Lego has announced plans to invest $1bn to develop its first carbon-neutral factory in Vietnam, powered by solar energy, as the country continues to lure investors in the wake of the US–China trade war.

In December, the Danish company signed a memorandum of understanding with Vietnam Singapore Industrial Park Joint Venture Company Limited (VSIP) to develop a 44-hectare site in the Binh Duong province, roughly 50km from Ho Chi Minh City, where it expects to create up to 4000 jobs over the next 15 years.

Growing Asian market

Carsten Rasmussen, Lego’s chief operations officer, tells fDi that the new factory is part of the company’s push to expand its factories base globally, keep supply chains short and serve the booming Asia-Pacific market. 

“Our strategy is to locate our production sites close to our big markets. This enables us to respond to shifts in demand, it shortens our lead time and reduces our environmental impact from shipping,” he says.

Construction on the new plant is slated to begin in the second half of 2022 and production is due to start during 2024. The company also announced in January it will expand its existing operations in Jiaxing in China.

The fact that Vietnam has had its sights set on the build out of renewable energy infrastructure has also facilitated this investment. “The plans from the Vietnamese government to invest in expanding renewable energy production infrastructure was a factor in the decision to invest here, alongside access to qualified labour,” Mr Rasmussen says.

Regulatory headache

The new factory will feature solar panels on its roof and VSIP will build a nearby solar project on behalf of Lego. Both of these solar parks will produce enough renewable energy to match 100% of the factory’s annual energy requirements, the company says, as it plants 50,000 trees in Vietnam to compensate for vegetation removed during construction.

Dennis Meseroll, executive director at Tractus Asia Limited, which advised on the deal, says that foreign investors betting big on Vietnam is “certainly a continuing trend since the US–China trade war”, with the country thought to be “a highly sought after destination because of a combination of costs and its location”.

But he warns that while foreign investors wait on a clear renewables regulatory framework that is being drafted by the government in the form of the Power Development Plan (PDP) VIII, there is currently a moratorium on new green energy investments, including Lego’s and VSIP’s. 

Mr Meseroll expects the new PDP VIII to be finalised sometime early this year, which is well within the development schedule of Lego’s project and will allow other projects to be approved. 

There is also a parallel investor headache in the form of industrial zones — the easiest way for foreign investors to gain access to land — reaching full capacity. As of 2020, Vietnam’s Ministry of Planning and Investment estimates that the 31 industrial zones in Binh Duong province are operating at 99% capacity. 

While Lego’s site has been approved in VSIP, other investors might have to look elsewhere, according to Mr Meseroll. “As for other major large scale investments, the industrial real estate capacity constraints across Vietnam are a threat to its competitiveness,” he says, adding that this creates opportunities for neighbouring countries, such as Thailand.

This article first appeared in the February/March 2022 print edition of fDi Intelligence.