Vietnam’s Diversification of Trade and the China Plus One Strategy
Vietnam Briefing examines Vietnam’s position in the China plus one strategy appearing as a favorable investment destination due to its proximity to China, its coastline, and lower export tariffs implemented by free trade agreements. We also look at the complementary relationship between Vietnam and China due to close trade ties.
Recent media reports have underlined Vietnam as an export destination with exports surpassing those of Shenzhen in March. Several analysts have said that this is a result of Vietnam benefitting from a shift in global supply chains. While this is true, we need to examine which products are being exported at what cost and which industries have shifted their supply chain ecosystem to the country.
We have discussed the China plus one strategy in several articles on Vietnam Briefing, but we will look more in-depth given the current scenario in the aftermath of the pandemic.
Vietnam’s exports rose to 48.2 percent in March from the month earlier and 14.8 percent for a year earlier to US$34.7 billion while Shenzhen’s exports contracted 14 percent year on year to US$18.3 billion due to pandemic related lockdowns as per customs data.
Since the US-China trade war, and even before that, businesses have been looking at Vietnam as a China plus one destination due to cheaper labor costs, particularly in electronics and supply chain industries.
But rather than competing, the two countries are complementing each other. Vietnam still imports a significant amount of raw materials from China, South Korea, Japan, and others and has a less developed supply chain network. Products are then processed and completed before being shipped to the US, the EU, and so on. It is important to note that Vietnam’s current trajectory is what China’s coastal areas were at several years ago.
Vietnam and China’s bilateral trade jumped to US$230.2 billion and China is Vietnam’s largest trade partner and the second-largest export destination.
It is also important to note that Shenzhen is just one city in China compared to Vietnam as a whole country. And while Vietnam’s success should be applauded Shenzhen has moved away from lower-quality manufacturing to high-end manufacturing something that even Vietnam wants to mature into. Several large tech companies such as Huawei and ZTE have headquartered in Shenzhen.
Vietnam, in contrast, has benefitted from lower costs in land and labor and with a younger population. This is especially seen in labor-intensive industries such as textiles and garments, footwear, and electronics. Vietnam will hope that it can emulate a similar path to Shenzhen in attracting hi-tech industries.
While Vietnam is not yet at the level of China in terms of developed supply chains, infrastructure, and business environment, there are signs of a shift.
Recently, Hong Kong’s richest man Li Ka-Shing made headlines when it was announced that his company CK Asset Holdings would invest in real estate in Ho Chi Minh City. Most recently, Apple also asked its suppliers to diversify production out of China due to the country’s strict pandemic-related lockdowns to countries like Vietnam and India. There were also reports that the Airpods 2 Pro could come with a ‘Made in Vietnam’ stamp in the future.
Signs of a high-tech shift
Vietnamese auto manufacturer VinFast part of the VinGroup conglomerate also made headlines when it announced that it will stop producing gasoline-powered vehicles by the end of 2022 and will focus on only electric vehicles. Vinfast plans to build an electric vehicle factory in North Carolina, US. It has also inked a deal with Intel to develop autonomous technology for its vehicles, while also building electric vehicles in Vietnam
Earlier in the year, the government passed a US$15.21 billion economic stimulus with a part of it on infrastructure spending with the government using infrastructure to drive urbanization.
Businesses in Vietnam also benefit from several government incentives such as tax incentives, exemptions on land and water rent, as well as favorable investment policies for certain industries like high-tech. In addition, Vietnam’s plethora of free trade agreements, offer several competitive tariff rates for businesses looking to manufacture and then export to other countries.
Pandemic and lockdowns
There are two different approaches that China and Vietnam have followed in relation to the pandemic. Vietnam and China followed similar models of closing borders and locking down their countries at the beginning of the pandemic. This served them well, as it kept case numbers low. However, the Delta variant broke through which proved traditional lockdown measures ineffective.
After vaccinating most of its population and suffering the sharpest declines in GDP. Vietnam reopened its economy on October 1, 2021 and decided to follow a live with COVID approach. This allowed factories and businesses to resume operations; Vietnam slowly relaxed border control measures allowing foreigners entry without quarantine and allowing business and tourist travel.
In contrast, China has been following a zero-COVID policy and has locked down its major economic centers such as Shanghai. The disruption has snarled supply chains, with goods stuck at ports, airports, and trade hubs. Disruption in logistics has also affected several cities such as Shenzhen, Guangzhou, Dongguan, and Foshan affecting their economies.
Time will tell if these changes are temporary or if manufacturers start to shift away from China in the longer term. But if lockdowns are prolonged with no exit strategy, then businesses may seriously consider alternative locations like Vietnam despite China’s well-developed supply chain networks and logistics. This will likely be an expensive initiative but may reap benefits in the long term.
Complementary rather than competing
Even before the pandemic, Vietnam’s deep integration into the economy made it reliant on imports for raw materials. Shutdowns in China, also hamper Vietnam’s exports and businesses have complained that their exports are hampered due to their inability to source raw inputs from China.
Emulating China’s supply chain network will also be an expensive affair but is likely to happen in the long term. Vietnam is also likely to follow China’s model of upgrading its economy by attracting hi-tech industries. The government already has investment policies in place to attract these kinds of investors.
Vietnam cannot be the factory of the world at present but rather supplements businesses with operations in China. Vietnam is also in a convenient position with the West and the East. While sizing up Vietnam as an alternate destination, investors should be aware of the country’s limitations as various bottlenecks have emerged. While investors will continue to diversify operations, Vietnam and the wider ASEAN region are primed for this future growth.
Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Hanoi, Ho Chi Minh City, and Da Nang. Readers may write to firstname.lastname@example.org for more support on doing business in Vietnam.
We also maintain offices or have alliance partners assisting foreign investors in Indonesia, India, Singapore, The Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.