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Vietnam The New Global Manufacturing Hub

Manufacturing Hub Vietnam

The Vietnamese economy is perhaps the biggest beneficiary of the US-China trade war as many companies have moved their factories to Vietnam to rebuild their supply chains. Can Vietnam replace China to become the “new factory of the world”? The talk around this topic has been turned into a heated discussion.

According to the General Statistics Office of Vietnam (GSO), the GDP of Vietnam in 2020 grew 2.91%. Although this is the lowest growth in the last 10 years, taking into account the complexity of the Covid-19 crisis worldwide, Vietnam is the only country in ASEAN that has achieved positive growth. In the past decade, Vietnam attracted many manufacturers in garment, textile and other low-end industries as an alternative to China due to rising labor costs. In 2010, for example, Vietnam overtook China to become Nike’s leading shoe manufacturer.

Now, in the midst of the trade war, Vietnam is rising to become Asia’s new manufacturing hub in many sectors. To bring high-tech manufacturing back to the United States, the Trump administration has taken a series of actions, including launching a trade war with China and imposing tariffs on Chinese imports to reform global supply chains. Many multinational companies have been shifting their operations to lower-cost countries like Vietnam, partly because of the tariffs imposed by the US on Chinese exports. With a geographical location near China, Vietnam possesses the largest industrial production system in Southeast Asia. Moreover, Vietnam’s young population and low labor costs also add to the attractiveness of the country for foreign multinationals
As the international giants in the electronics industry are relocating to Vietnam, the country is fast becoming the new manufacturing hub of the global electronics industry. In 2018, Samsung Group and Olympus Corporation closed their factories in Shenzhen, Guangdong province in the south of China, and moved production to Vietnam. Samsung has invested billions of dollars to build a large manufacturing base in the Saigon Hi-Tech Park in Ho Chi Minh City. In March 2020, Samsung officially announced the start of construction of its new Research and Development Center which has the largest scale in Southeast Asia. The building will be built in Tay Ho Tay urban area (Hanoi). The Hi-Tech Park has also received massive investment from other famous tech giants like Schneider, Intel, and Jabil.

Many observers believe that low labor cost is the main factor behind Vietnam’s growing attractiveness to multinationals. The average labor costs in Vietnam is about 1/3 of those in most regions in China, giving a great advantage to labor-intensive manufacturing industries. However, the observers often fail to notice other key factors that attract global manufacturers, such as Vietnam’s close proximity to China, young population, business friendly policies and solid economic growth.

Multinational companies are now also taking into consideration the differences in disease handling in each country. The researchers from Nomura Research Institute (NRI) emphasize that Asian countries have done better than others in the fight against the COVID-19 pandemic. Although the prospect of world economic recovery is still uncertain, Asia is in a favorable position to benefit from global growth in 2021 when the Covid-19 pandemic is better controlled. Asia will have the best opportunity to attract huge inflows of investment capital next year. Once the Covid-19 is effectively controlled, the investment decision will increase.

Furthermore, China’s industrial transformation and upgrading also have a role in creating favorable conditions for the transition of manufacturing work into Vietnam. As China strongly shifting towards medium and high-tech manufacturing because of increased labor costs, low-cost manufacturing industries will inevitably shift to Vietnam and other countries.
Although there are special advantages in attracting foreign manufacturers, Vietnamese production still has limitations.

manufacturing hub construction vietnamVietnam has a young, growing workforce but its size is much smaller than that of China. Vietnam’s population is about 1/10 of China, leading it to a labor shortage as global manufacturers are flocking to set up factories to avoid US tariffs. The lack of human capital does not just lie in the quantity but also in quality. The workforce’s economic value remains limited, including academic levels, health, professional skills. Furthermore, China facilitates more efficient business operations because it has a much bigger economy on the whole, as compared to that of Vietnam. Vietnam’s infrastructure such as ports, roads, and other logistical support is also falling behind China’s.

Vietnam will only be able to absorb the sectors it targets, such as textiles, footwear, and electronics. And even in the electronics and manufacturing sectors that require a large workforce, Vietnam is currently unable to reach the same scale that China has as well as its existing supply linkages. China boasts a specialized supply chain, for products such as vacuum cleaners, aluminum ladders, smartphones, and other products, which are difficult to find in Vietnam. There are also not many Vietnam factories with certificates of safety to serve the US market and its expensive machinery.

The current tensions between the US and China along with the Covid-19 supply chain crisis have led governments and many analysts to call for a diversification of the supply chain in order to ease the dependence on China. However, in reality, Vietnam or other potential manufacturing alternatives will take years to replace China. With the aforementioned limitations, Vietnam still has a long way ahead to close the gap with China. The disparity in the working population between Vietnam and China is a difficult barrier to overcome. Perhaps, in the long run, foreign firms still have to carefully reconsider their repositioning strategy, but for now, in the context of US-China trade tensions, the main beneficiary from the shift of global manufacturing supply chains will be the ASEAN region, in which Vietnam is expected to be one of the winners.