When the Trump administration began piling tariffs on Chinese goods two years ago, Vietnam looked set to be one of the countries that would benefit most from companies looking to diversify from Asia’s top manufacturing location.
Veteran businesspeople in the region like to compare its rising economy and exuberant business climate to Thailand’s during its foreign investment-driven boom that began in the 1980s, or China’s 20 years ago when its manufacturing sector was taking off.
The boosters point to Vietnam’s solid record in making products to global standards, and to a widening network of free trade agreements, including recently with the EU and the UK.
Covid-19 and the closing of Vietnam to most international travellers have calmed some of the hype by hampering companies’ ability to do due diligence there. However, analysts say the pandemic has also driven home the need for businesses to diversify their supply chains away from China, where the crisis struck first.
“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.”
One prominent example is Apple, known for its huge manufacturing base in China. It began mass production of some of its AirPods wireless earbuds in Vietnam in the second quarter of this year, when most of the world was in lockdown. But new entrants to Vietnam still come up against the considerable challenges that the country poses as a manufacturing destination.
Local labour markets are not as deep as China’s. Industrial park space is in brisk demand, especially in the south around Ho Chi Minh City, where the bulk of Vietnam’s clothing, furniture and other exporters are based. The city’s Tan Son Nhat International Airport has long operated at well over capacity. An expansion is under way, and a new airport is being built, but it is scheduled to be ready only in 2025.
Most significantly, many of the components used to manufacture high-value products in Vietnam, from microchips to smartphones, are still sourced from China, South Korea, Taiwan or elsewhere, and flown in for assembly there. Vietnam's local supply base is no match for China's.
“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.”
Meanwhile, trade tensions have flared with the US — another downside of Vietnam’s export success. Against the backdrop of a growing US trade deficit with Vietnam, Robert Lighthizer, the outgoing administration’s trade representative, recently launched a Section 301 investigation against the country that includes a probe into whether it is manipulating its currency. Vietnam’s government denies this.
Although it is not yet clear how the arrival of the Biden administration will affect this investigation, Washington used the same process to place tariffs on Chinese exports to the US, launching the trade war.
Businesspeople say the Vietnamese market is adjusting to all these difficulties, even amid the pandemic.
New business park developments are on their way. For example, GLP, Asia’s biggest warehouse operator, is developing projects in Hanoi and greater Ho Chi Minh City and plans to invest $1.5bn over three years as it ramps up its Vietnamese business.
Vietnam’s big numbers remain robust. Despite the pandemic, foreign direct investment disbursements are down only 2 per cent in the year to November, at $17.2bn, according to Vietnam’s General Statistics Office. The Vietnamese economy is on track to grow by 2.4 per cent this year, and for 2021 the government is targeting growth of 6.5 per cent.
Analysts say multinationals in Vietnam are now building up their supply bases, in a move that promises to take manufacturing closer to a level where — with time — it can truly be seen as China’s rival. “We are now seeing a proper build-out of supply chains here,” said Mr Kokalari.