Aseonomics

Vietnam’s Manufacturing Miracle Has a Structural Problem

tuan

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Vietnam’s economic numbers have become a kind of shorthand for Southeast Asian success. GDP expanded 8.02 percent in 2025, the fastest growth since 2019, driven largely by a 9.97 percent surge in manufacturing and processing. Total trade crossed $930 billion. FDI disbursement hit a five-year high of $27.6 billion. At $5,026, GDP per capita crossed the threshold for upper-middle income status. By almost any macro indicator, the model is working.

Look more closely at how that growth is structured, and a different picture emerges — one that matters considerably for where Vietnam’s economy goes from here, and whether the window to change direction is closing faster than Hanoi recognises.

An economy built on someone else’s supply chain

The engine of Vietnam’s export growth is electronics, and the engine of electronics is foreign capital — overwhelmingly so. FDI firms account for around 98 percent of the country’s electronics exports, which reached $126.5 billion in 2024, or roughly a third of all export revenues. Samsung alone produces half of its global smartphone output from Vietnamese facilities. Electronics now account for more than 30 percent of total exports. By any measure, this is a remarkable manufacturing base — built almost entirely without Vietnamese manufacturing firms inside it.

This is not merely a question of ownership. It reflects a structural arrangement in which large multinational manufacturers, particularly those producing complex goods, chose Vietnam for assembly but continued sourcing inputs from existing overseas suppliers rather than building local supply chains. Research published in late 2025 found that domestic Vietnamese electronics firms operate at only 52 percent efficiency relative to foreign counterparts, and reach just 64 percent of the FDI technological frontier — with little improvement observed over time. Horizontal FDI appeared to enhance domestic management practices modestly, but delivered negligible technology spillovers. In high-tech sectors, the gap between foreign and local firms has not narrowed; it has widened.

Only around 14 to 15 percent of local Vietnamese firms are integrated into FDI supply chains at all. The rest operate in a parallel domestic economy that shares geography with the foreign-invested sector but limited economic linkage to it. Samsung, to take the most prominent example, sources most of its inputs from non-domestic suppliers. Vietnam provided the labour, the land, the tax incentives, and the political stability. It got employment and export revenues. It did not get an industrial base.

The tax architecture that locked the structure in

Part of what sustains this two-track economy is a tax system built specifically to attract FDI before Vietnam had much else to offer. Foreign investors receive corporate income tax holidays — zero rate for four years, followed by a 50 percent reduced rate for nine additional years. Domestic firms face the standard 20 percent rate far sooner. This asymmetry made rational sense when Vietnam was competing for its first wave of factory investment against more established regional locations. It looks different now that the country has become a substantial manufacturing hub with genuine scale — and is trying to build a domestic private sector capable of surviving alongside its foreign guests.

The import dependency compounds the problem. Vietnam’s ratio of imported inputs in intermediate costs is substantially higher than China’s — 0.29 compared to 0.08. In textiles and garments, around 60 percent of raw materials and intermediate products come from China; in electronics, roughly half. This means a significant portion of the value created in Vietnamese factories flows immediately back out as payments to foreign suppliers, mostly Chinese, South Korean, and Taiwanese. The gross export figures that dominate the growth narrative are not a reliable guide to how much value Vietnam actually retains.

Tariffs and the transshipment trap

Vietnam’s structural exposure to this arrangement has been brought into sharp relief by US trade policy. In 2025, facing an initial threatened tariff rate of 46 percent, Hanoi moved quickly to negotiate. The resulting framework, agreed in October 2025 at the margins of the ASEAN Summit in Kuala Lumpur, locked in a 20 percent baseline tariff on Vietnamese exports — a meaningful cost, but manageable — alongside a 40 percent tariff on goods deemed to have been transshipped through Vietnam from third countries.

That second number is where the structural problem becomes acute. The US definition of transshipment, as articulated by Commerce Secretary Howard Lutnick, is goods from another country routed through Vietnam to access Vietnamese tariff rates. The definition sounds clean. In practice, when the majority of inputs in a Vietnamese electronics or textile factory originate in China, the line between legitimate Vietnamese manufacturing and transshipment is not always obvious — and US Customs and Border Protection has moved to treat it as a compliance risk. CBP expanded inspections of shipments from countries associated with transshipment risk, with Vietnam explicitly named alongside Thailand, Malaysia, Indonesia, and Mexico. The risk of a compliance finding became, for many importers, as significant as the tariff itself.

Vietnam responded with its own enforcement. A decree on anti-evasion measures took effect in 2025, and the government pledged to crack down on Chinese goods relabelled as Vietnamese for export. The problem is that the categories most exposed to scrutiny — electronics assembly, textiles, footwear — are the same categories that genuinely depend on Chinese inputs not because of evasion, but because domestic alternatives do not yet exist at scale. The enforcement response and the supply chain reality are, for now, in direct tension.

Despite all of this, the headline trade numbers remained remarkable: Vietnamese exports to the US rose from $119.6 billion in 2024 to $153.2 billion in 2025, a 28 percent increase even under the new tariff regime. The surplus with the US approached $123 billion. These figures demonstrate the resilience of the model. They also guarantee continued Washington scrutiny.

The upgrade question

The Vietnamese government is not unaware of any of this. The 2025–2030 industrial development roadmap explicitly targets domestic supplier upgrading and technology transfer. High-tech manufacturing is being prioritised in FDI screening. Vietnam ranked third in the 2026 Asia Manufacturing Index, which credited its efforts to transition from low-cost assembly toward more advanced industrial output. FDI in Q1 2026 reached $15.2 billion in total commitments, a 42.9 percent year-on-year increase, with manufacturing and processing taking 74 percent of newly registered capital. The investment interest is not declining.

The question is whether industrial policy ambition can outrun a structural arrangement that has now been in place for two decades. The UNDP has noted that the import-intensity of Vietnamese exports has risen steadily since 2000, while remaining flat or declining in comparable countries — the opposite of the pattern one would expect from an upgrading economy. Vietnamese manufacturing is still largely concentrated in low value-added assembly operations that are sensitive to labour costs, and those costs are rising. When wages in Vietnamese industrial zones increase faster than domestic productivity gains, the competitive logic that attracted labour-intensive FDI in the first place begins to erode.

The window for reorientation is real, but it is bounded. Countries that moved successfully from assembly-hub to industrial economy — South Korea, Taiwan, to a lesser extent Malaysia — did so in a period of stable multilateral trade rules, relatively open capital accounts, and sustained technology transfer from foreign partners. Vietnam faces a more constrained environment: active US scrutiny of its trade surplus, a 40 percent transshipment tariff that penalises deep integration with Chinese supply chains, and an FDI sector that research increasingly suggests delivers managerial spillovers but not technological ones.

None of this is a crisis. Vietnam’s trajectory over the past twenty years is one of the more impressive economic stories in the developing world. But the next phase of that story depends on something the current growth model was not designed to produce: domestic firms capable of competing in the supply chains that foreign manufacturers bring with them. Without them, Vietnam risks remaining a very efficient assembly point for other countries’ products — generating employment, export revenues, and GDP growth, while the industrial capability and the profit stack sit elsewhere.

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