Economy, Talking Point

The diversification trade

Analysts mull ramifications of Vietnam’s exports now surpassing Shenzhen’s

Vietnam-Factory-w

Factories in Vietnam have been picking up business from China’s ‘workshop of the world’ in Guangdong

Not many Chinese pay too much attention to what is happening in Vietnam. But the Southeast Asian country did make unwelcome headlines in February after beating China 3-1 in a qualifier for the football World Cup, which eliminated any chances of the Chinese reaching the finals of the tournament in Qatar later this year.

While Chinese football fans are accustomed to embarrassing setbacks for their men’s national team, the reversal was still difficult to stomach – and not only because Vietnam has been a footballing minnow for decades.

The Middle Kingdom was a suzerain state to Vietnam for more than a thousand years. And in more contemporary times the Chinese have liked to think that they enjoy a sphere of influence over Vietnam as a communist ‘big brother’.

Away from the football pitch there has been a little more discussion of Vietnam in the Chinese media of late, however. The reason being that the country’s exports surpassed those of Shenzhen in value in the first quarter this year.

In fact, Vietnam’s exports were nearly double those of Shenzhen’s last month, the local media noted, as the Southeast Asian country profited from a shift in global supply chains.

It might not sound like much of an achievement for a country’s exports to exceed those of an individual city. But commentators are wondering if the news is a signal of a broader trend as Vietnam starts to emerge as more of a manufacturing rival to its much larger neighbour.

How much more has Vietnam been exporting than Shenzhen?

Shenzhen’s exports declined 14% in March on the year to Rmb120 billion ($18.3 billion). That disappointing monthly performance capped first-quarter exports from the southern Chinese powerhouse at $62.1 billion of goods, which was 2.6% lower than the same period last year.

In comparison, Vietnam’s exports jumped 14.8% in March on the year to $34.7 billion. In the first three months its exports grew 13% to $89.1 billion.

That means Vietnam’s sales of goods overseas have not only surpassed Shenzhen – the biggest exporter among all of China’s cities for the past 29 years – but done so by a sizeable margin of $27 billion in the period.

That said the excitement among Chinese journalists over the ‘news’ surrounding this export data reveals something else as well: the bulk of China’s media hasn’t been paying as much  attention to the rise of Vietnam’s robust export economy as it warrants and thus overlooked that this is not the first time it has overtaken Shenzhen. According to Jiemian, a more data-diligent Chinese news portal, exports from the Southeast Asian nation exceeded those of Shenzhen in early 2019. And in 2021, they topped $336.2 billion for the full year, exceeding Shenzhen’s $292.7 billion.

Isn’t that because Shenzhen’s economy is suffering from a short-term glitch?

Shenzhen’s economy grew 2% in the first quarter, the slowest growth seen by any of China’s tier-one cities, including Beijing, Shanghai and Guangzhou.

The resurgence of the Covid-19 pandemic in major cities, including Hong Kong, has clearly taken a toll, not least in the stultifying economic effect from the Chinese government’s ‘zero tolerance’ approach to containing infection rates.

The latest outbreak in southern China predated that of much of the rest of the country, happening earlier in the first quarter. Economic activity at ports in Shenzhen and Guangzhou was heavily disrupted. Shenzhen was forced to lock down the entire city for a week in March (the economic impact in Shanghai, which went into citywide lockdown in April, will be seen more clearly when second quarter growth figures are announced).

Every year huge amounts of goods are exported from Shenzhen and Guangdong through Hong Kong before being shipped to other countries in the world. This cross-border trade accounts for more than a fifth of Shenzhen’s exports. But the disruption in logistics has also weighed heavily on shipments from other southern Chinese cities, with container ports in Shenzhen, Guangzhou, Dongguan and Foshan all reporting throughput declines in the first quarter.

Countries that have opted to ‘live with Covid’ and lift the majority of their anti-virus restrictions have been less inhibited in economic terms. Supply chains in Southeastern Asian countries such as Vietnam have been operating at fuller force, winning some of the business that might otherwise have been taken by factories in China. The focus now is whether some of these changes will move from being cyclical to structural, as contracts start to shift away from Chinese cities for the longer-term.

Can Vietnam replace Shenzhen as ‘the world’s factory’?

Vietnam is a country with a population of nearly 100 million people, while Shenzhen has about 17 million residents. The latter accounts for 40% of exports from Guangdong province or about 9% of China’s total. But in absolute size its economy is $480 billion, still much larger than Vietnam’s $350 billion.

Vietnam’s capture of a growing share of exports from the region is partly a result of Shenzhen’s success in moving away from lower-value activity on the manufacturing side  and its supply chain too. Shenzhen’s focus has been more on transforming into China’s leading tech hub over much of the last decade (Huawei, ZTE, DJI and Tencent are all headquartered there, for instance).

That transition has also made the city a more expensive place to do business. In comparison, Vietnam has been winning overseas orders thanks to its lower costs in key areas like land and labour. Factory owners need to pay about $320 a month to hire a worker in a factory in Vietnam, National Business Daily reported. The monthly cost of similar labour in Shenzhen now exceeds $900. The disparity seems likely to widen, too, as China struggles with an aging society and shrinking workforce, while Vietnam enjoys the economic benefits of a younger population.

The shift in the global supply chain to Vietnam is accordingly  more evident in labour-intensive industries such as textiles, footwear and the assembly of electronics. That means that Vietnam isn’t usually competing with Shenzhen so much anymore for international orders, but more with inland provinces in northwestern China such as Guangxi, which have been trying to persuade more manufacturers to relocate from China’s coastal regions.

