Can Vietnam Replace China as A Manufacturing Hub?

After the start of US-China trade war in January 2018, which resulted in higher tariffs on both sides, experts believe that Vietnam may become the next manufacturing hub of the world. With the world’s two economic giants colliding and getting their horns locked, both countries are believed to face the consequences of this ongoing quarrel.

In the beginning of 2019, not just Vietnam but also Mexico and Malaysia were observed to have a serious boost in their overall manufacturing industry. More orders started coming in as an increasing number of companies decided to shift their main focus of manufacturing from China to other countries. And, why would it not happen? With the additional tariffs of $60 billion, imposed on US by China as retaliation on President Trump’s action of raising the tariffs by 25% on almost $200 billion on Chinese products.

Retaliation after retaliation from both sides has resulted in the actions taken by most companies to shift their manufacturing operations to other countries and Vietnam is said to be the country, which will benefit the most from it all.

However, many experts believe that Vietnam does not have the production capacity, which is required to fill China’s shoes, as far as replacing China as a manufacturing hub is concerned.

The US China Trade War

The two-year trade lock led to many businesses moving their manufacturing businesses to other countries. For example, according to Spartronics “Last year, we added a second floor to our factory. And now I’m looking at a new site four times larger than the current one.” And various sources say that Spartronics is not the only company, which is growing after relocating their operations to Vietnam.

• Effects of the Trade War

• How has the US-China trade war affected the economy in China?

• Effects on US

• Effects on China

1. Effects of the Trade War

To illustrate this point, here is an article about the effect of the US-China trade war in The Economist. In another example, here is an article about the US-China Trade war. The US Trade War Shouldn’t Cause China to Lose to the US In short, the US-China trade war will not cause China to lose the trade war. Instead, it will cause them to gain, as the experts explained sometime back, that the U.S. tariffs on $200 billion of Chinese goods will have to make their way through the American legal system, and Chinese retaliation may take many months to unfold. The net effect is unlikely to be a loss of trade, but the American stock market is betting that it will. That’s no shock, as the stock market doesn’t know anything.

Before this trade war, China had overtaken the US as the second-largest market in the world and was the US largest creditor nation for about a decade. China had also become one of the US largest trade partners. Now, China manufactures almost 30% of all the manufacturing worldwide. Many companies have started shifting their business operations from the US to China. According to US News & World Report, some suppliers for Apple’s iPhone have been operating out of China and shipping parts to the US for assembly. So, Apple won’t have to deal with the tariffs imposed by the US on Chinese products, but will still be forced to pay higher costs for its products. The trade war could have devastating effects for many businesses which rely heavily on products and materials from China.

2. How has the US China trade war affected the economy in China?

As the trade war of the US with China has progressed, China has faced increasing challenges. It was around June this year, when the US started with their massive $34 billion import tariffs against China. This includes both steel and aluminum.

On the other hand, the US is importing China to the WTO for negotiating trade disputes. Some of the things they are demanding from China is: Accept termination of their subsidies of tech products and reduced pressure on intellectual property. This is likely to be very difficult for China to do, especially with all these restrictions. In case China does not agree to US demands, the US trade actions will escalate.

3. Effects on US

The US was affected by this trade war. According to some experts, the US economy was already shrinking, and the trade war has accelerated its decline. Additionally, the US is already having a trade deficit with China that is, more than $365 billion. Effects on China, China will not lose face. “While the US has increased tariffs, China has instead retaliated. Its tariffs are more realistic than the United States tariffs, because they can harm China’s own business interests more easily. In fact, most of China’s retaliations are targeted specifically at making it cheaper for US-based companies to operate in China and to attract American talent. This shows that China is not afraid of American tariffs and is not afraid of hurting US interests to get what it wants,” says Gao.

4. Effects on China

China is the world’s second-largest economy and first in terms of capital and manufacturing power. In the aftermath of the trade war, a bunch of Chinese companies had to close down their factories. In response to the trade war, China decided to roll out import tariffs on a bunch of products such as US automotive, components, some vegetables and fruits, natural gas, liquefied petroleum gas (LPG) and agriculture products, automobiles, and aircraft. China also stated it would make it even harder for foreign companies to operate there. So far, the US has imposed tariffs on $250 billion worth of goods from China. The two countries are now engaged in the threat of trade war, as China has hit back with $110 billion worth of tariffs against the US.

Vietnam may be the next manufacturing hub

In his article “Philippines Is the Next Manufacturing Hub. Why Not Vietnam?” published on World Times Online on January 21, 2019, the Editor-in-Chief, Steve Mosher, asserted that Vietnam will become the next manufacturing hub of the world.

He stressed that both countries have similar market growth, while Vietnam has a huge export capacity and great workforce. “We believe that by the time we end up with a new President in the U.S., China will be close to collapse. I also believe that the Vietnamese will come around and think ‘why don’t we just move away from the TPP.’ It was a disaster waiting to happen,” Steve Mosher commented. According to him, if one took a long view of history, Vietnam’s main export goods have always been electronics, clothing, footwear, and toys.

