The China + 1 Strategy: Foreign Companies Are Choosing Vietnam
This article was originally published in Italian in Panorama on 18th Nov 2022.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/news/dal-mondo/cina-aziende-straniere-vietnam
The 20th National Congress of the Chinese Communist Party held last October confirmed expectations on the political front, handing President Xi Jinping a historic third term at the helm of the Party. However, on the economic front, the congress did not fully meet the expectations of the many foreign investors who had hoped for a significant easing of anti-COVID restrictions in China.
As a result of the rules imposed by China's Zero-COVID strategy and global geopolitical challenges, more and more companies are looking to other Asian countries to diversify their supply chains, as part of what is called the 'China + 1 strategy'. In this context, a country with a fast-growing economy like Vietnam can become more attractive as an alternative for companies willing to reduce their dependence on Beijing.
Vietnam: Political Stability and Economic Boom
During the COVID-19 pandemic, Vietnam's economy proved resilient, recording +2.9% economic growth. This year, despite the crisis unleashed in Europe by the Russian invasion of Ukraine, Vietnam remains one of the best performing economies. In fact, the World Bank has estimated Vietnam's GDP to grow by 7.2% by 2022. At the basis of this growth, we can identify some decisive factors such as political stability, a young population and competitive labor costs.
Ensuring stability in Vietnam is the Communist Party of Vietnam, which has ruled the country since 1975, the year of the reunification of North and South Vietnam. In addition to ensuring stability, the Party has over the years fostered Vietnam's economic integration by joining major international organizations such as the World Trade Organization (WTO) in 2007, and by signing numerous trade agreements, both as a member of the Association of Southeast Asian Nations (ASEAN) and as an individual state. Prominent among these trade agreements is the EU-Vietnam Free Trade Agreement, which entered into force in August 2020 and will gradually cut tariffs on 99% of products traded between the EU and Vietnam.
The Meeting of Party Chiefs Nguyen Phu Trong and Xi Jinping Boosting China-Vietnam trade Corridor
Between October 30th and November 1st of this year, General Secretary of the Communist Party of Vietnam Nguyen Phu Trong travelled to Beijing for a diplomatic visit with his counterpart Xi Jinping, making him the first foreign leader to officially visit the Land of the Dragon since the 20th National Congress of the Chinese Communist Party. Although differences remain between the two countries over the territorial dispute in the South China Sea, the two leaders pledged to strengthen bilateral relations by signing cooperation agreements on a variety of topics, including promoting trade between China and Vietnam and reinforcing the supply chain.
This meeting is of particular importance for China, which is trying to win the competition for hegemony in the Asia Pacific against the US. However, the meeting is even more important for Vietnam, which emerges as a bright spot for investors who have a presence in China but who, due to anti-COVID restrictions and geopolitical challenges, want to relocate their production to a more stable country with lower production costs.
Vietnam, the Ideal Destination for the China+1 Strategy?
Vietnam has strong economic and political ties with China, making it a candidate as a potential investment destination within the China+1 strategy. Let us now look at the factors that make Vietnam an ideal destination to adopt this strategy, especially compared to other emerging Southeast Asian countries.
Labor costs are significantly lower compared to both China and Thailand. In addition, Vietnam has a large and well-educated workforce, making the country a very important production center for companies in the manufacturing industry. Among the most important sectors in Vietnam are textiles and electronics manufacturing, which in recent years has attracted leading foreign companies to move production to the country.
Two other factors to consider are infrastructure and proximity to China. North Vietnam borders the Chinese regions of Guangxi and Yunnan, to which it is connected by an important network of highways, railway lines and seaports. In particular, the port city of Hai Phong and the province of Quang Ninh in the north of the country are two of the areas where most foreign companies are opening their factories to take advantage of the proximity to key Chinese cities for trade such as Shenzhen, which is less than 1000 km away. These companies include LG, Bridgestone and Pegatron, a Taiwanese company that produces electronic components for Apple, Microsoft, and Sony.
As far as security is concerned, Vietnam's country risk rate is lower than, for example, Thailand, which in 2020 and 2021 witnessed numerous protests against the regent monarchy, or Indonesia, where there is a risk of terrorist attacks in some areas. Problems such as corruption, lack of transparency and slow bureaucracy remain in the region, but the situation in Vietnam is gradually improving, making it even more attractive than less politically stable Southeast Asian countries.
Finally, for companies that want to sell within Vietnam, it is crucial to consider the domestic market. The Vietnamese retail market is in fact booming thanks to the fact that the country has a population of almost one hundred million inhabitants, half of whom are under 35 y/o, while also boasting a constantly growing urbanization rate.
Over the past 40 years, many foreign companies have invested in China mainly because they were attracted by the low production costs and the huge domestic market. However, the factory of the world over time has turned into a cutting-edge country, a leader in the hi-tech sector, and with increasingly high labor costs. This, coupled with supply chain disruptions, mainly linked to the zero COVID policy, has led foreign companies to supplement their production activities in China by moving part of their production to other countries with lower labor costs, such as Vietnam.
Although, to date, Vietnam is not comparable to China in terms of supply chain network, supply options, infrastructure network, quality of the logistics system and presence of specialized human resources, and is still significantly dependent on foreign markets such as China, Japan and South Korea for the supply of raw materials, Vietnam, which has resilience and dynamism as its strengths, is taking on - especially in this complementary perspective - a leading role among the countries of South-East Asia, and is now seen by investors as a welcome destination thanks to its political stability and steady economic growth.
Edited by: Att. Carlo D'Andrea, Vice President of the European Union Chamber of Commerce in China