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An opinion piece in Bloomberg titled ‘Trying to Replace China’s Supply Chains? Don’t Bother?’, published March 1, 2023, claims that ‘Vietnamese factories were supposed to save globalization’ but that they cannot. This is incorrect and here’s why, writes Dezan Shira and Associates, Head of Business Intelligence, Pritesh Samuel.

Vietnam’s factories were never supposed to save globalization. They offer businesses an alternate location for manufacturing – in line with a China+1 strategy that myriad companies now pursue due to rising costs in China.

Globalization is shaped by several factors, including geopolitics, national interests of governments, regional trade and investment initiatives, public policymaking directives by key trade bodies, and so on. It cannot be trivialized into the assumption that a single country can save it.

China’s advanced supply chain and supplier network, driven by the government’s long-term national policies, make it a manufacturing giant. At present, no single country, including Vietnam, can fully replace China’s manufacturing capacity.

Instead, various countries across different continental markets, such as ASEAN in Asia, will be increasingly integrated into diversified supply chains. To establish their operations, businesses must conduct their due diligence and select the appropriate country or countries. Additionally, friend-shoring and near-shoring may influence where companies choose to do business – that is in or with markets aligned with their government’s interests or that are located near their home base and thereby reduce operations costs and secure supplies from geopolitical risks.

China’s supply chain cannot be replaced overnight. This will take time as businesses figure out which parts to relocate. It will likely be messy to begin with, but processes will get easier over time.

Vietnam’s government has been pushing to move from being a low-tech manufacturer to hi-tech manufacturing. Recent investments from Intel, Samsung, and UAC show that there is immense potential in the country. And while it is safe to say that Vietnam can’t absorb all of China’s manufacturing, it is well positioned to take on more production, along with other countries in the region, and to play an important role in global value chains.

Vietnam is not immune to global headwinds

The Bloomberg article notes that Vietnam’s manufacturing receded and there were job losses in January. While this is true, the drop in manufacturing was due to less demand from western markets in North America and Europe.

As Vietnam’s economy is predominantly export-facing, its industries are sensitive to any changing dynamic in global trade; for example, slowdown in consumption in western markets present serious headwinds. Besides, most economies are not immune to external shocks, such as the ongoing Russia-Ukraine conflict. This can be considered part of being an economy that is so well integrated with global supply chains.

Vietnam is targeting GDP growth of 6.5 percent and inflation at 4.5 percent for 2023, which is slightly above the GDP growth we saw in Q4 2022 and right at the inflation rate we saw in December 2022. The World Bank projects Vietnam to grow 6.3 percent this year. Foreign direct investment (FDI) remains consistent with manufacturing and processing accounting for roughly 60 percent of FDI coming into Vietnam.

While there has been a slowdown in real estate, including a recent debt crisis, Vietnam’s real estate sector remains among the top five destinations of ultra-high net worth individuals (UHNWI) in Singapore, according to Knight Frank.

Most recently, Singapore’s CapitaLand has been said to be in talks to buy property assets from Vietnamese property firm Vinhomes JSC.

Governance challenges are likely only temporary

Vietnam is a one-party state that has a relatively stable government, which provides strategic direction and decides all major policy issues. While the Bloomberg article noted the recent anti-graft campaign, including the recent changes in the government, Vietnam’s economic policies are unlikely to be affected in the long term.

The Lowy Institute, a prominent Australian think tank, also believes that personnel changes in the Vietnamese government will not disrupt political stability or affect foreign policy. Vietnam is therefore expected to continue its policy of ‘diversification and multilateralization’.

Economic growth remains vital to the government. While short-term delays in investments and approvals may be expected, long-term growth is likely to continue, with foreign investment welcomed.

Moving from low-cost to high-tech manufacturing takes time

Admittedly, the move to high-end manufacturing will be a gradual process for Vietnam.

But the country has been prioritizing high-tech FDI. The government is offering incentives and benefits to attract high-tech enterprises.

United Alloy Corporation (UAC), for example, which makes aircraft components for Boeing and Airbus opened a US$170 million factory in Da Nang in 2020.

Dutch chip-making giant ASML Holdings is considering building plants in Southeast Asia with Vietnam one of three options being considered.

Apple suppliers are already building AirPods and MacBooks, while Google is expected to begin producing its Pixel line of smartphones sometime in 2023.

Half of Samsung smartphones are already made in Vietnam while Japanese manufacturer Canon has over 100 local vendors.

Geopolitics should not be ignored

Perhaps the biggest issue that the Bloomberg article ignored was geopolitics – if anything, global issues will play a bigger role in the diversification of supply chains.

Vietnam has benefited from the US-China trade war and continues to reap its rewards, as many companies seek to cut costs.

The US government in August 2022 introduced the Chips and Science Act, which provides around US$280 billion in funding to boost domestic research and manufacturing of semiconductors in the US.

In February 2021, the Japanese government allocated US$2.1 billion to help Japanese companies decouple and diversify their supply chains in Asia.

In November 2022, Canada launched the Indo-Pacific Strategy as part of its foreign and security policy to counter China’s growing influence.

Most recently, Australia announced it will buy US nuclear powered submarines, a move aimed at countering China’s growth in the Asia Pacific region.

China itself is also ensuring that it can reduce its reliance on other regions in trade and security issues.

All these factors point towards a diversified supply chain network with reduced dependence on a single market. Vietnam will likely continue to be a beneficiary of these gradual shifts.

Vietnam’s future in global supply chains

Vietnam is a rapidly emerging market, but its fast growth brings challenges related to infrastructure, land, and policy development. Additionally, it still heavily relies on raw inputs from China, South Korea, and ASEAN countries. While Vietnam cannot be the world’s factory or savior of globalization, it can serve as an alternate location to supplement China operations.

Despite significant hype surrounding Vietnam, investors must also be aware of its limitations. Multinational corporations (MNCs) will continue to diversify operations across Asia to save on costs and limit production disruptions. ASEAN, including Vietnam, is well-positioned for future growth and primed for this shift.