How far is the rising Vietnam from the 'world factory'?
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In the post-pandemic era, Vietnam is experiencing its dazzling moment - sustained economic growth, influx of foreign capital, and record export rates. People are amazed that Vietnam’s exports surpass Shenzhen, Li Ka-shing moved to Vietnam after withdrawing from the UK, Nike, Adi and Samsung’s factory moved to Vietnam. Obviously, factories in Vietnam are playing an increasingly important role, so that some people worry that Vietnam will replace China. Become the new "world factory".
In fact, in 2020, when other economies in the world fell into recession due to the COVID-19 epidemic, Vietnam was one of the countries with the fastest economic growth. In 2021, Vietnam's economy began to recover from the end of 2021, despite the fact that some factories were forced to stop production due to the COVID-19 epidemic. The rise of Vietnam seems to be a foregone conclusion, how far is Vietnam from the "world's factory"? What challenges will the rise of Vietnam bring to China?
Vietnam is on the rise?
Currently, Vietnam is the fourth largest economy in Southeast Asia and one of the fastest growing economies in Asia and the world since the 1990s. According to the World Economic Outlook, during the period 2010-2021, Vietnam ranked 14th with an average economic growth rate of 5.99%. Although it is not as good as China's 7.24%, this growth rate has surpassed that of many countries.
According to the 2019 Global Competitiveness Report released by the World Economic Forum in Davos, Vietnam ranks 67th. According to the Doing Business Report 2020 released by the World Bank, Vietnam ranks 70th among 190 economies in the world. In fact, for more than 30 years since the Vietnamese government announced the implementation of reform and opening up in 1986, Vietnam has developed from one of the poorest countries in the world to a middle-income country. Vietnam's per capita GDP was only US$230 in 1985, but by 2021 it has reached nearly US$3,700, a 15-fold increase .
Of course, Vietnam's development is the result of multiple factors. The Ministry of Commerce of China has pointed out the main advantages of Vietnam in attracting foreign investment in the report "Guidelines for Foreign Investment and Cooperation Countries (Regions) 2021 Edition - Vietnam". The first one is political stability and rapid economic development. The Communist Party of Vietnam and the government of Vietnam have strong governance capabilities, and their policies are consistent, with particular emphasis on economic construction.
In 1986, neighboring Vietnam launched an "Economic Renewal" policy aimed at promoting bold economic opening and easing of restrictions. In 2007, Vietnam joined the World Trade Organization (WTO). Around 2016, Vietnam's role in international trade has become increasingly prominent. In 2018, Vietnam joined the TPP. In June 2020, Vietnam's National Assembly approved the Free Trade Agreement (FTA) with the European Union (EU). After the agreement takes effect, 71% of Vietnam’s tariffs on exports to the EU will be cancelled, and 65% of EU’s tariffs on Vietnam’s exports will be cancelled.
In addition, the rejuvenation of the population structure gives Vietnamese people confidence that the country can maintain rapid growth for a long time. In fact, the Vietnamese government has been highlighting its advantages in terms of population and investment policy, so as to more likely undertake the "de-industrialization" of developed economies in the process of globalization. Changes in international relations and the game between major powers have given Vietnam corresponding opportunities. .
In 2021, Vietnam's national population will exceed 98 million, with an average age of less than 33 years old. Among them, the working population exceeds 52 million, and the age structure presents a very ideal spindle shape. The number of people in the age group of 25-29, 30-34, 35-39, 40-44, and 45-49 ranks in the top five, and the proportions are respectively 11.97%, 13.95%, 14.59%, 12.92%, 11.67%. That is to say, young people account for almost 60% of Vietnam's population of more than 90 million, which will greatly supply the labor required for manufacturing.
However, the overall education level of Vietnamese young people is not high, the government does not have enough economic strength to develop advanced education and invest in scientific research, and the national basic education still ranks behind. Cheap labor only means that the potential of primary production is huge, but it does not mean that there must be innovation and high efficiency in production and management. However, a large population is still directly proportional to consumption potential, which also attracts multinational companies to make bold bets.
More importantly, Vietnam also has advantages that other countries do not have, and these advantages are driving Vietnam into a new "world factory".
On the one hand, at present, epidemics have occurred in major cities in China, and isolation and control have actually caused inconvenience to multinational companies and their home governments, while Vietnam borders China. Close to the Chinese market, the cost of "trial and error" for enterprises is relatively small.
On the other hand, as Vietnam's institutional reforms have intensified and gained recognition from the West - a series of "industrialization" policies and "industrial policies" by the Vietnamese government make it possible to undertake the industry or supporting transfer of multinational companies. The West has intensified its isolation and exclusion of China through tariffs and divestment measures, which has further enhanced Vietnam's position in the global geoeconomics.
