Vietnam: Silver Linings: Trade War Spurs Interest In Vietnamese Manufacturing

Last Updated: 27 February 2019
Article by TMF Group

With China engaged in a bruising trade war with the US, Vietnam is fielding an increasing number of enquiries from Chinese producers looking to shift their manufacturing units.

Vietnam's manufacturing sector has been a linchpin of the country's stellar economic performance over the years. Global corporations, looking for an inexpensive and productive labour force in a stable, business-friendly political environment, manufacture everything from electronics to apparel in the country.

In 2018, Vietnam's GDP grew by 7.1%, its best performance since 2007, and the manufacturing sector remains a leading contributor to this growth. The sector was also responsible for attracting a bulk of foreign direct investments, which rose by 9% in 2018 to US$19.1bn, led by inflows from Japan, South Korea and Singapore.

Now, with China engaged in a bruising trade war with the US, Vietnam is fielding an increasing number of enquiries from Chinese producers looking to shift their manufacturing units to avoid debilitating trade tariffs. This is a positive by-product of the friction between the world's two largest economies - which also happen to be Vietnam's top two export markets - and has the potential to enhance Vietnam's stature as a regional production hub and fuel its move up the manufacturing value chain.

Welcome developments

As the trade war has ground on it's become risky to predict the outcome of the ongoing negotiations between the US and China. Faced with this uncertainty, manufacturers are preparing to act quickly in the event of a worsening of relations between the two superpowers. Already there has been a discernible shift as Chinese firms, including makers of Apple's AirPods as well as garment units, make plans to move production capacities south of the border.

Vietnam is well placed to serve these new entrants and other aspirants. The government has stepped up efforts to provide vocational training to its young and growing workforce. And, with a steadily improving physical infrastructure connecting the hinterland to a long coastline dotted with ports and container terminals, Vietnam is becoming a key part of the global supply chain.

It's not just the trade war that's prompting Chinese manufacturers to look outside for cheaper production hubs. Long known as the shop floor to the world, China is now increasingly focusing on high-end manufacturing. And with mainland labour costs on the rise, Vietnam is poised to take the lead as a substitute low-cost manufacturing hub. The only other markets in the region that offer a comparable alternative in terms of labour costs are Cambodia and Myanmar, which lack the trained workforce and infrastructure found in Vietnam.

Moreover, Vietnam has introduced several measures to address the bureaucratic hurdles that in the past made the country one of the most complex places to set up and run a business. The government is now more open to suggestions from the private sector on ways to facilitate ease of business and several operations have been moved online, enhancing processing speeds and reducing corruption. 

Vietnam has also struck a number of free trade agreements with other markets, ranging from ASEAN to the European Union. It has also recently ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which should further aid growth in the country's export-oriented economy.

Continuous improvements

Vietnam has made great strides in recent years to enhance its profile as an investment destination. But there is room for improvement and more needs to be done if it is to meet its goal of pulling the country's manufacturing sector up the value chain.

While transport links have improved significantly it is distributed unevenly and concentrated in certain regions. And it may be a while before a network is in place that successfully links the entire country to the global supply chain.

These improvements, when they come, will aid the development of high-end manufacturing and spread economic development more evenly as low-end, labour-intensive production shifts to smaller provinces. The country also suffers from a skilled labour shortage, a key constraint, and its onerous tax structure needs to be simpler to make it less of a burden for companies operating in the country and attract new entrants.

In the meantime, however, Vietnam continues to offer global corporations a vibrant, cost-effective production hub in one of the world's fastest-growing emerging markets.

Talk to us

TMF Group, with its long-running presence in Vietnam and in-depth knowledge of local and international regulations, is best placed to help businesses of all sizes establish a presence across a range of industries in the country. Contact us today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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