Some people say, “Vietnam is the next China.”
The basis behind this statement comes from the recognition of a series of rises in Vietnam’s textile manufacturing industry, as well as investment, exports, and supply chains since the first half of this year:
In the first quarter of this year, Vietnam’s domestic GDP increased by 5.03% year-on-year, becoming the country with the fastest economic growth rate in Asia under the influence of the global epidemic. News such as “The global supply chain is shifting and new world manufacturing factories are emerging” and “Foreign businessmen are accelerating investment in emerging developing countries in Southeast Asia such as Vietnam” have also ignited anxiety in countries surrounding Vietnam.
This small country, whose economic aggregate has long ranked behind Indonesia, Thailand, and the Philippines, has suddenly become the center of everyone’s attention. In addition to the “crazy” export manufacturing industry, Vietnam’s cross-border e-commerce live broadcast, new energy vehicle industry, and even “real estate speculation” are all considered by cross-border businessmen as possible potential outlets.
How was the potential of Vietnam’s manufacturing “super factory” formed? Is the rise of “Made in Vietnam” a “passive undertaking” under the pressure of the times?
Sportswear labeled “Made in Vietnam”
Source: Vietnamese media
01
Made in Vietnam, produced by Chinese companies
It is nothing new that major international OEMs have chosen to build factories in Vietnam.
The wave of enthusiasm about “Vietnam’s Rise” began in April this year. However, the relocation of Chinese OEMs to Vietnam began 10 years ago. Behind Vietnam’s soaring export data, it is also inseparable from the power of the relocation of Chinese manufacturing manufacturers.
The manufacturing industry that has moved out of Vietnam is mainly concentrated in two categories: clothing, textiles and light electronic products. According to foreign media data, in Vietnam’s export product structure in the first four months of 2022, processed products alone accounted for 89%, an astonishing proportion.
In 2021, more than half of the world-renowned sports brand Nike’s footwear production and more than 30% of its clothing production came from Vietnam. Similar sports brand Adidas also produces more than 40% of its footwear products from factories in Vietnam. Electronic products such as Sony and Samsung also rely on Vietnam’s cheap productivity. More than half of Samsung’s mobile phone exports are produced in Vietnam.
But this does not mean that Vietnam has “snatched” orders originally belonging to Chinese OEM companies. Compared with orders, the real dividend taken away by Vietnam is labor jobs, which also means that the country has made room for industrial upgrading.
In the past ten years, China’s large-scale listed foundries have gradually moved to Southeast Asia, and Vietnam is one of their main targets for building factories.
For example, Shenzhou International, China’s largest integrated clothing OEM leader, originally started in Ningbo, Zhejiang. It currently has relocated garment factories in many Southeast Asian countries. It has 28,000 employees and 2 garment factories in Vietnam. and a fabric base.
Similarly, Huali Group, a major international foundry that was just listed on the Shenzhen Stock Exchange in April last year, also moved its production plants to Southeast Asia early. The company’s three new factories put into production in Vietnam have successively reached production last year.
As a foundry for clothing brands such as Nike and Puma, Huali Group now has 100% of its production capacity overseas. In addition, the production base of Taiwan-funded Hong Kong-listed foundry Yue Yuen Group is also mainly in Vietnam.
According to data from the Vietnam Bureau of Statistics, Vietnam’s total import and export volume in the first quarter of 2022 was approximately US$176.35 billion, especially export volume reaching US$88.58 billion, a year-on-year increase of 12.9%.
At the same time, according to a report by Vietnam’s official media “People’s Daily”, Vietnam’s foreign capital has increased by 60% in the past three years. In the past five years, foreign-invested enterprises have accounted for more than 70% of Vietnam’s overall exports. In the first quarter of this year, the proportion of foreign-invested exports reached 73.8%.
Among them, investment from China, in addition to light industries such as clothing processing and manufacturing, is also reflected in the fields of new energy and cross-border e-commerce. The photovoltaic investment by Chinese companies in Bac Giang Province in Vietnam alone has reached US$2 billion. Vietnam is almost China’s largest overseas photovoltaic product production base.
Among the three largest e-commerce platforms in Vietnam (Shopee, TiKi, and Lazada), Chinese Internet companies such as Tencent and Alibaba also have large shareholdings and play an important role in their operations.
From this point of view, Vietnam’s so-called “prosperity” is inseparable from the industrial transfer of foundries in neighboring countries.
02
Ten years of “outmigration”
In 1986, Vietnam embarked on the road of “reform and opening up”, and in 2006, Vietnam joined the WTO. In addition, Vietnam has signed free trade agreements and regional comprehensive economic partnership agreements with many countries and regions in recent years. These foreign trade promotion documents have enabled Vietnam to achieve “zero tariffs” on more than 90% of goods trade in the region.
Relying on preferential investment policies and relatively low labor costs, Vietnam has accepted a lot of overseas capital from Singapore, South Korea and China, and has begun to become the transfer direction of labor-intensive industrial chains in various countries.
Among them, there are many overseas foundries from China.For example, Chinese company Shenzhou International is one of the typical examples of “migration southward” in the past decade. Half of its production capacity is now located in Vietnam.
Shenzhou International is not only an OEM factory for major international brands such as Nike, Uniqlo, Adidas, and Puma. Not long ago, the Internet celebrity brand lululemon also became its OEM customer, bringing in a large order of US$30 million, truly “making clothing OEM It’s become a big business.”
