No competition

With more and more manufacturing companies setting up shop in Vietnam, many see the nation as a natural competitor to China. But with both countries seeing big growth in this sector, rather than being rivals, they may be playing in completely different leagues

Maxfield Brown
May 22, 2018
No competition
A worker operates at a transformer manufacturing workshop in Hanoi Photo: Minh Hoang / EPA

Manufacturers in China would be wrong to consider their Vietnamese counterparts as serious competition. And if a management team were questioning this, it would be a clear signal their company’s business model in China was no longer viable because in reality, the competition already has the upper hand.

Executives who worked and traveled in China during the 1990s and early 2000s often make the mistake of assuming that China is as it was then: a low-cost and rapidly developing economy. While the latter may be true, cost and a lack of regulation are quickly becoming antiquated aspects of China’s competitive advantage. China is instead embracing rising labour costs and increased regulation as a means of building up a new competitive edge – deep technical talent pools, efficient quality control and a huge domestic consumer market.

China’s increasing economic costs, while opening doors for new investment, have left the first wave of outsourced manufacturing operations, which set up shop in China decades ago, with similar costs and regulatory conditions to those they originally fled.

Textiles producers, positioned at the low end of the value chain, were the first manufacturers to jump ship. Nike and Adidas began to move production facilities from China to Vietnam as early as Vietnam’s accession to the World Trade Organisation in 2007.

Textiles were only the start. In recent years, electronics facilities have followed suit, becoming a staple in Vietnam’s numerous industrial parks. Samsung, LG and Foxconn are prominent industry leaders that exemplify this trend and showcase the changing nature of manufacturing capacity in Asia.

Analysts may point to increased investment outflows as evidence that Vietnam is increasing its competitive position relative to China, or to substantiate arguments that China is losing its economic muster. This couldn’t be farther from the truth. Despite a continued movement of low-cost manufacturing from China to Vietnam, both countries maintained healthy growth rates of 6.7% and 6.8% in 2017, respectively.

China is simply moving on from low-cost production. Investors that are no longer required to boost its GDP are finding a home in surrounding countries such as Vietnam. Firms that realise the lack of competition between China and Vietnam and start to identify the complementary production strategies between the two are going to be the winners in the next decade.

A man rides past a Samsung mobile shop on a street in Hanoi Photo: Luong Thai Linh / EPA

So what makes Vietnam the rising manufacturing star of Southeast Asia?

Vietnam is just starting its journey up the value chain as it models successful development policy by China and South Korea – Vietnam’s largest foreign investor. Vietnam’s stable governance easily outshines competitors such as Cambodia and Myanmar for all but the lowest-cost manufacturing. Investors will also find Vietnam to be consistently more receptive to foreign investment than regional competitors such as Indonesia.

Vietnam’s largest asset for investors is its network of trade agreements. This is a tool that not only benefits producers in Vietnam but also underscores the complementary rather than adversarial relationship between China and Vietnam. Vietnam’s inclusion in the Asean-China Free Trade Area allows for inputs to be imported with almost no tariffs. Vietnamese investors can then assemble goods for sale in markets such as the European Union, which looks set to implement a free-trade agreement (FTA) with Vietnam in late 2018.

Electronics exemplify this advantage. Complex components can be sourced from China, Malaysia, Singapore or Korea (all of which enjoy FTAs with Vietnam) and then assembled in Vietnam with cheaper components that are sourced or produced in country. Vietnamese assembly and limited production is usually sufficient to satisfy rules-of-origin provisions under Vietnam are various FTAs.

Companies employing this model of operation in Vietnam are often at a significant advantage over their counterparts operating exclusively in China. While Chinese talent pools run deep, increased operational costs and imposition of import duties by key import markets such as the European Union result in a clear cost advantage for companies that assemble in and export from Vietnam.

This is not to count out the benefits of China. In fact, for many industries, Vietnam and other alternatives to China are simply not capable of producing the inputs required to house an entire production chain of a more complex product.

Ultimately, Vietnam and China are not in competition over investment. Companies operating exclusively in each market are not in competition either. The real competition is between companies that are producing goods exclusively in China and those that are diversifying their production chain to include both China and Vietnam.

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