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Wednesday, 21/10/2020 | 20:04:36 GMT+7
Is Vietnam poised to inherit China's mamufacturing base?

“Vietnam has attracted more supply chains because of its significant advantages, including but not limited to the initial ability to control the outbreak of the coronavirus at an early stage and to reopen its economy, but also its relatively developed infrastructure and proximity to the existing supply chains in China.”

23/09/2020 16:31:13

Foremost in threats to global supply chains is the ongoing trade war between China and the United States. “It has led to a growing trend of shifting supply chain activities from China to Southeast Asia, especially at the stages of final product assembly and finishing.

Furthermore, the complete shutdown of the world economy in general, and of China’s in particular, for an extended period due to Covid-19 has led to a break in global supply chains.

For this reason, the need for greater diversity in supply chains and the reduction of reliance on China is evident,” says Duc Dang, managing partner at law firm Indochine Counsel in Ho Chi Minh City.

“Vietnam has attracted more supply chains because of its significant advantages, including but not limited to the initial ability to control the outbreak of the coronavirus at an early stage and to reopen its economy, but also its relatively developed infrastructure and proximity to the existing supply chains in China.”

Vietnam has accelerated the restructuring of its labour force from low-skilled labour-intensive industries to industries that use a lot of high-quality labour, says Xuan Duc Nguyen, managing partner at law firm Ageless IP Attorneys & Consultants in Hanoi. “The proportion of employees in the electronics industry has increased from 8.03% in 2012 to 15.7% in 2017.”

Nguyen says that in order for Vietnam to develop high-quality human resources and improve national competitiveness, the government has introduced the following policies:

Developing a vocational education renewal programme for the period of 2020-2025 associated with training high-quality human resources for each specific field and retraining of employees to meet the requirements of the Fourth Industrial Revolution;
Creating an attractive working environment for highly qualified Vietnamese people working abroad, overseas Vietnamese and foreign experts to work in the country;
Prioritizing budget allocations and other resources for high-quality labour education; and
Strengthening cohesion and incentives for businesses to participate in training high-quality human resources as well as cooperating with large corporations and enterprises in training high-quality human resources for enterprises (i.e. Vinfast, Samsung, FPT).
In the short term, Vietnam must continue to control the pandemic, Nguyen emphasizes. “In early March, the government announced a comprehensive anti-COVID-19 solution including a monetary policy package worth D250 trillion (more than US$10 billion) to restructure debt, reduce interest rates and support loans for businesses; a social security package worth D62 trillion (US$2.7 billion); and a fiscal policy package worth D180 trillion (US$8 billion) which extends tax payment time and land rental.”

The packages include faster approval for business loans, tax relief, a 10% reduction in electricity prices for manufacturing and trading industries, and others.

For airlines, the government has reduced by 50% fees for aircraft take-off and landing costs and flight control services for domestic flights from March to the end of September 2020. It has also applied a minimum price of D0 for specialized aviation services on the list of which Vietnam regulates from March to the end of September 2020.

Tuan Nguyen, managing partner at law firm ANT Lawyers in Hanoi, cautions that while Vietnam has signed many free trade agreements such as the ASEAN Free Trade Area, the EU-Vietnam Free Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, such FTAs still have limitations.

One of the utmost important matters is strengthening IP protection, Tuan Nguyen says. “Raising IP awareness and building up of an effective enforcement system is essential.

Many foreign investors have been reluctant to carry out production and business activities in Vietnam because of the lack of serious enforcement.”

Local administrative procedure reform and investment opportunities are being promoted to fight for a place in the global supply chain. “On the regulatory aspects, Vietnam has amended the Enterprises Law and the Investment Law taking effect from January 1, 2021, to improve the business environment,” he adds.

“Vietnam has applied a number of preferential policies to attract investors with financial capacity, using high technology, implementing projects to protect the environment, social security, etc. However, the limitations on the complexity of administrative procedures and ineffective management of state agencies still lead to the lower score on ease of doing business in Vietnam in comparison with neighbouring countries.”

Therefore, in order for Vietnam to become a link in the global supply chain, it is necessary to cut down the customs procedures for importing and exporting.

“Clearing customs for import goods in Vietnam has been considered an obstacle for a smooth supply chain, and this is the ‘minus point’ when foreign investors consider Vietnam as their destination. Hence, the application of IT for customs declaration as well as control and management of goods is an important thing,” he says.

“Although, local customs have applied IT in the fields of customs management, tax collection, risk management, checks after clearance, violation handling [and others], it still needs to reduce the number of procedures, provide clearer instructions in the implementation procedures, shorten clearance and document processes in order to help create a favourable business environment.”Is Vietnam poised to inherit China's mamufacturing base?   - 1

As companies begin to diversify their manufacturing hubs following the Covid-19 pandemic, Vietnam finds itself well-positioned to take on a variety of new supply chains.

Prior to the pandemic, Vietnam’s foreign direct investment was mainly from processing and manufacturing, real estate trading, wholesaling and retailing as well as automobile and motorcycle assembly, which account for 81 percent of the total registered capital in 2019, says Xuan Nguyen. But since Covid-19 hit, FDI has shifted to the following fields:

Technology. “For example: Samsung Electronics plans to move its last plant from China to Vietnam,” Xuan Nguyen says. “Also, according to the official website, Apple has announced vacancies for hardware engineers, engineers and managers in operations and supply chains, managers in sales and business development, as well as managers in corporate functions in Hanoi and Ho Chi Minh City. The series of job openings have been posted over the past few months, fueling the rumour that the iPhone producer is fleshing out a plan to launch a production site in Vietnam.”
Electronic equipment and accessories (i.e. Panasonic);
Logistics or e-commerce (i.e. Alibaba); and
Consumer goods, retail (i.e. Zara, H&M).
When relocating supply chains to Vietnam, costs will be a key consideration, especially in a post-COVID-19 world.

“The most important cost factors for businesses are labour development, relocation and facility development, imported material and components, quality control and regulatory compliance,” Dang says.

“The last has shrunk over the last decade though remains higher in Vietnam than other countries. One benefit, here, for companies shifting to Vietnam, is the fact that the application of Vietnam’s policies has become more transparent than China’s and that Vietnam is still looking to lure new investment in comparison with its already sated neighbour. Businesses will also consider incentives and tax breaks that the country currently offers to make the most of the opportunities available.”