Vietnam is a key beneficiary of China+ manufacturing strategies due to close geographical proximity and wider regional/global connectivity, writes Cushman & Wakefield Vietnam in its "Strength through diversification – Opportunities across Asia Pacific" note.
Aside from its strategic location, Vietnam remains cost-effective with significantly lower labour costs compared to China. Further benefits comes from a balanced mix of high value manufacturing such as electronics and low value manufacturing such as garments, footwear and food.
Southeast Asia is gaining export global market share, albeit at a gradual and steady pace. Nonetheless, first-mover advantages are still available, and the region will continue to benefit from several catalysts such as increasing consumption growth due to favourable demographics, higher regional trade due to regional economic growth as well as trade agreements such as the reegional comprehensive economic partnership, which would cut tariffs on most goods traded between member countries.
Industrial rents in greater Hanoi are 40% cheaper than Tier 1 cities in mainland China
Mainland China has made rapid advances in its manufacturing sector, in part spurred by technological development and automation but also supported by increasing labour costs, which on average have risen 10% per annum over the past decade. These factors, together with government policy such as “Made in China 2025” and a greater focus on sustainability, have driven a marked shift to higher order goods production and the development of a “modern industrial system”. For example, mainland China has taken a leading position in the production of electric vehicle batteries, photo-voltaics and quantum sensors.
This progression in mainland China is providing opportunities across the region, much of which first emerged in the mid-2000s and was directed initially toward South East Asia and now also to India. This originally was driven by cost pressures, with these markets offering the combination of comparatively less expensive labor and real estate costs; factors that are especially important for lower-order goods production, where cost pressures are a much more significant input variable. In USD terms, industrial rents in greater Hanoi are 40% cheaper than Tier 1 cities in mainland China, while markets in India are over 50% cheaper.
These gains extend to Tier 2 cities in mainland China, though with a reduced margin nearer 5% for Hanoi and 25% to 40% for Indian cities. The impacts of this transformation are now becoming clearer, with China expected to soon account for less than 50% of low-cost imports to the U.S. in 2023 for the first time in a decade. Vietnam has been a key beneficiary, which has doubled export volumes to the U.S. over the past five years and tripled them over the past decade, though India and Malaysia have also grown export share.
Manufacturing sector growth in these markets has not just been due to the lower cost base. The need for diversification in supply chains, not least due to Covid-related bottlenecks, as well as supportive government policy have also contributed. In India, the Modi government’s “Make in India, Make for the World” is a major policy drive to grow manufacturing’s share of GDP through reducing reliance on imports but also driving export growth. Increasing industry specialisation has also played a contributing role. Together, these factors suggest there are multiple options for developing new hubs across the region.