Is China losing its grip on manufacturing? The rise of Vietnam

In recent years, the economies of Vietnam and India, neighbours of China, have risen rapidly, achieving growth rates that rank among the top in the world. The two countries’ foreign trade exports have increased significantly, and foreign-funded enterprises have made rapid inroads.

Based on this, some foreign analysts believe that the three-year pandemic combined with the decoupling and “de-risking” policies of the US and the West have seriously impacted China’s position in the global supply chain. Southeast Asian countries, especially Vietnam, will catch up and even replace it. In addition, “Made in Vietnam” is likely to replace “Made in China” in the near future.

Benefiting from strong exports, domestic demand and increased foreign investment, Vietnam’s economy has experienced stable growth in 2022, with its GDP exceeding US$400 billion for the first time, a year-on-year increase of 8.02%, the largest growth rate in 12 years. In 2023, Vietnam’s economic growth rate was 5.05%. With a total economic output of US$430 billion and a per capita GDP of US$4,284, the country continued to rank among the top Asia Pacific countries.

A greater number of internet technology giants are abandoning China to invest in Vietnam, especially in the context of intensified competition between China and the US after 2018; Vietnam is not only attracting low-end manufacturing industries such as clothing, shoes and hats, but also many high-end manufacturing industries as well.

Many internationally renowned multinational companies such as Apple from the US, Samsung from South Korea, and Sharp from Japan invested in building factories in Vietnam; Google and Intel have also moved their factories to Vietnam. South Korean Samsung has even shifted its global production centre for mobile phones and home appliances to Vietnam, where the output value of Samsung’s factories has reached one-third of Samsung Group’s.

The migration of a large number of new technology industries has driven the rapid development of Internet technology in Vietnam. It is expected that Vietnam’s Internet economy will become the leader of Southeast Asia by 2025.

A large amount of capital began to flood into Vietnam crazily. A few years ago, Li Ka-shing, who sold billions of assets in the UK, did an about-turn and invested in Vietnam; many investment institutions in the US, including American banks, and a majority of of European companies, have either expressed their intention to increase their investments in Vietnam or have also begun to invest heavily in Vietnam. Of particular concern is that many manufacturing companies including Adidas, Samsung and Nike are withdrawing from China and entering Vietnam.

Even Chinese companies are following suit. Companies such as clothing company Bosideng and furniture company Xilinmen have relocated their factories to countries such as Vietnam and Cambodia. Undoubtedly, another shift in the world’s manufacturing industry has begun.

The current scene of foreign investment flocking into Vietnam is like China’s economic boom after joining the WTO 20 years ago. In 2023, foreign investment contracts in Vietnam amounted to US$36.6 billion, a year-on-year increase of 31.1%. The actual utilisation of foreign investment was US$23.18 billion, a year-on-year increase of 3.5%, reaching a new high in five years.

As a result of this, Vietnam has enjoyed a trade surplus for eight consecutive years. Its total import and export value of goods in 2023 is about US$683 billion, a year-on-year decrease of 6.6%, of which the export value is US$355.5 billion, a decrease of 4.4%. The import value was US$327.5 billion, a decrease of 8.9%, with a trade surplus of US$28 billion.

It cannot be denied that Vietnam does have multiple advantages and has become a rising star in the economic development of the Asia Pacific region. Vietnam’s manufacturing industry has enormous potential for development, and “Made in China” may be replaced by “Made in Vietnam”.

The political situation in Vietnam has been stable, and Vietnam is also enjoying a population dividend with its large number of young labour force;

The most crucial factor is that, due to geopolitical and ideological biases, countries such as Europe, the US, Japan and South Korea have adopted a “de-sinicisation” and “decoupling” strategy towards China globally, taking various measures to encourage manufacturing to return or to stay domestically, in order to get rid of excessive dependence on China’s manufacturing industry.

