Can Vietnam Take on China Industries Relocation?
1.
Japan-Korea - Old Love
For the past decade, Japan and Korea had become the closest trade partners to Vietnam.
Since 1990, Japanese companies which eyeing for the economic prosperity of Southeast
Asia, have entered Vietnam in large scale. Companies such as Sony, Toshiba, and Sanyo
have set up assembling plants for their TV sets, DVD players and radio tape recorders.
The famous "Wild Goose Queue Effect" proposed by Japan , Vietnam is part of the
important goose body. For the past two years, when Japanese companies moved some
assembly plants out of China, they basically did not forget to give their old partners a bite
of food .
Company
Relocation Plan
Olympus
Shenzhen Plant stop production, focus production in Vietnam
Sharp
Computer production relocate to Vietnam, Printer production relocate to Thailand
Kyocera
Photocopy machines and Printer Production relocate to Vietnam
Ricoh
Photocopy machines and Printer Production relocate to Vietnam
Optex
Surveillance and Sensors production relocate to Vietnam
South Korea, although it came later than Japan, but the actions even more
fierce. Vietnam formally joined the WTO in 2007, and companies such as Samsung
and LG have successively entered. Since then, the proportion of FDI absorbed by
Vietnam from Japan and South Korea has remained above 40%, in 2017 particularly it
reached a historical high of 48% .
Vietnam Major FDI Contributors
South Korea
Japan
Singapore
Taiwan
2014 was a important turning point when South Korea surpassed Japan to become
Vietnam's largest source of FDI. And South Korea's important pusher behind is
Samsung. This "National Enterprise", has also built up deep foundation in a foreign
country.
Samsung's positioning in Vietnam is a "strategic plan" directly set by the Top
Management.
In year 2009, Samsung’s 1st factory in Vietnam was officially put into operation; three
years later, Chairman Li Kun-Hee personally visited Vietnam and held a meeting discuss
the future plan. Then there was a 2nd factory, and the plan was led by Lee Jae Yong
himself and was called the "Lee Jae Yong Project". In 2019, Lee Jae Yong also directly
held talks with Vietnamese Prime Minister Nguyen Xuan Phuc to open up political and
business relations and plan Samsung's future investment plans.
The foundation of Samsung’s “Vietnam Empire” actually came from China.
Samsung's old base in China is the Huizhou factory established since 1992, which
started with the production of MP3 and other electronic products. Because of this
investment, Li Kun-Hee was received by the President when he visited China.
In year 2006, the factory introduced mobile phone production line. At its peak, production
hit 6 million mobile phones per month, account for approximately 17% of global
shipments. Subsequently, Samsung move on to opened factories in Suzhou, Dongguan,
Tianjin and other places. But in 2015, Samsung's " change his heart ".
In year 2015, Suzhou factory and Dongguan factory closed down and stopped production.
In year 2018, Samsung Shenzhen and Samsung Tianjin also closed down. Factories shut
down and the influx of overlay poor performance of the company product Note7.
In October 2019, headquarters of Huizhou Samsung factories shut down, completely stop
the production of mobile phones in China.
For the past ten years, Samsung has invested more than US$17.3 billion in Vietnam
to build eight factories and one R&D center, with product ranges covering smartphones,
displays and home appliances. For smartphones alone, the annual output of the
Vietnamese factory is about 150 million units, accounting for about half of the global
output. Overall, Samsung Vietnam exports reached US$60 billion in 2018, which is 1/3 of
Vietnam’s national exports.
The influence of giants cannot be underestimated. Samsung has boost the whole
economy, leveraging various supporting manufacturers, and directly driving the rise of a
city development.
At the end of 2019, among Samsung's first-tier suppliers, 42 have invested in Vietnam. In
addition, there are about 200 supporting manufacturers in groups. Just the factory in Bac
Ninh alone, about 120,000 employees, hundreds of shuttle bus bring employees travel
everyday from 60km range. Farmers who used to work in the fields have now become
assembly line workers earning nearly US$5,000 a year, and the local GDP per capita has
reached three times compare to national level .
Samsung, LG, Sharp, Intel and other companies have launched new production lines in
Vietnam, and even Nintendo has begun to produce Switch game consoles in Vietnam.
2.
China - New Love
There is nothing more worrying about whether Vietnam will replace China as the World
factory with the migration of the industrial chain. This wave started in 2018, and the main
reason is tariffs.
Among the relocation companies, the most significant one are consumer electronics
assembly plants dominated by Taiwanese companies, and also Apple's supply chain from
China. Taiwanese enterprises in Vietnam can actually traced back to many years ago,
but it become more severe after the trade war.