In March this year, Vietnam's exports reached a record 34.71 billion US dollars, a month-on-month increase of 48.2%, which also brought Vietnam's total exports in the first quarter to 88.58 billion US dollars, a year-on-year increase of 12.9%. In contrast, Shenzhen, which has always been the No. 1 foreign trade city in mainland China, has experienced a decline in exports. Data from Shenzhen Customs shows that in the first quarter of 2022, Shenzhen’s exports were 407.66 billion yuan (about 60.83 billion U.S. dollars), a year-on-year decrease of 2.6%, of which March exports were 120 billion yuan (about 17.83 billion U.S. dollars), a year-on-year decrease of 14%.
In this context, more and more products such as Uniqlo clothing, Nike sneakers, Apple headphones, and Samsung mobile phones have also begun to be labeled as "Made in Vietnam".
Become the new "world factory"?
In recent decades, the global industrial chain has undergone several major shifts.
Around 1960, after developed countries such as the United States, Japan, and Germany were saturated with domestic industries, in order to reduce production costs, labor-intensive industries were gradually transferred to South Korea, Singapore, Taiwan, and Hong Kong. The process of industrialization has been accelerated, the economy has developed rapidly, and it has become the "Four Asian Tigers".
With the industrial upgrading of the "Four Asian Tigers", after 1980, labor-intensive and energy-intensive industries have been transferred to Thailand, the Philippines, Malaysia, Indonesia, the coastal areas of China and other places . Among them, after 30 to 40 years, China has become the core of the current global supply chain according to different historical stages, either actively or passively, known as the "world factory".
Today, with the rising labor costs in China and the acceleration of industrial upgrading, some manufacturing industries with low added value have gradually moved to Vietnam . In fact, Vietnam's industrial development depends on industrial transfer and foreign investment. Since 2015, more than 70% of Vietnam's exports have been contributed by foreign-funded enterprises, and the growth rate of Vietnam's foreign-funded enterprises' exports is much higher than that of local enterprises.
More importantly, the transfer of manufacturing to Vietnam is inevitable under the general environment. In fact, the United States has calculated that before China and the United States clearly intend to carry out continuous decoupling, they have deduced two issues about China. One is the issue of the manufacturing supply chain, and the other is the issue of the inheritance of the consumer market.
You must know that the core of the professional manufacturing industry chain leaving China is not for the United States itself, but mainly for allied countries such as the European Union. As far as the United States is concerned, the United States has a population of more than 300 million. This demand relies on the basic needs of South Korea and Japan. above can be solved. And if the United States wants to be a big brother, it must consider the supply of these allies who follow him.
Therefore, the United States must consider who will undertake this manufacturing industry base, and the more suitable candidates are India and Vietnam. The Biden administration's newly proposed "Indo-Pacific Strategy" report is an obvious proof. The United States is not in a hurry to achieve immediate "decoupling" with China, but supports countries such as Vietnam and India to replace some areas of China's commerce and trade, and pays more attention and industrial transfer to these countries.
Among them, compared with India's deep-rooted religious culture, some standardization-based management methods in India will be more difficult to implement, the production efficiency is not high, and the cost of employee training is relatively high, and Vietnam is obviously better than India. In April 2021, the U.S. Treasury Department removed Vietnam from its list of currency manipulators. The United States has seen Vietnam as a key part of its global supply chain. More and more U.S. money is flowing into Vietnam’s digital economy, green energy, and healthcare.
American companies that have invested or plan to invest in Vietnam include 3M, Amway, Apple, Bank of America, Boeing, Exxon Mobil, Google, Medtronic, Netflix, Nike, Roche, UPS and Visa. At the same time, GE, Cantor Fitzgerald, DeLong, Valero, AGP, and UPC also plan to increase their shares in Vietnam. If these investment plans are implemented, the boosting effect of technological capital on Vietnam's economy will surpass another order of magnitude.
At present, Vietnam's replacement of the market share of the United States and Europe is already taking place. According to data from the United States International Trade Commission (USITC), the growth rates of U.S. imports from ASEAN and Vietnam in March this year were 27% and 30% respectively, both exceeding the growth rate of imports from China (18%); the proportion of U.S. imports from ASEAN that month was 13.6 %, a significant increase from December last year, while China's share dropped from 19.2% to 16% during the same period. China and Vietnam customs data further show that the growth rate of Vietnam’s exports to the United States and the European Union in April increased significantly to more than 30%. 9.4%, 7.1).
In terms of categories, share substitution mainly occurs in labor-intensive and consumer electronics commodities, which are highly related to the existing industrial structure of emerging manufacturing countries. On the one hand, ASEAN and Vietnam's share of China's labor-intensive commodities is very obvious, which is mainly reflected in plastics and their products, leather and their products, knitted garments and accessories, footwear and their products, furniture and their products, toys and other products. On the other hand, the share of consumer electronics products such as computers and mobile phones has also been squeezed to a certain extent. Since the beginning of this year, the share of communication equipment and components imported by the United States from ASEAN has increased, while the share of China has declined in the same period.
