Manufacturing has been Vietnam’s key growth driver in recent years. While global trade has stagnated, Vietnam’s has soared from 70 per cent of GDP in 2007 to 200 per cent in 2017.
The manufacturing sector has been the key component of Vietnam’s FDI, which experienced a compound annual growth rate of 18 per cent from 2012 to 2017 (the majority of which was sourced from Japan and South Korea).
Meanwhile, China’s role as the global manufacturing hub is in decline as an increasing number of elements prompt companies to diversify their investment. The factors that drove its position as a manufacturing darling – government reforms and the availability of a cheap, young workforce – are beginning to soften.
Many multinationals are reviewing their global supply chains and looking to diversify by relocating production facilities to other countries.
Head of Asia Research at ANZ, Mr. Khoon Goh, said Vietnam has opened its doors to foreign investment and removed barriers to doing business in the country. “Vietnam is actually likely to benefit from the more fraught global geopolitical environment,” he noted.
Through this period of global adjustment, manufacturing will flow down the path of least resistance – and greatest opportunity.
The US has traditionally been a major trading partner of China, with around 19 per cent of the Asian giant’s total exports going to the States.
Import tariffs imposed by President Donald Trump on 50 per cent of goods imported from China and the retaliatory measures by President Xi Jinping have increased the costs of exporting products from China to the US.
The concern over a prolonged trade war could accelerate companies’ decisions to explore alternative manufacturing bases and diversify away from China to lower-cost countries such as Vietnam. The country has already become a major exporter of textiles, electronic goods, and footwear, among other items, with one in ten of the world’s smartphones produced in Vietnam.
As far back as 2017, the United States’ Fashion Industry Association noted the sourcing model in the sector was shifting from a “China Plus Many” model to a “China Plus Vietnam Plus Many” one.
Increasing trade liberalization, deregulation, lowered costs of doing business, and investments in human capital have contributed to the growing attractiveness of Vietnam as a manufacturing hub. Favorable factors include labor costs and high productivity, a young workforce, trade liberalization, a favorable investment climate and economic stability, taxation, and incentives.
There are no winners from war but Vietnam looks poised to benefit from the US-China trade fallout.