NEWS & EVENTS

The China plus One Strategy in Vietnam - Part 1: What Vietnam can do for Your China Business

30/01/2020
Companies facing rising costs in China are turning to Vietnam to outsource low value production and assembly under a production model known as ‘China plus one’ manufacturing. This strategy has been around for many years, but has received renewed attention as trade tensions between the US and China drive up costs for manufacturers.

Overall

 

 

Increasing regulation

Vietnam is the subject of renewed interest as tariffs between the US and China threaten to increase operating costs for Chinese manufacturing operations.
 
Instead of abandoning China, investors are choosing to supplement Chinese operations with assembly and low value add production in markets such as Vietnam. While the structures of these operations differ greatly depending on the industry and investor, this production model has become widely known as China plus one.
  The Chinese government is actively supporting the economy’s transition its economy from one driven by low-cost manufacturing and exports towards growth led by value added manufacturing and consumption. For example, programs such as ‘Made-in-China 2025’ incentivize advanced manufacturing sectors such as robotics, aerospace and biomedicine.

Traditional low-end manufacturing is no longer eligible for the same incentives packages that were available in years past. Meanwhile, companies involved in these industries find that the government authorities have increased the number of regulations as well as their enforcement capacity, which has created many challenges for manufacturing projects with tight margins.
 

Why China plus one?

 

Tariff avoidance

Companies that set up manufacturing facilities in China in the last 20 years now face production conditions far removed from those that attracted them originally.
 
Automation and deepening supply chains offer unique benefits, but these improvements come at the expense of the low-cost production conditions that dominated China in years past.
  The trade dispute between the US and China is easy to credit as decisive factor for the relocation of operations from China. As of September 2018, the US has already slapped tariffs on US$250 billion worth of Chinese products and has threatened tariffs on US$267 billion more. China has set tariffs on US$110 billion worth of US goods and is threatening qualitative measures to frustrate US business.
 
In reality, however, the “trade war” is more of  a catalyst than a driving force for relocation. Manufacturers in China have long been looking at alternatives in South and Southeast Asia due to rising costs, the need to diversify, and changes in government policies that have affected lower-end manufacturers.

Rising costs

 

 

In recent years, almost all Chinese provinces have increased minimum wages significantly, mostly due to the shrinking labor force and rising living costs. Even with significant improvements to labor productivity, the economics of labor-intensive manufacturing are starting to tilt in the favor of alternative markets. As the Chinese economy continues to transition towards consumption-led growth, both statutory minimum and real wages will rise further, especially in the coastal areas where many manufacturing and export-led industries have clustered.
 
 

 



 

 

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Why Vietnam?

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  Vietnam has quickly become the most popular destination for China plus one manufacturing due to its low costs, overall proximity to China, and excellent network of trade agreements.
 

Costs

Investors in basic manufacturing benefit from significant wage discounts compared to China, and even regional competitors, such as India and Indonesia. Foreign companies often find Vietnam’s operating conditions similar to those found in China 10 to 15 years prior.
 

Proximity

Vietnam’s proximity to China also plays a large role in its attractiveness as a China plus one destination. Cities such as Hai Phong are just 537 miles away from China’s manufacturing hub of Shenzhen. While a considerable journey, this is much closer than alternatives such as Jakarta (2,050 miles), Bangkok (1,708 miles) or Kuala Lumpur (1,879 miles).
 
By situating manufacturing cost centers close to traditional hubs in mainland China, investors can reduce costs with limited interruption or delays to currently existing supply chains.
 

Trade

Vietnam’s economy is highly dependent on exports and foreign investments, which is favorable for investors as the government continues to implement economic reforms to maintain its status as an attractive manufacturing hub. As of 2018, Vietnam’s exports accounted for roughly 200 percent of national GDP, making it the most globalized economy of over 50 million inhabitants.
 
In recent years, the Vietnamese government has entered into a number of free trade agreements to press this advantage, most notably with the
European Union and members of the TPP



Next Part : How to Plan a Supply Chain Shift

Source: Dezan Shira & Associates

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