Why Vietnam?
Many factors account for the reason why Vietnam was considered as the prime location of China Plus One alternative.
Long Trading History with China
Since 1990s Chinese companies have been going overseas with a primary focus of simple trading of products like motorbikes to cater to Vietnam market. Since the 2000s, simple trading was no longer the default mode with Vietnamese government constantly launching more and more incentives to attract foreign direct investments to set up factories in Vietnam. Back by other incentives like low labor costs, strategic geographic location, favoring taxes regulations, Vietnam has become a prime destination for Chinese factories that are ready to take the leap.
According to Vietnam Industrial and Commerce Bureau, China has been the biggest trading partner since 2004. In 2017, Sino Vietnam trade has reached US$937, a 30% increase compared with 2016. China Chamber of Commerce in Vietnam has mentioned in their latest newspaper that there’re over 700 registered Chinese businesses.
Growing GDP
The annual GDP in Vietnam from 2000 to 2018 reached 6.3%, though in the second season of 2018 the GDP growth was only 6.8%, it’s higher than China in the same period. Besides, Vietnam has a large pool of young workforce with its population ranked at the top 3 in Southeast Asia, and it’s estimated to be the 8th Asian country with population exceeding 1 billion.
Higher KOF Index
The economy of Vietnam relied heavily on trading. According to the KOF Global Index Report released by Swiss Economic Analysis Bureau, the global index point of Vietnam has exceeded more than average point. In 2015, the KOF in Vietnam has reached 62%, while the average global KOF is 56.65%.
Incentives of Vietnam Government
Since the release of Foreign Investment Law on the 1st, January 1988, Vietnam government has been favoring foreign investments in various policies. In 2017, Foreign Direct Investment (FDI) in Vietnam has set a new record of US$175 billion, while in September 2018, FDI has increased by 6% to US$132.5 billion.
Similarities of Culture
The Vietnamese culture and Chinese culture shared a lot in common. For instance, some traditional Chinese festivals like Spring Festival, Mid-autumn Day and Tom-Sweeping Day were also celebrated in Vietnam. A stroll down the streets in Hanoi you would come across lots of Chinese elements like Duilian, Chinese lanterns, etc.
VCEP industrial park that Sanhua, Huayi and Daotong chose as their home in Vietnam was a Sino-Viet economic cooperation zone. Before 2016 it was a deserted land with only an office building and few residential buildings for workers sparsely dotted along the park. Villagers from nearby villages even started to grown grain there. Though the project of VCEP industrial park has started as early as in 2008, due to unexplained reasons it’s abandoned and delayed for many years, not until the end of 2016 did it start another round of re-plan and construction.
Hai Phong, the northern Vietnamese city where VCEP was located, was the third largest city in Vietnam with proximity of only 230 km to Chinese border. It’s also home to the biggest port in northern Vietnam, and well connected with direct flight to Shenzhen.
Speaking of the sky rocketed number of Chinese businesses visiting VCEP this year, Mr. Zhang, CEO of VCEP, wasn’t as exciting as the statists, “The number of Chinese businesses visiting this year are about three to five times more than previous year, and it’s growing. We’ve happy to see the growing trend as an industrial park developer, however, it’s just the beginning stage, a good beginning doesn’t always mean a good ending.”
Mr. Zhang believed it’s a wise choice for many Chinese businesses to choose Vietnam as the first stop of their “Going Overseas” program as Vietnam enjoyed more advantages of political and economic stability in Southeast Asia. When asked about the challenges ahead, Mr. Zhang smiled, “The biggest challenge for most companies is to conquer their inner fear.”
Uneasiness Behind Hastiness
The hasty decision of investing and setting up factory in Vietnam has planted seeds of uneasiness in Mr. Xia from Sanhua Group. “The biggest risk of doing things in a hurry is lacked of information, before coming to Vietnam we can only get information online, which is proven to be completely different when we arrive. Besides, Chinese businesses in Vietnam are not that united, the facilities of most industrial park are at the early stage far from being mature, which pose great challenges for us to get the right information.”
Though Vietnam and China has been trading for a long period of time, in terms of direct investment, Chinese businesses are still at the early stage which has been a matter of trial and errors. The earliest investors in Vietnam were Japanese and Korea companies. It’s estimated that only 20% of businesses were directly invested by Chinese businesses in industrial parks in Hai Phong, the rests were Japanese or Korea invested businesses. As a result, many Chinese invested companies felt as if they’re in a state of fighting alone, especially when it came to information transparency.
What Mr. Xia worried the most was the level of information opacity would directly affect the overall efficiency from company registration to manufacturing. A case in point was environment assessment. “In China it takes very short time for environment assessment and the overall process is very transparent, back here, I was told it would take at least four months, which is quite mind-blowing.”
Facing with the risks of rushing things within a short time, Mr. Tao, vice GM of Daotong Technology, spoke with great concern, “Things are not going step by step, for example, we started to renovate when the business license is still processing, if we fail at getting the business license, we would risk losing all the invested money in vain.”
For many Chinese businesses taking the leap to expand into Vietnam, low labor cost used to be one of the biggest attractions, however, it’s getting less and less competitive year by year.
With increasing of living standard year by year, the advantage of cheap labor in Vietnam is not as appealing as before. In District One of Hai Phong, the minimum wage has increased from VND 2,7000k (CNY 800) to VND 3,980k (CNY 1,175) in 2018. It’s estimated in 2019 the minimum wage in Vietnam would continue to increase by 5.5% to VND 4,180k (CNY 1,235).
Mr. Tao, who has been working in Vietnam for five years, has agreed that the salary in Vietnam has increased a lot for the past five years. “The salary for employees in management level has increased twice, while the salary for workers has witnessed an annual increase of 10%, though compared with five years ago, we have a larger pool of talents now, and the expertise, efficiency of workers also improved drastically.”
As to government incentives towards foreign direct investments, most are given to high tech companies.
Facing with the overflowing of Chinese factories into Vietnam, concern in Vietnam was growing as it’s believed China might be taking advantages to transfer surpassed manufacturing into Vietnam and exported to United States with the country’s favoring export taxes, which to some extent, might put Vietnamese made products into trouble once US decided to get hands on it. There’s considerable ambiguity about Chinese factories setting up manufacturing facilities in Vietnam.
Regardless of the uncertainties and challenges ahead, Chinese businesses never ceased the pace of progressing. After staying in Vietnam for a month, Mr. Xia return home. When he made way back to Hai Phong again in September, the Investment Certificate, Business License of Sanhua Group were ready in place, next came to assessment of environment, hiring, purchasing equipment, setting up the assembly line, etc. It’s estimated till January next year the factory would be able to start production, however, till now the water and electricity supply inside the factory hasn’t been completed, the plan might be delayed again, said Mr. Xia.
On the contrary, Daotong Technology, as always, rotates at a much higher speed, the factory has started production in October. However, since the Certificate of Place of Origin hasn’t been approved yet, the delivery time was still unclear.
Check the previous chapter about Chinese factories in Vietnam.