China+1 Strategy: Why Vietnam Is Becoming the Preferred Manufacturing Destination for German Companies
Attorney Vu Manh Quynh is the Managing Partner of ECOVIS Vietnam Law, advising international investors on Foreign Direct Investment (FDI), corporate governance, and regulatory compliance in Vietnam.
The Strategic Shift Is No Longer Speculative
Five years ago, China+1 was a contingency discussion in German boardrooms. Today it is an execution programme. The drivers have broadened well beyond labour cost arbitrage: supply chain resilience mandates from major customers, friend-shoring and near-shoring policies, tariff diversification across export markets, the reorganisation of the semiconductor and electronics supply chain, ESG-driven supplier requirements — including the German Supply Chain Due Diligence Act — and the European Union’s economic security strategy have all converted a defensive hedge into a board-level requirement.
For German Mittelstand manufacturers, the question has shifted from whether to diversify production beyond China to where and how fast. Vietnam has emerged as the most frequently selected answer — and the legal questions that follow mirror what CEOs, CFOs and General Counsel ask before investing in Vietnam.
German companies with Vietnamese suppliers or subsidiaries should also note the compliance interaction between German law and Vietnamese operations, examined in our analysis of the German Supply Chain Due Diligence Act (LkSG) and Vietnamese suppliers.
Why China+1 Is No Longer Only About Cost
The first wave of China+1 relocations was cost-driven. The current wave is risk-driven, and this changes how projects are structured:
- Geopolitical risk: concentration of production in a single jurisdiction is now treated as a balance-sheet risk by customers, insurers and lenders.
- Resilience and redundancy: multi-country manufacturing footprints are designed for continuity, not only for margin. A second plant is an insurance policy with a payback period.
- Customer requirements: major OEMs increasingly require suppliers to demonstrate a production location outside China as a condition of long-term contracts.
- ESG and supply chain law: European due diligence legislation makes supplier-country governance, labour standards and traceability a legal obligation rather than a preference.
- Tariff diversification: exporting from Vietnam under the EVFTA and Vietnam’s broader free trade agreement network reduces exposure to tariff escalation in any single corridor.
Because the drivers are risk-based, execution discipline matters more than speed. A China+1 project that fails licensing, environmental or labour compliance recreates in Vietnam exactly the risk it was designed to eliminate. This is why experienced investors sequence the legal workstream first — as outlined in our legal roadmap for relocating production from China to Vietnam.
Why German Manufacturers Choose Vietnam
Vietnam’s candidacy rests on a combination that few alternative locations replicate:
- EVFTA: the EU–Vietnam Free Trade Agreement, in force since August 2020, progressively eliminates the substantial majority of tariff lines between Vietnam and the EU — a structural export advantage for EU-bound production. Details are published by the European Commission’s trade directorate.
- Engineering talent: a young technical workforce with growing depth in electronics, precision engineering and industrial automation.
- Supplier ecosystem: two decades of Japanese, Korean and increasingly European manufacturing investment have built supporting industries around the main industrial corridors.
- Political stability and policy continuity: a consistent pro-FDI policy line, with investment conditions codified in the framework summarised in our FDI Law Vietnam 2026 overview.
- Export capability: deep-sea ports, established export logistics and customs regimes designed for export manufacturing — covered in our FAQ on customs, import-export and supply chain compliance.
- Manufacturing ecosystem: the legal, land and incentive architecture for manufacturing projects is mature and documented in our Manufacturing Investment Vietnam guide.
What German Manufacturers Are Actually Moving to Vietnam
The China+1 transition rarely means closing China operations. In practice, German manufacturers are moving: assembly and final production stages for EU- and US-bound goods; new capacity expansion that would previously have defaulted to China; component manufacturing where the supplier ecosystem supports it; and, increasingly, engineering-adjacent functions attached to production.
Electronics, semiconductor supply chain participants, automotive suppliers, precision engineering, machinery and industrial equipment dominate the pipeline. Location decisions concentrate on the northern corridor (Hanoi–Hai Phong), the southern corridor (Ho Chi Minh City, Thu Duc City, Binh Duong, Dong Nai, Long An) and selected central provinces — assessed against criteria described in our factory site selection guide for foreign manufacturers.
Vietnam’s 2026 Regulatory Landscape: What China+1 Investors Must Plan For
Vietnam rewards investors who respect its regulatory sequence. The framework below is where most projects succeed or stall.
