Employees work at a textile mill in Ho Chi Minh City, Vietnam. Photo: CFP

Three days after New Year's Day, Xiao Renping, manager of China Cutting Die Co (Vietnam), sat in his office in an industrial development zone in Binh Duong Province, Vietnam, brewing a plan to set up a branch factory in Myanmar. Xiao is hoping to diversify his investment as the company is facing rising costs and lower productivity while operating in Vietnam.

For Xiao, the advantage of lower operating costs in Vietnam is long gone. When the company first came to the country to set up a factory in Di An Town, Binh Duong Province in 2009, it offered 1,200 yuan ($190.79) a month to local workers, compared with the average monthly salary in Vietnam of only around 600 yuan.

Over the past three years, Xiao's company has raised workers' salaries by 40 percent to the current average level of 2,000 yuan a month. And Xiao said the Vietnamese government has just ordered companies to raise workers' salaries by 20 percent this month.

Given the low work efficiency of Vietnamese workers, the advantage of cheaper labor in the country has lost its attraction, Xiao said.

The difficulty of finding skilled workers in Vietnam is also something that Xiao had never anticipated. Even when offering a higher salary than the country's average, Xiao could not get enough experienced workers and had to hire seven skilled workers from China to fill the labor shortage.

The dispute between China and Vietnam over sovereignty in the South China Sea has also added uncertainty to Xiao's business, and he sometimes has to "tip" Vietnamese officials in order to get a visa.

Investment frenzy 

Xiao's company was among a host of Chinese manufacturers who were forced to move to Vietnam after the global financial crisis in 2008, when many firms were struggling with rising labor costs in China, appreciation of the yuan and a decline in export orders.

Compared to China, Southeast Asian countries like Vietnam and Myanmar have cheaper labor, electricity and raw materials. In the 1990s, the Vietnamese government also started offering preferential policies to attract foreign capital, such as tax exemptions for companies in industrial development parks across the country and zero import and export duties.

"Apart from the low costs, many Chinese firms set up factories in Vietnam as a strategic plan to diversify the location of their operations to combat rising trade protectionism from the US and European countries," said Wang Yiyong, manager of the Import-Export Department of Texhong Renze Textile Joint Stock Company (Vietnam).

The US and EU tend to levy steep anti-dumping and countervailing duties on imports from China to protect domestic manufacturers as their economy is facing a downturn, but operating in Vietnam can help Chinese manufacturers avoid the pressure of this protectionism, Wang said.  

By 2010, China's direct investment in Vietnam reached $365 million, a surge of 74.3 percent year-on-year, data from the Foreign Investment Agency of the Ministry of Planning and Investment of Vietnam showed.

Low cost, low efficiency

However, Chinese enthusiasm for investing in Vietnam is fading due to rising costs, low labor efficiency and a drop in the number of preferential policies.

"Prices are rising in Vietnam. Although labor costs are still low compared with China's eastern coastal regions, the efficiency and expertise of labor is low in Vietnam," Wang said.

According to Wang, the efficiency of Vietnamese workers is usually 15 percent or 20 percent lower than that of Chinese workers and Vietnamese staff dislike working overtime even if the overtime wage is much higher than the normal daily wage.

"Unlike in China, trade unions in Vietnam are independent and powerful and fight fiercely for workers' rights," Wang said.

"This has much to do with Vietnamese traditional culture and the influence of the French who used to rule Vietnam. Pursuit of romance, harmony and freedom is what the Vietnamese learned from the French. Vietnamese people are easily content with the modest amount of money they earn and prefer to devote more time to leisure," said Xiao.

Even though costs have been rising, the Vietnamese government has in recent years offered fewer preferential policies to foreign investors.

"Most of the industrial parks in Ho Chi Minh City (formerly Saigon) no longer enjoy tax exemptions. That means foreign businesses in Vietnam have to pay a 25 percent income tax. For foreign investors, now is not the right time to invest in Vietnam," said Zhejiang native Weng Renyu, manager of the Business Investment Department at Long Jiang Industrial Park in Tien Giang Province, Vietnam.

The deteriorating business environment in Vietnam has led to a decline of inbound foreign direct investment (FDI) to the country.

FDI inflows into Vietnam reached $12.7 billion in 2012, down from $14.7 billion in 2011 and $19.7 billion in 2010, Vietnam Economic Times reported in December.

Vietnamese Prime Minister Nguyen Tan Dung attributed the decline of FDI in the country to lengthy review procedures for investment projects, the prevalence of corruption, a lack of preferential policies, backward infrastructure and a shortage of talent, the report said.

New efforts

Vietnamese Minister of Planning and Investment Bui Quang Vinh vowed to improve Vietnam's investment environment by improving the country's infrastructure, starting training programs and providing credit support and subsidies to foreign investors, Vietnam News Agency reported Saturday.

"Compared with other East Asia economies, Vietnam still has great market potential. Being in the China-ASEAN Free Trade Zone, Vietnam will implement zero tariffs in 2015. Trade and investment between the two countries is bound to rise by then," Li Zhenmin, first secretary at the Economic and Commercial Counsellor's Office of the Chinese Embassy in Vietnam, told the Global Times.

"The heyday of traditional manufacturing in China has long gone. Vietnam and other countries in East Asia will become the next world hub of traditional manufacturing. No investors can afford to miss the chance of benefiting from their rise," said Wang.

"China's position of being the world's factory has been gradually weakened with the rise of East Asian countries. The migration of traditional manufacturing industry from China to East Asian countries will continue to be a trend," said Zhao Yongsheng, a visiting scholar at the Chinese Academy of Social Sciences.

"But this is not necessarily a bad development as China is upgrading its industrial structure to focus on developing high technology," Zhao said.

Cao Junchen contributed to this story