Trade War Pushing Companies from China to Vietnam, But Experts Warn they May have Missed the Boat

Cissy Zhou

06:46 08/05/2019

Rising land and labour costs, bottlenecks at ports, traffic jams on roads and diminishing manufacturing capacity are leading to saturation in parts of Vietnam. Other parts of Asia, including Malaysia and Batam in Indonesia, emerge as alternative manufacturing hubs to Vietnam

Trade War Pushing Companies from China to Vietnam, But Experts Warn they May have Missed the Boat
When Ernie Koh first opened a production plant in Vietnam in 1993 to manufacture furniture, the Southeast Asian nation was not on the radar of many manufacturers, but a quarter of a century on, and companies are moving there in their droves.
A combination of higher wages and increasing environmental regulations means China’s southern manufacturing powerhouse of Guangdong is no longer the low-cost hub it once was, and for many companies, Vietnam has been viewed as a logical alternative. The US-China trade war, which is set to ratchet up a notch on Friday with a planned increase in tariffs on Chinese exports to the US from 10 per cent to 25 per cent, has accelerated this trend.
The first quarter of 2019 saw foreign investment in Vietnam rise by 86.2 per cent, to US$10.8 billion, with Chinese investment accounting for almost half of that, according to the Chinese state-run Securities Times newspaper.
Koh, executive director of Singaporean furniture manufacturer Koda, runs plants in Malaysia and Vietnam, and while he is fully committed to his Vietnamese investments, he is now worried that parts of the country are struggling to cope with the influx of companies, many of which are looking to escape trade war tariffs.
“Everywhere, there are buildings going up. The roads are more crowded, the traffic jams are getting worse,” Koh said. “There has been a big difference in port congestion in the last two years. Nowadays, we have to book space on a ship two weeks in advance. We did not have to do this before.”
Vietnam’s economy grew by 7.1 per cent last year compared to 6.8 per cent, while it has attracted a plethora of multinational companies, including Intel, Samsung and LG, all of which have made huge investments.
Fred Burke, managing partner of law firm Baker McKenzie’s Vietnam office, noticed a flood of Chinese manufacturers into Vietnam even before the trade war.
“There is just all kinds of people coming in. There's a few coming in and saying that they're being hammered by the import duties in the US on Chinese exports. So people making things like emergency exit signs, brake cables, all kinds of specific items that are being cost-plus manufactured in China,” Burke said.
However, while China’s main industrial hubs have become known for high quality manufacturing and top-class infrastructure, Vietnam is a less mature prospect.
“The Vietnamese workers were really not trained up to the level that the Chinese are, and that starts with the construction of your factory, or the road to get there. China has got so good at infrastructure, some people just take it for granted that everywhere there's these eight lane roads with high-speed rail and everything. But in Vietnam, they're just starting to build all that stuff. They have their first [underground train] lines coming online in the next year or two in Ho Chi Minh City,” Burke said.
The exodus of firms out of China has been predicted to continue, especially as US President Donald Trump prepares to take the trade war to the next level.
But with rising costs of land and labour, bottlenecks at the ports, traffic jams on the roads and quickly diminishing manufacturing capacity, experts are warning that those who have yet to make the leap to Vietnam may have already missed the boat.
“Last year, there were several manufacturers trying to relocate to Vietnam to offset the trade war impact,” said Kong Xiangping, general manager at the Ho Chi Minh branch of Ever Win Service Group, a Taiwanese consulting firm.
“The land price back then was around US$60 per square metre (11 sq ft). Those companies decided not to relocate to Vietnam because they thought the trade war risk had eased. They must be regretting their decision now because the land price has drastically gone up to over US$100 this year. Previously, it only went up by US$5 to US$10 per square metre each year.”
Vietnam is roughly the same size of China’s Guangdong province, and while China’s southerly manufacturing base has a population of 104.3 million, Vietnam’s is 95.5 million. But while Guangdong can draw on massive pools of migrant workers from around the rest of China, Vietnam cannot.
According to an official Vietnamese government database, there were 9.3 million workers in the country’s manufacturing sector in 2017.
Comparably, Guangdong province alone had a manufacturing workforce of 12.71 million in September 2018, accounting for 58 per cent of the total workforce, according to the Guangdong Statistics Bureau. Guangdong is China’s most populous province, while 10 other provinces have populations greater than 50 million people.
It means that companies that have already set up in Vietnam have already picked up the skilled staff, with high turnover rates and poaching of talent a cause of anxiety for many in the country, limiting the possibility that Vietnam can be “the new China”, or even “the new Guangdong”.
Wilkie Wong is a managing director at the world’s largest woven shirt maker, Esquel Group, which makes about 100 million shirts annually. The company is Chinese, but has had presence in Vietnam for 15 years.
“In the past we used to have workers striking in Vietnam, but we haven't had that problem for many years. That is because we have improved the way we work with the workers to help them improve productivity, thereby allowing them to earn more,” Wong said. “At one of our factories, we have people lining up in front of our gate every day trying to look for a job. I mean, that is due to word of mouth. So if we can become an employer of choice, then we can mitigate some of the problems in Vietnam.”
Some Chinese manufacturers, though, have struggled to recruit those with requisite language skills in Vietnam, particularly in and around the industrial hub of Ho Chi Minh City, the country’s largest metropolis.
“Chinese manufacturers have been increasing investment in Vietnam in recent years, but there is a shortage of Chinese speakers,” said Zhang Diansheng, general manager at Ho Chi Minh-based Hang Sinh Consultant Company. “It is getting more difficult to recruit workers around Ho Chi Minh City. Factories even fight against each other for more workers. It’s easier to find more labour in remote areas, but workers are less professional in less developed cities.”
This has driven companies farther out of the traditional manufacturing hubs to more remote parts of Vietnam, where the infrastructure is less developed. It has also led companies to look at alternative locations around Southeast Asia.
Among them is Malaysia – a fellow signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which offers preferential access to markets such as Australia, Canada, Japan and Mexico – and Indonesia, where multinational companies have been setting up manufacturing bases in the free-trade zone of Batam, a small island an hour’s ferry journey from Singapore.
Last year, it was announced that the Taiwanese iPhone assembly company Pegatron was shifting production away from China to Batam, as a means of avoiding US tariffs. The plant was due to begin manufacturing in April. Appliance manufacturer Phillips also has a large plant on the island, producing shavers and irons, among other products.
Angelia Chew, founder of the Singapore-based consultancy AC Trade Advisory, said that Vietnam and Batam are the jurisdictions attracting most interest from her clients.
“Batam is one of the most successful trade zones in Indonesia because of the proximity to Singapore,” she said, adding that despite the concerns over capacity and infrastructure, she is still bullish on Vietnam. “The advantage is that Vietnam has the free trade agreement with the European Union and the CPTPP. Now I'm seeing a lot of Chinese investments going into Vietnam as well. So if you’re looking to move in the near future, that is still the best bet.”


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