Investment licensing
Most greenfield manufacturing projects require an Investment Registration Certificate (IRC) followed by an Enterprise Registration Certificate (ERC) — the sequence, timing and interaction are explained in our guide to the IRC and ERC for foreign manufacturers. Licensing strategy, sector conditions and approval pathways are covered in the FAQ on licensing and approvals for factory projects. Charter capital must then be contributed through the Direct Investment Capital Account (DICA) within the committed schedule — late capital contribution is one of the most common and most avoidable violations, as noted in our review of common legal mistakes foreign investors make in Vietnam. Post-licensing obligations begin immediately upon incorporation.
Manufacturing implementation
Industrial park selection determines the environmental, construction and incentive position of the project — compare structures in our guide to industrial zones in Vietnam for foreign investors and the FAQ on industrial land and location. Ready-built factories accelerate timelines but require careful lease and compliance due diligence. Environmental approvals, construction permits and fire safety acceptance follow a strict sequence explained in the FAQ on environmental, construction and operational approvals — a factory that starts construction or operation before the corresponding approval faces suspension risk.
Labour and global mobility
German project teams typically deploy expatriate engineers and managers during setup and ramp-up. Work permits, work permit exemptions and temporary residence cards must be sequenced with the production timeline, and Vietnamese labour law imposes registration and internal labour regulation obligations from the first hire. Our FAQ on labor, expatriates and HR compliance for factory projects and the employment law practice overview set out the framework.
Tax architecture
The Vietnam tax position of a China+1 project is determined at structuring, not at year end: CIT incentives must be recorded in the IRC; VAT refund eligibility for exporters depends on documentation discipline; transfer pricing documentation is mandatory for related-party transactions; and profit repatriation runs through audited accounts, tax finalisation and the DICA. Each is answered in our Vietnam Tax FAQ for foreign investors, with incentive specifics in Tax Incentives for Foreign Investors in Vietnam. Note that Vietnam applies the OECD Pillar Two global minimum tax to large MNE groups, which changes the value of headline incentives for groups above the EUR 750 million threshold. Official tax policy is published by the Ministry of Finance.
Governance and compliance
A Vietnamese subsidiary of a German group needs governance that satisfies both German group standards and Vietnamese corporate law: legal representative arrangements, board and shareholder resolutions, internal controls and an annual compliance calendar. The governance framework for German-invested companies is described in our Vietnam FDI legal guide for German investors, and ongoing obligations in the FAQ on post-licensing and operational compliance.
Common Mistakes in China+1 Execution
The same avoidable errors recur across projects:
- Choosing the factory before the licensing strategy — signing land or lease commitments before confirming the IRC pathway and sector conditions.
- Selecting an industrial park on rent alone — ignoring environmental category, incentive status, utility capacity and expansion room.
- Ignoring environmental approval sequencing — starting fit-out before the environmental licence is issued.
- Underestimating labour lead times — expatriate work permits and local hiring take longer than most German project plans assume.
- Poor tax planning — missing incentive registration in the IRC, or discovering foreign contractor tax and transfer pricing obligations after the first intercompany invoice.
- Weak contracts — supply, tolling and OEM agreements drafted for German law realities without Vietnamese enforceability in mind; our dispute resolution practice sees the consequences.
- Delayed capital contribution — missing the DICA schedule committed in the IRC, which can block later payments and amendments.
Risk allocation, dispute prevention and exit planning are addressed in the FAQ on risk management, disputes and exit strategy.
The China+1 Roadmap: Seven Stages
- Evaluate — confirm the strategic driver (customer requirement, tariff, resilience) and target product scope; test assumptions against our FAQ on market entry and investment strategy.
- Feasibility — location shortlist, supplier ecosystem mapping, incentive and tax modelling, labour market assessment.
- Structure — entity form, ownership, capital structure and governance; see company setup in Vietnam for foreign investors.
- Investment licensing — IRC application, ERC issuance, company incorporation, DICA opening and capital contribution.
- Factory — land or ready-built factory transaction, environmental approval, construction permit, fire safety acceptance.
- Operations — hiring, work permits, customs registration, VAT and invoicing setup, first production and export.
- Expansion — capacity increase, IRC amendments, additional lines, supplier localisation and possible M&A.
