Supply chain shifts from China to Vietnam
duonghanhnguyen 20-11-2020, 11:13
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Written by: Dezan Shira & Associates

Translated by: Fatma Gueye Dione

Supply chain transfers to Vietnam are gaining momentum, aided by rising labor costs in China and by other factors such as current US-China trade war .

Companies with production sites in China are looking to Vietnam to find another manufacturing destination.

Navigating the geopolitical landscape of Asia is difficult for most foreign companies. This is especially true when they have to consider relocating their business activities outside of China.

China's trade ecosystem is second to none in Asia due to its mature manufacturing system, advancements in infrastructure, and an increasingly predictable bureaucratic system.

The reason why Vietnam then figures prominently for foreign companies expanding their business, or choosing alternative locations outside of China, is its ability to create an adaptable production base, also focused on high-value manufacturing.

All countries in Asia have different strengths when it comes to the manufacturing process, and many factors will be considered when rebuilding supply chains. outside of China .

In this article, we explain why Vietnam takes center stage as companies around the world reexamine their overreliance on a single production and supply base in China.

Vietnam's appeal to multinational manufacturers

A study by Natixis SA assessed seven emerging Asian economies as manufacturing alternatives to China, with Vietnam ranking number one. The study looked at demographics, low wages, ranking Ease of Doing Business World Bank and logistics to determine manufacturing options.

The Vietnamese government has strategically transformed the nation into an alternative “ China plus a "By concluding numerous free trade agreements such as the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) and the EU-Vietnam FTA (EVFTA) while developing its infrastructure to become a source of global exports.

Vietnam has received some of China's labor-intensive manufacturing activities, and this trend is expected to continue given the government's willingness to make gradual economic changes. Over the past decades, the implementation of market characteristics, such as openness and trade, have become pillars of its economic restructuring. For example, Vietnam joined the World Trade Organization (WTO) in 2007 marking an important milestone in its merger with the world economy. Since then, several international trade agreements aimed at creating favorable tax and investment conditions have followed.

Relocation of supply chains to Vietnam: Clothing and Textiles

The textiles and clothing sectors are two of Vietnam’s main export markets. For example, Vietnam is the second largest supplier of textiles and clothing to South Korea after China. Industry observers also predict Vietnam will soon take the top spot.

In recent years, multinational retail giants such as Nike and Adidas have expanded their manufacturing bases in Vietnam due to lower labor costs. Beginning in 2009 Nike began manufacturing more of its line in Vietnam than in China, and Adidas quickly followed suit in 2012.

The two shoe makers shifted production to Vietnam when wages in China hit around $ 400 a month. The current average salary for a production worker in Vietnam is $ 216 per month. However, with wages increasing at the current rate of 7.9%, manufacturers will most likely have to move production again in the near future.

Maxfield Brown, Head of Business Intelligence at Dezan Shira & Associates, said:
“At the current rate, and given the establishment of the CPTPP to eliminate tariffs on textiles and clothing items, the textile industry in Vietnam still has a six-year production window before becoming commercially non-commercial. viable. "

Supply Chains Move to Vietnam: Electronic Equipment

Vietnam's high-tech boom in recent years has paved the way for the country to start producing more high-end goods. This can be seen, for example, in the recent trend of electronics factories moving to Vietnam.

In particular, Chinese Goertek (the maker of AirPods, Apple's wireless headphones) has confirmed its intention to move production to Vietnam. Amid global tensions over the uncertain outcome of the US-China trade war, in addition to high tariffs imposed on high-tech, Vietnam has become an alternative manufacturing choice.

Large electronics companies (such as Cheng Uei, a Taiwanese company specializing in manufacturing iPhone equipment and Petragon, an iPhone equipment assembler) are also expanding their options outside of China, with Vietnam being the l one of the main alternative countries.

Future changes in Vietnam's supply chain

As technology evolves, automation is likely to replace low-cost industrial production. This will create a greater demand for workers in the field of component manufacturing and assembly of electronic components, such as electronic components on printed circuit boards.

Vietnam's proximity to China, its growing skilled labor force, competitive labor costs, and political stability make it an ideal manufacturing destination. Especially since the manufacturing of components is a complex process that must leave room for trial and error.

Why relocate your business to Vietnam?

The truce in the current war between the United States and China offers temporary relief to manufacturers who were considering a 25% tariff hike. Whatever the outcome, business leaders will continue to assess the positives of the trade war or seriously consider possible relocation. Companies too reliant on China as their primary source of manufacturing will continually struggle with unstable trade regulations, rising labor costs, and tighter operational oversight.

Offshoring, however, is an extremely expensive process. This includes converting and relocating industrial facilities to appropriate regions, relocating production lines, and sending skilled workers to a new country, such as Vietnam.

Multinational companies wishing to change their production base have to install new logistics in a new country, which can be expensive and take years. For foreign companies wishing to set up in Vietnam, it would be desirable to partner with experienced entrepreneurs with the right connections and local knowledge to facilitate effective integration.

Vietnam’s interest as a “China plus one” destination generates competition among international companies. The production costs of leasing industrial land and raw materials are increasing in competing areas, showing that Vietnam's resources are in demand.