Vietnam beats China, India to become next manufacturing hub

In doing so, the country has become a new hub for low-cost manufacturing in Asian supply chains.

The report suggests that the key factors in pushing the nation ahead of its peers include incentives offered to international firms to allow them to set up units to manufacture hi-tech products, a wide pool of low-cost workers, and the proliferation of free trade agreements (FTAs).

The EIU report indicates that the country scored more than both India and China with regard to FDI policy. As such, India remains behind both China and Vietnam in terms of foreign trade and exchange controls.

Furthermore, India fared surprisingly low in its FDI policy, in comparison to the 14 countries that were studied by the EIU. With the exception of Indonesia and Bangladesh, other places outscored India in FDI and the labour market. Indeed, both India and Indonesia have been pushing for further labour law reforms, whilst Bangladesh is in the process of negotiating 17 preferential FTAs.

Pakistan performed worse than India in terms of foreign trade and exchange controls, with only Bangladesh behind India in terms of infrastructure, whilst China continues to hold its leading position in infrastructure.

Moving forward, the report states the nation enjoys a positive outlook, with the country set to continue offering generous arrangements for international firms such as incentives for investment.

Despite the absence of specialised labour potentially posing a disadvantage to businesses, the nation’s low-skilled manufacturing wages provide plenty of competition.

The report also underlines that “Vietnam’s proliferating membership of FTAs represents a strong point of its trade relations, reducing export costs.”

Ruchir Sharma, an emerging markets strategist at Morgan Stanley, outlines that Vietnamese FDI has averaged more than 6% of GDP, a figure which is the highest ratio among any emerging country.

India had been in line to become the region’s next manufacturing hub after companies began moving away from China due to their higher labour costs after 2013 which ultimately led to a reduction in FDI and movement to relocate to other Asian countries.

The report rightly points out that the Vietnamese emergence represents an alternative manufacturing hub to China, a trend which predates the trade war between Washington and Beijing.

Ever-changing policies in line with market demand has proved to have worked out well for the country, with former Prime Minister Nguyen Tan Dung writing for the World Economic Forum that vigorous changes in the business and investment climate have made the country attractive for FDI.

Former PM Dung also notes that socio-political stability and population structure helped to win the trust of investors in the Vietnamese market. At one stage the country had initially allowed state-owned enterprises to compete with foreign investors, although after witnessing attacks on foreign-owned enterprises the Government immediately move to change their policy.

The recent FTA signed with the EU has served to benefit the country due to the EU lifting 85% of its tariffs on local goods from 2020, with the report stating that the biggest gains were witnessed by footwear manufacturers in Hanoi.

Approximately 40% of exports to the EU in terms of footwear manufacturing faced 30% tariffs, which were completely withdrawn from August, 2020, with the nation registering FDIs worth over US$12 billion between January, 2020, and April, 2020.

Even amid the novel coronavirus (COVID-19) pandemic, by September, 2020, the entire country had attracted US$21.20 billion, or 81.1 % compared to the same period last year, as per a report in Vietnam Briefing.