Vietnam becomes vital link in supply chain as business pivots from China

Space at the Deep C Two industrial estate in northern Vietnam is in such demand that its developer is already thinking about how to create more — by pushing back the South China Sea.

Some of the biggest suppliers to global tech companies such as Apple are clustered at Deep C Two, close to northern Vietnam’s biggest port, Haiphong. Now geopolitical tensions between Beijing and Washington and the risks to business exposed by the Covid-19 pandemic are spurring more manufacturers to shift out of China — and Deep C, a Belgian developer which runs five zones in Vietnam, is getting ready.

If there is enough demand, “we will reclaim the land from the sea”, said Dung Bui Thi Thuy, a marketing executive.

The accelerating shift to countries such as Vietnam is part of a growing “China plus one” strategy to redraw global supply chains. As rivalries grow between China and the US over technology and security, more companies fear curbs on what and where they can manufacture. As a result, many are supplementing production in China, still the world’s biggest manufacturing hub, with expansion to other countries.

“Koreans, Taiwanese, Chinese — there seems to be an unstoppable transfer or at least relocation from mainland China into other countries,” said Koen Soenens, Deep C’s sales and marketing director. “Foreign companies currently in China, ask them what’s next. [They say] ‘For the Chinese market, we stay in China; to serve our overseas clients, we are looking for a new location’.”

But the trend also exposes the risks and uncertainties of shifting resources to countries such as Vietnam, where the bureaucratic and physical infrastructure, including the electricity grid, is straining under the weight of demand just as the country faces headwinds from a turbulent global economy.

Vietnam’s export-led growth has pulled millions of people out of poverty over the past 30 years, and the country has won a big role in the tech supply chain: Apple already produces millions of AirPods there.

But one European diplomat there said the country was “at a crossroads” where it had to ease bureaucracy, create a more transparent regulatory framework and get rid of “absurd” red tape.

“They received this strong trend of investment . . . up till now it has been easy for them,” the diplomat said, questioning whether Vietnam had the infrastructure for further growth.

Vietnam generated $22.4bn from foreign direct investment projects in 2022, an increase of 13.5 per cent over the previous year, according to government data. While FDI is slightly down in the first five months of the year on the same period last year, investors, analysts and officials said interest remained strong. Vietnam attracted 962 new FDI projects in the first five months of the year, up from 578 in the same period last year.

Ho Duc Phoc, Vietnam’s finance minister, said in an interview that the country’s infrastructure was “improving and becoming more modern” and highlighted a big attraction for investors: cheap labour.

“We have an abundant and cheap supply of labour . . . [it] will be cheap for a long time,” he told the Financial Times.

Still, some investors are already noticing a tightening labour market. Soenens points to Pegatron, one of the biggest suppliers to Apple, which began production of electronic equipment in Haiphong in 2021. By the end of next year, the Taiwanese company hopes to have 20,000 workers in Deep C.

“How are they going to find those people? Most probably outside the city limits, thanks to their investment in dormitories for workers,” said Soenens.

Some 150km away at the Thanh Oai industrial complex in Hanoi, where B. Braun employs about 1,100 people, the medical technology company is considering building dormitories on site as it plans to double investment and its workforce within the next five years.

The labour market is taut and “getting more and more difficult . . . highly skilled labour is needed by every company”, said Torben Minko, managing director of B. Braun Vietnam. “The challenge is the human capital. If you have to build a huge factory that needs 10,000 workers, they need to come from somewhere.”

Vietnam’s highly qualified young people also expect to earn far more than the monthly minimum wage, which for the biggest cities is 4.68mn dong ($198). “I can tell you now the normal average salary for people my age is 15mn to 18mn a month,” said Tran Khanh Ly, a 24-year-old business developer in Ho Chi Minh City.

New investors quickly find the wheels of bureaucracy grind slowly in a consensus-driven and decentralised system in which multiple signatures are required for every approval. Companies already in Vietnam said expansion was tough.

A big corruption crackdown has exacerbated delays. “Government has become paralysed by procurement anxiety, a fear of making a mistake and winding up in prison for corruption or misuse of public resources,” one western official said.

The finance minister said the impact of the crackdown on business had been minimal. “The aim . . . is to make the economy healthy and transparent, for protecting the rights of the citizens and the enterprises,” he said.

“The length of procedure and the complexity is an issue,” said Jean-Jacques Bouflet, vice-president of the European Chamber of Commerce in Vietnam, citing the absence of a centralised investment agency as one reason why approvals for everything from work permits to solar panels move slowly.

As Vietnam develops, it remains highly dependent on ties to China’s crucible of manufacturing around the Pearl River delta, which — marketing material from Deep C at Haiphong points out — is just “12 trucking hours” away.

That proximity allows for easy transfer of materials but leaves Vietnam’s supply chain more vulnerable, according to Brian Lee Shun Rong, an economist at Maybank in Singapore. “What happens if there are any disruptions to the flow of imports from China?” he said.

“This is our Achilles heel,” said Michael Kokalari, chief economist at VinaCapital in Ho Chi Minh City. “To the extent there are supply chains, it is [companies such as] Samsung or LG bringing their whole supply chains here.”

One solution is for big anchor investors to play a role in improving the whole supplier ecosystem. Samsung, which has six factories in Vietnam as well as a research and development centre and is the biggest foreign investor, said since 2015, it had worked with about 400 Vietnamese companies to help them improve product quality.

Another solution is for companies to move in clusters. Deep C cites the example of Pyeong Hwa Automotive, which moved to the Haiphong zone with three others in 2019.

Whatever the doubts about labour, infrastructure or other issues, few expect “China plus one” growth to end soon. “The gates open, they come in,” said Soenens of Deep C, which is considering further sites. “It doesn’t stop.”

Additional reporting by Andy Lin in Hong Kong