Vietnam’s Business Growth and China Plus One

The term “China Plus One” refers to a business strategy that involves diversifying the supply chain by adding additional manufacturing facilities outside of China. This has become increasingly common due to rising labour costs, international trade tensions, and other uncertainties associated with doing business in China. Vietnam has been one of the major nearby Asian countries to benefit from the relocation of Chinese manufacturing. Pietro Karjalainen, Asian Insider’s partner in Vietnam, discusses Vietnam’s experience.

Vietnam has achieved an average annual growth rate of 6.5% over the past decade, driven by a combination of factors including political stability, favourable demographics, and a business-friendly environment. Further, the government has been proactive in attracting foreign investment, with a range of foreign-friendly initiatives, including special economic zones where doing business is easier for foreign firms.

One recent factor contributing to Vietnam’s recent growth is its position as an alternative to China for manufacturing. As companies look for new manufacturing bases outside of China, Vietnam has emerged as an attractive option due to its low labour costs, large and young workforce, and geographical proximity to China as well as its better trading relationship to the US.

The strategy now known as ‘China Plus One’ first emerged in the late 2000s as a response to rising costs and other challenges associated with doing business in China. The intention is to diversify the supply chain by adding additional manufacturing facilities outside of China, reducing over-reliance on a single manufacturing base while allowing access to new markets and resources. Further ongoing trade pressure between China and the US has led many companies to look for alternative manufacturing bases to avoid tariffs and other uncertainties associated with doing business in China. There are many cases where Chinese companies themselves are following the same path, by spreading their manufacturing bases more widely.

Vietnam has gained recent foreign investment through its position as an alternative to China for manufacturing with companies accessing lower labour costs, a large, younger workforce and  a business-friendly environment. One example of this is the textile industry. Vietnam is now the fourth-largest textile and garment exporter in the world, and this growth has been driven by a surge in foreign investment in the sector. In 2020, Vietnam’s textile and garment exports reached USD 35 billion, up 2.6% from the previous year, despite the impact of the pandemic. Another example is the electronics industry with many electronics companies relocating their manufacturing bases to Vietnam. Taiwan’s electronics goliath Foxconn has announced plans to commence manufacturing Apple products in Vietnam, while South Korea’s Samsung Electronics is now one of Vietnam’s largest investment groups. Other sectors to benefit include furniture construction and steel fabrication.

Chinese companies themselves are opening secondary factories in Vietnam, although they tend to bring their own management structure and often, also their own workers. This plus the tightening rules around working visas mean the costs saving aren’t as great while dual facility management is more complex. However while the US maintains extra tariffs around products directly from China, the value in offshore manufacturing remains strong.

Should tensions between the US and China continue to escalate and perhaps affect shipping routes from China, Vietnam enjoys direct land access with good rail and road links across the shared border and with fair amounts of raw materials also coming from China, this is an important link for Vietnam.

Over recent years, Vietnam has made efforts to invest in and improve workforce education and the country’s infrastructure while also tackling bureaucratic and regulatory inefficiency. Further Vietnam’s increased participation in free trade agreements such as the CPTPP, along with increasing engagement through the China Plus One initiative is leading to a revitalised economy especially in manufacturing.

On the other hand, Vietnam’s government, recognising the risks of an economy overly reliant on foreign investment, is making efforts to diversify supply chains and further develop domestic industry, particularly SMEs while promoting local innovation and entrepreneurship.

China Plus One has become an important channel for Vietnam, capturing an estimated 10% of the manufacturing business relocating abroad. There will be more as the world adapts to new political, economic and environmental forces shaping the region. Vietnam is talking advantage of this to implement a range of far reaching policy initiatives that will offer new opportunity for businesses operating in Vietnam in coming years.

To discuss any arrangement around product sourcing or manufacturing in Vietnam, Asian Insiders offers years of experience and deep practical first-hand knowledge. For a no obligation call, please contact Jari Hietala, Managing Partner: jari.hietala(at)asianinsider.com or Pietro Karjalainen, Vietnam Partner:Pietro.karjalainen(at)asianinsiders.com

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