As the US-China trade war continues to escalate with no relief in sight, American businesses are scrambling to find solutions to avoid the hard swallowing 25% tariffs on imported Chinese goods. One silver lining from the protracted conflict is China’s neighbor to the south and, at one time, one of America’s staunchest enemies, Vietnam. War-torn and poverty stricken merely 4 decades ago, this Southeast Asian star is rising quickly and experiencing record performing 7% GDP growth. However, despite its potential can Vietnam live up to the hype as China’s best alternative?
It is without a doubt that Vietnam has been rising eyebrows the last decade as a low-cost manufacturing destination. Since early 2000s, supply chains have been shifting quickly to this small, Southeast nation. In recent years, foreign direct investment (FDI) from China, Taiwan, Japan, and South Korea have been pouring in, boosting its manufacturing base. For the last several decades Vietnam has been an export leader in textiles, electronics parts, machinery, and cell phones, with no signs of slowing down.
Vietnam’s manufacturing potential has been creating a buzz—and for good reason. One of the most dynamic countries in Southeast Asia, Vietnam’s population is just under 100 million to which a 70% of the population is under the age of 35. A young, vibrant, hungry and able population make for an attractively strong workforce. As labour prices and raw materials continue to climb in China, manufacturers are enticed by Vietnam’s low-cost labor often at one-third less to that of China.
Government stability, fostered by Vietnam’s communist government, is also an attractive condition many businesses require before investing whole-heartedly. Finally, geographically, Vietnam is blessed as sits strategically to the south of China and is at the cross-roads of some of the busiest maritime trading routes in the world and within easy access to its economically growing ASEAN neighbors. For these reasons, Vietnam is a standout among its peers.
Despite the country’s potential, however, when it comes to manufacturing investors are quickly discovering that Vietnam is no China. For one, the overall country’s infrastructure is underdeveloped and in bad need of repairs and upgrades: roads, bridges, ports and railways all lag many of its neighbors. To the government’s credit, there are major infrastructure and developmental projects in the works, such as commuter metro trains in both Hanoi and Ho Chi Minh City and updated shipping ports, however, Vietnam needs to press on in major ways if it wishes to compete in the 21 century global economy.
Though Vietnam boasts a young and energetic workforce, the reality is that the majority of its workers are low-skilled, lacking any modern manufacturing training and skill sets essential to meeting the current manufacturing surge. This phenomenon dates back to the historically poorly plagued educational system, including its outdated vocational training, facilities, and know-how. Third, production infrastructure, proper facilities, and quality raw materials are in short supply, compounding this problem. For these very reasons, Vietnam may not be the silver bullet many are hoping for.
Vietnam’s stunning export growth is backed by impressive numbers. In 2019, exports to the USA increased 28.8% compared to last year. The investment bank Nomura in one estimate credits the US-China trade war to boosting Vietnam’s economy 8%. Everything from telephone electronics parts, furniture, and automatic data processing machines have all seen an uptick. Light industry manufacturers such as textiles and electronic components have all benefited in recent months.
Though the lack of modern infrastructure has plagued Vietnam’s growth, in recent years the government has been investing heavily in industrial parks, answering the calls by large corporation demands and their needs for up-to-date facilities.
While Vietnam is rising as a quick alternative to China, obstacles could quickly derail this apparent boon. For one, in late June of this year American President Donald Trump, in a news briefing with reporters who asked what his thoughts are about the quick shift in manufacturing from China to Vietnam, remarked, “Vietnam is one of the worst offenders. Sometimes even worse than China.” He followed up by threatening that as president he would consider tariffs against Vietnam. If President Trump were, indeed, to follow through on his threat doing so would quickly sap Vietnam’s headlining potential. Moreover, as Vietnam nudges forward as an export leader, its neighboring countries are also quickly upping their manufacturing, technology and export industries in earnest, adding to the competition in the process.
Thailand, Cambodia, the Philippines, Malaysia, and Indonesia—all members of ASEAN— are ramping up their industrial competitive advantage. Finally, rampant corruption at both the provincial and national level as well as the increasing environmental destruction and pollution are cause for concern. The result is the lack in the ease of doing business; foreign direct investment and attracting skilled foreign expats to work in Vietnam are increasingly being jeopardized. Vietnam’s recent gains, though substantial, are fragile are at risk of unraveling at a moment’s notice.
Vietnam finds itself at an opportune crossroads at a time to reap the benefits made by the US-China trade war. This emerging market holds great potential which has already proven itself as an industry leading manufacturer in electronics, small parts, and textiles. However, despite Vietnam’s enormous strides in recent years, the country falls short in several key areas, mainly, skilled workers with modern training and know-how, outdated facilities, lack of quality raw material, and overall poor infrastructure.
Despite these deficiencies, with government leadership, input from business leaders, continued foreign investment, and the implementation of the rule of law and decreased corruption, Vietnam may not only be a convenient alternative to China but emerge as an economic Asian tiger in its own right.
Vinh Ho is a Manager at APAC Consulting