Can Vietnam build an industrial powerhouse of its own?

(Edited and refined by Candice Chan, with the assistance of AI translation.)

“A lot more people are going to Bac Ninh these past two years. Everyone is rushing there in droves.”

Fu Mingdong, founder and president of Fable Lubricants, has been in the industrial lubricants business in Dongguan, Guangdong, for nearly 30 years. He told Lianhe Zaobao (LHZB) that over the past two years, a growing number of factory owners, suppliers and industry peers from China’s Pearl River Delta have been making regular trips to Bac Ninh, the industrial heartland of northern Vietnam.

Fu first established a factory in Ho Chi Minh City in southern Vietnam in 2017, primarily to follow customers relocating from Dongguan. In 2023, the company opened a second plant in Bac Ninh, allowing it to move closer to customers and local supply chains.

Dongguan, where Fu built his business, attracted substantial foreign investment in the 1990s and gradually developed a comprehensive manufacturing and supply chain ecosystem. In recent years, some Chinese media outlets have begun describing Bac Ninh as the “Dongguan of 20 years ago”.

Emerging manufacturing clusters

Today, similar manufacturing clusters have emerged not only in Bac Ninh, but also in the northern port city of Hai Phong and around Binh Duong province and Ho Chi Minh City in the south.

In Fu’s view, the immediate driver of this southward manufacturing shift has been the US’s increasingly restrictive trade policy towards China.

“Chinese companies used to have it easy at home. Business was profitable and life was comfortable. But over the past two years, tariffs have left many with little choice but to expand overseas.”

The Vietnam-Singapore Industrial Park (VSIP), jointly developed by Singapore’s Sembcorp Development and Vietnamese state-owned partners, now operates 26 industrial parks across 15 Vietnamese provinces and cities. Responding to LHZB’s queries, Sembcorp Development said Chinese companies accounted for around 9% of tenants in VSIP parks in 2021, rising to about 15% by 2025.

A similar trend is evident at the DEEP C Industrial Zones in the Vietnamese port city of Hai Phong, where Chinese firms now account for about 20% of tenants, up from around 7 to 8% before the pandemic.

Unlike in the past, the Chinese companies entering Vietnam today are no longer confined to labour-intensive manufacturing.

Marco Foerster, ASEAN Regional Director at Acclime Vietnam in Hanoi, said major Chinese technology firms such as Luxshare and Goertek are expanding production in Vietnam, capitalising on its skilled workforce and growing industrial base, and this sits alongside a broader wave of electronics and precision manufacturing investment that has moved well beyond the textiles and furniture of a decade ago.

Foerster believes this shift reflects Chinese manufacturers moving up the value chain domestically while offshoring the mid-tier, export-oriented production that still needs a cost-competitive and tariff-neutral location.

Factories move south, research stays north

Even so, Vietnam’s supply chain depth is improving but still limited. Most precision-machined components still come from China, Taiwan, or South Korea, while domestic machine shops are emerging but lack capacity for tight tolerances.

Uni-Trend, the Chinese instrument manufacturer that has established operations in Bac Ninh, positions Vietnam primarily as a production base for the US market. Zhang Deng, general manager of Uni-Trend Vietnam, said the company has completed construction of some high-end production lines in Vietnam but has yet to commence formal production because “Vietnam still lacks the capability to manufacture these products”.

Trayton Group, one of China’s largest furniture manufacturers and retailers, also began production at a new factory in Vietnam last year to serve the US market. Founder and chief executive Simon Lichtenberg said the Vietnamese plant manufactures relatively simple products, while the Chinese factories continue producing more sophisticated items.

“Research and development, as well as design, all remain in China.”

Lichtenberg told Zaobao this arrangement is driven not simply by costs, but by the fact that the company’s headquarters and R&D infrastructure have been based in China for 30 years. Although Trayton now operates factories in Vietnam and Mexico, all product development continues to be led by its China-based teams.

An article published by Foreign Affairs in March argued that cutting-edge Chinese firms have built largely self-contained systems at home in which they control production at every stage from raw materials to final assembly, with relatively limited reliance on overseas suppliers.

The article also noted that at the upper end of the manufacturing value chain, in sectors such as electric vehicles, batteries, and solar panels, Chinese firms generally relocate only the more labour-intensive parts of the production process to Southeast Asia, while Beijing encourages companies to keep the highest value-added processes in China to prevent core technologies and knowledge from being transferred overseas.

