Sharing the same export-led path of growth with a number of emerging countries in Asia like India and Cambodia, Vietnam has been expected to be the greatest beneficiary of US-trade war, and with the pouring in of foreign investment that greatly spurs exports.
Vietnam’s export growth as an emerging manufacturing hub in recent years has sky rocketed, especially due to the Sino-US trade war that shows no sign of abating.
The first quarter of 2019 has witnessed an increase of 28.8% of US exports from Vietnam as businesses shift their supply chain from China to avoid tariffs leveraged on Chinese goods, which makes US the biggest importer of Vietnamese products.
A significant number of mainstream manufacturing businesses have moved their operations to Vietnam, including Samsung, LG and Foxconn. In this post, we look into the five main reasons why Vietnam is overtaking China as the preferred destination for US importers.
Why do some brands choose Vietnam as manufacturing base over China?
1. Free Trade Agreement
Free trade agreements, abbreviated as FTAs, refer to the terms of trade two or more countries agree on, the value of tariffs and duties they impose on imports and exports. Vietnam has been actively reaching bilateral trade agreements with countries all over the world.
In 2007, the country became the 150th member of the WTO.
In 2000, the United States and Vietnam has signed a bilateral trade agreement, which came into effect in 2001.
Besides, Vietnam is also a long established member of ASEAN (The Association of South East Asian Nations) and a member of ASEAN Free Trade Area, which means the trading between ASEAN members (Brunei, Philippines, Indonesia, Vietnam, Laos, Myanmar, Singapore, Malaysia, Thailand and Cambodia) enjoys a competitive free trade regulation. Together with other members of ASEAN, Vietnam has also concluded trade agreements with China, South Korea, Australia, New Zealand, India, Chili and Japan.
Few months earlier in June 2019, the country has just signed a significant free trade deal with the European Union that will slash duties on most goods, which is considered as a milestone for Vietnam import and export industry.
Besides, the Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Vietnam will also drive Vietnam into a more competitive environment for manufacturing exports.
2. Proximity to China
Dwarf in size while compared with northern neighbor China and with most of raw materials for manufacturing imported into Vietnam, its proximity to China helps to make sure there’s a strong back up in manufacturing process, while being considered as a China plus one destination.
The Vietnamese city Hai Phong is just about 865 km away from the electronic manufacturing hub of China – Shenzhen. With newly developed manufacturing hubs located strategically next to the existing manufacturing hubs in China, factories in Vietnam can reduce costs as well as avoiding production interruptions.
Besides, the greatest perk of manufacturing in Vietnam is some factories are foreign owned with investments from Japan, Korea, China and Taiwan, which makes the relocating of productions from China into Vietnam easier and smoother.
3. Infrastructure
Though the infrastructure in Vietnam is incomparable with China’s, the government is taking relentless efforts to prioritize infrastructure to cater to economic growth. The country’s strategic location neighboring shipping routes and position in Asia allows manufacturers to ship easily all over the global. The country houses over 114 seaports along 3,200 km long coastline, with the three biggest ones scattering all over the country, i.e., Hai Phong in the north, Da Nang in the center and Saigon in the south.
Besides, the extensive railway network between Kunming (China) and Hai Phong (Vietnam) remains an important bridge especially for cargo transportation.
4. Low Labor Costs
Low labor cost used to be a major factor importers consider while outsourcing to China, however, with the drastically rising wages in China, many businesses have shifted the operations to other lower costs manufacturing bases. The minimum monthly wages in Vietnam in 2019, though vary depending on regions, ranges from US$125 to US$180, only half of the minimum wages in China. Another problem the manufacturing industry in China faces is aging population which has lead to labor shortage, while Vietnam has a younger, more dynamic workforce ready to fill the gap.
5. Governance
The country used to be war torn now has a relatively stable government, providing strategic directions and decisions on important political issues.
For the past decades, the government in Vietnam has taken a series of measures to improve business policies, labor laws, prioritize infrastructure, build industrial parks, attract foreign investment and does not shy away from building trade cooperations with other countries to fuel its growth.
Relocating manufacturing from China to Vietnam
The greatest challenge of moving operations from China to Vietnam is how to manage its growth responsibly.
The good news for Vietnam is the unpredictable and abated Sino-US trade war has created strong incentives to encourage manufacturing businesses to shift their production to Vietnam. Before taking the move, it’s important for foreign investors to do their diligence and consider a few factors as we write in our previous post.
5 Key Factors to Consider While Moving Manufacturing from China to Vietnam
It’s highly recommended to use a professional local service with knowledge in the region and regulations to assist with the relocation.