In 2007 when Vietnam joined WTO , the Foxconn Terry Gou had personally inspect
cross-border transport routes from Shenzhen to Hanoi, after that buy more than 400 Ha
of land in Bac Ninh Vietnam, due to financial crisis, plans to put on hold. In year 2010,
they retrigger the production plant again, but the scale is only 3 factory space, 40,000
workers compared with the hundreds of thousands of workers in China, there is no sense
of existence.
But as soon as the trade battle was fought, "Foxconn" immediately began their expansion
plan in Vietnam. At present, Foxconn factory in Bac Ninh has become a manufacturing
center for Netcom products in the United States, serving major customers such as Cisco .
Other assembly plants are also following the flow. The notebook assembly plant restarted
its plant in North Vietnam. 2nd plant for PC production will also be put into operation in
the middle of next year. Companies such as Wistron, Pegatron and Inventec will also go
to Vietnam to start production from 2021 to 2022 .
Anxious companies cannot wait to buy land and build factories. For example, the
communications equipment manufacturer Wistron directly rented a factory from MiTac
Precision. After all, one or two months late may cause losing American customers.
Manufacturer
Production Planning
Operating Timeline
Factory 1: Netcom Products
Factory 1: mid 2020
Factory 2: PC, SMT
Factory 2: 2021 mid year
Wistron
Notebook and Display
2021 year end or 2022 1st half
Pegatron
PC, SMT
2021 1st half
Inventec
Wireless Ear Pod
2021 1st half (rented factory)
Compal Electronics
And for iPhone products, Foxconn do not shift the production to Vietnam, but instead
move to high density population county, India. The Apple suppliers in China had move
one step ahead. Luxshare Precision, Goertek, Lens Technology, Desay Battery and other
manufacturers rushed out of the country and engage in production in Northern Vietnam .
Luxshare Precision started production in Vietnam in 2016. Last year, Chairman Wang Lai
Chun said that the previous capacity transfer has basically solved the problems caused
by tariffs, and the company will continue to transfer the affected products to Vietnam or
other countries if necessary. In the future, Luxshare will build a second plant, and Vietnam
will carry 1/3 of its production capacity.
Goertek, which also produces the Air Pods series, actually started as Samsung’s
suppliers since 2013 and came to Vietnam to build a factory. After that, it
produced EarPods wired headsets and Lightning cables for many years, also began to
assemble Air Pods products last year.
In 2018, the order of Vietnam's FDI attraction was South Korea, Japan, Singapore,
Taiwan, BVI, Hong Kong, and Mainland China. Excluding the old love of Japan and South
Korea, Taiwan and Taiwan, it reflects China's growing love for this country that borders
Guangxi and Yunnan and has become the "new love”.
After all, under the trade war tariff pressure, the “new friends” hope to find a new position
to transfer the last link of assembly and production, and effectively avoid taxes by taking
advantage of the country’s trade policy. Vietnam is one of the countries that has benefited
the most from the trade war.
As a member of a number of international free trade agreements, Vietnam
has everything to do with it and enjoy all its benefit: it joined the CPTPP agreement and
began to harvest Canadian market orders ; it signed an EVFTA free trade agreement with
the European Union, which will eliminate 99% of tariffs in bilateral trade within ten years;
in addition, there are ASEAN Economic Community, One Belt One Road, WTO... Some
people describe it like this: In Vietnam, there is always a "zero tariff " for you.
3.
Receiving Capacities
Trade war is the trigger point, and its industrial logic is also worth studying. For companies
that
entered
the
bureau
relatively
late,
Vietnam
has
three
bright
spots: demographic, policy advantage, and geographical location.
The demographic advantage is mainly a push factor.
The advantages of the China labor force in terms of age structure and salary levels are
gradually weakening. Vietnam currently has a population of nearly 100 million, with a
median age of 30.5 and 56% of young adults under 35. In terms of salary, Vietnam's
current average monthly salary is still below US$ 300, only about one-third of that of the
China, and it is also at a low level among Southeast Asian countries.
Meanwhile Policy advantages can be the pull factors. The Vietnamese government has
amended the "Investment Law" many times to vigorously attract foreign investment. The
corporate income tax rate is 20%, which is lower than China’s 25%. Enterprises in the
industrial park can enjoy tax exemption policy.
Geographical conditions are Vietnam's unique position compared to other Southeast
Asian countries.
As per understanding, Southeast Asia countries located at southwest corner of China. If
you take out a map and observe carefully, you will find that Vietnam has unique
geographical advantages, only Vietnam bordering with Yunnan and Guangxi at the same
time, and it is also very close to Guangdong. Laos and Myanmar are only adjacent to the
border of Yunnan, and there is a more dangerous zone " Golden Triangle " in between.
When Foxconn made an inspection in Vietnam, their main concern is the connectivity to
Chinese supply chain, that why South Vietnam idea dropped. Total journey from
Shenzhen Longhua to Bac Ninh is only 13 hours, which can be cut in half from Nanning.
