Recently, Apple reported it is shifting its iPad production out of China and into Vietnam. What advantages does Vietnam offer over China in manufacturing these kinds of high-tech products?
Apple is not only planning to shift its iPad production, but also talks about producing entirely new Apple Watch and MacBooks for the first time in Vietnam. From an international business perspective, when you diversify the iPad production, you’re generally supplementing and assembling older flagship models where the value-added is low. However, when Apple decides to upgrade its new watches and phones outside of China for the first time, it can be very beneficial for local upstarts to capture opportunities from new features within these products’ supply chain. Apple’s willingness to explore a “China plus Vietnam” for its supply chain illustrates what is going on the ground. These trends illustrate Vietnam's ability to accumulate advantages from U.S.-China trade tensions. That is, before the tensions, multinational companies like Samsung had been setting up shops in Vietnam since 2013. The U.S.- China trade war tensions and the COVID pandemic just accelerated that. Vietnam has strategically put themselves in position to gain from these developments.
Overall, the fact that Apple is diversifying to Vietnam signifies two things. First, Vietnam is a top IT outsourcing destination. Second, Vietnam is quickly becoming the top location for FDI geared for export. If you look at the electronic exports, Vietnam currently is number seven with $111 billion. Number one is mainland China with about $719 billion. The second place is Taiwan with about $216 billion, while in third is U.S. with $162 billion. With all the trends that are happening, it is likely that Vietnam could be number three in the coming years, right after mainland China and Taiwan.
One reason why companies have long looked at Vietnam, even before the trade war tension, is the rising costs -- wages, labor shortage, and tighter environment regulations -- particularly in China. An interesting study on software outsourcing estimates that offshoring to Vietnam is 90% less expensive than employing U.S. workers, 50% less than China, and 30% less than India. So that is really one of the reasons why Vietnam is looked at in terms of IT outsourcing and manufacturing. In general, Vietnam has one of the lowest wages in the outsourcing world. And the workforce in Vietnam is predominantly semi-skilled or medium-skilled. Vietnam leads in the region in terms of spending 6% of the GDP in infrastructure, which is higher than the average of all countries in Southeast Asia with about 2.3 percent. Vietnam has had the right policy in place and has done well to capture those trends that I mentioned. Even before Apple decided to ship its iPad, Vietnam was already Apple's biggest manufacturing hub outside of China. In 2018, they had 14 suppliers’ facilities for Apple. After the trade tension between U.S. and China, Apple had 22 suppliers in Vietnam. Even if U.S.- China trade tensions significantly thaw, this trend will likely continue.
Another major development is that Vietnam just signed a free trade agreement with the EU. In Southeast Asia, including China, Singapore is the only other country that has a free trade agreement with the EU. When you are assembling and exporting things from Vietnam to other places, because of the free trade agreement with the EU, products to the EU have relatively low tariffs; meanwhile, when they are exported to the U.S., they have not faced tougher tariffs due to the Biden’s trade policy to manage China’s rise via courting Vietnam as a strategic political ally. This is what we call an “export FDI platform.” In fact, Vietnam is known as the region’s friendliest trade hub with a number of new generation of free trade agreements. As a result, foreign invested and domestic firms can avoid higher tariffs while expanding to global markets.
Do you think Apple moving some of its supply chain from China to Vietnam will prompt other companies to do the same?
I definitely do. Though IT firms such as Samsung should be seen as a first-mover, where it has become Vietnam’s largest FDI investor and contributes almost a quarter of the country’s export. Apple is seen as a late mover and can benefit from coming in late, given many of infrastructure services could already be in place. The disadvantage is that higher-quality human capital and manufactured capital might already been taken. Also, when you come in, some infrastructures may not be able to absorb everything that you need, such as Vietnam’s air freight industry that is already struggling to meet the current demand with soaring logistic costs.
To what extent can Vietnam replace China as the next central manufacturing hub? How prepared is Vietnam in terms of infrastructure and semi-skilled labor to handle manufacturing on a much larger scale, an advantage that China was known for?
What you are hearing in China is that many citizens are concerned that their country’s world factory tag is being threatened by Vietnam. What is interesting is that the economists in China are saying publicly that there is really nothing to worry about, because Vietnam exports are complementary to Chinese companies and Chinese industry. So, if you take a closer look at the major hub of China, which is in the south, it is connected to major hubs in northern Vietnam. You can see them as a part of the supply chain in the region. Instead of competing with each other, they are actually connected to each other economically and geographically. Nevertheless, I don't think China will be replaced by Vietnam because Vietnam is only 1/16 of the population of China. What it could do, as I mentioned before, is to further capture the diversification and the technology transfer between foreign invested enterprises and domestic enterprises.
What steps can Vietnam take in order to encourage more foreign investment and a bigger manufacturing footprint? What risks might this entail?
Here, Vietnam can do more in terms of vocational training. For example, about 56% of the Vietnamese labor force is semi-skilled, about 36% is low-skilled, and another 12% is high-skilled. For Vietnam to reap the benefits of the relocation of supply chains, they would need to upgrade that 36% of the lower-skilled up to the semi-skilled. In regards to the country's vocational education system, government has a lot of issues and challenges ahead. Currently, Vietnam has not been able to create a vocational system that could meet the demand of the incoming foreign invested businesses.
Another is the improvement of seaports, which have drastically been upgraded. But what you are seeing is that the seaports are struggling to deal with container ship traffic that almost doubled last year. As I mentioned before, Vietnam spends about 6% of the GDP on infrastructure. But in order to address such shortcomings they actually need to spend more than 10% for that infrastructure to work. For example, the roads and highways connected to seaports are still really bad. In fact, studies find that Vietnam has a gap between its current transportation infrastructure and its aspirations to be number two, right behind China as the world IT supply chain hub.
How will Vietnam’s capture of a larger share of manufacturing, at the expense of China, affect Vietnam’s relationship with China? Will it make Vietnam less dependent on China economically?
There is a term we used in international business called “co-opetition,” which means that you have the coexistence of both competition and cooperation. That's the way that I would describe Vietnam's relations with China in which Vietnam has been a part of China’s political and economic orbit. Since 1986, Vietnam’s government has effectively created competitive advantage in terms of establishing great bilateral relationships with both China and the U.S. While their tensions in which Vietnam needs to appease both superpowers, their ability to manage and thrive within the growing disputes between the two has been the key to the country’s success. Unlike Thailand and the Philippines, the political-economic stability is one key reason why foreign businesses have continued to invest in Vietnam. The recent free trade agreement with the EU further demonstrates the ability of Vietnam in creating a sustained competitive advantage in regards to business environment for foreign invested companies.
However, it is important not to paint such a rosy picture in terms of Vietnam becoming a top IT outsourcing and a platform-exported FDI destination. For instance, Vietnam is challenged in raising its GDP per capita: $3,373 (2021) of which is ranked 126 in the world. In part, this is caused by over reliance on foreign invested firms that do most of the value-added activities. But this is something that we could discuss at another time.
栾盛杰, CC BY 2.5 CN <https://creativecommons.org/licenses/by/2.5/cn/deed.en>, via Wikimedia Commons