By UOB FDI Advisory
- Companies are looking to diversify their global supply chain to minimise business disruption, to manage cost and to access fast-growing consumer markets.
- Vietnam is a popular choice among multinationals because of its low labour cost, political stability and proximity to Southeast Asia.
- Companies diversifying to new locations would benefit from having partners who understand the local market regulations and business practices.
The COVID-19 pandemic has cast a spotlight on how vulnerable the global supply chain can be in the age of outsourcing and offshoring. Faced with the need to prevent the transmission of the COVID-19 virus, countries had to close their borders which in turn led to the disruption of supply chains.
A survey conducted by the Institute of Supply Management (ISM) among US organisations in April 2020 found that 95 per cent of participants experienced a disruption to their supply chain as a result of the COVID-19 outbreak. Respondents reported that the average time taken for materials to be delivered from China increased by more than three times as compared with normal operations. Other markets were not spared, with the average time taken for deliveries from Korea and Europe also increasing by around three times.
In a survey conducted in April 2020 by the Institute of Supply Management, respondents reported that the average time taken for materials to be delivered from China increased by more than three times due to disruptions caused by COVID-19.
While supply chains globally were impacted by COVID-19, the over-reliance on China for global manufacturing has been raised as one of the key reasons for the severe supply chain disruption during the pandemic. According to data released by Resilinc, a supply chain intelligence provider, majority of the world's largest 1,000 companies or their suppliers have factories and warehouses in China.
For example, there were 3,238 high-tech, semiconductor and consumer electronics facilities located in Chinese cities that were quarantined as at March 2020. This is significantly higher than the 13 sites in South Korea. As such, China's lockdown in the first quarter of 2020 affected many companies that depended on China for their operations.
Comparison of the number of facilities situated in quarantined areas in China, Italy and South Korea for the high tech, semiconductor and consumer electronics industries. Source: Resilinc
To build a more resilient and diversified supply chain while maintaining their presence in China, many companies have started to rethink their sourcing strategy. The “China Plus One” supply chain strategy has been touted by industry players as one option to reduce the impact of ongoing US-China trade tensions and future supply chain shocks.
Vietnam: An ASEAN draw for companies
The shift towards a “China Plus One” supply chain strategy is likely to benefit emerging manufacturing countries as companies look to diversify their manufacturing bases to minimise business disruption, manage costs and access fast-growing consumer markets.
In the ASEAN region, Vietnam has emerged as a bright spark. Against the backdrop of protracted US-China trade tensions, the total merchandise trade between the United States and Vietnam has grown exponentially from US$1.5 billion in 2001 to US$77.6 billion in 2019, according to US trade statistics. Vietnam's market share for global electronics exports grew from less than 0.5 per cent in 2010 to four per cent in 2018.
Drawn to Vietnam's labour advantage, athletic footwear manufacturer Brooks Running is relocating its production facilities – along with 8,000 jobs – to Vietnam from China. High-tech companies such as Google and Microsoft have moved some of their manufacturing activities to Vietnam, with Google announcing plans to manufacture its next-generation flagship smartphone – the Pixel 5 – in the country. Meanwhile, Samsung Electronics produces 40 to 50 per cent of its smartphone range in Vietnam.
A local government that acts swiftly and decisively
Vietnam also benefits from having a government that has shown its ability to act swiftly and decisively in managing issues including the COVID-19 pandemic. While the country has faced a resurgence in cases, the Vietnamese Government acted quickly to implement measures such as local lockdowns to contain the spread of the virus. Opting for local lockdowns instead of a nationwide one also indicates the government’s resolve in controlling the epidemic while maintaining economic activity.
In addition to the strong leadership from the Vietnamese Government, the country’s stable political climate, pro-business policies and proximity to both China and Southeast Asia are among the reasons why it remains attractive to global companies.
In the World Bank’s Ease of Doing Business Rankings, Vietnam has made strong progress, rising from the 104th place in 2007 to the 70th spot in 2019. Despite the improved ranking, the Vietnamese Government is not resting on its laurels and has committed to introducing more enterprise-friendly policies to attract foreign direct investment, such as allowing foreigners to own a majority stake in Vietnamese companies.
Vietnam’s intellectual property laws have also been updated to comply with international standards and the country has entered into free trade deals with trading partners such as the European Union (EU).
As Vietnam emerges as a manufacturing powerhouse for the region and the world, the need to trade with Vietnam businesses and to invest into the country has grown. To meet Vietnam's increasing banking needs, UOB was the first Singapore bank that set up a branch in Vietnam in 1995 and opened a foreign-owned subsidiary bank in the country in 2018.
(From left) UOB Hanoi Branch Director Mr Jason Yeo; Foreign Investment Agency Deputy Director Mr Vu Van Chang; State Bank of Vietnam Hanoi Director Mr Nguyen Minh Tuan; Deputy Chairman and Group Chief Executive Officer of UOB Mr Wee Ee Cheong; Singapore's Ambassador to Vietnam, Her Excellency Ms Catherine Wong; Head of Group Compliance, UOB, and Chairman of UOB Vietnam Mr Victor Ngo, and UOB Vietnam CEO Mr Harry Loh at the official opening of the UOB Hanoi branch on Aug 22, 2019. Photo: UOB
Over the past 25 years, UOB has forged strong local partnerships with the likes of Business Association of Overseas Vietnamese, the Ho Chi Minh City Export Processing and the Industrial Zones Authority Business Association. UOB's keen understanding of Vietnam's domestic market, coupled with its extensive regional network and strong product capabilities will help connect businesses with the right investment opportunities and grow their trade and business activities in Vietnam.
Business considerations when investing in Vietnam
Supply chain diversification is a complex process which requires careful review of many factors. In venturing into Vietnam, companies need to be prepared for the fierce competition for skilled talent. While Vietnam has a lower manufacturing cost than China, its smaller population size and lower percentage (12 per cent) of skilled workforce make it difficult to source for skilled workers.
Despite significant investments made over the last few years, infrastructure development in Vietnam hasn't quite kept pace with business growth. In particular, there is a need to upgrade transport and electricity infrastructure to ease traffic jams and to prevent frequent blackouts. According to the World Bank, Vietnam will need to spend US$25 billion a year to keep up with its fast-paced economic growth.
That said, these challenges are not unique to Vietnam but are common limitations faced by many emerging, high-growth markets. As such, it is important for companies to work with reliable partners who understand the local business environment and regulations. By tapping the expertise of these partners, companies will be able to navigate their entry into the market better.
To help companies in their expansion into ASEAN, UOB set up a Foreign Direct Investment Advisory unit in 2011. The unit serves as a one-stop shop dedicated to helping companies set up regional operations in the region, including in Vietnam. We help clients establish connections with the relevant government agencies, trade and industry associations and professional service providers across the Bank's regional network, providing comprehensive business advisory services to support our clients' expansion into new markets.
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