CHINA + 1: STILL RELEVANT? REASSESSING VIETNAM AS A MANUFACTURING DESTINATION

I. Evolving from a Diversification Concept into a Manufacturing Strategy

Japan's expansion of manufacturing operations into China provides an early illustration of how global supply chains have evolved across Asia. By the late 2000s, China had become Japan's largest trading partner and the second-largest recipient of Japanese FDI, while Japanese investment in China was heavily concentrated in manufacturing. However, greater investment in China also created a new concern: concentration risk.

The China+1 concept is not new. Japan was already encouraging companies to adopt this approach as early as 2005, by maintaining operations in China while establishing additional production or sourcing capacity in another country to avoid excessive dependence on a single market or location. Since then, the rationale has evolved considerably. US–China trade tensions, the COVID-19 pandemic, geopolitical uncertainty and repeated supply-chain disruptions have pushed companies to reconsider the resilience of highly concentrated manufacturing networks.

The main objectives include:

Vietnam has emerged as one of the key destinations within this strategy. Its proximity to China allows manufacturers to remain connected to established Chinese suppliers while adding production capacity outside China. This makes Vietnam particularly relevant to a modern China+1 strategy for electronics and other industries where production networks span multiple Asian economies.

The trend is also visible in investment flows. China was Vietnam's second-largest source of registered FDI in 2025, with approximately US$5.7 billion, while remaining one of the largest sources of new investment in the first 7 months of 2026.

II. Vietnam Is Building the Industrial Foundations to Support the Next Stage of Growth

2.1. Economic Growth and Industrialisation

Vietnam's economy grew by 7.09% in 2024 and 8.02% in 2025, with 2025 marking a significant acceleration from the previous year. The country has also raised its ambitions for the next development cycle: Vietnam is targeting average annual GDP growth of at least 10% during 2026–2030, alongside a broader objective of becoming a high-income country by 2045.

This ambition is increasingly being supported by a broader effort to renew Vietnam's development model. In July 2026, the Politburo issued Action Programme No. 33-CTr/TW, implementing Resolution 19-NQ/TW on reforming Vietnam's development model, focused on productivity, competitiveness, innovation and more efficient economic growth.

2.2. Supporting Industry Development

One of the clearest signals of this longer-term industrial ambition is Vietnam's new Supporting Industry Development Programme for 2026–2035, approved under Decision 929/QĐ-TTg in May 2026. The programme identifies supporting industries as a foundation for a self-reliant and modern industrial base, aiming to increase domestic production capacity, raise localisation and enable Vietnamese companies to participate more deeply in regional and global supply chains.

The programme prioritises supporting industries including smart electronics, energy equipment, automobiles, mechanical engineering and automation, high-tech industries, textiles and footwear. Vietnam targets an electronics localisation rate of 25–30% by 2030, alongside a broader objective for key industries to reach average localisation of 40–45%.

This industrial development is being supported by investment in infrastructure and industrial corridors. The emergence of manufacturing clusters in Northern Vietnam has created closer connections between industrial parks, suppliers, logistics infrastructure and export gateways. For China+1 investors, this means the question is not simply whether Vietnam can assemble the product today, but whether the supporting ecosystem can become deeper over time.

2.3. Manufacturing-Focused FDI Policy

Vietnam is also moving toward a more selective and strategic approach to FDI. Resolution 10-NQ/TW places greater emphasis on technology transfer, participation in supply chains, domestic value creation and linkages with Vietnamese companies, and sets a target of attracting US$200–300 billion in registered FDI during 2026–2030.

At the same time, Vietnam continues to provide a targeted investment incentive framework that can directly affect project economics. Under the Corporate Income Tax Law No. 67/2025/QH15, effective from October 2025, the standard CIT rate is 20%, while qualifying investment projects can receive preferential treatment — for example, a 10% CIT rate for 15 years, or 17% for 10 years for certain other incentivised projects, together with applicable tax exemption and reduction periods. Eligibility depends on the project's industry, location and other prescribed conditions, rather than simply being a foreign-invested manufacturing project.

2.4. Trade Agreements and Market Access

Vietnam's manufacturing proposition is further supported by its extensive network of trade agreements, including CPTPP, EVFTA, UKVFTA and RCEP, which can provide preferential access to major export markets and therefore influence the economics of where production is located. Vietnam's value is not limited to its domestic market, as the manufacturing operation can potentially use Vietnam as an export platform into multiple markets.

However, preferential market access is not automatic. Manufacturers must satisfy the applicable Rules of Origin, which determine whether a product qualifies for preferential tariff treatment — making trade agreements a strategic consideration alongside manufacturing cost, rather than simply a tariff benefit added after the production decision has been made.

III. Cost Component Comparison Goes Beyond Labour

Lower labour costs are often cited as one of the primary reasons for considering Vietnam. However, labour is only one component of a manufacturing cost structure. The table below summarises several key operational and cost dimensions manufacturers should consider, although the assessment should not be limited to these factors alone.

Source: DCF Vietnam analysis based on market research and publicly available information.

Vietnam's China+1 case is therefore not based on every cost being lower. Labour may be structurally cheaper, while inputs, infrastructure and supply-chain depth may still favour China. The investment case emerges from the combined effect of operating costs, market access, incentives, supply-chain diversification and investment requirements.

IV. The Investment Model Matters as Much as the Location

Where a company manufactures is important, but how it establishes its manufacturing presence can be equally critical. Each approach involves a different balance between upfront investment, speed of market entry, operational control and long-term flexibility.

The most appropriate model ultimately depends on the manufacturer's investment horizon, required level of control, available capital and expected production scale. A company entering Vietnam cautiously may favour a ready-built factory lease, while a manufacturer with a long-term commitment may justify owning and developing its own facility. An acquisition can provide the fastest route to an established operating platform, but requires a substantially deeper assessment of the target company's assets, liabilities and underlying business value.

V. Key Challenges to Consider

VI. How DCF Vietnam Can Support China+1 Investment Decisions

A China+1 decision involves more than identifying a lower-cost manufacturing location. Companies need to evaluate market conditions, operating costs, investment requirements, asset values and the potential returns of different entry strategies. DCF Vietnam supports investors by combining local market research, feasibility analysis and valuation to help translate these considerations into an investment decision.

Conclusion

China+1 has evolved from a China-dependency hedge into a broader strategy for resilient, diversified manufacturing. While Vietnam has emerged as a significant manufacturing destination, supported by foreign investment, infrastructure development, trade integration and proximity to China, its attractiveness extends beyond labour-cost advantages. Choosing the right investment location depends heavily on specific product needs, supply chain structures, regulatory environments, capital requirements and other relevant factors.

At the same time, regional economies such as India, Indonesia, Malaysia and Thailand are increasingly competing for the same high-value manufacturing and technology investment.