Should China worry about losing factory orders to Vietnam?
As Omicron flare- ups in China’s manufacturing hubs, like Guangdong Province and Shanghai, disrupted supply chains, Vietnam’s Q1 economic figures appear to show promising outlook amid the pandemic.
According to Vietnam’s General Statistics Office, Vietnam’s economy expanded by 5.03 percent in Q1 of 2022, compared with the same period of last year, surpassing China which grew 4.8 percent. What’s more, Vietnam’s foreign trade rose to $ 176.35 billion in Q1, a year- on- year rise of 14.4 percent. In comparison, China’s Q1 foreign trade rose 10.7 percent in yuan terms.
As Southeast Asia eases its epidemic restrictions and China continues to battle Omicron flare- ups in its major cities, a new wave of headlines emerged over whether factory orders will continue to flow out of China, and if China should have a sense of crisis as global manufacturing may be weaning off dependence on the world’s second largest economy and turning to countries like Vietnam.
From an economic and population perspective, it is unlikely for Vietnam to absorb a significant share of manufacturing from China. According to the World Bank, Vietnam’s labor force is only 7 percent the size of China’s. This means that even if Vietnam succeeds in attracting manufacturing in sectors such as electronics and textiles, it cannot replace China’s overall production.
Despite a trade war and the pandemic, China’s complete supply chains and strong production capacity have proved to be resilient to global shocks in the past few years and the country’s share in global manufacturing is unshakable, at least in the short term.
It is true that Vietnam has taken over the final assembly of some electronic products but China’s overall manufacturing levels have remained consistently high.
For example, between 2019 and 2021, Apple decreased the number of its manufacturing locations in the Chinese mainland from 48 percent to 42 percent, most of which was a shift of labor- intensive work to Vietnam. But Apple also added 14 new Chinese suppliers, many of which are high- value and knowledge- intensive manufacturers specializing in optical components, sensors and connectors, the Maritime Executive reported.
The structure of China- Vietnam trade also shows complementarities rather than competition. Vietnam’s exports to China focus on fruits, aquatic products, textiles and electronics, while the country relies heavily on China for materials and equipment for its laborintensive manufacturing. In fact, China is Vietnam’s largest intermediate supplier, accounting for nearly one- third of all Vietnam’s imports of intermediate products in manufacturing, according to data from the OECD. Vietnam’s integration with China has risen over the years with higher dependency on Chinese inputs for production, according to a report from the Carnegie Endowment for International Peace.
China’s other advantage is its giant middle class and a huge domestic market. The McKinsey analysis previously estimated that the Chinese middle class could reach 550 million by 2022, more than one- and- a- half times the entire US population, CNBC reported. Companies that want to tap the massive Chinese market will naturally want to move manufacturing closer to their customers.
Chinese government fully recognized the difficulty Chinese manufacturing is currently facing. “This year, due to domestic and external factors, the growth of import and export is much lower than previous years and is under immense pressure. We must find ways to retain orders and stabilize foreign trade,” Chinese Premier Li Keqiang said at the State Council’s Executive Meeting on May 5. He vowed to ensure stability in the production and circulation in foreign trade, work out lists of key foreign trade enterprises and support their production, logistics and employment.
For the foreseeable future, Vietnam will continue to remain an attractive market for foreign investment and a destination for supply chain diversification, but its ability to bite into China’s share of manufacturing is limited.