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Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Rising Tech Powerhouse Stock in Asia

Companies / Tech Stocks Dec 10, 2014 - 02:45 PM GMT

By: Money_Morning


William Patalon III writes: The world's next big center for semiconductor production isn't going to be somewhere on the U.S. West Coast.

It won't be in South Korea, Taiwan, or somewhere in mainland China.

It will be Ho Chi Minh City, in an increasingly powerful Vietnamese tech economy…

The Spike in Production

Next year, the CPUs for 80% of the world's new PCs will be produced at an Intel Corp. (Nasdaq: INTC) plant in the Saigon Hi-Tech Park (SHTP) near Ho Chi Minh City.

The Intel Vietnam CPU line is the latest addition to a major chip assembly-and-testing plant that dates back to 2006. New system-on-a-chip (SoC) platforms for smartphones and tablets have been produced at the Vietnam plant since the beginning of this year. By the time the curtain falls on 2014, that portion of the plant will have churned out 40 million SoCs.

All of "these products will service customers from all over the world and have a positive impact on export turnover and the development of Vietnam high technology," Intel Vietnam CEO Sherry Boger told the Vietnam Investment Review.

She's right: This tale is about much more than a single plant.

In a story we've been following for you almost since its beginning, Intel first announced its Vietnam plant as a $300 million investment back in 2006. Just one year later, Intel more than tripled its planned investment to $1 billion.

The Intel Vietnam plant – the size of six football fields – became operational in 2010. It accounted for $1.8 billion in exports this year. And that total will surge in 2015.

So will the beneficial ripple effects – which underscore the big-time profit opportunity that Vietnam represents.

We've been talking about Vietnam's long-term investment potential for more than two years. In fact, our analysis grabbed some air-time attention on a "Voice of Vietnam" international broadcast.

Even Barron's – in a recent cover story – sees Vietnam as one of the world's most-promising profit plays.

We were a bit early with our "call" on Vietnam.

But we weren't wrong.

And our story about Intel underscores the massive upside we see from this emerging Southeast Asian economy.

Today we're going to share the rest of that story – and show you how to cash in.

Vietnam Is Now Planting the Seeds of Wealth

B.C. Forbes, the Scottish journalist who founded Forbes magazine, once said "it is only the farmer who faithfully plants seeds in the spring, who reaps a harvest in the autumn."

He's right about seeds leading to windfall harvests: That's the essence of investing – global or personal.

And Intel Vietnam is accelerating its planting – in hopes of reaping a financial bounty. For instance, the company wants to:

  • Develop a local supply chain so it can "source" needed materials right in Vietnam.
  • Establish strategic alliances and foster the kind of tech-sector network that will help Vietnam develop its own semiconductor industry.
  • Work with Ho Chi Minh City to establish an education-and-training program for engineers and technicians for the semiconductor industry.
  • Work through the parent company's Intel Capital venture-funding unit to invest in any companies that meet its Vietnam business growth strategy.

That last item is no small thing. According to market researcher CB Insights, since the start of 2009, Intel Capital has realized the highest number of deal "exits" – either mergers and acquisitions or initial public offerings (IPOs) – of any investor. Even the No. 2 and No. 3 venture firms – the Cisco Investments unit of Cisco Systems, Inc. (Nasdaq: CSCO) and the Motorola Solutions Venture Capital group – fail to come close.

These "exits" are the transactions (either buyouts or stock offerings) that let initial investors "cash out" and recoup their investment. In other words, an exit is like the Silicon Valley version of the Good Housekeeping Seal of Approval on a venture deal – and represents a successful investment, or financial harvest.

Over the last five years, Intel has done this better than anyone – even the venture-capital funds that invest in startups for a living.

During that five-year run, there were 22 corporate-venture or venture-capital investors that recorded 40 or more M&A/IPO exits. Intel Capital topped the list with 100 by itself.

So any venture investments Intel makes in Vietnam are certain to benefit that country's entire tech sector, and not just the chip giant.

Former Intel CEO Paul Otellini said his company "helped put Vietnam on the map for high-tech investment."

He's right. The investments that have followed Intel include:

  • Korea's Samsung Electronics Ltd. (OTCMKTS: SSNLF), which last month announced plans for a new $3 billion smartphone unit in Vietnam – the biggest investment Vietnam allows at any one time. It will be situated next to an existing $2 billion Samsung smartphone plant that already employs 16,000 workers.
  • L.G. Electronics Inc., Samsung's smaller South Korean rival, which is building a new 4.3-million-square-foot complex to make TVs and appliances – and, eventually, smartphones – as part of a $1.5 billion investment plan.
  • Nokia Corp., which now belongs to Microsoft Corp. (Nasdaq: MSFT), in July said it would move mobile phone production from China to Vietnam, and in October said it was doing the same from a facility in India. Nokia broke ground for the $302 million Vietnam plant in April 2012, and began operating at full capacity in June 2013. With the new production, the Nokia plant will be able to produce as many as 45 million units a quarter – with most being exported to markets around the world.
  • And Panasonic Corp. (OTCMKTS ADR: PCRFY), which is opening a new manufacturing facility to expand production of wiring devices and circuit breakers.

