Will Vietnam Replace China?

Whilst large western corporations are currently reviewing their reliance on China based on geopolitical tensions. Vietnam would seem to offer an alternative for companies wishing to purchase abroad.

Vietnam’s Import & Export

Vietnam’s Import & Export increased from US$36.5 billion in 2002 to US$668.5 billion in 2021, a growth rate of 17 times in 20 years. 1/3 of all shoes & 1/5 of clothes in the US market are made in Vietnam, and 50% of mobile phones and 30% of electronics (Samsung) are made in Vietnam. In comparison, 51% of the output of its mobile phones came from China in 2011. Nike’s 1/3 of clothes and 50% of shoes are now made in Vietnam. In comparison, 40% of its shoes were from China in 2001.
In 2020 when the pandemic started, Vietnam’s GDP growth was 2.91% which surpassed China’s 2/3% and made it the second-best country in this index.

Low Salaries

Vietnam’s one-party state offers large amounts of cheap and young labour. 56% of its population is youthful, with an average age of around 30. The average salary of workers in Ho Chi Minh is ½-2/3 of Chinese workers in large cities. Vietnam is one of the nations in Asia that has joined more free trade agreements in the world than any other country. This gives Vietnam a favourable position in terms of international trade and lower costs.

Low corporation tax

Vietnam has amended its laws on investment multiple times, such as lowering the corporate income tax to 20%, tax reductions and exemptions, to make it an attractive country for foreign businesses, especially in the manufacturing sector. In 2021, the FDI (Foreign Direct Investment) was US$31.1 billion having grown by 9.2%, of which 58.2% was manufacturing.

Vietnam Challenges

Low-end manufacturing is based on low cost, and the key to high-end manufacturing is technology. It takes time to form a full-scale supply chain and without the continued upgrade of the industrial supporting system, will it really be able to become the “world factory”. The lack of core technology in manufacturing may be its Achilles heel.

Workforce Woes

With a workforce of 55m compared to China’s of 806m it may not have the people capacity to fulfil the global demands of an alternative production source.

Outdated Infrastructure

It takes a whole day from Ho Chi Minh to Miu Ne, a popular tourist destination by car/train/bus which is only 200km away. Vietnam’s outdated infrastructure has many challenges compared to China’s which has 40,000 km of high-speed railway, according to a report by the World Bank. China’s high-speed rail network is extending and is now longer than the total length of all the high-speed railways in the rest of the world.

Expensive Land prices

According to Zhao Qian, Chairman of the China Business Association HCMC Branch, Vietnam, is building an industrial park near Ho Chi Minh, with a land price of US$200/m2, which is higher than the average price of US$172/m2 in Guangzhou, China

Education system

Only in 2001 did Vietnam start introducing year 9 compulsory schooling. This has meant that many workers did not go to middle school. This points to the fact that many Vietnamese are not as highly educated by the time they leave school. Based on this shortfall in education the lack of local middle management appears to be a challenge. A Chinese clothes company Jason Group which supplies UNIQLO, and PUMA set up a US$100 million factory in 2019, but still sends managers from China to Vietnam to oversee the work as Vietnam has a shortage of these skills.

Unsound Supply Chain for medium-high end sectors
Vietnam’s manufacturers are still heavily dependent on importing raw materials, machinery, and key components globally, including in China. 33% of imports are from China, 56% of textile, fabrics & leather are from China, 48% of machinery is from China, and 42% of components of telephones, and mobile phones are from China. After assembly of 63% of wooden products, 46% of textile/clothes and 42% of machinery are exported to the USA. All these figures show the heavy dependence on China for materials.

With these statistics is Vietnam now becoming the new factory of the world and taking over from China?

Reality Check Vietnam versus China

China intends to eliminate or move some low-end, labour-intensive or less competitive sectors to Vietnam itself. So the move to Vietnam by China for parts of its own manufacturing requirements is essentially an overflow of its less cost-effective operations, such as shoes, clothes and furniture, rather than replacement.

China is the second-largest investment source for Vietnam in 2021, with 20.8% of the total, according to Securities Times.

According to Han Jun at CSC Financial, a Chinese investment bank and brokerage firm, China started investing in Vietnam in 2000.

In the 2018 consumer electronics category, China was the main producer of Apple and Samsung. Although some orders moved to Vietnam, actually it’s the Chinese companies that are making them. Bros Easter, one of the largest textile manufacturers in China set up facilities in Vietnam in 2013 and 60% of its revenue comes from there now. 1/3 of foreign furniture companies in Vietnam are Chinese

What is China Industry 4.0

China is the only country in the world with “the Complete Industrial Chain” that Vietnam does not have. It would be a high risk for a lot of foreign companies to move orders which would also implicate re-tooling, training new suppliers at a higher cost

China is focusing on moving to The Fourth Industrial Revolution, 4IR (Industry 4.0), which is the ongoing automation of traditional manufacturing and upgrading of industrial practices and the use of modern smart technology to achieve more profitable and efficient growth.

As South China Morning Post reports: After China’s new five-year plan listed the development of seven key “frontier technologies” as the nation’s top policy priority, it is now home to the most cutting-edge advanced manufacturing facilities, ahead of the likes of the European Union, the United States and Japan.

Size matters

When the CCP (Chinese Communist Party) decided to open to market reforms in 1978, it opened up a vast opportunity for foreign multinationals to invest not only in products for export but also in the ability to tap into the rapidly developing living standards and disposable income. The investment brought rapid progress and transformation to China we see today. The massive transfer of knowledge to achieve this growth led to massive growth in not only the large manufacturers – but the significant development in smaller specialist manufacturers that make up such a large part of the economy.

These manufacturers have now matured allowing other countries hard pushed to compete – these companies will not give up their position without a fight – they know they are at a significant labour cost disadvantage, but is the future about labour or robotics and automation? China is very aware that it needs to a find way to compete and has the industry capabilities to provide technology to ensure that this happens.

Sourcing SMEs

Sourcing from two countries for larger SMEs could be a realistic option, but for small companies with limited resources and unable to justify the cost of dual-sourcing, China would still seem to hold the trump card with more experience and a larger choice of suppliers.

Vietnam versus China Supply Chain

SMEs might think they are moving away from China, but in reality, many of the raw materials and components are still coming from China. Vietnam is not a resource producer so getting hold of materials means a continued reliance on China.

Whilst Vietnam might be the relatively new kid on the block – China still offers a vastly superior supply base and should not be ignored.

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