Report: Vietnam Primary Alternative to China’s Pearl River Delta
A report from Standard Chartered Bank has identified Vietnam as a primary destination for businesses relocating from China’s Pearl River Delta (PRD) region. The report estimates that relocating to Vietnam from the PRD can reduce operating costs by at least 19 percent.
The Pearl River Delta (PRD) metropolitan area in Guangdong Province is one of China’s key engines of growth and a magnet for foreign direct investment (FDI). Although taking up only 0.6 percent of China’s land area, the PRD contributes 27 percent of the country’s exports and accounts for 20 percent of China’s inward FDI.
According to the report, labor shortages and stricter social insurance requirements for workers have driven wages higher and put additional pressure on manufacturers located in this export powerhouse. As such, PRD worker salary rose 8.1 percent in 2014 and is expected to increase by 8.4 percent this year.
Vietnam’s lower operational costs and abundant supply of labor make it a top location for manufacturers shifting production capacity. Besides labor and material cost savings, manufacturers in the textile and garment sectors consider Vietnam as a great option to relocate from China due to its geographical proximity with China.
In addition to competitive operating and labor costs, surging domestic consumption and the rising middle class are also key drivers to attract foreign investment into Vietnam. Vietnam has one of the fastest growing middle classes in ASEAN, with a projected 12.9 percent per annum growth from 2012 to 2020.
Compared to China, Vietnam’s labor force is young and cheap. In 2014, while China’s median age was 36.7 years, Vietnam had a much lower median of 29.2 years. In terms of starting a business, Vietnam overtook China on the World Bank’s Ease of Doing Business rankings in 2015 to reach 78th place, while China ranked 90th. Vietnam was ranked higher than China for all criteria, including dealing with construction permits, electricity supply and trading across borders.
It is no wonder that when 290 manufacturers surveyed by Standard Chartered were asked where they plan to move capacity out of China, 36 percent chose Vietnam, the most popular choice.
As China shifts away from the growth model based on low manufacturing costs, there are more opportunities for a low-cost manufacturing in Vietnam. These factors help explain why the processing and manufacturing industries accounted for 75.9 percent of the total FDI in the first eleven months of 2014, reaching US$11.2 billion.
With the Trans-Pacific Partnership Agreement soon to come into effect, Vietnam will benefit further from tariff reduction and removal of non-tariff barriers, and be able to integrate into global supply chains.
Further Support for Your Business
Dezan Shira & Associates provides accounting and tax compliance services to companies investing in and selling to Vietnam. The firm can help companies establish an online presence and direct office in the country and can guide them through the affiliated accounting, tax, legal and HR issues that come with doing so. To arrange a free consultation, please contact us at: firstname.lastname@example.org
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