After China’s reform and opening up, Shenzhou International’s old factory in Ningbo has successively accepted a large number of high-end clothing OEM orders from Japan, Europe and the United States. At that time, many eastern coastal cities in China had become the destination for the transfer of labor-intensive industries from developed countries.
As the OEM business grows, Shenzhou International gradually builds OEM factories specifically for Nike and Adidas, and there is also a trend of “vertical integration” of modern factories. But then the proportion of domestic garment exports began to decline, and these OEM factories began to turn their attention to Southeast Asia.
As early as 2005, Shenzhou International’s garment factory in Cambodia began production. After 2013, the first and second phases of fabric factories invested in Vietnam were also put into production one after another. With the expansion of production capacity in Southeast Asia, Shitong Vietnam Garment Factory and Deli Vietnam Garment Factory have also been established, hiring local people to expand production capacity and absorb these orders from high-end European and American sports brands.
Compared with the rising domestic labor prices and the tightening of environmental policies at that time, the low-cost labor force and tax incentives in Southeast Asia became the direct factors that attracted Chinese OEMs to relocate, and the deployment in Southeast Asia became an inevitable trend of the times.
After 2010, domestic foundries began the “decade of out-migration” to Southeast Asia. In the past ten years, the trend of listed companies in the textile industry like Shenzhou International shifting their production capacity to Vietnam cannot be underestimated.
According to data from Northeast Securities, Shenzhou International has 50% of its fabric production capacity in Southeast Asia and 40% of its garment production capacity. Another garment OEM company, Jian Sheng Group, has three major production bases in Hai Phong, An Hing and Thanh Hoa in Vietnam, with related production capacity accounting for 50% of the total production capacity. Blum Oriental and Huafu Fashion, whose main business is the production of color-spun yarn, have also built spindle factories in Vietnam, accounting for 60% and 15% of the total production capacity respectively.
In addition, electronic product foundries such as Foxconn have also invested US$350 million in Vietnam, building a factory with more than 60,000 people. They also plan to invest US$700 million in a new Apple OEM assembly plant.
Vietnam, flooded with overseas capital, has gradually gained the label of “a new generation of world super factory.”
03
“Epidemic window” special opportunity period
Although the formation of the manufacturing export industry chain did not happen in a day, Vietnam’s export data in the first quarter of this year “bumped the trend and soared”, mostly because Vietnam seized the window period for epidemic fluctuations.
In July last year, when Vietnam experienced the peak of the first round of the epidemic, it faced a severe labor shortage. A large number of Vietnamese workers chose to leave densely populated factory areas and return to their hometowns because of concerns about the epidemic. As a result, the industrial parks where electronic product foundries such as Samsung and Apple were once closed, and Vietnam’s manufacturing industry suffered a severe impact.
At the beginning of this year, Vietnam experienced another severe epidemic. Many Southeast Asian OEMs’ operating rates and production capacity were seriously insufficient, resulting in a reduction in shipments. Shenzhou International, which has deployed production capacity in Vietnam, was also affected, with its stock price falling by more than 30%.
But after March this year, as the epidemic situation in northern Vietnam improved, foundry production recovered quickly. Vietnam’s export and foreign trade has seized the gap caused by the global epidemic and made efforts to undertake the industrial chain, thus achieving its advantages to stand out.
Therefore, during the short period of time disturbed by the epidemic this year, Vietnam showed a relatively high growth rate and became the “world’s factory” during this special period, squeezing the export order resources of neighboring countries affected by the epidemic.
Some domestic small and medium-sized factory owners who have been engaged in OEM for many years said that this year many European and American customers have decided to move their original domestic orders to Vietnam for production, causing many domestic OEM companies to suffer a lot.
As for the large-scale listed foundry companies that have already been deployed in Vietnam, due to the loosening of the epidemic in Vietnam, overseas production pressure has been borne more. In this case, capital, raw materials, and process technology do not originate from Vietnam, and local labor is only responsible for processing and assembly work.
According to research data from Zheshang Securities, from 2016 to 2020, the labor cost of China’s manufacturing industry is basically more than twice that of Vietnam. Whether from the perspective of export volume or supply chain dimension, Vietnam is obviously still in the stage of attracting overseas labor-intensive industries by relying on low labor costs.
Source: Zheshang Securities Research Report
In terms of export scale, Vietnam’s export scale in 2021 is only equivalent to 10% of China’s, and can barely surpass Shenzhen only during this year’s domestic epidemic window. From the perspective of the supply chain, Vietnam lacks a complete industrial structure and heavy industry. In particular, the supply of raw materials depends on China’s exports, and the degree of freedom is very low.
In addition, although labor costs in Vietnam are low, due to the slow overall pace of life there, there is a lack of basic qualities of “skilled workers” in domestic factories. For example, AirPods produced in Vietnam often encounter complaints, and the quality control of the textile, clothing and light industry chain also has more problems than in China.
From a longer-term perspective, Vietnam is still in a relatively early stage of development, and it will be difficult to replace China’s position in the global supply chain in the short term.
�Basic qualities. For example, AirPods produced in Vietnam often encounter complaints, and the quality control of the textile, clothing and light industry chain also has more problems than in China.
From a longer-term perspective, Vietnam is still in a relatively early stage of development, and it will be difficult to replace China’s position in the global supply chain in the short term.
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