Impacts of Potential Tariffs on Samsung and Vietnam's Economy

SEOUL/HANOI - Samsung Electronics, under the leadership of chairman Jay Y. Lee, has established a significant presence in Vietnam, emphasizing that the prosperity of Vietnam aligns with the company's growth. Lee highlighted this during a meeting with Vietnam's Prime Minister Pham Minh Chinh, expressing commitment to long-term investments aimed at making Vietnam the primary hub for Samsung's display products.

Since entering the Vietnamese market in 1989, Samsung has invested billions to broaden its manufacturing capabilities beyond China, a move mirrored by several other companies following the imposition of tariffs on Chinese imports by the U.S. administration during the Trump era. This strategic pivot has positioned Samsung as Vietnam's largest foreign investor and exporter, with around 60% of its global smartphone production occurring in the country. The majority of these smartphones are exported to the U.S., where Samsung holds the position of the second-largest smartphone vendor.

However, this heavy reliance on Vietnam is beginning to pose risks as the nation engages in discussions with the Trump administration regarding a potential 46% tariff that could severely impact its export economy. Recently, Vietnam and Samsung received a temporary reprieve with a tariff rate set at 10% for a 90-day period, but uncertainties loom as interviews with industry insiders suggest that Samsung would be significantly affected should these tariffs escalate come July.

A Samsung executive noted the internal confusion regarding the tariffs, stating that the initially proposed rates were higher than anticipated. Even if a resolution is reached with the U.S., Vietnam's substantial trade surplus of approximately $120 billion has drawn attention from the U.S. government, which is keen on addressing such trade imbalances. Reports indicate that Vietnam is negotiating to reduce the tariff rate to between 22% and 28%.

In light of these developments, Samsung and its supply chain partners are contemplating adjustments to their production strategies, which may involve relocating some manufacturing to India or South Korea. However, such transitions are expected to be resource-intensive. Samsung has not provided specific comments on its approach to the tariff situation but has indicated a willingness to adapt its global supply chain operations as necessary.

The Vietnamese government has also remained silent on the matter, reflecting the delicate nature of the ongoing negotiations. Meanwhile, competing tech giant Apple faces even greater challenges, as its tariffs on Chinese products have surged to 145%. Apple sources around 80% of its iPhones from China.

The looming tariff threats have created a cloud of uncertainty over Vietnam's manufacturing landscape, which had previously attracted numerous companies seeking to diversify their operations amidst U.S.-China tensions. However, this surge in foreign investment has led to emerging challenges, including power supply issues and an increase in the effective tax rate for large multinational corporations, which has raised concerns among businesses operating in Vietnam.

Furthermore, the influx of foreign firms has strained the availability of skilled labor and driven up wage costs, prompting some economists to warn that Vietnam's investment allure may diminish in comparison to other countries. Analysts from Nomura have suggested that while Vietnam faces potential losses, India stands to benefit as it advances toward a trade agreement with the U.S.

In February, India committed to working on a preliminary trade agreement with the U.S. as part of its strategy to enhance economic collaboration. Vietnam has already made concessions, including increasing its imports to the U.S., becoming one of the first nations to initiate trade discussions following the moratorium on reciprocal tariffs.

Despite the uncertainty, sentiments within the manufacturing sector reflect a cautious approach, with some businesses initially reacting with alarm to the tariff announcements. As companies recalibrate their strategies, many have entered a phase of observation, waiting to see how the situation unfolds.

Samsung has not finalized its response to the evolving tariff threats, but potential options include reallocating some smartphone production to its facility in South Korea. Additionally, expanding operations in India remains a possibility, although the current capacity there can only accommodate around 20% of Samsung's total production needs.

According to BMI Research, electronics account for approximately 45% of Vietnam's exports to the U.S., and major manufacturers like Samsung may need to scale back production in anticipation of declining demand. Samsung's operations in Vietnam extend beyond smartphones, encompassing TVs, home appliances, and device screens, with total exports reaching around $54 billion last year, constituting about 15% of Vietnam's overall exports.

The uncertainty surrounding tariffs is already causing ripples on factory floors, with local workers expressing concerns over potential cuts to operations.