As tech firms from Greater China seek protection from trade tensions, many are adding manufacturing capacity in Vietnam to build everything from AirPods to TVs. To find out more, we spoke to Goldman Sachs Research’s Allen Chang, who recently visited industrial parks across Vietnam to interview the tech companies expanding there.
Allen, given China’s unrivalled role in tech manufacturing, what attracts Greater China tech firms to Vietnam?
Allen Chang: Vietnam is an appealing prospect for these firms because it offers lower labor costs, a reprieve from American tariffs and tax incentives for tech companies. Although several manufacturers we talked to already had a minor presence in Vietnam as early as 2008, Apple suppliers FIT Hon Teng and Luxshare both specifically cited US-China trade tensions as they near factory openings in Vietnam. Similarly, Hon Hai—better known as Foxconn—and its subsidiaries have invested in Vietnam even as a planned factory in Wisconsin nears completion, and TCL Electronics is adding TV assembly capacity in both Vietnam and Mexico specifically to serve the American market.
So should we expect a mass migration of production capacity from China to Vietnam?
AC: The labor costs aren’t quite that advantageous—direct labor makes up less than 5% of the cost of goods sold for equipment makers, and the level of automation in Vietnam is much lower compared with China and nearby Southeast Asian countries. Staffing and training can also be an issue—there are fewer English and Mandarin speakers in Vietnam than there are in mainland China, and several Chinese semiconductor producers also cite a lack of advanced engineering talent that could preclude any Vietnamese expansion. So for some companies, we think it will ultimately make more sense to bear the costs of the tariffs and rely on the ready-made domestic supply chain in China rather than absorb added costs for transportation, infrastructure and training in Vietnam. Our takeaway is that Vietnam most likely offers more value in back-end processes, like final assembly, than high-end manufacturing processes like component development, panel production or semiconductor fabrication—and we’re seeing that reflected in the companies choosing to make the move.
How is this affecting Vietnam?
AC: The shift is producing new trade and investment. In September, China’s exports of electronic products and components to Vietnam was up 24% from the prior year to US$3.2bn, while Vietnam’s exports of those products to the US market was up 77% year over year through September. Foreign direct investment continues to grow—in September, newly registered capital increased by 187% year over year while new FDI projects increased 34%. Some manufacturers we talked to predicted a broader shift away from centralized production in China towards a more regional focus to minimize political economic risks. In Vietnam at least, the government is already conscious of growing pains from such a shift, warning that severe power shortages could start from 2021 amid increased demand.