The first even happened two years ago, when the United States and China began a trade war- initiated by the Trump administration imposing heavy tariffs on China.
The second event was the outbreak of COVID-19. The lockdown of China meant a halt for global trade. And as we can clearly see, supply chains and the logistics industry are still struggling to recover from the chaos it has caused.
Why manufacturing in Vietnam looks so attractive
When the China-America trade wars began, American companies started looking for Asian manufacturing alternatives to China. And looked as though Vietnam would be the actual winner of this war.
Vietnam's rising economy could be compared to that of Thailand's in the 1980’s, thriving as a result of increased foriegn investment. Or that of China’s in the 1990’s as the manufacturing sector started booming. For example, new infrastructure developments are in progress. Asia’s largest warehouser, GLP is already working on and has pledged to invest 1.5 billion USD in Hanoi and Ho Chi Mihn City projects.
An array of free trade agreements, including the EU-Vietnam free trade agreement (EVFTA), undoubtedly certify it’s position as a reliable global exporter. Manufacturing in Vietnam already has a solid record of meeting global standards and is a clear factor in Vietnam’s rising economic success.
The pandemic also made it even clearer that business should not solely rely on China to meet the needs of their supply chains. Diversification is in order.
“Firms thought they had a global supply chain, and what Covid showed them was that they had a China supply chain,” said Michael Kokalari, who is chief economist with VinaCapital in Ho Chi Minh City. “This phenomenon of companies moving from China to Vietnam is just starting, and we will see an acceleration next year.”
Major global brands moving manufacturing out of China
Textile manufacturing in Vietnam is already well-known, with companies like Addias and Nike already having moved the majority of their manufacturing from China to Vietnam. The Japanese fashion brand Uniqlo increased suppliers in Vietnam by 40% in the last year. Furniture companies like Lovesac are following suit as well.
But now even technological device manufacturers like Samsung and Apple are making the shift. For example, in the second quarter of 2020, Apple started moving a significant portion of their AirPod manufacturing from China into Vietnam.
New entrants to Vietnam do face challenges, however
The production shift, especially in the short term will force supply chains to realign. Furthermore, companies have to decide which operations make sense to relocate, what strategy they take to enter the Vietnamese market, and where they will set up operations within the country. Due Diligence is a must.
Some of the setbacks to manufacturing in Vietnam as opposed to China include: shallower labor markets, swift demand for industrial space, and overcapacity already running on the Tan Son Nhat airport. Though expansion is underway as Vietnam is looking to raise $15.8bn to build and expand airports over the next 10 years, according to the Civil Aviation Authority of Vietnam (CAAV).
Most importantly, the manufacturing of components used in high-value products is still mainly in China, or South Korea and Taiwan. This is simply because Vietnam cannot compete with China in terms of local supply base.
“When companies move to Vietnam, many of them still have to rely on a supply chain from China,” said Nguyen Phuong Linh, associate director with Control Risks, a consultancy. “And Vietnam is not ready for a major shift yet. Infrastructure is not ready, logistics need to be improved and labour is no longer that cheap compared to its neighbouring peers.”
Another concern is the US investigation which has been launched against the country that includes a probe into whether it is manipulating its currency. Vietnam’s government denies this and it’s still unclear what the future actions the Biden administration will take on this matter.
A positive outlook for manufacturing in Vietnam in 2021
Despite the pandemic, Vietnam’s economy has continued to display strong growth patterns ensuring investors the country is a solid investment destination.
Figures from 2020 only prove the strength and promise in Vietnam’s rise. Foreign direct investment disbursements only went down by 2 percent in 2020 to November, at $17.2bn, according to Vietnam’s General Statistics Office.The Vietnamese government targets economic growth of 6.5 percent in 2021.
Some suggest that with time, Vietnam could truly become China’s rival. As multinationals start properly building up their supply bases in Vietnam, a boom in manufacturing is expected in the very near future.
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