Lessons to learn: Vietnam’s rise as manufacturing hub

According to Global Times, while supply lines were interrupted by Omicron flare-ups in China's manufacturing centres like Guangdong Province and Shanghai, Vietnam's Q1 economic results appeared to suggest a downturn outlook. Vietnam may soon overtake China as the world's factory due to better alternatives with lower costs for land purchase rights, labour pay, and operating costs for manufacturing facilities and warehouses.

Vietnam's GDP rose by 5.03 percent in Q1 of 2022 in comparison to the same period the previous year, outpacing China's growth of 4.8%, based on the General Statistics Office of Vietnam. Additionally, Vietnam's foreign trade increased by 14.4% year over year in Q1 to reach USD 176.35 billion. Comparatively, China's Q1 foreign trade increased by 10.7% in yuan terms. Additionally, money is coming into the Vietnamese market from international investors and other foreign-owned companies. Business tycoon Li Ka-shing reportedly spent billions on Vietnam's facilities after leaving the UK, according to Global Times.

India, which has one of the fastest-growing markets, had been a strong contender. However, since 2014, the nation has had one of the lowest percentages of worker involvement worldwide, according to Bloomberg. In addition, the government has not improved its industrial policy significantly throughout its eight-year reign and it has not negotiated any trade pacts. By taking a more protectionist stance, India is losing out on $28 trillion in prospective global trade. This propensity toward inwardness results from the belief that domestic consumption alone can maintain a 1.4-billion-person economy. In India, just 1% to 2% of the people might be considered middle class, compared to 25% in China, prior to the Covid-19. According to Bloomberg News, a number of prominent economists think that India will have a difficult time achieving the ultimate goal of a "self-reliant economy." However, Hanoi is implementing the open and seamless trade strategy used by the East Asian Tiger nations. Despite having a far smaller population than India, the nation is expanding its market position in international trade.

Vietnam is well known for being a manufacturing hub, especially for wealthy nations who adhere to the "China plus one" policy. In order to minimize their dependence on China, firms might use this method to diversify their investments. The cost of conducting business in Vietnam is reasonable, especially for industry, due to low overhead costs for things like buildings, land, and labour. Additionally, it offers incentives for companies using or planning to use renewable technology as well as progressive taxation laws for overseas enterprises. Vietnam has the right policies to promote FDI and prioritizes fostering a free-wheeling, unbiased environment. By establishing the necessary conditions for effective democratization of FDI administration, it also encourages the help of other industries and more in-depth contact with current and potential investors. Location and accessibility are two additional benefits of doing business in Vietnam. Vietnam's processing and manufacturing sector was the most well-liked, and for good cause, receiving 58.2% of FDI in 2020.

Cheap input costs, stable political conditions, and progressively lenient trading and investment regulations are just a few of Vietnam's appealing qualities, especially in light of the country's recent free trade deal with the EU. But due to its heavy reliance on imports for industry and its much smaller population, Vietnam is unable to acquire substantially more manufacturing from China and advance up the value chain. Hanoi could only draw a small portion of the businesses seeking an alternative to China's escalating labour expenses because its work force is only 7 percent as large as China's. Targeting industries like textiles, footwear, and electronics has been successful for Vietnam. However, due to its lower magnitude than China, it cannot replace output that calls for a significant deployment of the work force. As a result, businesses seeking to diversify away from China could find a home in Vietnam, though it will probably only be able to satisfy a portion of their needs. If other countries in Asia and elsewhere try to compete, more of the pie will be accessible to them. Vietnam's advantage over China is also limited by the fact that a large portion of its gross exports are made up of South Korean and Chinese imported inputs. Although exports from Vietnam have grown significantly, international companies rather than indigenous ones are capturing the majority of that growth.

Vietnam's strategies have increased its share of production chain activity and value even if it is becoming more difficult for it to wrest industrial activity away from China. Because of its success, similar economies can learn how to take advantage of global production diversification trends and raise the standard of living for their people. Before Indian enterprises can begin manufacturing for the global market, deeper domestic policy reforms with an emphasis on ease of doing business, effective logistics, and infrastructure would be required.

Notes-

1.       Vietnam’s Rise as a Regional Manufacturing Hub https://www.tricorglobal.com/perspectives/vietnams-rise-as-a-regional-manufacturing-hub#:~:text=Through%20domestic%20reforms%2C%20natural%20resources,growing%20economies%20in%20Southeast%20Asia.

2.     Why Manufacturing is Driving Vietnam’s Growth https://www.vietnam-briefing.com/news/why-manufacturing-is-driving-vietnams-growth.html/

3.      Vietnam likely to replace China as factory of the world in near future https://www.business-standard.com/article/international/vietnam-likely-to-replace-china-as-factory-of-the-world-in-near-future-122062500379_1.html

4.     Vietnam and manufacturing: What’s driving its success? https://techwireasia.com/2022/01/vietnam-and-manufacturing-whats-driving-its-success/

5.     Vietnam likely to replace China as factory of the world in near future https://www.business-standard.com/article/international/vietnam-likely-to-replace-china-as-factory-of-the-world-in-near-future-122062500379_1.html#:~:text=reported%20Global%20Times.-,According%20to%20Vietnams%20General%20Statistics%20Office%2C%20Vietnams%20economy%20expanded%20by,rise%20of%2014.4%20per%20cent.

6.     Vietnam may replace China as factory of the world in near future https://theprint.in/world/vietnam-may-replace-china-as-factory-of-the-world-in-near-future/1011789/

7.     Vietnam on track to replace China as new manufacturing hub: experts https://opendevelopmentmekong.net/news/vietnam-on-track-to-replace-china-as-new-manufacturing-hub-experts/#!/story=post-918021&loc=21.0292095,105.85247,7

8.     Why more European firms are choosing Vietnam over China https://indianexpress.com/article/world/why-more-european-firms-are-choosing-vietnam-over-china-7960529/

Pic Courtesy-Andrea Popa at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)