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Vietnam Starts to Catch Up With Chinese Manufacturing

Monday - 11/11/2019 11:24
Outside a former Nokia phone factory in the north Vietnamese province of Bac Ninh, a freshly posted sign advertises jobs for “hardworking, dynamic” workers over the age of 16.
Vietnam Starts to Catch Up With Chinese Manufacturing
The plant, which was bought by Taiwan’s Foxconn in 2016, may soon start making Google’s Pixel phones, according to local officials and to a report by the Nikkei index, as the Silicon Valley company looks for an alternative to manufacturing in China.

If the investment materializes, it will be a huge windfall both for Bac Ninh, to the east of Hanoi, where Samsung also has a major smartphone manufacturing base, and for Vietnam, which is emerging as one of the main safe havens from the trade war between the United States and China.

“Under our policy of welcoming foreign investment, we welcome Google to come to Vietnam,” says Nguyen Huu Quat, the province’s deputy general secretary. He says the company has “decided to choose Bac Ninh” but has not yet finished planning the finer details of the operation, including its exact location. Google declined to comment.

The magnitude of the shift from China to Vietnam is hard to measure, in part because multinationals are keeping their moves discreet to avoid upsetting delicate government and supplier relationships in China. But Vietnam’s trade numbers, not least its record $39.5 billion surplus with the U.S. last year, suggest a significant realignment is underway, as do anecdotes from companies, consultants and suppliers in Hanoi and Ho Chi Minh City.

Apple recently began trial production of its AirPods in Vietnam, according to Nikkei. Amazon and Home Depot are among the retailers that have stepped up sourcing in Vietnam recently, according to Vu Ngoc Khiem, country director for Global Sources, a consultancy that links global suppliers to buyers. But trade experts say Vietnam is limited in how quickly it can lure manufacturing orders from China.

“Global supply chains are complicated,” says Adam Sitkoff, executive director of the American Chamber of Commerce in Hanoi. “There are a lot of players and a lot of workers involved, and you can’t just pick up and move from one day to the next because of tariffs.”

Bac Ninh, a densely settled region of factories, malls, chain restaurants, housing for migrant workers and other ex-urban sprawl, is the country’s smallest province but has attracted $18.2 billion of foreign investment in recent years from Samsung, Canon and Nokia, according to Quat.

It is all about location, officials say. Bac Ninh is a 40-minute drive from Hanoi, 30 minutes from Noi Bai International Airport — where Samsung exports its phones from — two hours from the port of Quang Ninh, and an hour and a half from the Chinese border.

Provincial officials offered Samsung land in the Yen Phong Industrial Park and successfully lobbied the central government for generous tax breaks for both Samsung’s initial factory, built in 2009, and a subsequent expansion from 2015 that helped make the South Korean company Vietnam’s biggest exporter.

Vietnam Singapore Industrial Park, where the Nokia factory sits, is served by a six-lane roadway and is replete with working factories and available office space, suggesting a region and a country open for business. Samsung buses in some of its workers from several other provinces and has hostels for them on-site.

Hanoi has pulled out so many stops for foreign investors in recent years that the government speaks of leveling the playing field so that Vietnamese companies can compete. But Vietnam’s manufacturing workforce is only about the same size as that of China’s Guangdong province, and cannot draw on migrant workers from a bigger hinterland. The smaller scale means that manufacturers must dig deep, and work hard, to find local suppliers, workers and managers.

Vietnam ranks 55th on the World Bank’s Global Competitiveness Index, which assesses infrastructure, labor market efficiency and education, among other factors, compared to 27 for China. While roads are good in the north around Hanoi, they are less so around Ho Chi Minh City, Vietnam’s business capital. The city’s Tan Son Nhat International Airport, in the midst of an upgrade, can be congested and unpleasant.

And while Vietnam’s wages are lower on average, China’s factories sometimes have higher productivity, and often the support of local or even national government. “Chinese manufacturers get tax support from their government,” says Khiem. “They can even sell for zero profit to their buyers to compete directly with Vietnam, and claim their tax back.”

Stelvio Guglielmi, general manager of Arda, a furniture-making company outside Ho Chi Minh City, says the skills of factory workers are often lower, and that good staff can be hard to attract. “Middle management is the biggest problem, particularly for us [since] we are farther out,” he said. “Young people want to live in the city.”

Vietnamese workers also have a reputation for being more restive than their Chinese counterparts. While the country’s trade unions are Communist Party-controlled, Vietnam saw a spike of wildcat strikes in recent years, which reached nearly 1,000 in 2011.

Since then, the number has gone down to about 300 a year, according to government statistics. Vietnam’s recent accession to the trans-Pacific CPTPP trading group and signing of a free trade agreement with the European Union will require the country to begin allowing independent trade unions, although their potential impact is unclear.

“I am sure new workers’ organizations will emerge,” says Chang-Hee Lee, country director for the International Labour Organization in Vietnam. “But I can’t imagine they will disturb companies’ operations, because their number will be small and there is overall political stability.”

Business leaders say that while the notion of Vietnam replacing China is unrealistic, it is among the main countries manufacturers are choosing as part of a “China plus-one” strategy — trade war or not. “Nobody has what China has, no country in Southeast Asia,” says Sitkoff. “But Vietnam can get some of it.”

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