Via the Sunday Times,  a report on Vietnam’s manufacturing surge:

On any given work day, Nguyen* wakes early in his cramped rental room in a boarding house in Binh Duong, the heavily industrialised province that neighbours Ho Chi Minh City in southern Vietnam.

Nguyen is one of millions of Vietnamese who work in the country’s huge manufacturing industry, which makes hundreds of billions of dollars’ worth of clothes, electronics, furniture and other goods for the world.

In 2021, Vietnam’s exports hit $336 billion (£282 billion) in value, up 19 per cent from 2020 despite the pandemic. Foreign-invested production dominates, with 73 per cent of last year’s export turnover generated by international firms.

Last week it emerged that Apple is about to boost those figures even more, with its supplier Foxconn, a huge employer in China, announcing plans to spend $300 million on a new factory in the northern Bac Giang Province, near Hanoi, that will create 30,000 jobs.

At a time of increasing tensions between the US and Beijing over Taiwan and other issues, Apple’s move woke up western firms more than ever to the possibilities of finding alternative sources to China for cheap, well-made goods.

Nguyen works in the expansive furniture industry, which exported $7.4 billion worth of goods to the US alone in 2020. His factory sits in a sprawling industrial park, one of dozens in Binh Duong and nearby provinces. Huge factories sit side by side, while container trucks clog roads as they take finished products to busy ports for shipment across the Pacific.

While Vietnam’s powerhouse export sector is seen as a positive for the country, contributing to rapid economic growth that has regularly reached 7 per cent annually over the past decade, working within manufacturing isn’t easy.

“Working in a factory doesn’t provide a good quality of life,” Nguyen said. “Orders are down [due to global inflation] and wages have been reduced a lot. We work eight hours a day from Monday to Saturday and there is no overtime.”

The minimum monthly wage in Vietnam ranges from $140 to $202, depending on the region. Most workers make more than this, but the cost of living is often higher than standard income, and blue-collar workers have long relied on overtime for extra cash.

Ongoing expansion

Despite the international economic headwinds created by Russia’s invasion of Ukraine, the pandemic and inflation, manufacturing in Vietnam continues to expand, especially in hi-tech sectors.

Foxconn’s move last week was far from the first. China’s Luxshare Precision, another big Apple supplier, has already announced plans to begin Apple Watch production in Vietnam.

Previously, products such as these were made exclusively in China — indicating the latest move in a seismic manufacturing shift that began in January 2018 when Donald Trump signed the first set of tariffs on goods imported from China. “International companies, and even Chinese companies, started looking for ways to get around the tariffs and continue exporting to the US,” said Le Hong Hiep, a senior fellow at the Vietnam studies programme of the Singapore-based Iseas-Yusof Ishak Institute. “One way was to shift manufacturing facilities to Vietnam, which has a good relationship with the US and is part of many free trade agreements that cover other markets.”

The Vietnamese government is a keen partner in international free trade agreements, with over a dozen signed, including with the EU and the UK. “So when companies shift to Vietnam, they can benefit not only from continued exports to the US, but also … to other markets,” Hiep added. The US is now Vietnam’s largest market, with exports to the country reaching $96.3 billion in 2021.

Other factors contributing to Vietnam’s investment attractions include geography, as it neighbours China, and improving infrastructure, especially in the northern Red River delta where tech giants such as Samsung, LG and Foxconn are concentrated.

“Vietnam’s labour is also still relatively inexpensive compared to China,” Hiep said. “It’s more than Bangladesh or Cambodia, but the general perception is that Vietnamese workers are more disciplined and have better capabilities.”

Government support

Vietnam’s government maintains a communist political system — it is a single-party state with onerous restrictions on the press and public speech. But economically, the system has evolved significantly. In the 1980s, it moved away from being a centrally planned economy and towards one where private companies, both foreign and domestic, generate most growth and dynamism.

Ministers have embraced new western firms prepared to invest in manufacturing there, while, according to Hiep, becoming more selective in the type of investments they approve.

“Vietnam established a taskforce two years ago … to work with international companies to help them move to Vietnam,” he said. “They have also been careful in picking which investors and sectors they look for by trying to avoid resource or labour-intensive investment projects, while looking for hi-tech companies that can add more value and help Vietnam upgrade its capabilities.”

Examples include Foxconn; Intel, which operates a large chip factory in Ho Chi Minh City; Lego, which is building a $1 billion carbon-neutral factory in Binh Duong; and most notably Samsung, which has invested more than $18 billion and turned Vietnam into its largest smartphone production hub.

Hiep argued that the government sees such investment as a win-win that aids economic growth while also strengthening Vietnam’s geopolitical position, especially as the US and its allies attempt to counterbalance China’s growing economic and military power.

Vietnam has its own complicated relationship with China dating back centuries. The two governments share close ideological ties and trade between the two countries is significant, but China claims huge swathes of Vietnam’s territory in the South China Sea as its own, leading to constant tension and a handful of skirmishes in the past.

“Welcoming foreign investment strengthens Vietnam’s bargaining power,” Hiep said. “It will become a key player in other countries’ strategic thinking, because they will need to maintain good ties with Vietnam in order to maintain the global supply chain.”

Challenges

While Vietnam’s manufacturing base has expanded considerably at the expense of China, there are big challenges to address. Among these, workers from relatively low-skill sectors such as textiles and garments are not trained in the precision processes required to produce, say, an Apple Watch or Samsung smartphone.

“The labour force is not well prepared for all these hi-tech jobs,” Hiep said. “It will take time for them to be reskilled or upskilled. But the important thing is that there is still an abundance of affordable labour to hire and retrain. This is a challenge that investors will encounter anywhere, whether Vietnam or Indonesia.”

Nguyen, the furniture worker, said retraining was common and generally quick — at least in his sector: “If there is a new product, the supervisor will train the workers, but most of us are experienced, so they don’t need much time.”

Beyond labour-related issues, an intense focus on improving infrastructure in northern Vietnam has left southern regions, including Ho Chi Minh City and Binh Duong, at a distinct disadvantage. While Hanoi and its tech-heavy neighbouring provinces are connected to coastal ports and the Chinese border by a network of high-speed expressways, the southern industrial region is hampered by clogged-up ports and airports, overcrowded highways, and other examples of chronic underinvestment.

“The government is trying to promote development across the south to create more room for industrial expansion, but it’s slow,” Hiep explained. “For so long, the central government neglected the south — so now is the time for them to rebalance to relieve pressure on northern provinces, which could become a bottleneck if more investors build there.”

While significant, these challenges aren’t enough to swing things against Vietnam. It is beating rival countries in southeast Asia due to its own strengths, and the disadvantages of its neighbours. Cambodia and Laos have small populations and underdeveloped economies and infrastructure, while Thailand and Malaysia are more expensive. Indonesia and the Philippines, with their thousands of islands, suffer difficult logistics.

China will continue losing business to Vietnam as more multinationals run into difficulties there. Beijing’s pursuit of zero-Covid, for example, exposes companies to the risk of temporary factory closures, and it is also difficult for international staff to enter the country.

While Vietnam, and especially the south, endured an extremely strict lockdown during 2021’s coronavirus surge, restrictions have since been lifted completely as the country embraces a model of “living with Covid”.

“I think this shift will continue for at least five years,” Hiep said. “As long as the US-[Beijing] rivalry continues, investors will have reason to consider diversifying away from China. They won’t abandon it but they need a China+1 or +2 plan, and Vietnam continues to be attractive.”