[5 min read]
When choosing to move part of their production line out of China to minimize risks, most of the world’s leading CCE manufacturing companies choose Vietnam as a priority thanks to its geographical advantages, qualifications, and attractive domestic market. In 2020, the emergence of the COVID-19 pandemic is accelerating the Vietnam investment process by foreign enterprises.
THE WAVE OF MOVING OUT OF CHINA
In April 2020, the Japanese government approved a USD2bn economic support package — the highest ever — to assist Japanese manufacturers to shift their production processes out of China. The impacts of the COVID-19 pandemic has crippled China while also affecting companies whose factories are situated in China.
In order to obtain the best profit, manufacturers have placed their supply chains in China because of the convenience of the transport infrastructure, materials and prime geographical location. However, their decision to relocating out of China as the entire supply chain is shut due to COVID-19 has become a fatal blow to China.
Economist Shinichi Seki from the Japan Research Institute said that a number of Japanese goods and electronics manufacturers have been considering this transformation. Thanks to government support, the process of shifting production and supply chains out of China will be conducted faster. However, not all companies are choosing to leave China. Mr. Seki also mentioned that companies producing for the Chinese domestic market, such those in the automotive industry, may stay.
According to the Nikkei Asian Review, Google and Microsoft have made efforts to shift their hardware production lines to other parts of Asia. Risk mitigation is the common reason given by these companies after being affected by the production stagnation caused by the COVID-19 pandemic as well as previous tax regulations enacted during the Sino-American trade war.
VIETNAM – A PROMISING INVESTMENT DESTINATION
Among the considered locations, Vietnam is a commonly mentioned name, especially by CCE manufacturing companies.
According to Nikkei, it is said that Google intends to start producing its newest low-cost smartphone — expected to be called Pixel 4A — with its partners in northern Vietnam in April 2020. In addition, Google plans to produce its next generation of smartphones — Pixel 5 — in the second half of 2020 in Vietnam.
Similarly, based on reliable sources, Microsoft is planning to start the production of its Surface models, including laptops and desktops, in the North of Vietnam in the second quarter of 2020, at the earliest.
Earlier, the second biggest Japanese gaming company, Nintendo, had plans to move its production line from China to Vietnam, according to a Bloomberg report.
According to the Financial Times, Nintendo is currently assembling its Switch consoles in China; however, it started to relocate its manufacturing facilities to Vietnam and plans to increase the quantity of products produced here.
Due to BW’s research, there are three reasons that make Vietnam a promising CCE manufacturing destination:
First of all, portable consumer electronics and home appliances are the fastest growing segments in Southeast Asia — which is expected to be one of the biggest markets — taking up USD632bn in sales in 2020, according to Euromonitor.
Therefore, establishing factories in this area will bring certain advantages in terms of time to supply products to the market, availability of raw materials and making use of local high-skilled human resources.
Why Vietnam? In the past few years, electronic sectors continues to be dominant export product of Vietnam, accounting for 1/3 of total export value in 2019 according to Vietnam General Statistic Office. Its export value almost doubled, from $45.8bn to $87.3bn in the past 4 years
Secondly, many of the world’s CCE queenbees are located here. Following the waves of Japanese and South Korean companies setting up production in Vietnam, many Chinese partners, including Xiaomi and Oppo, have successfully joined the market.
Third factor is a combined advantages of competitive manufacturing costs (based on the labor costs and electricity prices), prime location (near China), recent free-trade agreements, and government incentives to develop Vietnam as an industrialized and modernized nation.
For investors who choose Vietnam as a place to produce goods for export, the northern region is an optimal choice for several reasons. First of all, northern Vietnam is near China, meaning that transportation costs for the import of raw materials will be less. Moreover, the average salary costs in the North are more competitive while clustering efficiency is better due to the presence of foreign investors.
Meanwhile, investors who need a lot of skilled local labor or want to serve the local market often choose the southern region because labor with engineering and technical skills is focused mostly in the South. In addition, residents in the South have a higher average income, leading to an increase in consumption capability.
CCE manufacturers are located either near Hanoi or HCMC due to different strategic reasons
Despite several limitations of Vietnam investment environment, including an uneven quality of human resources and incomplete supply chain, these problems are able to be solved due to the long-term development of the country’s supply chain. Investing in Vietnam is like investing in a backup plan as no one wants to be stuck with same issues endured in China following the emergence of COVID-19 in the first quarter of 2020.
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