Among countries like Vietnam, Indonesia, the Philippines, India and Bangladesh, Vietnam has territorial and maritime disputes with China, and has the strongest comprehensive national strength among Southeast Asian countries. Vietnam, China’s neighbour, is the best chess piece used by Europe and the US to contain and suppress China. Thus, Vietnam is naturally the biggest favourite for Western industrial transfer.

However, it is not easy for Vietnam to replace China as the “world’s factory” within a short timeframe, because compared with China, Vietnam has shortcomings and deficiencies. Vietnam’s manufacturing industries such as textiles, clothing, furniture, and electronic products are currently mainly stuck in relatively low-end industries.

The main shortcomings and deficiencies of Vietnam’s economy and industry can be summarised as follows:

Low wages make the Vietnamese labour market highly competitive, but there are problems with insufficient technical level and ability, and low labour efficiency. In 2022, the labour force aged 15 and above in Vietnam was approximately 51.7 million, an increase of 1.1 million from the previous year.

Among them, approximately 13.5 million people (26.2%), have obtained diplomas or certificates through skills training, of which 19.1 million were urban labourers (37.1%). The female labour force also reached 24.2 million, accounting for 46.8% of the national labour force.

In terms of industry, in 2022, approximately 13.9 million of the Vietnamese labour force were employed in the primary industry (27.5%), 17 million in the secondary industry (33.6%) and 19.7 million people (8.9%) in the tertiary industry.

In terms of industry, in 2022, labourers aged 15 and over numbered 50.6 million working people, including 13.9 million people working in agriculture, forestry and fishery (27.5%), down 2.5% compared to the previous year; 17 million people in the industry and construction sector (33.6%), up 4.5%; and 19.7 million people in the service sector (38.9%), up 6.1%.

The expansion of the labour force in the manufacturing and service sectors signifies a transition in Vietnam’s economic structure, wherein manufacturing and services assume a more dominant role, with a heightened interdependence between the two sectors.

A well-established supply chain system is one of the main reasons why “Made in China” is internationally renowned, and there are obvious shortcomings in Vietnam’s current supply chain.

Firstly, in terms of product development and manufacturing, China is currently the only country in the world that has all industrial categories in the United Nations Industrial Classification, thanks to the development of China’s heavy and chemical industry. Otherwise, China would not have been able to obtain the raw materials and machinery production capacity needed for economic development.

However, Vietnam has a problem of insufficient development of the heavy and chemical industry, which has led to a limited supply of raw materials. Referring to Vietnam’s import structure, it can be found that Vietnam imports a large amount of raw materials every year, such as textile fabrics, chemicals, primary plastics, steel, etc., which can be attributed to Vietnam’s imperfect heavy and chemical industry system.

Secondly, in terms of product distribution, Vietnam is also far behind China. On the one hand, logistics costs in Vietnam are high. Vietnam’s logistics costs account for 16.8%-17% of GDP, which is much higher than that of neighbouring countries such as China, Thailand, Malaysia and Singapore.

In addition, Vietnam does not have any shipping companies that can transport domestic goods to overseas markets, and freight and air transportation are also very backwards. China already has internationally renowned logistics companies such as China COSCO Shipping Group. Relying on multinational logistics companies has directly increased the cost of logistics in Vietnam.

On the other hand, Vietnam’s logistics efficiency is also low, which directly increases the time required for goods turnover and limits the development of the manufacturing industry.

Taking the logistics situation between the two major cities of Hanoi and Ho Chi Minh City in Vietnam as an example, the road distance between the two places is 1,700 kilometres, requiring two drivers to work in shifts and drive non-stop for 48 hours to arrive, and this is excluding special circumstances such as traffic congestion. If you choose the train, it will take four days, and if you choose sea freight, it will take up to seven days to arrive.

The logistics efficiency of domestic China is much higher than that in Vietnam. Currently, goods from non-peripheral provinces in China can arrive at their destination within three days. If express delivery is chosen, they can arrive within one day. In addition, China’s logistics performance is superior to that of Vietnam.

