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Why so Many Foreign Businesses are moving to Vietnam

Saturday - 03/08/2019 21:19
When I go to Vietnam today, I see the Southern China of fifteen years ago.

Companies from around the world are setting up in Vietnam and the government is trying to keep up by improving the ease of doing business. Office buildings and manufacturing centers are sprouting across the country as more foreign companies are catching onto Vietnam’s potential.
Why so Many Foreign Businesses are moving to Vietnam
Why so Many Foreign Businesses are moving to Vietnam
Vietnam has become an increasingly popular choice for many company’s China plus one strategy.

For over a decade, businesses have sought to expand their Asian operations into emerging markets, rather than confining them exclusively to China. But as prices of labor and real estate grew in China, diversifying a company’s operations meant not only benefiting from cheaper costs, but also becoming less vulnerable to risks (supply chain disruption, inflation). It also meant gaining access to a new, quickly growing production and consumer market.

In the past few years, we have helped more and more companies move to Vietnam. Rarely, however, has it been an outright shut-down of their China operations. On the contrary, we have seen a lot of expansion, automation, and research and development (R&D) investment still taking place in China. Companies move divisions or units to Vietnam that are more exposed to market and cost pressures and, thus, are not as competitive in the Mainland’s new business environment.

In other cases, we have seen clients who are involved in larger supply-chain operations – as second or third tier suppliers –follow their customers out of China, expanding their operations overseas in order to provide the same quality products and services they offer in China.

Many other clients decided to preserve their main operations in China and sell industrial goods and services to their clients in Vietnam and the Association of South East Nations (ASEAN), profiting by the new free trade agreements signed and “upgraded” by China with its neighbors.

Only in a few cases – in sectors that could no longer afford to pay a “China price” – did clients decide to close down completely and move to Vietnam instead.

Who is moving to Vietnam?

Vietnam is red hot, arguably the best alternative in a China plus one strategy. But despite its allure, Vietnam has not – and will not become – a dreamland for all manufacturers.

Many companies making the move from south China to Vietnam operate in low-cost, low-value manufacturing, especially those in textiles, accessories, leather, plastic, and shoes. The supply chain in these sectors has been largely disrupted with the big brands hedging their bets on other developing markets, in both Asia and elsewhere.

Many consumer fashion brands – like Nike and Adidas – already have sourcing operations in the country. Typically, such brands arrange their sourcing operations in Vietnam through Taiwanese or Hong Kong-based manufacturers.

Walmart, IKEA, and other big buying houses have also established sourcing operations benefiting from the large array of local as well as foreign manufacturers employing workers at roughly a third to half of Chinese prices.

But companies realize that making in Vietnam also means selling in Vietnam. These companies have established brick and mortar stores – as well as mall outlets – to sell to the country’s young, outward-looking population.

Starbucks and McDonalds are good examples. They have set up operations in the country, benefiting from the double advantage of a low-cost workforce and high consumer power. The young nation’s desire to catch up with the West, and adopt a new way of life, in many cases, means spending five American dollars on a macchiato!

Vietnam continues to struggle to accommodate more sophisticated manufacturing. Yet, a few companies have recently invested into Vietnam’s burgeoning tech capacity, or have expanded their existing facilities in the country. INTEL opened a US$1 billion chip factory in 2010 in Ho Chi Minh City’s high-tech park, one of their most sophisticated assembly and testing plants in the world. Similarly, Microsoft moved its Nokia cell phone operations from southern China to Vietnam, while LG Group has invested US$1.5 billion to build a factory complex that will manufacture and assemble cell phones, televisions and other high tech products.

The South-Korean cell phone manufacturer Samsung – along with its many subsidiaries – has made Vietnam a major manufacturing hub. According to a recent report by Reuters, the Vietnamese government has approved a licence to invest a US$2.5 billion – upping their total investment in Bac Ning province to US$6.5 billion by the end of the year.

Tech giants have set up shop in Vietnam for other reasons than cost savings. Foreign tech brands now have to compete with quality Chinese products in China’s domestic market; in Vietnam, the tech market is less crowded and consumers are receptive to foreign brands. Plus, from Vietnam, these companies will have enhanced access to the South East Asian consumer markets which make up ASEAN.

