Why Vietnam is Overtaking China as a Destination for US Export Manufacturing

As has been the case for several emerging Asian countries, Vietnam has followed an export-led growth model, combining trade liberalization and foreign direct investment promotion to spur exports.

Vietnam’s growth has accelerated in recent years in part due to the US-China trade war, which kicked off more than nine months ago, and shows no sign of abating.

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As part of the fallout, Vietnam’s exports to the US rose by 28.8 percent year on year in the first quarter of 2019, making the US the largest importer of Vietnamese goods.

A steady stream of manufacturing businesses have also moved operations to Vietnam, including Foxconn, Samsung, and LG.

Here, we examine the five main reasons why Vietnam is emerging as the preferred destination for US exporters.

1. Free Trade Agreements

Over the past few years, Vietnam has been active in signing bilateral trade agreements with countries throughout the world.

Its membership in the Association of Southeast Asian Nations (ASEAN) also makes it a party to several FTAs that the regional bloc has signed.

In addition, the upcoming Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Vietnam – EU (EVFTA) will propel Vietnam into becoming a competitive business environment.

The standard of product quality, manufacturing, and employee rights guaranteed in these agreements will allow Vietnam to become a manufacturing hub and expand as an exporting base.

2. Vietnam’s proximity to China

Vietnam’s close proximity to China is further helping it to become a manufacturing base, while being viewed as a China plus one destination.

Cities such as Hai Phong in Vietnam are just 865 km away from China’s manufacturing hub of Shenzhen.

By situating manufacturing centers close to traditional hubs in China, manufacturers are able to reduce costs with limited interruption or delays to existing supply chains.

In addition, many factories in Vietnam are foreign-owned with investments from China, Taiwan, and South Korea. This makes transitioning out of China into Vietnam smoother, making it easier to transfer existing checklists, specifications, or other product information.

3. Transport networks

Vietnam’s location close to regional shipping routes and position in Asia allows manufacturers entering Vietnam to focus on exports.

It has an approximately 3,200 km long coastline with around 114 seaports. The three largest seaports in Vietnam are in Hai Phong (north), Da Nang (central), and Saigon (south).

In addition, Vietnam has an extensive railway network: the Kunming (China) – Hai Phong (Vietnam) is 855 km long and remains important for cargo transportation.

While Vietnam’s infrastructure is still unmatched to China’s, the government has prioritized infrastructure development to facilitate economic growth.

4. Low labor costs

Vietnam’s monthly minimum wages in 2019 vary by region – from US$125 to US$180 – with the highest being in cities like Hanoi and Ho Chi Minh City.

These wages are around half of what China’s are in various provinces, which range from US$143 to US$348.

China is known to dominate the manufacturing industry but with wages rising, many businesses have already moved operations to maintain margins in low cost manufacturing.

In addition, China’s ageing population has produced labor shortages in the manufacturing industry. While Vietnam still needs to develop a skilled labor force, it has a young, dynamic workforce that is ready to fill the gap.

5. Governance

Vietnam has a relatively stable government that provides strategic direction and decides on all major policy issues.

The government has worked to improve business policies and labor laws, including Vietnam’s ranking in the World Bank’s Doing Business report.

It continues to prioritize infrastructure investment, and does not shy away from looking at countries outside ASEAN to fuel its growth.

The government has also invested in industrial zones, and this investment is expected to increase as foreign investment pours in.

Moving your manufacturing business to Vietnam

Vietnam’s greatest challenge is how to manage its growth responsibly.

Thankfully for Vietnam, the trade war has created enough push factors to encourage manufacturing businesses to relocate. This has already caused a shift in global supply chain networks with countries such as Vietnam reaping benefits.

Before sizing up Vietnam as a potential destination for relocation, foreign investors must do their due diligence and consider several factors, such as identifying a location, raw materials, sourcing partners, and supply chain logistics.

It is further advisable to use a professional service with knowledge in the region to assist firms to plan out their manufacturing strategy.

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