The bottom line: Foreign investment in Vietnam is booming – especially in tech.

At this year's mid-point, there were 16,300 active foreign direct investment (FDI) projects in Vietnam that have pulled in a collective $238 billion. Those investors came from 100 countries and territories, and many are among the world's biggest multinational companies.

For calendar year 2013, FDI inflows exceeded $22 billion, an increase of more than 35% from 2012.

And the country is actively reaching for more. In mid-September, for instance, the second annual Semiconductor Industry Association (SEMI) Vietnam Semiconductor Strategy Summit was held in Ho Chi Minh City. The two-day session drew more than 160 people from Vietnam, Europe, the United States and other countries across Southeast Asia. The obvious goal: To bolster Vietnam's growing presence in the microchip sector.

Moves to Make Now

In a survey last year, the blue-chip consultant McKinsey found that 72% of foreign buyers were planning to cut purchases from China in favor of less-costly markets elsewhere in Asia – especially Vietnam.

Cheaper wages – a big part of any company's costs – are a major draw (Vietnam workers earn about $250 a month, compared with $750 in China). But there are at least six other catalysts that will keep attracting all that FDI cash, including:

  1. Faster economic growth than you'll see in developed economies (Vietnam's economy grew 5.25% in 2012, 5.42% in 2013 and will grow an estimated 5.9% this year and 6.2% in 2015 – with inflation staying under 3%).
  2. Two major free-trade pacts that could take effect next year.
  3. Improving infrastructure – including shipping ports, highways, proliferating cargo flights, and water and power.
  4. Increasingly business-friendly rules – including hefty tax incentives.
  5. A promising work force – with 60% of employment age and a literacy rate of 94% (compared to a global average of 84%).
  6. And a broad push for reform – from corruptive practices to wobbly banks.

To have a market worthy of sustained foreign investments, "you need high savings rates, clear land, labor-market freedom, and low-cost labor," Jonathan Woetzel, a Shanghai-based consultant for McKinsey, told Barron's. "Vietnam is the one that's most proximate [to China] and has most of these."

That's why experts say that, within the next decade, companies that currently source all their products from China will shift so that 30% to 40% of that total comes from Vietnam and its neighbor, Cambodia.

It's already happening. Samsung has been shifting production from China, India, and other countries to Vietnam. During 2015, the company expects to ship 40% of its phone handsets from its factories in Vietnam, where its total investment exceeds $11 billion.

This is the start of a growth story that will create meaningful wealth for folks with the foresight and patience to let this powerful cycle play out, says Thomas Hugger, chief executive of the AFC Asia Frontier hedge fund.

"The move away from China will benefit countries like Bangladesh, Cambodia, Myanmar, and Vietnam over the next five to 10 years," Hugger told reporters recently. "This massive shift will ultimately increase consumption of basic items in these countries because more people, who currently make their living in the countryside from farming, will be able to find a job and will receive a regular salary, which will be more and more used for consumer items. Thus, both of our funds [AFC Vietnam Fund and AFC Asia Frontier Fund] are about 40% invested in consumer stocks."

There still aren't a lot of ways to invest directly in Vietnam. But that will change as the market there continues to normalize.

In the meantime, we see two profit plays we like – one direct and the other indirect.

One indirect way is via Intel Corp. (Nasdaq: INTC), a stock that's up 62% (67% with dividends) since we recommended it to you in the July 2013 report "Why We Love the Stock Investors Hate." We made that recommendation because we knew that Intel was moving into mobile, wearable technology, and the "Internet of Everything," or IoE. And we knew the chip giant was restructuring its operations – which includes moving PC-chip production to low-cost Vietnam.

We still like Intel for those same reasons.

If you want a direct play, look at the Market Vectors Vietnam ETF (NYSE: VNM), which has $547 million in assets under management and is up about 8% this year.

As of Oct. 31, 73.1% of the fund's assets were invested in Vietnam, with an additional 9.7% invested in Thailand, one of five countries – along with Vietnam, Cambodia, Myanmar, and Laos – that are often viewed as the "New China."

If you go with the Vietnam ETF, look at it as a long-term investment. Start out with a smallish investment – less than 1% of your holdings – and look to add gradually on declines until you have the position you want.

Use a multi-year horizon on this one.

Down the road, you'll be glad you did.

Source :

Money Morning/The Money Map Report

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