Vietnam Shuffle

Vietnam has made made major inroads within the global industrial world in recent years.

Supported by developments to the national infrastructure, agreements in numerous trade pacts, and the fact that higher manufacturing costs in traditional markets, namely China, have opened doors with major corporations, Vietnam’s transition from peripheral to mainstream industrial nation has been swift and successful.

But will it last? With commentators and the business community touting the global trade conflict as a catalyst, China’s ongoing move towards a higher income nation and the deepening ties of Vietnam into global supply chains, questions rightly remain as to whether the country can sustain its new standing as Asia’s rising manufacturing economy.

The answer is clearly yes, but with the caveat that Vietnam cannot afford to rest on its laurels, especially as many nations will look to capitalize on high labour costs in China and geopolitical tensions. 

Why Vietnam, Why Now?

China’s role in the global economy is maturing. For decades, it has served as the workshop of the world, in the process creating one of the greatest economic rises in history and making the leap from low to middle income country in under two generations. While a transformation on this scale has been phenomenally beneficial to China, its people, and its economy, the position of this country is maturing as manufacturing focuses inwards and the country becomes more service-based.

As a result, China is relying less on exports. The trade dispute for the U.S. is only speeding up this transition. Irrespective, China’s traditional role in global manufacturing and exports will change, and its government will drive this change.

This is good news for developing Asian markets, particularly in South East Asia. With the ASEAN nations, Vietnam is poised to be a key beneficiary and to become an even bigger winner from this rotation in China.

A host of factors support Vietnam’s sustained emergence as a globally important industrial market. From where we stand, the key drivers for moving export production out of China to Vietnam are multi-faceted.

Foremost, lower labour costs are supporting the shift. Equally, more affordable land costs are playing a part, while less restrictive trade barriers, straightforward access to new supply chains, improved infrastructure and more industrial policy support, among others, are ensuring a robust foundation for ongoing manufacturing success.

Labour costs, in particular, are a major draw for corporations eyeing Vietnam. Annual salaries of manufacturing workers in Vietnam still remain comparably low on a global basis. At roughly a third of the salary of China equivalents, skilled Vietnamese manufacturing employees provide an advantageous alternative to China.

Furthermore, the country also provides more value than major ASEAN peers, including Indonesia and the Philippines, with the added value of a strategic geographic position.

Making Friends

Besides, the country’s sound economic fundamentals like GDP growth, initiatives including attracting more foreign direct investment and the reality of a stable inflation rate have become key drivers to Vietnam’s competitive position as a serious industrial player. We see institutional policy and reforms as solidifying the manufacturing sector for the longer term.

The Government continues to make heavy investments into infrastructure. According to Asian Development Bank (ADB) projections, Vietnam outpaces every Asian country, with the exception of China, on infrastructure spend as a percentage of GDP. This is translating into national highways, world-class ports, and better equipped airports to support present and future industrial demand.

Policymakers in Vietnam have been instrumental in providing producers with better access to key export markets by signing many bilateral and multilateral free trade agreements (FTA). Continuing to play politics will be pivotal for Vietnam’s rise to remain on course – a fact that is as much recognized by the business community as by policymakers. Unsurprisingly, five deals have been inked within ASEAN, while another six have been signed between ASEAN and its partners including China, the Republic of Korea, Japan, India, Australia and New Zealand – in addition to four bilateral free trade deals.

Why is this significant? Foremost, as the pacts allow for the removal of duties among membership countries. In other words, the aforementioned trade deals will help foreign manufacturers setting up production in Vietnam. Equally alluring, corporations manufacturing in Vietnam will enjoy tax benefits when they export to those markets that the country has signed trade deals with.

In order to shore up Vietnam’s economic future, investment in manufacturing and other industrial facilities has and will need to remain a priority. We don’t foresee any major slowdown in this commitment as the Government has committed to further capitalizing on Vietnam’s unique role as a viable China manufacturing alternative.

Landing on its Feet

The backbone for any emerging industrial economy is available and functional real estate. In Vietnam, this scenario will be no different, and will rely heavily on the favourable fundamentals of the property space.

In 2019, the scales are tipping in Vietnam’s favour. According to CBRE research, industrial land costs in a sample of major cities across China has reached $180 per square meter. Comparatively, in Vietnam, industrial sites are typically ranging between $100-140 per square meter. This is clearly attractive for prospective manufacturers.

Furthermore, the average land rental is increasing 5% to 8% in Vietnam. Reflecting this more modest price rise, rentals at Vietnam’s industrial parks, especially those that have strategic locations in close proximity to key infrastructure, are surging.

For example, the average ready built factory (RBF) and warehouse rental in Ho Chi Minh City (HCMC) is around $4.1 per square meter, per month. At the top of the range, the highest achievable RBF rental in South Vietnam currently reaches $8 per square meter a month from a new RBF campus dedicated to Japanese clients in HCMC.

In the north of the country, the average RBF rentals range from $3.5 to $4 per square meter each month. Highest achievable rent in North Vietnam ranges from $5.5 – $US6 per square meter for options in established industrial parks in Hanoi, Bac Ninh, Hai Duong and Hai Phong.

Ahead of the Curve

Going forward, we project that industrial parks will continue to thrive. Occupancy rates of between 70 – 90 percent will remain standard, as infrastructure connectivity will play a larger role in the occupiers’ location decisions.

In our recent survey, the number of factories in Vietnam named in Apple’s supplier list increased from 16 in 2015 to 22 in 2018; all of which are FDI companies.  Following the same trend, Samsung Electronics Co., Ltd announced last year that it would cease operations in its mobile phone production plant in China. Currently, 29 Vietnamese companies act as Samsung’s Tier-1 supplier. The localisation rate jumped from 34 percent of total product value in 2014 to 57 percent in 2017.

Clearly, this business speaks volumes about Vietnam’s place and reputation as a leading location of industrial production. The good times are expected to continue with the right governmental support, business incentives and corporate interest. For the remainder of 2019 and the full 2020, we predict an increase in industrial property supply across Vietnam – one of the key benefits of production shifting away from China.

New supply continues to come online in both the North and South of the country. The diversification of new industrial parks, manufacturing facilities, and infrastructure shows that Vietnam will enter the next decade in a prime position and further establish itself as one of the major beneficiaries of a rebalancing China and evolving global supply chain.

By Hang Dang, managing director, CBRE Vietnam.