By Jason Simpkins
Hon Hai Precision Industry Co. Ltd, the world’s No. 1 contract-manufacturer of consumer-electronics products, is boosting its Vietnam investment to $5 billion. The company originally planned to invest $1 billion, but the increased outlay underscores Vietnam’s strong prospects.
Vietnam, which joined the World Trade Organization (WTO) in January, is one of the world's fastest-growing economies. Its Gross Domestic Product (GDP) growth has exceeded 7% in each of the past four years, and the Vietnamese government is anticipating growth of 8.5% this year.
Deregulation and privatization programs, rising exports (helped along by the commodities boom), and rapidly increasing foreign direct investment, have helped fuel the nation’s broad-based and fast-paced economic expansion. Vietnam is attractive to foreign firms because of its inexpensive labor costs and a work force that’s well educated, despite its youth. As a result, Vietnam’s growth rate has exceeded that of Thailand, Malaysia, Taiwan, South Korea, and even India.
Foreign investment jumped by 49% in 2006, with major international companies moving in:
- Intel Corp. (INTC), which committed $605 million to the building of a factory in the country back in February 2006, is ready to spend $1 billion on a semiconductor test-and-assembly plant.
- Korea’s Posco (PKX) plans to invest $1.13 billion in new steel plants.
- Nike Inc. (NKE) is responsible for more than 130,000 Vietnamese jobs.
This year, projects financed by foreign firms have already attracted $8 billion in outside investment, after a year in which foreign investment reached a record $10.2 billion last year.
Hon Hai isn’t just a big fish in the global high-tech pond – it’s the whale. In fact, BusinessWeek referred to it as an “earnings machine.” It makes Nokia (NOK) cell phones Hewlett-Packard Co. (HPQ) PCs and Mac Minis and iPhones for Apple Inc. (AAPL). Video game consoles account for more than $10 billion worth of business worldwide and Hon Hai makes the Microsoft Corp. (MSFT) Xbox 360, the Sony Corp. (SNE) Playstation 3 and the Nintendo Wii.
Hon Hai’s market power drove Flextronics International Inc. (FLEX) into a deal to buy rival Solectron Corp. (SLR) for $3.6 billion. Flextronics wants the manufacturing and marketing muscle needed to keep pace with its other foreign rivals – particularly Hon Hai.
The deal brings the manufacturing capabilities of the Flextronics Ltd., a Singapore-based firm, together with the Milpitas, Calif.-based Solectron’s well-known strengths in the market for telecommunications equipment. The two companies have aggregate revenue of $30 billion
Hon Hai’s 2005 sales topped $28.4 billion, up six-fold from 2001, and it recorded a $1.3 billion profit. It’s also a company that’s expanding rapidly. Hon Hai has a large, well-established customer base in such Western markets as the United States, but also employs more than 100,00 workers on mainland China. It has acquired an Australian factory from H-P, a Mexican mobile phone plant from Motorola (MOT), and is set to build its North American headquarters just across the border from El Paso. It also has factories in Brazil, the Czech Republic, and Ireland.
Now it intends to build factories in six provinces across Vietnam in the next five years, according to Dang Van Hien of the Ministry of Planning and Investment. Earlier this week Hon Hai opened two factories in Que Vo Industrial Park in Vietnam’s Bac Ninh province, and is building two more plants in the neighboring Bac Giang province.
Unfortunately, because it’s not registered with the Securities and Exchange Commission, U.S. investors can’t invest in Hon Hai directly. The best way to get a piece of this company is through the iShares MSCI Taiwan Index (NYSE: EWT) exchange traded fund (ETF), of which Hon Hai accounts for a 9.4% stake. The fund is linked to the Morgan Stanley Capital International Taiwan Share Index. With a market cap that exceeds $2 billion and a low expense ratio of 0.74%, this ETF is diversified and provides a broad exposure to the growth potential of both Hon Hai, and Taiwan.
Related News and Story Links:
- Money Morning Investment Research Report: Global Investing: Has Wall Street Rigged the Game?
- Money Morning News Analysis Story: Flextronics Deal Creates Competition for Taiwan’s Hon Hai.
- Money Morning Investment Report: China’s Not The Only Red-Hot Economy In the East: Why Vietnam Is Asia’s Hidden Dragon.
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- Money Morning Investment Analysis: Vietnam: The Market That Will Emerge After the Emerging Markets.
- FREE Money Morning Investment Research Report: ( ).