Why are more companies shifting their production to Vietnam?

The Vietnam’s manufacturing industry, including electronics and auto industry, was deeply hit by Chinese import duties. However, experts believe that Vietnam could be the next best destination for Chinese manufacturers. The new round of US tariffs on Chinese goods could lead to massive losses for China, and many companies are already pulling out their investments from China.

Many economists also believe that Vietnam will eventually become the new manufacturing hub of the world. Most of the Chinese manufacturer who were planning to invest in Vietnam had their manufacturing locations located in China. However, the new trade war has forced them to reconsider their options.

What are the challenges of setting up operations in Vietnam?

Most of the investors nowadays opt to set up their factory in Vietnam because of the following reasons:

• lower production costs
• extensive workforce
• lenient tax regime
• low wage charges
• Need for Improvement in the legal system
• Nonexistence monitoring transparency

However, factors such as low worker efficiency and low-quality control have been identified as major threats by investors. With the recent increase in manufacturing costs, workers have started demanding a hike in their salaries, and factories are forced to consider the matter seriously. The government and various industrial companies are planning to build additional education centers to develop more highly qualified personnel. However, any change in the competitive landscape may impact the industry adversely.

Hopes and targets are set for Vietnam to keep growing in the coming years. The fact that it is poised to host the biggest digital transformation conference in Asia and has excellent opportunities to become the next manufacturing hub in the world are its massive hopes to bring more investments.

Most of the sources are divided into two in terms of what’s likely to change the current scenario in the coming years. On one hand, there are those who believe that the goal to be the next manufacturing hub of the world is a bit exaggerated. More investments will be made in Mexico and Malaysia instead, they say. On the other hand, the market analysts are more optimistic about the future of the manufacturing industry. With digitalization, robots are making manufacturing processes smoother.

How do companies make it work in this region?

The supply chain for their products that are exported to the US or China involve many countries and a lot of distance. It would not be a wise move to set up shop in China where the risk of manufacturing quality control is very high. A similar situation can be seen in Vietnam. However, Vietnam’s recent success story of turning around its textile industry is an eye-opener. Nguyen Hai Vu, manager of Quang Ninh branch of Italian company Brunello Cucinelli, said that Vietnam is becoming a better choice for the company since people can easily understand the company’s quality requirements and regulations, and the working process is fairly simple. “We have found many factories that can produce the fabric the same way and run them on relatively high-tech equipment,” Vu said.

Truce Between US & China in 2020

In January last year, China and United States tried to de-escalate the tensions between them by signing a truce. However, the conditions put forward by the US were designed to target China’s trade surplus, which did not to much good to the truce deal made earlier.

“The requirements for additional imports of US products appear very, very challenging, given the growth of the Chinese economy will be much slower than forecast in January,” said Yasuyuki Sawada. Even though the deal went on to uphold all the tariffs and did not do much in the resolution of the trade tensions between the two countries.

Current Level of US Imports from China

There has been a significant increase in the US imports from China during the pandemic. The data shows that China’s quick recovery from COVID-19 combined together with its superior labor force, technology and production capacity, as compared to Vietnam, US has been left with no choice but to fulfil its needs through increasing imports from China again. You can also say that it is one of the positive effects of the trade truce between the two giants. Nevertheless, China seems to be the victor in this battle.

However, if you take a look at the imports of China from the US, you will be able to see a clear difference, which will allow you to observe and understand the cold, hard fact, which is that China is no longer as dependent on imports from US as much as US is on China’s imports.

Countries Which Benefitted in the Trade War

Undoubtedly, among the top ten beneficiaries of the trade war between US and China, Vietnam sits on the very top with more than $6 billion worth of manufacturing and exports. China’s loss seemed to be divided into all these countries.

Conclusion

Yes, Vietnam seems to be the one country, which has gained more than any other country however, as far as becoming the manufacturing hub of the world, it pales in comparison to China’s superiority in almost every field and industry. So, logically looking at the complete picture, factoring the pandemic into the situation as well, it won’t be wrong to say that Vietnam simply, cannot fill China’s shoes in these current times.

FAQs

Q. Can Vietnam become the next leading manufacturer in the world?

A. Considering the giants Vietnam is up against, US and China, it is not an easy task for Vietnam to become the next leading manufacturer in the world. Furthermore, even in the current situation, where both US and China are facing problems due to the trade war and COVID, these two are still manufacturing much more than Vietnam.

Q. How long will it take Vietnam to become the hub of manufacturing in the world?

A. Looking at the current market condition and the current pandemic situation, which no one knows about, when its going to end completely. It may take decades for Vietnam to replace the likes of US or China as the next hub of manufacturing in the world.