“The transfer in activities isn’t for the entire supply chain of specific industries, but some of the segments of the production process which are less dependent on the complete supply chain and require more labour,” notes Shi Zhan, a professor at the Chinese Foreign Affairs University, in a 2020 book about the future of China’s manufacturing industry.

In short, Shi sees the impact as a spillover effect rather than a fuller relocation of manufacturing capacity to nearby rivals. The wide range of activities and excellent supporting infrastructure in China’s supply chain makes it difficult to copy in other countries, Shi argues, which protects it from fuller competition from rival locations.  

CBN, a newspaper, claims further that the rise of Vietnam as a leading exporter hasn’t had a damaging impact on China’s export trade. In fact, the two economies have been able to complement one another. Vietnam is now importing huge amounts of materials and parts from China for assembly exports, for instance. Bilateral trade between the two economies jumped nearly 20% to $230 billion last year, and China is now Vietnam’s largest trade partner.

Some of that relationship was highlighted in the Vietnamese press this week in reports that Vietnamese factories are unable to complete orders from international customers because materials have not been shipped from China for much of the last three months because of Covid-19 lockdowns.

Can Vietnam become more of a challenger?

In the short term, exporters in other markets are benefiting from the restrictive conditions across the Chinese economy. “For the first time, I see companies looking to other Asian countries for their sourcing. That means it will be more expensive, because in many areas you cannot simply replace the extremely efficient Chinese cluster. But more expensive sourcing is better than nothing,” warned Jörg Wuttke, head of the EU Chamber of Commerce in Shanghai, in an interview late last month.

Over the longer term, Vietnam will hope to follow a similar path to Shenzhen in upgrading its economy, however. After all, Shenzhen has proved that economic miracles can happen – and at lightning speed, in its case. Not that long ago the city had a reputation for low-quality manufacturing and a copycat culture known as shanzhai (see WiC1). Now it is home to advanced manufacturers such as Huawei and BYD and it is also nurturing a growing herd of unicorns in the tech world, many of them in technologies of the future like autonomous driving.

Vietnam has taken note of some of this success and tried too to emulate it with economic reforms of its own (known as doi moi the idea encapsulates an effort to “innovate” via a “socialist-oriented market economy”). The strategy has also seen the creation of special economic zones in another throwback to Shenzhen’s path to success. 

There are a few indications that the first Vietnam firms are moving up the value chain. Vinfast, the electric car unit of the country’s leading property conglomerate Vingroup, is reportedly planning to go public in New York, for instance, with plans to grow its business in the US as well.

“Following the relocation of low-end assembly to Vietnam, the manufacturing of core parts may follow the same track as well. The production chain in Vietnam will be gradually developed,” Jiemian, a news portal in China, predicted. “This was exactly what happened in Shenzhen just 20 years ago.”

“The rise of Vietnam should warrant our attention,” warned Hong Kong’s Takungpao, another newspaper. “Because of the restructuring of the global supply chain triggered by geopolitical tensions and security concerns, this is not only a matter of a city [Shenzhen] or a province [Guangdong]. It is about the future of our entire nation.”

What’s the impact of China’s wider relations with Vietnam?

The relationship has sometimes been turbulent in recent times. There was a border war in 1979, with thousands of deaths on both sides. In 1988 there was another deadly clash near the Spratly Islands, where 70 Vietnamese sailors were killed. A series of other disputes over maritime territory since then have provoked anti-China riots in Vietnamese cities too (see WiC237).

Despite sharing similar Confucian heritage, as well as a more recent overlap in the socialist ideologies of their respective ruling parties, the two countries don’t enjoy the warmest of ties and Vietnam is one of the least China-friendly nations in ASEAN, despite efforts from Beijing to improve the relationship in a bid to counter American influence in the Pacific.

Instead the emergence of a Vietnamese export economy has coincided with a period of improving relations between Hanoi and Washington, both of which are looking for a bulwark against Chinese influence in the region.

The tariff war with China launched by the Trump administration has also had an impact in accelerating the decisions of multinational companies to move some of their supply chain to neighbouring economies. Some companies were already doing so in Vietnam, including Nike and its manufacturing contractors, which had switched a growing proportion of orders to Vietnamese suppliers. Samsung is another of the leading multinationals to relocate some of its production to Vietnam in a supply chain strategy that has been christened as ‘China plus-one’.

More recently, Chinese media outlets have been speculating that another important investor will soon be arriving in Vietnam in the form of Li Ka-shing, who has been widely dubbed as Asia’s richest man for decades.

The speculation started after the Saigon Times reported last month that representatives of Li’s CK Asset Holdings, Japan’s ORIX Corporation and the leading local conglomerate Van Thinh Phat had met with leaders of the Vietnamese government.

The meeting was to “sound out investment opportunities” in the post-pandemic period, the newspaper said. But it raised eyebrows at a time when Li, the largest foreign investor in the UK, has been selling down parts of his infrastructure holdings  in Britain.

Other members of the Li family have been active in ASEAN for some time already. The patriarch’s younger son Richard Li has a $900 million stake in Indonesia’s biggest tech firm GoTo via an investment he made in e-commerce platform Tokopedia in 2017. GoTo went public in Jakarta last month as it gears up for competition with Grab and Sea, e-commerce platforms that focus on Southeast Asia and are also backed by Chinese internet firms such as Tencent.

Li junior’s FWD Group is also a fast-growing insurer, with businesses in 10 Asian countries including Vietnam.

In a meeting with Vietnam’s deputy prime minister Vuong Dinh Hue in 2019, Richard Li was also urged to invest in green bonds and renewable energy projects in Vietnam. FWD will have more financial firepower to do that if it pulls off a successful IPO in Hong Kong this year that could raise about $1 billion.


© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.