The United States in its search for alternative sites to semiconductor assemblage in China (40 per cent of global production in 2019) and Taiwan (27 per cent) is looking to Vietnam as a promising semiconductor chip partner. US President Joe Biden on his visit to Vietnam on September 10 wants to take the bilateral trade ties to a higher level, with a focus on the chip industry.

The US is willing to “friendshore” key elements of the chip industry to Vietnam. Interestingly, Vietnam remains a single-party ruled country, and that too the communist party. But Vietnam has followed its own path, and became closer to the US after the end of the disastrous war of the 1960s and 1970s, where both sides paid a heavy price.

What has helped in improving the Vietnam-US ties is the fact that Vietnam has been at loggerheads with its other communist neighbour, China. The Vietnam-China conflict in 1978 became the breaking point between the two. Until then, China has been supportive of North Vietnam and its communist leadership in their fight against South Vietnam and the US.  Vietnam had also become a member of the Association of South-East Nations (Asean), an economic group which was largely supportive of US policies. The US-Vietnam relations have been improving since the 1990s.

But Vietnam finds itself in a hard spot despite the keen interest shown by the US to make the country a strategic partner in the semiconductor industry even as the US wants to break the Chinese monopoly of the supply chain. The Chinese of course are dominating the backend of assembling the chips, and it is a position that Vietnam too is occupying.

The US is willing to transfer to Vietnam the technologies of the manufacture of chips as well, but Vietnam is falling short of the high-skilled chip engineers. The country has a supply of 5,000 to 6,000 engineers in the field. The demand is for 20,000 in five years’ time and for 50,000 by the end of the decade. It will be difficult for Vietnam to meet the fast-rising demand.

 The US is also interested in Vietnam because of the rare minerals available in the country for the semiconductor industry. “The number of hardware engineers is way below what is needed to support multi-billion-dollar investments,” said Vu Tu Thanh, head of the Vietnam office of the US-Asean Business Council. Vietnam’s chip exports to US are half-a-billion dollars annually. There would be US$500 million investment into China that could come from the US Chips Act and other private investments from American chip designing companies.

The US’ enthusiasm to invest in Vietnam to break Chinese monopoly is part of its Indo-Pacific strategy to contain China though this is not stated explicitly anywhere. Vietnam with is open-ended economic system and its 100 million population could be a good bet. It is one country in the region that would not be swept by Chinese trade like many other of its neighbours in the region. Many of the Asean countries like Indonesia, Malaysia, Thailand, Singapore and Myanmar are prone to Chinese influences, but Vietnam is not because of political and cultural reasons.

The US is also wooing India with prospects of setting up semiconductor manufacturing units there. But India is itself a large consumer of semiconductor goods because of its growing digital and electronics economy. The US is looking for those offshore countries which can serve as supply bases for the US needs. Secondly, Vietnam in comparison to India, would be a competitive place in terms of costs of production. Whatever its present handicaps, it looks like that the US would want to push Vietnam into the key manufacturing segment of chips.