Canon is no longer building or expanding factories in China, but the company is doubling its work force to 8,000 at a printer factory outside Hanoi.
Nissan is expanding a vehicle engineering center nearby. Hanesbrands, based in Winston-Salem, North Carolina, is building two new factories here. Texhong Textile Group of China is constructing two plants for manufacturing spandex.
China remains the most attractive destination for industrial investment in the world, drawing almost $83 billion last year. But, in a strategy that companies are calling "China plus one," multinationals - worried about soaring costs in China and about becoming overly dependent on factories in one country - are increasingly establishing or expanding bases elsewhere on the continent, particularly in Vietnam.
The long list of worries about China includes inflation, rapidly rising labor costs, shortages of workers and energy, a strengthening currency, dwindling tax breaks for foreign investors and the possibility of civil unrest. With wages in China now rising close to 25 percent a year in dollar terms in many industries, the vaunted "China price" for a growing list of goods, particularly low-tech products, is no longer such a bargain.
Multinationals "should be thinking about all the world and keeping a balance," and they are doing so by encouraging suppliers to diversify out of China, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory sells to Wal-Mart and Kohl's in the United States, and it is building a factory in Vietnam to supplement its three factories in China.
Very few factory jobs are headed from China to the United States, despite high oil costs that are making it more costly to ship goods across the Pacific. The factory investments shifting from China to elsewhere in Asia tend to be in low-skill, low-wage industries as China deliberately focuses on higher-wage industries like precision machining and computer component manufacturing.
That is making it an even more formidable rival for the United States. "China is becoming more competitive because they're moving upscale," said Jack Perkowski, the chairman and chief executive of Asimco Technologies, a 12,000-employee engine parts manufacturer based in Beijing. China's main rivals also suffer from serious inflation. But their costs are rising from a lower starting points. Inflation hit 25.2 percent last month in Vietnam, yet workers there still earn less than half as much as Chinese workers.
At stake is more than corporate profits. When the cost of making goods in Asia rises, consumers around the world inevitably feel the pain in the form of higher prices for imported products.
Moreover, higher prices for goods from China and elsewhere in Asia could make it easier for companies producing goods elsewhere to raise their prices as well, further contributing to inflation around the world.
Few companies are actually closing factories in China. For companies with large operations there, the China plus one strategy is meant to mitigate risk. Many of those staying in China are looking desperately for ways to control costs, including greater automation.
And that includes Chinese companies.
"We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees," said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world's largest manufacturers of cotton and spandex fabric.
Hanesbrands is building a largely automated factory in Nanjing to manufacture fabric, a process with limited labor costs. But the company is building a factory in Vietnam to sew underwear there and has recently bought another factory in Vietnam and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared with China, "we found more ready availability of both land and labor in both Vietnam and Thailand." Hanesbrands will be shifting some manufacturing from Mexico and Central America and is also expanding its overall output.
In China, where rural villages are running out of able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour workweek, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour workweek that includes a full day on Saturdays.
Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs. That is in addition to a 12 percen.t increase last year.
Regulations adopted last year in China are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.
Combine those increases with a currency rising against the dollar at an annual pace of up to 10 percent and labor costs in China are now climbing at 25 percent a year or more in dollar terms.
Inflation in China - more than 8 percent in February, March and April and 7.7 percent in May - raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods imported into the United States.
Over the past few years, some companies have sought relief from high wages in coastal provinces of China by moving inland. But companies like Ever-Glory are now doing the same arithmetic and finding it cheaper to move to other countries than to head inland, partly because of national policy changes in China, like the labor regulations.
China is also rapidly phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.
To be sure, China still attracts a large and growing torrent of foreign direct investment. It reached $82.66 billion last year according to China's Commerce Ministry, which mainly includes factories in its figures while excluding most real estate and service-sector investments.
Foreign direct investment in China has grown by a third over the past three years. By contrast, foreign direct investment has more than doubled in this period in the Philippines, quintupled in India and soared more than eightfold in Vietnam.
A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.
But how long those analogies will hold - in a world where economies evolve from agriculture to manufacturing to services in a couple decades - is unclear.
As foreign investors leap into each new country, they drive up the cost of workers and goods - a dynamic that makes it less likely that the shift in investment patterns will hold down inflation in American and European imports.
Vietnam has less than one-sixteenth of China's population, but receives one-fifth the foreign investment. Drive the roads outside Hanoi these days and they are dotted with construction cranes, like the site of a future Samsung mobile phone factory, where each crane carries the red national flag of Vietnam and the hammer and sickle flag of Vietnam's Communist Party waves nearby. But there may be too much investment, as companies scramble to find workers and materials.
Executives here bemoan the constant turnover of skilled staff members but try to keep paying the low salaries that drew them to Vietnam in the first place.
A recent survey by Grant Thornton, the global accounting and consulting firm, found that companies were more worried about attracting and retaining key staff members in Vietnam than anywhere else in the world. (China was a close second.)
"We trained them, we educated them, and then they quit - this is very painful," said Akira Akashi, the chairman of Nissan Techno, a vehicle design division of Nissan.
Despite the job hopping, Nissan Techno plans to expand to 1,400 engineers in Vietnam by 2010. That is because engineers fresh out of universities here still earn just $200 a month.
Blue-collar labor is also becoming harder to find. Vietnam's biggest factories are located in the south and have relied on migrant labor from northern and central Vietnam. But this year, many of these workers have found better-paying jobs at newer factories built closer to their homes.
Motorcycle parts manufacturers in southern Vietnam found this spring that large numbers of workers simply did not return from Tet holidays with their families in northern and central Vietnam.
Vietnam Manufacturing and Export Processing, a big motorcycle manufacturer controlled by Sanyang Industry of Taiwan, had to send 50 of its own employees to work at its suppliers' factories instead.
The company's pay increases of 30 percent to 40 percent in the past year are barely helping workers whose main cost is food items, for which prices are rising even more swiftly.
Infrastructure is likely to be another impediment to how fast China plus one can expand. Like most countries in Asia, Vietnam has not improved transportation links as quickly as China. Traffic jams slow down shipments and drive up costs.
Vietnam's biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes any hint of political opposition, keeps the military under control and changes government policies and leaders slowly.
"Communism means more stability," Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and other instability that has scared foreign investors.
Companies moving their operations to Vietnam use their geographic diversification as a selling point to American retailers nervous about relying too heavily on China for their wares.
Yet, like China, Vietnam does not offer complete tranquility. Workers are becoming more vocal and staging more strikes, despite a government ban on independent unions.
Nearly 20,000 workers walked out this spring at a Nike shoe factory run by a Taiwanese contractor. The workers went back to work only when given a 10 percent raise, to $55 a month, and a larger meal subsidy.
