said it would spend up to $1 billion in the country, but now plans to spend five times that much to build factories that will make a variety of components and high-tech products such as digital cameras.

Though it has a relatively low profile, Hon Hai has a hand in making parts or all of a host of brand-name electronics gadgets, from the PlayStation 3 to the iPod to handsets from cell phone makers such as Nokia (NYSE: NOK).

Diversifying Its Holdings

Hon Hai operates under the Foxconn Technology Group name, and though it is the largest exporter from China, it has recently begun to diversify its holdings to include manufacturing facilities in Brazil and in Eastern Europe.

The investment is the latest reminder of the growing importance of Vietnam in the global economy, including as a technology manufacturing center. Vietnam has several of the advantages of other developing countries, including a low-cost labor force, while also offering a relatively stable political environment, a favorable tax climate and relatively well-educated and computer-literate labor force.

Votes of Confidence

Western countries have also recognized the value of Vietnam due to its location amid a number of fast-growing economies where demand for computer technology is expected to skyrocket in coming years.

Last year, Intel (Nasdaq: INTC) announced that it would spend $1 billion to dramatically expand the size and capabilities of a chip testing and packaging plant it is building in Ho Chi Minh City, Vietnam. That plant is expected to open for business in the first half of 2009.

When that deal was announced in February, Intel CEO Craig Barrett said the investment was made possible by Vietnam's progress in a number of areas, including infrastructure development and workforce training.

Intel was driven by demands and expectations from customers, many of whom are also buying from Hon Hai, Gartner (NYSE: IT) analyst Martin Reynolds told the E-Commerce Times.

"Customers want to cut down on the logistics as they look to serve the fastest-growing markets -- most of which are in this region," said Reynolds. "Making investments in the region tells customers the manufacturers are committed to those same markets."

Sourcing It Out

The Intel investment was seen as a major vote of confidence in the country and shortly afterwards, another Taiwanese company, laptop PC maker Compal Electronics said it would spend $30 million on a factory near Hanoi.

The specific plans that Hon Hai has for Vietnam are still being worked out, the company said, but the government has said it has land available for the company to expand in several regions of the country.

While Vietnam has grown in importance as a regional manufacturing center, it has also attracted its share of outsourcing business, with call centers and software development labs springing up around the country, which had the advantage of having a large English-speaking population.

Vietnam still has work to do on getting its infrastructure up to speed, but has demographics in its favor, said World Bank analyst Anil Sinha. Half of the country is under 30 years old, he noted. Even though it is a Communist country, meanwhile, the government is seen as relatively benevolent and has made it clear it supports a free market economy.

"The government embraced the free market approach two decades ago, and the rest of the elements are in place to make Vietnam an important player in the technology economy," Sinha told the E-Commerce Times. "China and India can only grow so fast -- a country that is as geographically well-situated as Vietnam can grab a significant part of the economic activity if it is willing to make the investments to do so."