Vietnam’s rise in global supply chain doesn’t mean it will eati into China’s share of manufacturing, here’s why

Vietnam, which borders southern China, has recently shocked Chinese economy watchers with staggering export figures. Exports of the Southeast Asian country rose 14.8 percent year-on-year to $34.7 billion in March, while Shenzhen, China’s largest export city, fell 14 percent to $18.9 billion.

In this circumstance, people familiar with China’s reform and opening-up will feel right at home. So, should Vietnam’s growing prominence in the global supply chain be a worry for China？

The backyard of Chinese manufacturing

A few years ago, some large manufacturers began moving more production lines to Vietnam in an effort to maximize their profits due to rising labor and land costs in China.

Nike and Lululemon Athletica’s sportswear supplier Eclat Textile left China in 2016 due to a lack of local workers, instead deciding to expand their operations in Vietnam. The Taipei-based textile company was also looking to establish multiple smaller regional manufacturing hubs in other emerging countries in order to provide flexibility in serving customers.

Vietnamese labor costs are approximately half of China’s labor costs, at $2.99 (VND 68.000) per hour compared to $6.50 (VND 148.000) per hour, respectively. Consequently, Vietnam is gaining ground on its regional competitors as a more cost-effective option.

This echoes similar migrations in history, manufacturing hubs have moved from Japan to countries like South Korea, Singapore, and Taiwan, and then to China. These migrations haven’t gone unnoticed by veteran manufacturers, who have also moved their factories to lower-cost locations.

Then, as a result of the trade war between the United States and China, businesses have been rushing to shift their supply chains out of China, shifting production and distribution to other countries. Vietnam stands out as a top choice for many manufacturers due to the proximity to China’s manufacturing hub of Guangdong Province, its vast coastline, and, most importantly, lower export tariffs.

Trump imposed separate tariffs on Chinese imports in 2018 as part of his “America First” economic policy, igniting a trade war. While one of the stated goals of the increased tariffs was to bring manufacturing back to the United States, this has proven to be more difficult than anticipated, as more Chinese manufacturers have chosen to bypass the tariff by going through Vietnam.

As a result of Trump’s increased tariffs on solar panels in 2018, Chinese solar panel giants flocked to Vietnam to build factories for the final stage of solar module assembly. According to data, 89 percent of solar panel shipments in the United States will be imported in 2020, with Vietnam being the largest exporter. 

Meanwhile, according to data from Chinese customs, most PV modules in Vietnam in 2020 will be supplied by well-known Chinese manufacturers such as Jinko Solar, JA Solar, Xi’an LONGI Silicon Materials, Trina Solar, Risen Energy, Huansheng Photovoltaic, and Suntech.

According to Liberty Street Economics, China’s exports to the United States began to decline in 2019 as tariffs went into effect, while Vietnam’s market share of exports to the United States increased significantly.

Vietnam’s various bilateral and regional free trade agreements, which result in lower tariffs, also attract investors. Vietnam, for instance, is a signatory to two major regional free trade agreements: the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In 2020, it will also sign a free trade agreement with the EU.

Guangzhou Senda, a handbag manufacturer that primarily serves customers in the United States and Japan, said it began producing in Vietnam in 2017 and has been allocating more long-term orders to the facility in recent years. “Labor costs in Vietnam are about 40% lower than in Guangzhou, and lower tariffs encourage us to export more from here,” the firm said.

The production line transfer, on the other hand, was not without its challenges. The Delta virus broke out in Vietnam in April 2021, causing major disruptions in manufacturing and supply chains. “I even wondered if I had made a really bad decision,” said Wang Bo, the owner of a furniture company based in Zhejiang, “especially when I saw domestic manufacturing was still going on normally at the time.” Wang’s company began production in Vietnam in 2020 in order to meet rising demand from European and American clients while lowering costs. (A pseudonym was used at the request of the interviewee.)

In October, the Vietnamese government changed its policy from “Zero-COVID” to “Living with COVID” in response to economic and social pressures, lifting lockdown restrictions in most cities. “We cannot continue to use quarantine and lockdown measures indefinitely because it will cause problems for the people and the economy,” said Prime Minister Pham Minh Chinh.

Plants, including Wang’s, have gradually resumed production since then. “At this point, it appears that our stay has been worthwhile. “Diversifying our production channels will help us grow in the long run, especially given how strict COVID-19 prevention policies at home continue to force factories to close,” the business owner explained.

Consensus on building a decentralized global supply chain

“Made in China” products have taken root in the global market thanks to decades of hard work, earning the country the moniker “the world’s factory.” Since 2009, it has been the world’s largest exporter of goods, with total exports of $2.641 trillion in 2019.

China cemented itself as the heart of global manufacturing as it recovered quickly ahead of other economies from the COVID-19 outbreak, with overall exports rising to $2.59 trillion in 2020.

Having a comprehensive supply chain within one country has been highlighted by the health crisis, with China serving as a major supplier of pharmaceuticals and personal protective equipment (PPE) at a time when many countries are experiencing shortages. The country was already producing half of the world’s medical masks prior to the pandemic.