In addition, global giants such as Samsung, Nokia, Intel, Foxconn, Pegatron, Wistron, and Lego will continue to invest in Vietnam in early 2022, demonstrating that foreign investors still have confidence in Vietnam's economic recovery. In January 2022, Vietnam invested in seven countries and regions, of which Laos was the largest recipient of investment, reaching US$48.2 million, followed by the United States, China and South Korea.
Fitch Ratings predicts that Vietnam's economic growth rate will reach 7.9% in 2022 and 6.5% in 2023. The Russian Satellite News Agency news believes that Vietnam is very likely to realize its ambition to become a new manufacturing center in the world, and "Made in Vietnam" products will occupy a huge market share in the international trade arena. These advantages have led to growing calls for Vietnam to replace China as the "world's factory".
How far is it from the "world factory"?
Of course, the rapidly developing economy shows the prosperous side of Vietnam, but this is not the whole truth.
In fact, Vietnam's current industrial development model is similar to the processing factories in China's coastal areas 30 years ago, relying on cheap labor to earn the part of the money assembled in the "smile curve" of the industrial chain, with small profit margins and large profit margins However, the money for research and development, design, branding, sales and other links cannot be matched, because Vietnam has neither technology nor market, and only cheap labor.
In terms of labor force quality, according to the "Labor Force Survey Report" released by the Vietnam Statistics Bureau, as of the first quarter of 2021, the total proportion of the total labor force with a college degree, bachelor's degree or above is only 15.5%, and the proportion without training experience is as high as 15.5%. Correspondingly, the proportion of middle and senior technical and professional positions in the total employed population is only 10.9%, and manufacturing employment is still dominated by low-skilled primary jobs.
You know, the added value of products in the foundry mode is not high . In terms of total volume, in the first four months of this year, Vietnam's export value was 122.36 billion US dollars, a cumulative 16.4% year-on-year, and its import value was 119.83 billion US dollars, a cumulative year-on-year 15.7%. While imports and exports have increased rapidly, Vietnam's trade surplus has continued to show a low level. In the first four months of this year, the cumulative trade surplus was only US$2.53 billion.
Structurally, in the first four months of this year, Vietnam’s top three export destinations were the United States, China and the European Union, of which the United States accounted for 29.6%. It is worth noting that in the first four months of this year, Vietnam's imports from China and South Korea and its exports to the United States and Europe increased significantly compared with the same period last year . Parts, etc. are processed and assembled, and finally exported to Europe and the United States as a foundry, "quasi-transit station" model.
At present, Vietnam is encouraging domestic enterprises to integrate into the global market, attract foreign investment and expand exports by strengthening infrastructure investment and subsidies. However, global value chains will still highlight the pricing power and negotiating power of high-end companies and countries in the value chain, compressing the added value of production in countries at the lower end of the value chain. It is also difficult for Vietnam to break through this rut.
In addition, with the increase in global trade knowledge intensity and the popularization of automation technology, the integrity of the industrial chain and the business environment have gradually become more important considerations than labor costs. Under such circumstances, obstacles such as an incomplete industrial system, insufficient R&D investment, geographical dispersion, and backward infrastructure will also restrict Vietnam’s long-term agglomeration of factors and the formation of industrial clusters.
In contrast, China's status as the "world's factory" remains unshakable . At present, China's manufacturing competitiveness has risen to the second place in the world, after Germany. In April 2021, data from the United Nations Industrial Development Organization showed that China's manufacturing competitiveness has risen from fifth in the world in 2012 to second. China has achieved an industrial GDP of nearly 4 trillion US dollars and is the country with the largest manufacturing scale. The output of many products such as automobiles, mobile phones, computers, washing machines, air conditioners, color TVs, refrigerators, and steel ranks first in the world.
As shown above, the industries that Vietnam undertakes are basically labor-intensive industries with little technical content. Although it has a certain impact on inland provinces that want to undertake the transfer of low-end coastal manufacturing industries, Vietnam has neither high-end manufacturing nor Without heavy industry, it is impossible to establish a whole industry chain network like China. For China, which wants to upgrade its industry, Vietnam is more of an industrial complementary relationship .
However, in the medium and long term, for China, industrial transfer under the game of great powers is a major trend that has already emerged. Therefore, before Vietnam has formed a systematic industry and industrial chain, while the "decoupling" led by the United States and the West is still being debugged and debugged, and under the reality that China still has some advantages in independent research and development, the attractiveness of China's manufacturing industry And soft power also needs to be improved urgently. Tomorrow's world is unfolding in today's changing situation.