As the trend of moving production away from China intensifies, Vietnam’s joined the race of countries eager to benefit
For several decades, China has been the world’s key production workshop. Now, various countries are taking steps to reduce their dependence upon China. It’s said that when China sneezes, the world catches a cold. Any move from this economy may disrupt global supply chains. China currently accounts for some 28% of the world’s production. The 2018 US-China trade war and the 2020 Covid-19 pandemic have prompted an exodus of businesses from mainland China. This exit has resulted in a race among three forces working to take advantage of this opportunity.
This great exodus was initiated and led by the owners of the capital flow: Japan, the United States, and South Korea have recently introduced several policies to encourage their businesses to repatriate from China. Japan has spent ¥70 billion to move 30 Japanese factories from China, either back home or to other countries. President Trump has also requested the US government to facilitate US businesses’ homecoming.
Faced with this tremendous exit, the government of China has made significant moves to improve the country’s foreign investment environment. These actions include the promulgation of a new law on foreign investment with greater openness, transparency, and predictability.
The most motivated players in the great exodus are those who benefit from the “China + 1” strategy, including India, Indonesia, Thailand, and others. India has designated a land area of 460,000 hectares, twice the size of Luxembourg, to host businesses exiting China. Mid-2020, Indonesia negotiated with the US to move factories there from China. Meanwhile, Thailand has introduced new tax incentives to attract FDI to selected sectors, including healthcare and high-tech. One of the most significant incentives is a 50% reduction on business income tax for five years.
Vietnam, which finds itself in the third group, is facing fierce competition against other countries trying to either retain or attract capital.
The country, however, is definitely not an underdog in this highly competitive race. Ken Atkinson, a senior board advisor from Grant Thornton Vietnam, remarked that although Indonesia, India, and some other countries may have launched fresh incentives, Vietnam generally remains the top destination for businesses wishing to move out of China.
Vietnam has a track record of political stability, which offers a unique competitive advantage against contenders such as Thailand, Indonesia, and the Philippines.
A recent SSI Research study showed that, compared to Indonesia, a direct competitor for FDI, Vietnam’s special advantage is its geographical proximity to China, which greatly aids transportation. Researcher Nguyen Tran Bat once agreed with the statement: “Given the size of its economy, Vietnam would catch zero attention from the world if we were relocated to the middle of the Pacific Ocean.” He noted that bordering China to the south presents an advantage for Vietnam, and we should leverage it to attract investors.
In addition, Vietnam is offering many incentives to large FDI projects. Vietnam’s input costs for land rent, electricity, labor, etc. are cheaper than those of neighboring countries. Meanwhile, the VND is considered a “very stable” currency.
Being a party to multiple attractive free trade agreements such as the EVFTA and CPTPP also benefits Vietnam greatly. This can be viewed as a shortcut since the country is becoming an increasingly important link in the global supply chain.
Data from the US government showed that Vietnam’s trade surplus with America increased by 11% between July and August, to USD 7.6 billion. This represents a year-over-year growth of as high as 38.9%.
September statistics released by Vietnam’s Ministry of Industry and Commerce also reveal that exports to Europe rose by USD 600 million, only one month after the EVFTA came into effect.
Vietnam’s success in fighting the Covid-19 pandemic has further strengthened investors’ confidence. Mary Tarnowka, Executive Director of AmCham Vietnam, called this a big plus point for attracting migrating investors.
Japan External Trade Organization (JETRO) confirmed in July that 15 businesses, which were beneficiaries of payments from the Japanese government, did move their factories from China to Vietnam. Takeo Nakajima, JETRO’s chief representative, said: “These numbers, once made public, will definitely shock neighboring countries.”
Success is in sight, but more is needed
Statistics from Nomura Financial Group showed that Vietnam has attracted 26 out of 56 companies moving out of mainland China between 2018 and 2019. In the same period, Taiwan (China) won 11, Thailand eight, and India three.
However, Vietnam cannot afford to rest on its laurels. According to a World Bank study, multinational corporations view the investment approval process, localization requirements, and regulations on foreign workers in Vietnam as remaining obstacles.
Meanwhile, Hong Sun, Vice-Chairman of the Korean Chamber of Commerce in Vietnam (Kocham), noted that corporations do not only base their location decisions on current conditions. “They have to take into consideration the host government’s attitude in the next five to ten years, and they want to know if the incentives will remain in place till then,” he said. Mr. Hong felt that Vietnam should speed up administrative reforms and improve openness by, for example, “copying” Singapore and Hong Kong’s approach in the financial sector.
Last August, the Communist Party’s Politburo, for the first time in 30 years, adopted a resolution known as Resolution 50 to guide the attraction of FDI. Under this guidance, proper selection must be performed based on primary criteria including quality, efficiency, technology, and eco-friendliness. Vietnam, according to this resolution, prioritizes projects that employ advanced, new and clean technologies, and those that facilitate integration and connectivity to the global production and value chain. This is considered the blueprint by which Vietnam will seek to attract FDI in the coming decade.