Others, on the other hand, realized that relying too heavily on China would leave them vulnerable in the event of a crisis.

COVID-19 ravaged New York State in March 2020, catching the entire healthcare system off guard due to a lack of equipment such as personal protective equipment (PPE) and ventilators. Andrew Cuomo, then-Governor of New York, warned against relying on China for basic equipment in a daily briefing. “To me, that’s a national security issue… “You can’t rely on China for basic equipment to save lives in the United States,” the governor said.

Around the same time, French President Emmanuel Macron announced that the country would work toward “full independence” by increasing its own mask and ventilator production, though this was unlikely to be a quick or cost-effective solution. Not only for medical equipment and pharmaceuticals, but also for its automotive industry, France, like the United States, is heavily reliant on China’s supply chain.

Supply chain reform is also a hot topic in Japan. Tokyo announced an expanded subsidy program in October 2020 to encourage Japanese companies with China-centric supply chains to diversify into Southeast Asia. In a speech at Vietnam-Japan University, Japanese Prime Minister Yoshihide Suga said, “Japan will further strengthen cooperation with ASEAN to increase the resilience of supply chains and build economies in Asia that are resilient to crises.”

According to Bloomberg, Japan has distributed approximately 23.1 billion yen in subsidies to 81 overseas projects as of March 2021, the majority of which are in Vietnam, followed by Thailand and others.

Large corporations are looking to expand production outside of China. According to reports, Apple is informing suppliers that it plans to expand manufacturing operations in India and Southeast Asia. The tech behemoth has relied on Chinese manufacturing for more than a decade, with analysts estimating that contract manufacturers in China produce 90 percent of the company’s products.

The Wall Street Journal reported that Apple’s Chinese manufacturing contractors are looking to Vietnam, which is already a smartphone manufacturing hub for Samsung Electronics, citing people familiar with the situation.

Other key factors in seeking diversification include the recently tightened COVID-19 lockdowns and the escalating conflict between the US and China, whether over trade, technology, or geopolitics.

Nearly a quarter of respondents in a survey of more than 370 members conducted by the European Chamber of Commerce in late April are now considering shifting current or planned investments in China to other markets, up from less than a quarter two months ago.

“While the conflict in Ukraine has had an impact on European businesses operating in China, COVID-19 poses a far more immediate challenge and has resulted in a significant drop in business confidence,” the Chamber added.

Rajiv Biswas, chief economist for Asia Pacific at IHS Markit, a leading provider of analytics for major industries and markets around the world, believes that Vietnam is rapidly emerging as one of the world’s new manufacturing centers as the process of diversifying supply chains accelerates.

While Vietnam is more likely to be a complement to China’s supply chain than a competitor, China must step up its preparations for a more competitive future

Vietnam has been one of the biggest beneficiaries of supply chain diversification so far, thanks to its lower labor costs compared to China, incentive policies to support manufacturing, and geographic advantages. In the first quarter, the country received $4.42 billion in foreign direct investment (FDI), up 7.8% from the previous quarter.

These accomplishments serve as a springboard for Vietnam, which aims to compete with regional countries for high-quality foreign direct investment projects. The government has implemented several plans, including the vocational education and training strategy 2021-2030 and Decision 17 on vocational training support, to cultivate more skilled workers and IT talents for higher-end industries.

“In 2022, Vietnam remains a safe, attractive, and high-potential investment option for foreign investors,” said Nguyen Chi Dung, Vietnam’s Minister of Planning and Investment.

China, on the other hand, shouldn’t be too concerned about Vietnam’s recent economic growth. “Vietnam is more likely to be an extension of China’s supply network than an adversary,” said Momentum Works, a Singapore-based venture capital firm focused on Southeast Asia. “Given its smaller population and economy than Guangdong province, it may not be able to develop a comprehensive supply chain like China.”

The recent lockdown is proof that “Made-in-Vietnam” is inextricably linked to China’s supply chain – strict COVID-19 control efforts at some Sino-Vietnamese border crossings have resulted in supply chain disruptions and restrictions in the flow of some products.

China, which is battling its own Covid-19 outbreak, is Vietnam’s go-to supplier for steel, circuit boards, machinery and equipment, and textiles for the apparel and footwear industries. The material shortage problem has hurt the production and exports of every apparel factory, according to Pham Xuan Hong, chairman of the Ho Chi Minh City Garment, Textile Embroidery Knitting Association, who told Bloomberg in early May.

The country’s imports from China exceeded $38 billion in the first four months, an increase of more than 12% year on year, resulting in a trade deficit of more than $20 billion.

Still, realigning the global supply chain is not a simple or static process, and the coronavirus has demonstrated how closely China and the world’s major economies are linked and how difficult it is to separate them. Any true transformation could take many years.

Manufacturing, particularly labor-intensive industries, will inevitably relocate to lower-cost regions. As a result, China must address the job losses resulting from industrial transfer. Meanwhile, as the country’s supply chain diversifies, it must maintain a competitive advantage in the higher-end supply chain to ensure long-term growth.

Photo by Florian Wehde on Unsplash