Friday, May 24, 2024

Vietnam prepares to change supply chain from China

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When the Trump administration began imposing tariffs on Chinese products two years ago, Vietnam appeared to be one of the countries that would benefit the most from companies seeking to diversify from the premier manufacturing site of ‘Asia.

Seasoned businessmen in the region like to compare its booming economy and exuberant business climate to that of Thailand during its boom in foreign investment that began in the 1980s, or China there. was 20 when its manufacturing sector was taking off.

Boosters Highlight Vietnam’s Strong Track Record of Manufacturing Products to Global Standards and Expanded Network free trade agreements, including recently with the EU and the UK.

Covid-19 and Vietnam’s closure to most international travelers have calmed some of the hype by hampering the ability of businesses to perform due diligence in that country. However, analysts say the pandemic has also created the need for companies to diversify their supply chains away from China, where the crisis struck first.

“Companies thought they had a global supply chain, and what Covid showed them was that they had a supply chain in China,” said Michael Kokalari, chief economist at VinaCapital in Ho Chi Minh City -City. “This phenomenon of business relocation from China to Vietnam is only just beginning and we will see an acceleration next year.”

A striking example is Apple, known for its huge manufacturing base in China. he started mass production of some of its AirPods wireless earbuds in Vietnam in the second quarter of this year, when most of the world was locked down. But newcomers to Vietnam still face the considerable challenges the country poses as a manufacturing destination.

Local labor markets are not as deep as those in China. Industrial park space is in high demand, especially in the south around Ho Chi Minh City, where the bulk of Vietnam’s clothing, furniture and other exporters are located. The city’s Tan Son Nhat International Airport has long operated at a much higher capacity. An expansion is underway and a new airport is under construction, but it is not expected to be ready until 2025.

More importantly, many of the components used to make high-value products in Vietnam, from microchips to smartphones, still originate from China, South Korea, Taiwan or elsewhere, and are flown in for assembly there. Vietnam’s local supply base falls short of that of China.

“When companies move to Vietnam, many of them still have to rely on a supply chain from China,” said Nguyen Phuong Linh, associate director of Control Risks, a consultancy firm. “And Vietnam is not yet ready for a major change. The infrastructure is not ready, the logistics need to be improved, and the workforce is no longer as cheap as that of its neighboring peers. ”

Meanwhile, trade tensions erupted with the United States – another downside to Vietnam’s successful exports. Amid a growing US trade deficit with Vietnam, Robert Lighthizer, the outgoing administration’s trade representative, recently launched a Section 301 investigation against the country, which includes an investigation to determine if he is manipulate your currency. The Vietnamese government denies this.

While it’s not yet clear how the arrival of the Biden administration will affect this investigation, Washington used the same process to impose tariffs on Chinese exports to the United States, triggering the trade war.

Businessmen say the Vietnamese market is adjusting to all of these hardships, even in the midst of the pandemic.

New business park developments are underway. For example, GLP, Asia’s largest warehouse operator, is developing projects in Hanoi and greater Ho Chi Minh City and plans to invest $ 1.5 billion more than three years to develop its Vietnamese activities.

Vietnam’s big numbers remain robust. Despite the pandemic, foreign direct investment disbursements fell only 2% in November, to $ 17.2 billion, according to Vietnam’s General Statistics Office. Vietnam’s economy is set to grow 2.4% this year, and for 2021 the government is targeting 6.5% growth.

Analysts say Vietnam’s multinationals are building their supply bases, in a move that promises to bring manufacturing closer to a level where – over time – it can truly be seen as China’s rival. “We are now seeing a real construction of supply chains here,” Kokalari said.

Follow on Twitter: @JohnReedwrites


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