Shifting Sands: The Future of Manufacturing in Vietnam

Blogs - Vietnam: Sept. 19, 2017

After decades of growth, the Chinese economy has begun to slow. Rising wages, an ageing population and increased consumer spending has shifted the economy towards higher-end production and a more consumer-centric model of growth, which doesn’t bode well for many of the existing manufacturing activities in China.

What does this have to do with Vietnam? In short, investors fleeing skyrocketing costs in China are starting to understand the importance of lessening similar risks in what are termed “China plus one” markets — locations such as Vietnam characterised by lower costs and a capacity to take on manufacturing once located in China.

However, “The Vietnamese economy is slowing”, “Vietnamese wages will soon be rendered uncompetitive” and, most recently, “Automation will put huge segments of the Vietnamese population out of work” are just some of the headlines that have formed a counterargument for companies entertaining the idea of investing in Vietnam. But how real are these concerns and how does Vietnam really stack up against its northern neighbour?

manufacturingImage source: pcworld.com.vn

A Long Way to the Top

Vietnam, while certainly susceptible to these changes over the long term, is far from a point where investments, on aggregate, will be rendered uncompetitive. Instead, similar to China, Korea and other countries that have historically chosen to pursue export-driven models for growth, Vietnam is steadily working its way up the value chain and has a long way to go before it reaches the top.

Over the last two decades, Vietnam transitioned from exporting textile products to being one of the world's largest production hubs for cellphone manufacturing.

However, instead of replacing textiles, the export value of both textile and electronics products registered growth from 2001 to 2016 even as electronics overtook textile exports in their share of total exports.

This shift up the value chain has undoubtedly put upward pressure on wages, has demanded more technical skillsets, and led to increases in quality and value across all sectors. However, over this same period, investment into Vietnam reached record heights of US$11.8 billion in 2015 and economic growth has maintained a level of 6 percent since 2010.

manufacturing

But What About Automation?

Surely the introduction of automated manufacturing processes that are required for electronics manufacturing and increasingly accessible for textile production will decrease employment and render wages competitive.

While automation does pose the most realistic risk to labour-intensive manufacturing and has been a challenge for countries ranging from China to the United States, these concerns are less important in the immediate future in Vietnam.

Vietnam’s position on the value chain is food for thought when placing the risks of automation in context. Although Vietnam has benefited from divestment from China, many companies remain content to keep at least a portion of their manufacturing in Asia’s traditional manufacturing hub. Much of this production remains at the highest end of the value chain — with the manufacture and assembly of technical components.

manufacturingImage source: relateit.dk

Currently the Vietnamese government has free trade agreements signed or in effect with all of its ASEAN counterparts as well as China, Korea, Japan and most recently the European Union.

It comes as no surprise that these nations make up the bulk of investment within the country.

Additionally, the ability of the Vietnamese government to move quickly to institute domestic reform and conclude international agreements bodes well for the future when the challenges of wage inflation and automation will become more pronounced.

The true test, however, will be time. No one knows for sure what the manufacturing landscape will look like in five or ten years.

Banner image source: baomoi.com