Larger companies can afford to begin more sophisticated manufacturing in Vietnam. With more capital, they can invest in the necessary infrastructure, which Vietnam currently lacks, as well as afford to be patient while developing their workforces, local supply chain and supporting industries. These companies are positioning themselves to capitalize on the rising consumer markets of ASEAN states as well as tapping into an expanding list of free trade agreements Vietnam is negotiating with its trading partners.

Smaller companies, also want to be part of this industrial and consumer shift and not miss out any opportunity in a rapidly moving supply chain now spanning across multiple countries and time zones. Of course, Vietnam’s low-cost wages and beneficial fiscal policies are indeed other attractive factors convincing a larger pool of manufacturers to expand or set up operations in the country.

Why Vietnam?

In 1987, Vietnam officially opened itself up to foreign direct investment (FDI). In 2016, the Vietnamese government announced a record high in FDI inflow at US$15.8 billion. According to the Ministry of Industry and Trade’s 2016 Import-Export Report, Vietnam saw US$176.6 billion in export revenue (a 9 percent year on year rise), much of it from foreign companies.

The Vietnamese government has consciously crafted its business landscape to appeal to foreign companies. It also badly needs foreign technology and capital to upgrade its infrastructures and industrial base.

Where Vietnam is trying to make the business easier for foreign companies, China’s euphoria for foreign business has slowed down. According to the World Bank’s 2017 Ease of Doing Business report, it takes about 116 days and 10 procedures to open a warehouse in Vietnam. In China, according to the report, the same action takes 274 days and includes 22 required procedures.

This is particularly relevant in South China where manufacturers are being constantly challenged by new conformity and standard regulations, environmental policies, visits by aggressive tax bureau officials and a more demanding (and expensive) workforce.

Not only does Vietnam have a growing consumer market, the country is in the middle of several high impact trade deals that will benefit manufactures based in the country.

Vietnam is part of the ASEAN free trade agreement called the ASEAN Economic Community (AEC). The AEC seeks to promote economic cooperation through the region and transform the South-East Asian organization into a single market and production base by 2025. The AEC will slash almost all inter-regional tariffs to zero by 2018 (and capping any remaining ones at 5 percent) and is currently working to reduce non-tariff barriers to trade as well. This means companies manufacturing in Vietnam will have an easier time selling and sourcing within the ASEAN states.

Though the Trans-Pacific Partnership (TPP) is now defunct, Vietnam is currently in negotiations with 15 other nations for another ambitious FTA. The Regional Comprehensive Economic Program (RCEP) is a proposed free trade agreement between the ten ASEAN member states and India, China, Australia, Japan, South Korea, and New Zealand. This block of nations accounts for roughly 40 percent of world trade and could potentially create the largest bloc in the world.

China’s economy is maturing, not contracting

If, 15 years ago, China was a manufacturer’s best choice in Asia then the emerging Asian markets of today present foreign manufacturers with a plethora of options.

Manufactures need to adapt to changing market demands and disrupted supply chains to stay competitive. Manufactures need to find the right location based on their infrastructural needs and targeted markets. China can no longer simply be a default option.

In our Briefing websites, we aim to add clarity to an increasingly complicated business landscape. We provide updated legal, regulatory, market, and economic insights into emerging Asian markets in Vietnam and China as well as India and the ASEAN states.

China does offer comprehensive supply chain infrastructures, reliable local suppliers, and an experienced workforce which Vietnam is aiming to build, but currently lacks. For value-added manufacturing which requires skilled staff, China is still the best choice. China remains a workshop of the world, just perhaps not the world’s workshop.

To Vietnam, then what?

For manufacturers and large companies willing to make a big investment in a rapidly growing, well-connected market, Vietnam is a great bet. That doesn’t mean it’s going to be easy.

Though improving, the Vietnamese business landscape is still rife with corrupt practices, plenty of red tape, convoluted legal work, and faulty infrastructure. To truly benefit from the advantages Vietnam offers, foreign companies need a clear-sighted strategy and expertise in maneuvering the landscape.

Teaming with professionals who have a physical presence in the country and knowledge of its legal and regulatory landscape will maximize the advantages of coming to Vietnam.

Five years from now, Vietnam may be the new manufacturing hub. If your company doesn’t have a Vietnam plan now, it’s best to start planning.

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