Foerster cited the semiconductor industry as another example. Vietnam’s greatest constraint, he said, is its shortage of skilled talent. Many newly recruited employees require six months to a year of training before they can contribute effectively. Meanwhile, Vietnam’s domestic supply chain remains underdeveloped, with relatively complete industrial ecosystems existing only within a handful of industrial parks.

Fu, who frequently travels between China and Vietnam, has observed this firsthand.

“Over the past few years, I’ve seen more and more Chinese suppliers following their customers into Vietnam. But whenever machinery breaks down or technical problems arise, they still have to rely on technicians from China.”

This dependence is equally evident in supply chains. Citing Vietnamese government data, Reuters reported that Vietnam imported about US$168 billion worth of goods from China during the first 11 months of last year, an increase of nearly 30% year-on-year and already exceeding the total for the whole of 2024. About one-third of those imports consisted of electronic components, many of which were subsequently assembled in Vietnam before being exported to markets such as the US.

As more factories are established in Vietnam while core equipment and advanced technologies remain concentrated in China, an increasingly important question arises: can Vietnam build an industrial ecosystem of its own, or will it remain merely an outward extension of China’s manufacturing supply chain?

Can the flying geese model be repeated?

During the last century, South Korea, Taiwan, Singapore and later mainland China all gradually built their industrial capabilities by absorbing relocated manufacturing industries. This process became known as the “flying geese” model, whereby production relocation drives technology transfer, nurtures local supply chains and ultimately supports industrial upgrading.

Le Hong Hiep, senior fellow at Singapore’s ISEAS – Yusof Ishak Institute, believes today’s Vietnam and Southeast Asia face fundamentally different conditions.

“Japan, South Korea, and Taiwan industrialised into a world where most manufacturing sectors were still contested. The global supply chains back then were shallower, and there was genuine space for new entrants to build competitive advantage from scratch. That window is considerably narrower today.”

Today, Chinese companies dominate almost every mature manufacturing sector.

What Vietnam and Southeast Asia are doing

Le noted that Vietnamese suppliers trying to break into global supply chains face a Chinese competitor that can undercut on price, scale rapidly, and often do better on quality. The rational response for Vietnamese firms, and many have taken it, is simply to import from China rather than attempt to develop their own supply base. 

“The result is a persistent hollowing-out of domestic industrial capacity.”

Tommy Xie, Head of Asia Macro Research at OCBC, cited trade data showing that before 2019 China still ran trade deficits with the six largest ASEAN economies in categories such as machinery, electrical equipment, chips and semiconductors. By last year, however, China had recorded a trade surplus of US$133 billion in these sectors with ASEAN-6, accounting for around 12.4% of its overall trade surplus.

“Southeast Asia has now effectively become part of China’s industrial supply chain.”

Nevertheless, Xie does not believe the expansion of Chinese supply chains into Southeast Asia necessarily means the region’s manufacturing sector is being hollowed out.

He argued that while exports of finished consumer goods such as clothing may directly compete with local manufacturers, imports of intermediate goods such as machinery and electronic components can instead stimulate local industrial development and create additional employment.

He also pointed to Japanese investment in China several decades ago. At the time, much of the core technology likewise remained in Japan, yet China gradually built its own industrial capabilities through participation in global supply chains, workforce training and accumulated manufacturing experience, eventually upgrading into higher value-added industries.

“Southeast Asia has already secured its ticket to participate in these industries,” Xie said. “Whether it can eventually develop its own technological capabilities and home-grown companies depends on its own efforts.”

Vietnam has already taken its first steps down that path.

Hanoi plans to train 50,000 chip design engineers by 2030 and expand its semiconductor workforce to more than 100,000 by 2040. In January this year, Viettel officially broke ground on Vietnam’s first semiconductor chip fabrication plant, with pilot production expected to begin by the end of 2027.

For Chinese companies, Vietnam may simply represent another node in an increasingly international supply chain.

For Vietnam and Southeast Asia, however, the significance of this manufacturing migration extends far beyond that.

Whether it gives rise to a new industrial centre or merely binds the region more tightly into China’s manufacturing ecosystem remains a question that only time can answer.

This article was first published in Lianhe Zaobao as “中国制造迁往越南 供应链外延能否带来产业升级？”.

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