The complete lifecycle — 100 questions across all seven stages — is consolidated in our comprehensive factory setup guide (100 FAQ).
Common Misconceptions About Vietnam as a China+1 Destination
“Vietnam is just cheap labour.” Labour cost is no longer the primary case; the case is EVFTA access, ecosystem depth and risk diversification. Wage growth is real and should be planned for.
“Setup works like in China.” Vietnam’s IRC/ERC sequence, capital account rules and licensing logic differ materially from Chinese practice; teams that transplant their China playbook create delays.
“Everything can be negotiated later.” Incentives, business lines and project scale committed in the IRC define what the company may do. Retrofitting is amendment work, not conversation.
“One advisor per topic is enough.” Licensing, land, construction, labour and tax interlock; treating them as parallel silos is the root cause of most timeline overruns — the reason we structure factory setup in Vietnam as one integrated legal workstream.
Frequently Asked Questions
Is Vietnam still attractive for China+1 in 2026?
Yes. The structural drivers — EVFTA tariff advantage, supplier ecosystem maturity, policy continuity and export infrastructure — remain in place, and risk-driven demand from European customers continues to grow. Competition for prime industrial land in the main corridors means location decisions should be made earlier, not later.
Can German companies own 100% of a Vietnamese manufacturing subsidiary?
In most manufacturing sectors, yes — a wholly foreign-owned enterprise is the standard structure. Sector-specific conditions apply in a limited number of fields and should be confirmed before structuring.
Which industrial parks should German manufacturers consider?
The right park depends on sector, environmental category, logistics profile and workforce needs rather than rent alone. Northern and southern corridor parks serve different supply chains; our industrial zones guide sets out the selection criteria.
How long does a factory project take from decision to production?
A realistic range for a mid-sized greenfield project is 12–24 months from decision to commercial production, depending on land status, environmental category and construction scope. Ready-built factories can compress this materially.
What taxes will a German-owned Vietnamese manufacturer pay?
Standard CIT is 20%, with preferential rates available for qualifying projects if registered in the IRC; VAT at 0% on exports with refund entitlement; transfer pricing documentation for intercompany transactions; and foreign contractor tax on many payments to the German parent. See the Vietnam Tax FAQ for details.
How much charter capital is required?
Vietnam has no general statutory minimum for manufacturing, but the capital must be credible for the registered project scale and must be contributed through the DICA within the committed schedule. Undercapitalised applications attract licensing scrutiny.
How do we deploy German managers and engineers?
Through work permits or work permit exemptions plus temporary residence cards, sequenced with the project timeline. Intra-group transferees and certain experts benefit from specific pathways — see our labour and expatriate FAQ.
How are profits repatriated to Germany?
Through the DICA after audited financial statements and tax finalisation, with no Vietnamese dividend withholding tax on distributions to the corporate foreign parent — one of Vietnam’s most underappreciated advantages. The mechanics are covered in the tax FAQ.
How ECOVIS Vietnam Law Supports China+1 Projects
ECOVIS Vietnam Law is part of ECOVIS International, a global multidisciplinary network with deep roots in Germany. We advise German Mittelstand companies, European manufacturers and multinational groups on the complete China+1 lifecycle — combining Vietnamese licensing, land, labour and governance execution with tax and accounting coordination through the ECOVIS network, and German-language support through our German Desk Vietnam.
Planning a China+1 expansion into Vietnam? Whether you are evaluating a second manufacturing location, relocating part of your production, establishing a wholly foreign-owned subsidiary, or acquiring an existing operation, ECOVIS Vietnam Law provides integrated legal, tax and compliance support throughout the investment lifecycle — market entry strategy, investment licensing (IRC/ERC), factory setup, industrial park due diligence, employment and global mobility, tax and transfer pricing coordination, corporate governance and ongoing compliance. Contact Attorney Vu Manh Quynh: vietnam@ecovislaw.vn | Contact page
This material is for general informational purposes only and does not constitute legal, tax or professional advice. Investors should seek specific advice based on their business sector, ownership structure and investment location in Vietnam.
Attorney Vu Manh Quynh is the Managing Partner of ECOVIS Vietnam Law, advising international investors on Foreign Direct Investment (FDI), corporate governance, and regulatory compliance in Vietnam. Email: vietnam@ecovislaw.vn | Website: www.ecovislaw.vn