Closing doors and opening windows
This momentum was furthered by COVID-19, with restrictions in China hampering production, which led global manufacturers to seek a more stable location for their operations. It also helped that Vietnam’s authorities prioritised vaccination over lockdown, helping the country emerge relatively quickly from the pandemic. As a result, it was one of a select group of nations to register growth in 2020.
From a supply-chain perspective, Vietnam’s geographic position is also advantageous. The country has a land border with China to the north and Cambodia and Laos to the west. More to the point, it can access Thailand via the Gulf of Thailand; and the Philippines, Indonesia, and Malaysia across the South China Sea. Significantly, its labour costs are the fourth lowest in Asia, behind the Philippines, Cambodia, and Myanmar.
Success breeds success. Vietnam’s gross domestic product (GDP) growth is among the highest in the ASEAN bloc (beaten only by Cambodia) in 2022. GDP growth this year is expected to touch 6.3%, according to the Asian Development Bank. And while other currencies fell in value against the US dollar – the Thai baht lost 9.2%, and the Korean won dropped by 8.5% – the dong held firm in 2022, declining by only 3.5%.
Lego goes carbon neutral in Vietnam
If proof were needed of Vietnam’s success, November 2022 saw Lego begin the construction of a US$1.3 billion factory in Binh Duong Province, around 50km from Ho Chi Minh City. The project, which will be the Danish group’s first carbon-neutral manufacturing plant, is expected to generate an estimated 4,000 new jobs. Production at the 44-hectare site is due to start in 2024.
The Vietnam base also bolsters Lego’s global network, which gives the company what it hopes will be several advantages. For instance, it allows the business to react more efficiently to any changes in demand. Moreover, it trims Lego’s supply chain, meaning the environmental effects of moving products and materials over extended distances will decrease.
“The government’s plans to invest in expanding renewable-energy production infrastructure and a collaborative approach to working with foreign companies seeking to make high-quality investments were among the factors in our decision to build here,” said Lego’s Chief Operating Officer, Carsten Rasmussen.
A combination of roof-based solar panels and a nearby solar farm will power the new premises. Lego believes this will deliver sufficient electricity for the factory’s needs.
The plant will also be constructed to international sustainable criteria. Lego is seeking a minimum building standard of LEED Gold, the most widely used green-building rating system, across the entire site.
Given public and private support, Vietnam is already a regional pioneer in green power, according to a recent article in the journal Energy for Sustainable Development. This has been underpinned by generous economic incentives such as feed-in tariffs, tax exemptions, and investment subsidies.
Apple eyes a further shift in production
Tech giant Apple already has 11 partner factories in Vietnam, employing as many as 160,000 people, where it currently assembles AirPods, iPads, and HomePods.
This trend is accelerating. At the beginning of January 2023, Chinese display manufacturer BOE Technology, which supplies both Apple and Samsung Electronics, said it intended to invest up to US$400 million to construct two factories in Vietnam.
Other high-tech companies moving out of China include Apple suppliers like Foxconn and Luxshare, as well as LG, Xiaomi, Pegatron and Wistron.
These moves have, to some extent, been triggered by challenging conditions in China. November saw a clash between employees and security personnel at the world’s largest iPhone factory in Zhengzhou, Henan. The previous month, the same plant was hit by a COVID outbreak. China’s ageing population also makes the country less attractive to cost-conscious manufacturers. In 2019, around 250 million people in China were aged 60 years or above. By 2040, that number is expected to almost double to 402 million, representing nearly a third of the population.
And in what could be a publicity coup for Vietnam, there are reports that the assembly of some MacBooks is being moved to Vietnam’s Bac Giang province. Situated in the country’s north, the region allows for easy transportation of materials and parts from Chinese to Vietnamese factories.
China used to be called the factory of the world, but that title has been slipping. Vietnam is in a prime position to take the crown. Indeed, it has seen far-distance trade expand by around 360% since 2014. Underpinned by an attractive cost base and supportive government policies, Vietnam’s progress is unlikely to be dented by China’s post-pandemic reopening.
Another pivotal moment for Vietnam
We mentioned that 2007 was a turning point for Vietnam. The same could be said for 2023 vis-à-vis inward investment. The entry of high-profile companies into a market is often a catalyst that encourages other businesses to make similar moves. By way of illustration, January 2023 saw licenses granted to over 150 new projects funded by foreign investment. In monetary terms, this represents over US$1 billion of inward capital.
It is said that momentum demands movement. In this case, the direction of travel is clearly towards Vietnam. If you want to know more about our journey and Kenno’s Asia Top Picks Fund, please do not hesitate to reach out.
Email: ir@kennogroup.com