Vietnam is preparing to shift the supply chain from China

When the Trump administration started imposing tariffs on Chinese goods two years ago, Vietnam appeared to be one of the countries that would benefit most from companies looking to diversify from Asia’s top manufacturing base.

Seasoned businessmen in the area like to compare its burgeoning economy and exuberant business climate to that of Thailand during the foreign investment boom that began in the 1980s or China 20 years ago when manufacturing took off.

The boosters point to Vietnam’s solid track record of manufacturing products to global standards and a growing network of free trade agreements, including recently with the EU and the UK.

Covid-19 and the closure of Vietnam to most international travelers have calmed the hype somewhat by hampering companies’ ability to conduct due diligence there. However, analysts say the pandemic has also driven home the need for businesses to diversify their supply chains away from China, where the crisis first occurred.

“Companies thought they had a global supply chain and Covid showed them they had a Chinese supply chain,” said Michael Kokalari, chief economist at VinaCapital in Ho Chi Minh City. “This phenomenon of companies moving from China to Vietnam is just beginning and we will see an acceleration next year.”

A prominent example is Apple, known for its huge manufacturing base in China. Mass production of some AirPods wireless earbuds in Vietnam started in the second quarter of this year when most of the world was under lockdown. However, newcomers to Vietnam are still faced with the considerable challenges that the country presents as a production location.

The local labor markets are not as deep as those in China. Industrial park spaces are in great demand, especially in the south around Ho Chi Minh City, where the majority of Vietnamese clothing, furniture and other exporters are based. The city’s Tan Son Nhat International Airport has long been congested. An expansion is underway and a new airport is being built, but it shouldn’t be ready until 2025.

Most importantly, many of the components used in Vietnam to make high quality products, from microchips to smartphones, still come from China, South Korea, Taiwan or other countries and are flown in for assembly. Vietnam’s local supply base is no match for China’s.

“When companies move to Vietnam, many of them still have to rely on a supply chain from China,” said Nguyen Phuong Linh, assistant director at Control Risks, a consulting firm. “And Vietnam is not ready for a big change yet. The infrastructure is not yet ready, the logistics have to be improved and the labor is no longer so cheap compared to the neighbors. ”

In the meantime, trade tensions with the US have increased – another disadvantage of Vietnam’s export success. Amid a growing US trade deficit with Vietnam, Robert Lighthizer, the outgoing government’s commercial agent, recently opened a Section 301 investigation into the country, which includes an investigation into whether it tampered with its currency. The Vietnamese government denies this.

Although it is not yet clear how the arrival of the Biden administration will affect this investigation, Washington used the same process to impose tariffs on Chinese exports to the US and spark the trade war.

Business people say the Vietnamese market is adapting to all of these difficulties, even amid the pandemic.

New business park developments are on the way. For example, GLP, Asia’s largest warehouse operator, is developing projects in Hanoi and the greater Ho Chi Minh City area and plans to invest $ 1.5 billion over a three-year period to expand its Vietnamese business.

Vietnam’s large numbers remain robust. Despite the pandemic, FDI disbursements had fallen only 2 percent to $ 17.2 billion through November, according to the General Statistics Office in Vietnam. The Vietnamese economy is well on its way to growing 2.4 percent this year, and the government is targeting 6.5 percent growth in 2021.

Multinational corporations in Vietnam are now building their supply base, according to analysts, which promises to bring production closer to a level where it can truly be seen as China’s rival over time. “We are now seeing proper supply chain expansion here,” said Kokalari.

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