According to the Logistics Performance Index Report released by the World Bank, in 2023, China’s Logistics Performance Index score was 3.7, representing a 0.09-point increase from 2018, and its global ranking rose to 19th from 26th. In contrast, Vietnam’s score in 2023 was 3.3, 0.4 points lower than that of China. Despite an improvement of 0.03 points from 2018, Vietnam’s global ranking declined from 39th to 43rd, thereby widening the gap with China. The problems in the distribution of Vietnamese products are due to inadequate infrastructure in Vietnam.

In 2023, Vietnam’s GDP was about US$430 billion US dollars, the import and export of goods reached 683 billion US dollars, and the trade dependence was 158.83%. In other words, Vietnam’s economy is driven by foreign trade, and the scale of domestic demand is negligible.

Vietnam’s international economic environment is currently good due to two reasons. On the one hand, due to the efforts of the Vietnam government, the country has reached free trade agreements of varying degrees with China, Japan, South Korea, the US, the EU, ASEAN and other internationally important economies. On the other hand, there is the trade war between China and the US, which has benefited Vietnam.

However, foreign companies have a significant impact on Vietnam’s economy. From 2019 to 2021, the proportion of exports of foreign-funded enterprises in Vietnam’s exports exceeded 70%.

Take South Korea’s Samsung as an example. In 2019, Samsung’s exports were US$51.3 billion, accounting for 21% of Vietnam’s total exports. If foreign companies find other areas with higher profit margins and withdraw from Vietnam, Vietnam’s domestic enterprises alone will not be able to support Vietnam’s long-term economic development.

With China, South Korea, Japan and other countries transferring a large amount of manufacturing to Vietnam, Vietnam’s power infrastructure construction has failed to keep up with the pace of industrial development, resulting in a serious shortage of power supply.

In order to solve the “electricity shortage” in Vietnam, multinational power consumers such as Samsung, Apple, and Canon are required to “limit power” and start work after 10 pm. However, the power outage does not necessarily follow the schedule, leading to production uncertainties.

Many foreign factories are unable to carry out normal production and manufacturing due to a lack of sufficient electricity, resulting in significant economic losses. In such a situation, Vietnam had no choice but to seek help from China.

At the end of May 2023, China and Vietnam reached a power purchase agreement, agreeing that Guangxi would supply 30 million kilowatts of electricity to Vietnam every month. In 2023, Vietnam imported a total of 2 billion kilowatt hours of electricity from China, and in 2024, Vietnam signed a contract with China to purchase 1.8 billion kilowatt hours of electricity from China.

The total GDP of Vietnam in 2023 is US$430 billion, which is only equivalent to the size of Guangxi Zhuang Autonomous Region in China.

Vietnam attracted US$36.6 billion of foreign investment in 2023, while China’s foreign investment has been between US$150-180 billion annually from 2016 to 2023 since surpassing US$100 billion in 2010, ranking second in the world and first among developing countries for more than 20 consecutive years.

In 2023, the total import and export volume of Vietnam’s foreign trade was less than US$700 billion, while China’s foreign trade import and export in 2021 crossed the two levels of US$4 trillion and US$6 trillion, with an average of over US$6 trillion in 2022 and 2023. The huge disparity in size and strength makes it a bit unrealistic to discuss the prospect of “Made in China” being replaced by “Made in Vietnam”.

In short, it is hard for Vietnam to replace China as the “world factory” within a short period, but Vietnamese manufacturing indeed poses an increasingly strategic challenge to Chinese manufacturing.

For this reason, China should actively promote industrial upgrading and replacement, with innovation as the driving force, upgrade the industrial chain, value chain, and supply chain into the mid to high-end, and enhance the international competitiveness of “Made in China”.

At the same time, China should improve the investment environment in the central and western regions, as well as the northeastern region, and guide the labour-intensive low-end manufacturing industry in the eastern region to shift towards the central and western regions and the northeastern region.

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