Vietnam: The New Industrial Powerhouse of Southeast Asia

Rising Industrial Landscape

A mere 90-minute drive north of Hanoi, a striking red banner with golden Chinese characters flutters over the gate of Mingjie’s newly completed factory. Inside, brand-new injection moulding machines stand idle, waiting for activation. Outside, farmers in traditional conical hats tend to their rice paddies. This seemingly tranquil scene belies a significant transformation occurring in Bac Ninh province, a locale that has rapidly evolved from a patchwork of farming villages into a burgeoning industrial hub.

This change is emblematic of a wider trend in Southeast Asia, particularly Vietnam, as manufacturing power shifts away from China. In recent years, Chinese companies have increasingly relocated operations to Vietnam, aiming to evade the impact of U.S. tariffs and adapt to a restructuring of global supply chains.

The Tirade of Relocation

What started as a trickle of investment during the onset of the U.S.-China trade war has morphed into a torrent. Notable Chinese manufacturers seeking to maintain access to the lucrative U.S. market are setting up shop in Vietnam. The factors driving this migration include surprisingly low labor costs, along with benefits from tariff relief and improved access to regional markets.

Mingjie, a Dongguan-based manufacturer specializing in plastic casings for electronics, is a case in point. For over 20 years, they exported products worldwide from China. However, by the end of 2023, they faced intense pressure from clients to adjust their strategy.

Li Fangting, who oversees foreign trade operations at Mingjie, recalls, “When trade tensions arose in 2018, one client suggested we explore Vietnam. After the pandemic, those suggestions turned into demands.” Following their largest client, Mingjie established operations in Bac Ninh to produce parts earmarked for exports to Europe and the United States.

Economic Challenges

Despite the appeal of moving to Vietnam, this relocation strategy isn’t without hurdles. Rapidly escalating costs in industrial sites and competition for skilled labor are forcing many firms into a precarious position. Companies are now confronting the challenge of producing goods that cost more than their Chinese counterparts, while relying on a tariff gap that could vanish with a political decision.

In April 2024, the U.S. imposed a steep 46% reciprocal tariff on Vietnamese exports. Subsequently, a bilateral deal reduced this to 20%, still higher than the 19% average faced by other Southeast Asian nations.

A Growing Industrial Hub

Bac Ninh and the surrounding regions are rapidly transforming into what resembles the bustling factory towns of Guangdong province, which thrived two decades ago. The area is now home to a diverse range of global manufacturers, including South Korea’s Samsung and Japan’s Canon, alongside an increasing number of Chinese firms, such as Goertek which supplies for Apple.

Over the past few years, there’s been a notable uptick in the number of supply chain companies, logistics providers, and packaging firms setting roots in Vietnam, many of whom follow their major clients. As firms like Mingjie enter the region, Vietnam is poised to deepen its role as a critical link in global supply chains.

The Impact of the Trade War

Vietnam’s industrial base has grown in waves over the past few decades. The late 1980s saw an influx of Asian manufacturers fleeing rising production costs in their home countries. The most recent wave has been directly tied to the U.S.-China trade conflict, which significantly influenced trade dynamics.

From 2018 onwards, the pressure to move operations intensified. Inquiries from Chinese firms skyrocketed, with general manager Niu Qiang stating that interest grew from one a week in 2016 to six or seven a day by 2018.

Prominent manufacturers like Samsung set up production in Bac Ninh back in 2008, investing over $23 billion, and several Apple suppliers subsequently followed suit. This growing presence solidified the region’s role in global electronic supply chains.

Proximity Matters

Vietnam’s geographical closeness to southern China further enhances its appeal. Components can move swiftly from the Pearl River Delta to Bac Ninh, taking mere days by truck or about a week by sea, as confirmed by Mingjie’s Li.

This migration is reshaping global trade flows. In 2019, the Association of Southeast Asian Nations (ASEAN) overtook the U.S. to become China’s second-largest trading partner, further cementing its importance in the region—culminating in an impressive bilateral trade figure projected to reach $982.3 billion by 2024.

Shifting Economic Dynamics

Historically, Vietnam’s economic growth was driven by its plentiful low-cost labor force; however, that advantage is dissolving as labor costs steadily rise. For instance, Hechang Threads Dyeing, which established its plant in 2002, saw local wages jump from 200 yuan to 2,500-3,000 yuan today, resulting in narrowed competitive edges compared to China.

Similarly, land costs in Bac Ninh have surged, now fetching nearly one million yuan per mu—two to three times higher than in certain areas of China. A potential consequence is that many firms may find themselves exposed to economic downturns, particularly if rents consume a significant share of their expenses.

The Dilemma of Supply Chains

Vietnam’s incomplete supply chain remains a considerable hurdle for foreign businesses. Many essential parts still need to be imported from China, resulting in higher operational costs. Though local sourcing in electronics is improving thanks to major players like Samsung, many complex products still necessitate imports.

The furniture industry has developed a more self-sufficient ecosystem, relying on locally available inputs for production. However, sectors like textiles remain heavily dependent on Chinese materials, due to insufficient refining capabilities within Vietnam.

Navigating U.S. Regulations

Vietnam’s role is becoming increasingly complicated, particularly due to U.S. regulations stipulating that goods transshipped through Vietnam from other countries now face a higher tariff. This uncertainty regarding what qualifies as “transshipment” leaves many businesses on alert.

Yet, despite these challenges, Vietnam presents numerous opportunities. Free trade agreements with the EU and ASEAN point to long-term growth potential. As Niu Qiang puts it, while trade wars may have triggered these changes, the real drive is about tapping into global markets, positioning Vietnam as a vital player in the region.

A Consumer Market on the Rise

While many Chinese firms view Vietnam as a manufacturing base for developed markets, there lies untapped potential for the country to evolve into an attractive consumer market. With a population of over 100 million and an economy growing more than 7% annually, Vietnam is emerging as a strategic entry point into broader Southeast Asian markets.

This transition is already visible, with Chinese firms like Shineray Motors customizing their products for local preferences—reflecting a growing understanding of the distinct needs of the Vietnamese market.

By recognizing and adapting to local demands, companies can capture significant market share and leverage Vietnam’s position as a launchpad into the rest of ASEAN.

Overall, as Vietnam continues to navigate the complexities of a rapidly changing global landscape, the nation stands poised to redefine its role as a manufacturing powerhouse, while simultaneously evolving into an essential player in the regional consumer market.