Supply chain diversification benefiting Vietnam

The World Trade Organization (WTO) projects global trade to improve in 2024 and 2025 in its latest Global Trade Outlook and Statistics report released in April, citing resilient supply chains as one of the key factors for this recovery.

The volume of world merchandise trade is expected to increase by 2.6 per cent in 2024 and 3.3 per cent in 2025, after falling by 1.2 per cent in 2023.

Hope for trade stability may be just around the corner. However, experts say that the rebound of global trade and the potentially new era of stability may not equal global trade seen previously as businesses are reconsidering their supply chain management and investment flows amid geopolitical conflicts.

“We’re seeing the world becoming more multipolar instead of focusing on one major destination,” said Nguyen Quang Hai, purchasing manager of TH Group, Vietnam’s top producer of clean and fresh milk.

TH, which is implementing a $1.2 billion high-tech dairy farm and clean milk processing project in the central province of Nghe An. It is also mulling investment expansion plans in not only Asia, but also in the US and Australia.

Aside from companies in the processing, garments and textiles, and toy industries, which are consistently on the hunt for competitive labour and shifting to new markets, companies in the high-tech industry are also making the move.

In early 2020, Apple announced the plan to produce about 30 per cent of its AirPods wireless earphones in Vietnam. Foxconn Group, Apple’s largest contractor, also revealed plans to invest over $1.5 billion to expand its operation in India. During a press conference in December 2023, AI chipmaker Nvidia CEO Jensen Huang said the company would expand its partnership in Vietnam, calling the country “Nvidia’s second homeland.”

Vietnam is on the radar of many foreign companies conducting a diversified plan on supply chains

These shifts capture the trend of attempts made by businesses to improve their resilience that was first prompted by the COVID-19 outbreak and further fuelled by recent geopolitical conflicts.

Policymakers and firm leaders across different industries are pushed to reassess the emphasis on efficiency and cost-cutting that characterised the earlier era of global trade.

“Risk management is now the top priority in supply chain management. We’re seeing security and predictability being given more emphasis than the traditional cost-related competitive advantage,” said Hai of TH Group.

If there is one important lesson for companies after the recent disruptions, it would be the risk associated with being overly dependent on one sourcing plan.

EY’s 2022 survey indicated that more than half of the responding companies are looking to add suppliers. Similarly, in a survey conducted by consulting firm McKinsey & Co., almost 80 per cent of the companies surveyed expressed their intent to adopt dual-sourcing strategies for essential raw materials to enhance the resilience of their supply chains.

“We now emphasise on growing our supply chain,” said Nguyen Ngoc Anh, purchasing manager at Blue Trading JSC, which provides feed addictive, premix minerals and vitamins in Northern of Vietnam.

“We want to expand and diversify our suppliers so that we will always have a second, or even third, option when one fails.”

New manufacturing hubs rising

The diversification trend has given rise to new manufacturing hubs, as companies are looking for new destinations.

“For example, China has taken off earlier than countries like Vietnam or India. But it has used up quite a bit of its potential as the so-called world factory,” said Oh Jinhwan, an international economics and trade professor at Ewha Womans University. “Some parts of production in China by foreign firms will be relocated to the emerging economies gradually.”

A recent survey by the German Chamber of Commerce in China showed that more than half of the companies surveyed are planning to invest more in India. What is more, 37.9 per cent are thinking about increasing investments in Vietnam and 30.1 per cent in Thailand.

Registered foreign direct investment (FDI) in Vietnam reached $9.27 billion during January – April, up 4.5 per cent on-year. The total disbursed sum hit $6.28 billion in the first four months, the highest in five years, according to Vietnam’s Ministry of Planning and Investment.

Mexico saw a registered FDI increase of 48 per cent on-year during the first quarter of 2023 compared to the same time last year, reaching $18.6 billion, according to Mexico’s Ministry of Economy.

Each country has its own advantages to draw in investors. However, the main reason all boils down to two essential characteristics: competitive labour costs and hedging against global economic uncertainties.

As China rapidly became the second-largest economy in the world, the average wage for a Chinese worker also rose. Once the go-to for low-cost production, China is now seeing competition. The monthly average salary for a Mexican working in manufacturing by the end of 2022 was $480, almost half that of a Chinese worker in the same industry, while that in Vietnam stands at only $360.

Besides lower costs, the emerging manufacturing hubs like Vietnam are also seen as more attractive for their improved investment policies.

According to Australia’s Perth USAsia Centre’s report, Australian companies see Vietnam as a promising investing destination for its integration policy in both economic and diplomatic aspects, including its participation in some major regional agreements such as the Comprehensive and Progressive Agreement for Trade Pacific Partnership.

“Vietnam’s hedging and diversifying partnership strategy allows it to maintain a stable political environment amid the uncertainties in the global political landscape,” said Pham Thuy Duong, a Ph.D. candidate in political science at the University of California, San Diego.

New shapes of global trade

With the diversification trend spreading marking the rise of new manufacturing hubs and the unexpected resilience of global trade, experts are directing their attention to the new shapes of global trade patterns.

The International Monetary Fund and the WTO have both warned of a fragmented world economy divided into trade blocs as companies shift away from China.

Analysis from the McKinsey Global Institute’s recent report found that major economies like China, Germany and the US have reduced the geopolitical distance of their trade. Between 2017 and 2023, China’s share of US manufactured goods imports fell from 24 to 15 per cent, reflecting the tensions between the two superpowers.

But on the other end of the spectrum, some said that globalisation is not coming to an end.

“Globalisation is an irreversible process,” said Ly Nguyen Ngoc, lecturer at the Foreign Trade University in Hanoi. “Countries now cannot avoid interacting with each other. They’re like links in a chain that can’t be separated.”

While some economies’ trade may be reconfiguring toward geopolitically closer partners, others are doing the opposite. In the same report, the McKinsey Global Institute noted that ASEAN, Brazil, and India have increased the geopolitical spectrum and geographical distances of their trade as their participation in the global trade is growing.

The institute said that the current diversification trend signals “a more inclusive trading system and economy.”

“Picturing a world in which countries ranging from Vietnam to Poland, India to Mexico, and Venezuela to Egypt play a larger role in global trade,” said the report.

“Diversification is well underway,” said research organisation Rhodium Group in its July 2023 report. “[But] it would not be surprising to see China’s overall share of global exports, manufacturing and supply chains continue to rise, even as diversification away from China accelerates.”

For Vietnam, since its opening doors to the world economy 38 years ago, the nation has reaped significant economic bonanzas from a large network of economic linkages including free trade agreements (FTAs) to which it is a member.

At present, Vietnam has 16 bilateral and multilateral FTAs already inked and entering into force, one FTA under negotiation and one deal whose negotiations will be kick-started soon. They have been helping further deepen Vietnam’s international economic integration in service of its people and businesses.

The total goods trade value of Vietnam last year reached $683 billion, including $355.5 billion for exports and $327.5 billion for imports. In the first four months of this year, total goods trade value of Vietnam sat at $238.9 billion – up 15.2 per cent on-year, including $123.64 billion for exports, up 15 per cent, and $115.24 billion for imports, up 15.4 per cent.

Dorsati Madani, senior country economist at the World Bank in Vietnam, said Vietnam in the long term will continue being an attractive destination for investors.

“Even during COVID-19, FDI still came into the country. Now when conditions are changing very fast, investors still enter Vietnam in greater numbers than other nations thanks to its improved business and investment climate,” Madani said.

“Moreover, Vietnam is an economy quite open to the world economy via a large network of FTAs, with a focus on export-oriented production development.”