Is Vietnam Replacing China as World's Manufacturing Hub? Here's How Beijing is Losing Out

China's loss has been Vietnam's gain. Ever since Washington and Beijing got into a trade war, US behemoths have harbored second thoughts about investing in China. Most of such investment in turn went to Vietnam.

It was reported recently that Apple is moving part of its iPad production from China to Vietnam. Nikkei reported that the move has a symbolic value though Apple is not expected to launch huge volume production facilities in Vietnam. For many other US companies, Apple also considers too much exposure to China a huge risk to its supply chain stability.

Diversification of Supply Chain Networks

Analysts confirm that companies are focused on diversification of their supply chain networks in an uncertain world. And, for many reasons, Vietnam figures high in a list of countries that the US and European firms consider safe. "They've had a fair amount of success there but are mindful about the headwinds, and hence, they wanted to put more money in Southeast Asia and India," . Amit Anand, co-founder of Singapore-based Jungle Ventures, told Nikkei Asia.

US companies moving production to Vietnam Wikimedia Commons

Others say the trade war with the US is not the only factor that cost China billions in investment. Vietnam has its own unique advantages that Europeans have discovered of late. Vietnam was one of the few Asian nations whose economy did not shrink in the aftermath of the coronavirus pandemic.

Economic Performance

According to the World Bank, Vietnam's GDP is on course to grow by around 5.5 percent. The Asian country's economic performance has also impressed European investors, DW noted in a report.

Meanwhile, Nikkei reported that China is losing appeal among VC funds even as Southeast Asian nations and India are among the popular destinations for SE Asia-focused venture capitalists. According to the Japanese financial news outlet, while these funds raised $3.1 billion this year, China-focused funds could drum up only about $2.1 billion, which is a tiny fraction of last year's $27.2 billion.

Pandemic Accelerated Shift

According to Vietnam Briefing, the move away from China and into Vietnam is not entirely a new development. It has been happening but the trade war accelerated the process, said Dustin Daugherty, Head of North American Desk for Dezan Shira & Associates. "Even prior to the start of the US-China trade war and more recently the outbreak of the COVID-19 pandemic, Vietnam offered the most cost-competitive China alternative for general manufacturing in Asia," he said, according to Vietnam Briefing.

Vietnam manufacturing
US companies moving production to Vietnam Wikimedia Commons

The expert notes that among Vietnam's advantages are efficient and stable governing structure, competitive labor costs and business-friendly tax regime. Another added advantage is that Vietnam offers cultural familiarity for companies used to doing business in China.

The report also says that tech giant Google is exploring the option of producing its Pixel smartphones from Vietnam instead of China. Chipmaker Intel has invested $1 billion in Vietnam and is looking at increasing the investment.

Another major company that moved production to Vietnam is Universal Alloy Corporation, which makes aircraft components for Boeing and Airbus. The company inaugurated a manufacturing facility in Vietnam this year.

European Companies Join the Trend

According to DW, German automotive supplier Brose is looking at opening a new production hub in either Vietnam or Thailand. Remarkably, the company has as many as 11 factories in China now.

The largest European investment in Vietnam was announced late last year, when Denmark's Lego said it was building a $1 billion facility near Ho Chi Minh City.

"Whether Vietnam will 'replace' China as a manufacturing option remains to be seen ... But as an extended or additional investment location, in addition to China, or as part of a wider China-plus-One strategy, is definitely gaining ground," Matthijs van den Broek of the Dutch Business Association Vietnam, told DW.