This is China! BLOG

China Plus-One in Vietnam, too?

Chris Devonshire-Ellis at Dezan-Shira Associates recently filed a report in one of the company’s online publications, China Briefing News, entitled “Corporate America’s China Plus-One Strategy.” During a round of speaking engagements in California – ostensibly about China business issues – he encountered overwhelming concern about further investment in China and alternatives to investing solely in China:

“One entrepreneurial businessman I met for martinis in the Bellagio was telling me China has gotten too expensive, and certainly now in Beijing, where he’s currently based. “Tianjin…” he said, “I need to consider relocating to Tianjin” referring to the major, yet somewhat shabby port city just 100 km east of Beijing. “Or failing that, Vietnam. I passed through there on my last Asia trip and it’s looking promising.”

During the conference circuit this past year I myself saw a clear saturation of American companies invested in China; the overwhelming majority already had interests in China: factories and/or supply chains. This past year I mostly spoke at conferences on investment conditions in second- and third-tier cities in China. Vietnam has come up in discussions, but for me typically off-circuit. Still, the other overwhelming fact I saw was that the majority of American companies with factories in China were locked within a 150km radius of the major cities in China: Beijing, Shanghai and Guangzhou. Now, that’s not a lot of China they’ve exploited as manufacturing bases. However, American companies in particular are notoriously uptight about their access to McDonalds and Pizza Huts and Starbucks coffee as infrastructure starters.

However, Chris’s observation is accurate about the increased costs of doing business in China. For instance, along the eastern seaboard everything from food through utilities through staff seems monthly to be becoming more expensive. In the interior of the country, an immature infrastructure can make logistics – especially for export markets – more expensive than basing an operation in Waigaoqiao Free Trade Zone in Shanghai. Also, the scarcity of qualified local Chinese professionals in China’s interior adds further expense and headache to export-led companies that settle inland.

“For many, the job of China expansion is done. The push into the inland regions there is proving financially unattractive. Other Asian destinations offer coastal facilities and in some cases demanding and growing middle class consumers on a scale that outstrips the Chinese. Why, after all, would you want to locate a new export manufacturing facility inland in China and away from the increasingly expensive coastal cities of Shanghai and Guangzhou, when you can have exactly the same plant slap bang on the coast in Vietnam or India, with an English speaking workforce and better tax investment incentives? You wouldn’t, and the savvy American boardrooms and entrepreneurs know this.”

What many of these manufacturers do not seem to realize is that though it might sound logical for them to put an operation in Vietnam because everyone else is talking about it, Vietnam is essentially where China was in its investment development curve ten to fifteen years ago, by all accounts. Whether infrastructure, staffing or logistics, Vietnam has a long way to go before it reaches the same level of sophistication as China currently has as a manufacturing base. Vietnam will be alluring predominantly to export-driven assembly MNCs like Intel with its billion dollar assembly plant in Ho Chi Min City, and to businesses like Dell and HP, which are eagerly eying the assembly-labor pool in the country. Meanwhile, Taiwan has had nearly 3000 small- and medium-size operations in Vietnam for 20 years, mostly in the South, according to the Taiwan External Trade Development Council. Now, larger Taiwanese assembly plant investment is seeing its way into the country , with Foxconn and Compal publicizing potential commitments in the billions of dollars. The South Chinese textile manufacturers - mostly Hong Kongese - blocked by American import quotas, have set up shop in the Southeast Asian nation, too.

Vietnam will, though, have a more difficult time than China has had in moving up the production value chain for precisely the same reason China is becoming less attractive to American companies: too many people becoming wealthy too quickly. The key to China’s rapid rise and success to date has been its huge potential consumer market – always has been, always will be (remember the old adage about adding an inch to every Chinaman’s sleeve). It’s the potential market size that has pulled the Western companies to China in the first place and that locked so many foreign companies into joint ventures with Chinese companies in which the Westerners had to transfer technology (for instance car makers like Ford and GM). Such technology transfers – and outright thefts of technology - have enabled China to rapidly move up the value chain, and so create a middle class that has imported inflation from the West.

The Vietnamese market will never have the same allure as China’s; India’s does, but India has its own investment karma that will eventually slow Foreign Direct Investment (FDI) momentum into the subcontinent. Indeed, Vietnam’s population of 85 million is only ten million larger than all of China’s Jiangsu Province, next door to Shanghai. Further, Vietnam’s immature transportation infrastructure and logistics industry will not place it as a logical platform from which to export to the two largest consumer markets in the world: China and India. Those markets will be best served from within each country.

Ultimately, Vietnam - as India has already become, and as Beijing and then Shanghai had been – will be just another lemming-run. Likely, by the time American companies have bidded up the cost of doing business in all of the Asian developing countries - say, over the next twenty years – they’ll find the United States , with its hollowed-out manufacturing sector and reformed health care system, an attractive base to which to return to export goods to rich Asian countries. Like China and India.

Bill Dodson
SUZHOU, China

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