Vietnam’s position in the global supply chain

Vietnam cannot replace China's role as the "factory of the world", so it is necessary to find its own way to attract investment.


The first Asian factory of the world's leading toy manufacturer Lego is located in Jiaxing city, Zhejiang province, China. At the end of 2021, Lego Group decided to build the second factory in Asia, which is Binh Duong province, Vietnam. The plant was started construction in 2022 and is expected to go into operation in 2024.


The reason for choosing Vietnam for the 2nd factory in Asia and the 6th factory worldwide, explained by Lego's leaders, comes from the Vietnamese Government's strong development plan for renewable energy, as well as Vietnam's efforts in promoting high-quality investment. Besides, the labor force is also a factor that is highly appreciated by the billion-dollar toy corporation.


However, from the perspective of the South China Morning Post, Lego's decision to set up the next factory in Vietnam instead of China opens up stories about Vietnam's position in the global supply chain as well as its competitiveness for investment attraction of Vietnam, compared to its giant neighbor China.


Vietnam started attracting FDI about 30 years ago, with the advantage of abundant natural resources and a large labor force. During the process of attracting investment capital, Vietnam has added many competitive advantages, through actively signing free trade agreements, reforming administrative procedures or issuing many special offers for foreign investors. Thanks to that, many global giants such as Samsung, Foxconn, Intel, and Pegatron have been present in this country.


In 2018, when the US-China trade war broke out, Vietnam once again became a bright spot, receiving more attention from foreign investors. FDI into Vietnam in 2018 reached USD 35.5 billion, of which USD 19.1 billion was disbursed. By 2019, the figure reached more than USD 38 billion, and USD 20.4 billion was disbursed. Capital from China and Hong Kong into Vietnam increased sharply, reaching 165% and 240% respectively for 2018 and 2019.


Next, large-scale blockades and China's "zero Covid-19" policy also had a positive impact on investment capital flows into Vietnam. After capital flow was slowed by Covid-19 in 2020, Vietnam attracted USD 38.85 billion in newly registered capital in 2021.


Vietnam to replace China?


The most notable event for the global economy in 2023 came at the beginning of the year, when China decided to reopen after 3 years of implementing the "zero Covid-19" policy. This event is considered to help reduce inflation pressure and increase global consumption demand, but it also raises the question of whether countries that are taking advantage of the trend of diversifying supply chains such as Vietnam still receive the attention of foreign investors?


Vietnam's efforts in attracting FDI, through improving infrastructure and improving the business environment, cannot be denied but it seems that Vietnam's advantages are still far behind that of China.


Mr. David Dapice, senior economist at the Ash Center of Harvard University, said that FDI inflows will continue to pour into Vietnam, but will be limited by many factors. It is market capacity and labor force. Vietnam has a population of only 7% of that of China, so it will only take on a part of a much smaller supply chain than the country of billions of people.


In fact, Vietnam's manufacturing industry, due to the lack of a complete industrial chain, is heavily dependent on China for its input. Vietnam can only handle a few links in the production chain, but cannot have a complete manufacturing industry like China.


In addition, unskilled labor is also a weakness of Vietnam if compared with the world's second largest economy. Only 11% of the workforce in Vietnam are skilled workers, only two-fifths of China's 26%.


Dr. Le Hong Hiep, an expert at the Institute for Southeast Asian Studies (ISEAS), also acknowledged that Vietnam cannot replace China to become a global factory. However, in the long term, the ASEAN region can do this.



Source: VietnamCredit

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