Vietnam has become a top economic hub in Asia, leveraging its strategic location, low labor costs, and government reforms that lower operating expenses. The retail sector, in particular, has attracted international brands aiming to cut costs. With labor costs more affordable than in other countries, many of these companies are setting up factories in Vietnam to maximize their investments.
Among 9 Asian countries, Vietnam has the second-lowest average cost of running a business. With monthly expenses of US$79,280, Vietnam’s manufacturing cost is only slightly higher than Cambodia’s, at US$65,313. In comparison, Thailand and Singapore have higher monthly manufacturing costs of US$142,344 and US$366,561, respectively.
Vietnam’s low operating costs result from investment-friendly policies, a supportive business environment, and low wages. This article explores how Vietnam’s labor costs attract global investors, covering operating expenses, labor trends, and tax incentives for manufacturers.
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Operating Cost for Business in Vietnam
By definition, operating costs are all the expenses incurred by companies daily to run a business. However, the cost of running a business varies based on your daily activities. While companies involved in buying and selling properties have to include real estate agents and marketing fees in the operating cost, a plumbing company would have to deal with storage and equipment costs.
Moreover, business owners must be aware of the differences between operating expenses and operating costs. Both might sound the same but they are not. Operating costs include all kinds of expenditures, even operating expenses like rent, utility bills, raw materials, and product delivery charges. Contrary to that, operating expenses are business spending not directly linked with manufacturing the product or delivering the service. It is merely a part of the operating cost.
It is calculated as:
Operating costs = Cost of goods sold (COGS) + Operating expenses (OPEX)
While COGs include direct labor costs, wages, raw material costs, repairs, utilities, tax, and rents, OPEX includes advertising, administrative, R&D, insurance, and office supply expenses.
Read Related: Setting Up a Manufacturing Company in Vietnam: Industries & Procedure
Operating costs for a business fall into three categories: fixed, variable, and semi-variable. Fixed costs, such as wages and rent, remain constant each month. Variable costs, however, fluctuate based on market conditions—such as increased manufacturing expenses when production scales up or higher marketing costs during festive seasons.
Semi-variable costs are typically fixed expenses with occasional fluctuations. For instance, a business might have a set budget for office cleaning, but an occasional deep cleaning will increase costs. Similarly, a software subscription might cover a set number of users, but adding a new team member could push the business into a higher pricing tier. Fixed costs can be direct, such as rent and leases, or indirect, like salaries and office supplies. Variable costs include raw materials, utilities, packaging, payroll, and sales commissions, while semi-variable costs often cover overtime pay, extra internet bandwidth, and additional electricity charges.
Overall, operating costs are essential for maintaining balance sheets and setting budgets. It can lead to better compliance and reduce your tax burden. Companies can save money if they are able to determine the operating cost accurately, as it takes into account base expenses like tools, utilities, rent, wages, maintenance needs, equipment, etc. It also provides important information about the financial condition of the business to investors, helping them make crucial investment decisions.
Cost of Doing Business: Understanding Vietnam Labor Costs
On June 30, 2024, the government issued Decree No. 74/2024/NĐ-CP, which introduces an approximate 6% increase in the minimum monthly wage for major cities like Vietnam’s largest city Ho Chi Minh and Vietnam’s Capital City Hanoi, raising it to VND 4,960,000. This new payroll regulation is essential for foreign direct investors setting up operations in Vietnam.
But despite the low labor cost, foreign companies might struggle to find workers due to the lack of a skilled workforce in the country. These days, an increasing number of supply chain managers are looking to outsource to Vietnam because of the cheap labor rate.
As of 2020, the hourly labor rate in Vietnam is US$3.10, which is less than half of the US$6.50 rate in China. It is even lower than Mexico’s labor rate of US$4.82. This has led to various global electronics manufacturing service providers like Foxconn, Samsung, LG, Canon, HP, etc. setting up factories in Vietnam, making smartphones, TVs, printers, computers, cameras, etc. more affordable in the country.
According to the Vietnamese Ministry of Labor, the number of employed persons in Vietnam has increased from 51.30 in the previous year to 51.40 units in 2024. The labor force participation rate has also increased to 68.60% from 68.50% in 2023. The monthly minimum wage reached the highest in 2024 when it was VND 4.9 million, while it was the lowest in 2008 at VND 1 million.
The business environment in the country is quite good, as seen in Vietnam ranking 5th in this category. It is the only nation in the region that is in the high-potential group of countries based on logistics costs.
Read More: Minimum Wage in Vietnam: Increase Keeps Vietnam Among the Most Affordable for Business
Manufacturers’ Inclination Toward Hiring Labor from Vietnam
When it comes to manufacturing, the United States is the second largest manufacturer in the world, with 10% of its economy based on this industry. However, despite being a leading manufacturing hub, the US outsources most of its functions in other countries like Mexico and China, where labor costs are lower. Vietnam’s labor cost is even lower than that of these nations. In 2018, Mexico’s labor cost was US$4.45 per hour, while China stood at US$5.51 per hour. In comparison to that, Vietnam’s labor cost was US$3 per hour.
Manufacturers are increasingly inclined to hire workers from Vietnam as more companies establish factories in the country. This inclination is enhanced by the fact that Vietnam has good infrastructure like ports, roads, and other transportation, along with policies supporting foreign direct investments.
Read Related: China +1 Strategy in Vietnam: An Overview for Chinese Investors
Tax Incentives for Reducing Average Cost in Vietnam
Global investors looking to set up a company in Vietnam are often worried about how to reduce costs in business. For them, knowing about tax incentives like Corporate Income Tax (CIT) incentives is essential. CIT incentives can considerably reduce the average cost of doing business in Vietnam, as it has preferential tax rates and tax holidays.
Read More: Unlocking Corporate Income Tax Secrets in Vietnam: A Comprehensive Overview
While the standard CIT rate is 20%, it can increase up to 50% based on the nature of the project. Also, there are specific provisions for providing 10%, 15%, and 17% preferential tax rates to foreign investors, which can be available either for a specific period or the full tenure of the project.
On the contrary, companies are granted provisions to pay 50% of their taxes or refrain from paying CIT for a certain period if they fulfill certain conditions. It is usually available for 4 years, starting from the first profit-earning year or the 4th revenue-generation year. The Vietnamese government also provides land rental exemptions and customs duty tax incentives.
Read More: Maximize Benefits: A Complete Guide to Tax Incentives in Vietnam for Foreign Companies
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