Analysis

By Francesco Guarascio

HANOI (Reuters) - A chronic shortage of engineers in Vietnam is emerging as a major challenge to the growth of its semiconductor industry and to U.S. plans of fast-tracking the Southeast Asian nation as a chips hub to hedge against China-related supply risks.

Semiconductors are expected to be a focal point when U.S. President Joe Biden visits Hanoi from Sept. 10 with the goal of formally elevating ties between the two countries. He will offer Vietnam support to boost its chips production, U.S. administration officials said.

"Friendshoring" segments of the strategic semiconductors industry has been one of Washington's key inducements to persuade Vietnam's communist leaders to agree to formally upgrade relations. Hanoi was initially reluctant about the move over fears of an adverse reaction from China.

The boost to formal ties could bring billions of dollars of new private investment and some public funds to Vietnam's semiconductor industry. But industry officials, analysts and investors said that the small pool of trained experts will be a crucial hurdle for the rapid development of the chip industry.

"The number of available hardware engineers is way below what is needed to support multi-billion-dollar investments," about one-tenth of expected demand over the next 10 years, said Vu Tu Thanh, head of the Vietnam office of the US-ASEAN Business Council.

The 100-million-people country has only 5,000 to 6,000 trained hardware engineers for the chip sector, against expected demand of 20,000 in five years and 50,000 in a decade, Thanh said, citing estimates from companies and engineers.

There's also a risk of inadequate supply of trained chips software engineers, said Hung Nguyen, senior program manager on supply chains at RMIT University Vietnam.

Vietnam's ministries in charge of labour, education, information, technology and foreign affairs did not reply to requests for comment.

CHINA'S COMMANDING POSITION

The Southeast Asian nation's semiconductor industry, whose exports to the U.S. are worth more than half a billion dollars annually, according to Vietnam government figures, is currently focused on the back-end manufacturing stage of the supply chain - that is assembling, packaging and testing of chips - though it is slowing broadening out into areas such as designing.

The White House has not specified which segments of the chips industry in Vietnam will be prioritised, but U.S. industry executives have indicated that the back-end is a key growth sector.

China has played an important role in these considerations. Nearly 40% of the global back-end manufacturing was in China in 2019, according to Boston Consulting Group, against just 2% in the United States. Another 27% was in Taiwan, around which China has stepped up military activity, fanning fears of conflict.

That makes the assembling segment one of the most concentrated in the industry, after chipmaking. In no other segment has Beijing had such a commanding position.

That is despite Intel having operated in southern Vietnam for about 15 years its world's biggest factory for assembling, packaging and testing chips.

But, in a sign of growing interest, rival Amkor is building near Hanoi "a state-of-the-art mega factory for semiconductor assembly and testing," U.S. Treasury Secretary Janet Yellen said on a visit to Hanoi last month.

More private investment could come, especially if a significant share of the $500 million available under the U.S. CHIPS Act for global semiconductor supply chains ends up in Vietnam.

The U.S. may also be interested in boosting Vietnam's supply of raw materials for chips, especially rare earths, of which the country is estimated to have the world's second largest deposits after China, said Hung at RMIT University Vietnam.

The country is making inroads in the smaller segment of chip designing. U.S. chip design software company Synopsys has operations there, rival Marvell plans to build a "world-class" centre, and local firms are expanding.

Vietnam is also attracting interest from manufacturers of chip-making machines and has flagged ambitions to build its first semiconductor manufacturing plant, or fab, by the end of the decade.

JOB OPENINGS

The semiconductor ambitions could, however, remain pipe dreams if the skilled labour shortage is not addressed properly, making Vietnam more vulnerable to regional competitors such as Malaysia and India.

Intel has repeatedly urged authorities to broaden the pool of skilled workers, officials said.

It has considered nearly doubling its $1.5 billion operation in Vietnam, sources said earlier this year, but it is unclear whether that is still the plan after it announced massive investments in Europe in June. Intel did not reply to a request for comment.

Amkor has about 60 job openings on its Vietnam website, mostly for engineers and managers. It did not reply to a request for comment.

A workaround could be to ease Vietnam's rules to issue work permits for overseas engineers, which currently "are very hard to get quickly," Thanh of the US-ASEAN Business Council said - until the domestic skilled workforce is sufficiently boosted.

But that would require legislative changes and faster administrative procedures - no easy feat, according to several Vietnam-based diplomats and entrepreneurs.

Biden intends to discuss with Vietnam's leaders workforce development programs, the White House said in a statement, that could expand existing training initiatives.

(Reporting by Francesco Guarascio; Additional reporting by Steve Holland and Trevor Hunnicutt in Washington, Khanh Vu and Phuong Nguyen in Hanoi; Editing by Muralikumar Anantharaman)