Chinese Enterprises Face Increasing Uncertainty as Vietnam is Losing Its Cost Advantage
2019-10-25    [Source:PUdaily]

PUdaily, Shanghai-- Last year, Donald Trump launched a trade war with China, which has had a direct or indirect impact on our work and daily lives.

The trade war has wide implications. At the macro level, it will cause a shift in the geopolitical landscape. At the micro level, it may affect individuals’ work. For example, a reporter may have to get up late at night to report the latest news on the trade conflict.

For some bosses in the manufacturing industry, they may be considering relocating their productions to Vietnam as quickly as possible.

As a matter of fact, Chinese manufacturers had begun to relocate their production capacities even before the trade conflict. Xu Qiyuan, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, believes that the Sino-US trade war can be seen as a watershed, capacity relocations before and after which are very different.

"Before the trade conflict erupted, the main motive for their capacity relocations was to reduce production costs. Such high costs were caused by years of Renminbi appreciation, rising labor costs, high cost of borrowing and tax pressures. After the trade war broke out, the global supply chain faced greater uncertainty. For example, the supply of key technologies and components may be disrupted. Also, there may be unexpected and dramatic change in tariffs. As trade conflict has erupted, when deciding to relocate their productions Chinese manufacturers should take into account not only the cost difference that is certain, but also the uncertainty of the future."

Among the many candidate countries and regions, Vietnam, which is close to China, has a development model similar to China’s, lags behind China in growing economy, but is catching up, is favored by many Chinese entrepreneurs. Past experience shows that low costs are the biggest reason.

In the early days, Vietnam’s labor cost was low, which was very attractive for manufacturers in labor-intensive industries. Also, the low rent of land made it popular among the manufacturers. Besides, to attract foreign investment the Vietnamese government offered generous tax incentives, including tax exemptions and 50% reduction in certain taxes. These are favorable factors for reducing production costs and motivated Chinese producers to move to Vietnam.

But now, many of the benefits are wearing thin.

Take Vietnam’s wages. Currently, the monthly salary of an ordinary Vietnamese worker generally stands at around 1,600 dong. In July 2019, the Vietnamese government raised different regions’ minimum wages for 2020. Starting from January 1, 2020, the minimum wage for Class I regions will increase by 5.5% from 4.18 million dong (equivalent to about 1270 yuan) to 4.42 million dong (1,350 yuan). In addition, many Chinese manufacturers have to assign their employees in some posts to Vietnam when they relocate productions there. This entails salary increase for these employees, which could to some extent offset the benefits brought by low labor cost.

The rent of industrial land in Vietnam is also rising. According to a study, in June 2018 the rent of land in Ho Chi Minh City was $150 per square meter, compared with $143 per square meter in the fourth quarter of 2017. The figure further jumped to $162 per square meter in June 2019. The rent of industrial land in South Vietnam is also increasing. It increased from $72 per square meter in the second quarter of 2018 to $80 in the fourth quarter, and further to $95 in June 2019.

Indeed, the Vietnamese government is keen on attracting foreign investment. But they prefer Japanese and South Korean businesses to Chinese ones. One of the reasons may be that the Japanese and South Korean businesses entered Vietnam earlier than their Chinese counterparts and have created well-established value chains there. Besides, the Vietnamese people’s attitude towards China is not very friendly.

Despite the dwindling cost advantages, some Chinese manufacturers still plan to or are relocating their productions to Vietnam. The history of Chinese producers relocating their capacities to Vietnam can be divided into three periods. The first period is around 2006, when some textile and clothing producers moved to Vietnam due to the impact of China’s additional tariffs on imported cottons and foreign countries’ anti-dumping duties on China’s exports. The second period is around 2010, when electronic and mechanical equipment manufacturers shifted their capacities. The third one is after 2018, when some businesses were eager to move to Vietnam due to the Sino-US trade war.

Currently, some major upholstered furniture makers, which are polyurethanes businesses’ customers, are relocating their production capacities in an attempt to evade the additional tariffs and anti-dumping duties resulting from the trade war.

Last year, the U.S. government imposed a 25% additional tariff on mattresses imported from China. In the first half of this year, the United States Department of Commerce ruled that mattresses made in China were "dumped" on the U.S. market at a price that is lower than the fair one, and decided that it would impose a preliminary anti-dumping duty. The U.S. government has imposed a tariff of up to 1731% on mattresses imported from China.

Compared with America’s high tariffs, the increased production costs in Vietnam become acceptable for Chinese firms.

But as Xu qiyuan said, "As trade conflict has erupted, when deciding to relocate their productions Chinese manufacturers should take into account not only the cost difference that is certain, but also the uncertainty of the future." How big the scale of the capacity relocation is and what impact it will have remain to be seen."

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