Can Vietnam Replace China in Global Supply Chain After COVID-19?

COVID-19 disrupts global supply chain

It has been nearly half a year since the outbreak of COVID-19 pandemic, which significantly impacted the global supply chain and continues to affect businesses with worldwide operations. Due to global interconnectedness, all economies are tremendously affected, except maybe North Korea.

The COVID-19 pandemic first started in China — the world’s biggest manufacturing hub, which caused many manufacturing facilities in China to be closed for a period of time. According to Ms. Caroline Bain, Chief Commodities Economist at Capital Economics, this has led to the disruption in global supply chain as well as goods trading around the world.

Businesses operating worldwide are struggling to source raw inputs, even some major manufacturers such as Hasbro, Michael Kors, Versace, Jimmy Choo,… are stuck in the same situation. Hyundai has just announced the suspension of some car production lines because of a lack of inputs. Fiat Chrysler is planning to cease production on its assembly line in Serbia due to a shortage of parts from China.

Mr. Alan Murphy, chief executive officer of container shipping analysis company Sea Intelligence, said about 600,000 containers were congested because of the COVID-19 epidemic in just under a week. On average, each shipping container costs about US $ 1,000, which means that shipping companies have lost about US $ 600 million. Cargo ships may remain in a slow-moving state in the hope that the epidemic will soon improve, or fall into “idle” state if the epidemic continues, Murphy said.

Opportunity for Vietnam

Relying on China as the only supplier has proved to be an expensive lesson for large corporations as they cannot afford another disruption like that, said Dr. Pavida Pananond, professor in the Department of International Business, Logistics and Transport at Thammasat University (Bangkok).

Factory relocation was mentioned when the US-China trade war took place and is now fueled up by the COVID-19 pandemic. The Straits Times stated that foreign companies are looking at Southeast Asia as an alternative location for China in the supply chain, Vietnam included. How countries respond to and manage the Covid-19 pandemic is a new factor in risk assessments, and the fact that Vietnam government has taken specific actions to prevent the epidemic from the early is a big plus when multinational companies take into consideration.

According to Mr. Samuel Pursh, Associate Director at Vriens & Partners, Vietnam has emerged to be an attractive industrial zone and supporting industries for foreign enterprises, thanks to the young population, larger workforce than other Southeast Asian countries, and relatively good infrastructure.

Another advantage of Vietnam is its proximity to China. This makes the China+1 strategy going smoothly. Instead of giving up the billion-dollar market, investors are looking for production facilities supplements with abundant human resources and low-cost input sources, such as Vietnam.

Can Vietnam replace China as the world’s manufacturing hub?

Although Vietnam is facing a great opportunity to attract foreign investment, one should not be confident that Vietnam has the ability to replace China.

Mr. David Dodwell, Executive Director of the Hong Kong-APEC Trade Policy Study Group, states that Vietnam would not be able to replace China any time soon due to two main reasons:

• Multinational companies heavily invested on China production facilities because they also have an eye on the country’s massive consumer market
• Other countries in South or Southeast Asia cannot compare to China in term of manufacturing capacity and infrastructure

Assoc. Vu Minh Khuong, lecturer at Lee Kuan Yew School of Public Policy — National University Singapore also has the same point. “Vietnam cannot and should not position itself as a substitute country for China in the global supply chain”, he affirmed and gave three reasons:

• Firstly, China, with a market of 1.4 billion people and strong potential both in purchasing power and supporting industries, will always have great power in reshaping the global supply chain.
• Secondly, positioning Vietnam as a reliable complementary destination in the China+1 formula instead of competing against China makes Vietnam more successful in attracting strategic investments.
• Thirdly, Vietnam should focus on a number of key areas to quickly upgrade the foundations of industry and labor productivity. Spread out all the projects to receive without a clear strategy that could make Vietnam more vulnerable in the upcoming period.

As a whole, Vietnam’s economy is much smaller than China’s, which is the world’s second largest. Vietnam is far behind China in many aspects, not only GDP and human capital but also infrastructure, manufacturing capacity and outputs. That investors should take into consideration its limitations when deciding to replicate the scale of China’s manufacturing successes.