4.
Hidden Concern
Vietnam is not the first country to enjoy the benefit of industrial chain transfer .
Throughout the history of 3 electronic information industry transformation, from United
States to Japan, from United States and Japan to South Korea and Taiwan, and finally to
mainland China, all of them are due to the industrial upgrading of the country itself and
the initiative to move out of low value-added production capacity. Hence will help to fatten
next new player.
Nowadays, although trade war and pandemic have disrupted the global industrial chain
and forced some companies to move out of China, it is difficult to conclude that the 4th
industrial transfer to Southeast Asia, especially Vietnam, is a foregone
conclusion. Looking back at the four major advantages of the previous analysis in turn, it
is hard to say stable and reliable.
In terms of labor, after all, Vietnam only has a population of 100 million, which is much
inferior to the 1.4 billion of China and India, which means that although the demographic
exists, the amount is not large.
Vietnam is destined to only able to accept part of the production capacity transferred from
China, half of Samsung mobile phones, most of the Air Pods products, some PCs and
Netcom equipment, this may be the upper limit of Vietnam's capacities. Other countries
in Southeast Asia can also benefit some, and if you really have to find the next "Made in
China", India is obviously a better solution.
Due to the small population, after the expansion acceleration, labor cost in Vietnam
has risen rapidly. In the past few years, it has grown at a rate of 10% per year, and the
growth rate has also been 5%-7% in the past two years. It may take three to five years to
catch up with China. At the same time, the number of working-age population has also
reached an inflection point.
In terms of policies and business environment, tax incentives are still attractive, but the
flock of manufacturers has pushed up land prices.
2019 years, the factory in Ho Chi Minh City rent an average of US$4.10/m2, North
Vietnam around US$3.50-$4.00/m2, compared Suzhou is US$4.20/m2, Dongguan
only US$3.60/m2, while the electricity & water tariff is also higher compare to China. In
this way, manufacturers have to weigh the advantage of labor, tax and other costs.
Vietnam's advantage is not firm.
Two long-term advantages have been reversed, and this is the same reason that many
manufacturers choose to withdraw from China. However, the heat of investment has risen
too fast, and the time for Vietnam to enjoy the benefits may be much shorter. Under the
context of trade war, more a reflection of Vietnam's hard to get rid of the "spare tire" role.
Finally, Vietnam's geographic location also determines its role in the division of labor in
the industrial chain. Vietnam's economy has characteristics of high dependence on
foreign trade, import and export volume reached twice of the GDP, but net exports
accounted for only 3.4% (GDP= Consumption + Investment + Government purchase +
net exports, net exports = exports-imports). This means that Vietnam is still undertaking
hard work. Imported parts are assembled and shipped out, and the added value of the
intermediate links is very small.
Therefore, both Samsung and Chinese companies have focused their investment on
northern Vietnam, which is closer to China. This can make use of China's southeast
coastal enterprises to quickly obtain parts and raw materials, while its domestic industrial
system and industrial chain have not yet been cultivated.
For example, during the pandemic, due to the better control in Vietnam, Samsung placed
its hopes in local factories. However, a large number of parts and components remain in
China due to the obstruction of land transportation, and the local supporting factories have
limited inventory, but production capacity is still too late to recover. Samsung had to
increase air and sea transportation to cope with the difficulties.
And for more advanced parts, Samsung still remains in China. For example, a
semiconductor factory was built in Xi'an and an MLCC factory was built in Tianjin.
In the book "Overflow" by the professor of the China Foreign Affairs University, the
Vietnamese electronics industry is described as a "half extracorporeal circulation " state
with " two ends outside " , which is an "overflow" rather than a "transfer" of China's
production capacity. A local industry expert also said that "we don't need industrial
policies because we have Guangzhou", which can be described as humble and clear.
5.
Conclusion
Vietnam, which took a ride on China’s, is indeed developing very fast, but to compete
with China will never be possible. After all, in essence, Vietnam is a natural extension of
China's industrial chain.
On the other hand, it is impossible to become a powerful country by just working. Any
developed economy needs one or two big industries that can generate huge profits and
are in their own hands. Memory chips in South Korea, Chips in Taiwan, automobiles in
Japan, Communications and Electricity in China.
Winning such a large industry often requires independent enterprises to cooperate with
the government's support to make one or two huge investments to defeat the original
opponents.
However, in Vietnam at present, companies that dare to dive deep into the technology
industry have not yet emerged, and the constrained international environment has left
less and less large industries for late-developing countries. Vietnam, which has not fought
hard battles before, can only rely on the new and old love spent a period of rapid growth
and hope to achieve another higher level.
For Vietnam, you can be the next Dongguan, but not Shenzhen yet.
Source: Stream Capital, August 2020