US-China trade war's pains and gains: Investment floods Vietnam but exposes limits of its economy

In­vest­ment floods Viet­nam but ex­poses lim­its of its econ­omy.

June 2019 , Featured:

The Straits Times

The brewing trade war between the United States and China has led some companies to shift their production out of China to Southeast Asia to avoid American tariffs - giving countries such as Vietnam and Cambodia an economic boost.

As the US-China trade war rages on, companies have started moving their production bases from China to Southeast Asia to avoid American tariffs. While the shift has given an economic boost to countries like Vietnam and Cambodia, suppliers face challenges such as infrastructure bottlenecks and a lack of skilled labour in these fledgling economies.

At the Que Vo industrial park, an hour's drive north of Hanoi, GoerTek's gambit to skirt American tariffs is taking shape.

Last year, the Chinese company, which makes AirPod earphones, became the first Apple supplier to say it would shift some production out of China. It has since vastly expanded its presence in Vietnam with a US$260 million (S$356 million) facility.

Seen from the road, the six factories on the 18,000 sq m plot appear to dwarf all else in the park. Its neighbours include Japan's Canon and Taiwan's Foxconn. GoerTek has an existing factory about three blocks away making conventional wired earphones.

Thanks to its proximity to China, cheap labour, a raft of trade pacts as well as ongoing efforts to liberalise its economy, Vietnam stands to benefit from the intensifying trade war between China and the United States.

Just last month, Seattle-based Brooks Sports said it would move its running shoes and apparel production to Vietnam from China. Swedish furniture giant Ikea too has indicated to local suppliers that it wants to rely less on China's furniture makers.

Vietnam's registered foreign direct investment (FDI) has surged by nearly 70 per cent so far this year, especially in labour-intensive industries like electronics, furniture and apparel. Investment in its textile industry, which employs 2.5 million people across 7,000 companies, totalled US$17.5 billion, up from US$15.9 billion a year ago.

"The trade war has been very good for us," said Ms Nguyen Thi Hong Thu of the Vietnam Textile and Apparel Association (Vitas), the government body that oversees the industry.

The administration of US President Donald Trump last month levelled additional tariffs of 25 per cent on Chinese products worth US$200 billion. China retaliated with tariff hikes of its own on US$60 billion of American goods. Mr Trump has threatened to impose tariffs on another US$300 billion worth of Chinese goods. 

Still, despite Vietnam's gross domestic product (GDP) growing by more than 7 percent last year, to US$240 billion, Vietnam's economy is still half of Thailand's. 

Not a Perfect Subtitute

Infrastructure bottlenecks, persistent anti-China sentiment among Vietnamese and a limited domestic industrial base of raw materials and services make the country an imperfect substitute for its northern neighbour. 

There is a lack of skilled labour as well. Garment makers operating in Vietnam pay on average US$300 a month to workers about half the going rate in China, according to data from Vitas.

"You can find the cost savings but not the quality," said Mr Maxfield Brown, a consultant with Dezan Shira and Associates, which helps clients set up businesses in markets across Asean including in Vietnam.

Mr Le Duy Anh, general director of local furniture maker Xuan Hoa, told The Straits Times: "The Chinese have much better supply chains that can affect the quality of the final product. In comparison, Vietnam has advantages in labour price but the Chinese have advantages in labour quality."

Mr Anh's company makes car seats for a Toyota affiliate and is in advanced talks with Ikea to supply office furniture.

Producers are also forced to import raw materials, which exposes them to exchange rate risks.

Exports of shirts and sneakers and other apparel will surge more than 10 per cent to a record US$40 billion this year, according to Vitas data. But the country will need to import six million tonnes of spun fabric triple its domestic capacity.

Vietnam's trade deficit widened last month to US$1.3 billion from US$810 million a year earlier.

"This is a benefit and a challenge for us because currently we are having trouble finding enough material and we have to import more," said Vitas' Ms Thu through an interpreter, referring to the increase in exports.

While infrastructure is in the works, including a US$15 billion north-south motorway and a third ring road around Ho Chi Minh City, congestion is getting worse. Merchandise from the province of Binh Duong, home to the biggest industrial zones in the south, must traverse about 100km through parts of downtown Ho Chi Minh City, including trendy District Two, on its way to the deep-water port of Cat Lai to the south of the city.

Vietnam ranked 45th in the World Bank's 2018 logistics survey that measures 160 countries on the basis of timeliness, quality infrastructure and ease of Customs procedures. By comparison, Singapore ranked seventh while China was 27th.

Vietnam-China Tensions

Chinese investment in Vietnam can be risky business. 

In 2014, China deployed a massive oil rig into waters around the disputed Paracel Islands, touching off protests and looting of businesses in Hanoi thought to be Chinese-owned but were often those belonging to Taiwanese or even Japanese investors.

High-profile Chinese investments in Vietnam have also attracted negative publicity.

The yet-to-be-completed Cat Linh-Ha Dong railway project in Hanoi, first agreed to in 2008, has suffered numerous delays and is two-thirds over budget. The government last week blamed China Railway Sixth Group, which was appointed by China according to the terms of a loan agreement between the two countries, for lacking the "experience in putting the line into commercial operation".

Last year, police rounded up dozens of protesters in Hanoi when news emerged that the government was setting aside three special economic zones offering 99 year leases that critics say would disproportionately benefit China.

"There's real tension," said Ms Pilar Dieter, senior partner at Shanghai-based supply chain consultancy YCP Solidiance. "This notion of a Chinese invasion is becoming a point of contention."

Vietnam's FDI from China has more than tripled so far this decade to roughly US$2.4 billion last year. In the garment industry alone, Chinese investment last year more than doubled to US$300 million from 2017, according to Vitas data.

But Chinese investment usually does little to benefit local industry and can come with few environmental safeguards, said Ms Thu.

"We aren't fully on board with China FDI," Ms Thu said. "There's no investment in infrastructure. They just want to jump in."

A warmer embrace of Chinese investment hinges on China dialling back the incursions into Vietnamese territory, said Dr Huong Le Thu, a professor in strategic studies at the Australian National University. This seems unlikely, though.

"China has built expectations at home that it is strong," Dr Thu said.

"The degree to which tensions ease will depend on how ambitious and confident China is."

Trade war or not, Vietnam's patchwork of free trade agreements, liberalisation and already close trading relationship with both China and the United States ensures that, for now at least, the country of 96 million people probably wins, whether relations between Beijing and Washington thaw or remain in deep freeze. 

"I have an optimistic view that Vietnam's foreign direct investment (FDI) inflows will continue to increase in the future," said Dr Lam Thanh Ha, senior lecturer in economics at the Diplomatic Academy of Vietnam.

"Maintaining reform of the investment and business environment and choosing quality investment projects still have important implications."

During the five months to May, investments from Hong Kong and China, including from Apple supplier GoerTek, added up to nearly US$1 billion (S$1.37 billion) in realised capital compared with US$7.3 billion in total, Vietnam government data shows.

The inflow of capital has touched off a scramble for resources such as industrial property.

Vietnam Singapore Industrial Park, a joint venture between Singapore's Sembcorp Development and Vietnam state-owned company Becamex IDC, attracted US$14.2 billion in investment by 822 companies across the eight properties it manages throughout the country, up from US$12.9 billion at the end of last year.

Mr Kelvin Teo, chief executive of Sembcorp Development, said: "We continue to receive inquiries for land because of the trade tensions between the US and China, and the interest has extended to our other industrial park in the region too."

Vietnam has also rekindled efforts to pare back its state-owned sector, which comprises 30 per cent of the economy.

Source: The Strait Times

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