Vietnam might become China's dumping ground amidst US trade war

Dinh Hong Ky, HCMC-based businessman

An executive of a large Chinese tile manufacturing company came to Ho Chi Minh City earlier this year to meet me and propose moving entire plants from Foshan in China to Vietnam.

The company’s plan was to produce goods in Vietnam and export to the U.S. to avoid the tariffs slapped by President Trump.

But after spending half a day crunching numbers, comparing the U.S. tariffs on their products, which might increase further, and the cost of producing in Vietnam, the executive changed his mind.

He said the tariff would only be 10-15 percent whereas moving the plant to Vietnam would increase costs by 25-30 percent. The rents in HCMC and its neighboring provinces are quite high compared to Foshan, while labor costs are higher after factoring in productivity. Data and logistics costs are also too high.

Besides, the company operates nine synchronized lines in Foshan, which can only be moved to Vietnam one by one, which will increase costs.

The following day the executive returned with a final decision: the company will not invest in Vietnam but focus on cutting costs in China.

This is one of the reasons I am not convinced many Chinese businesses are looking to invest in Vietnam to avoid the origin of products issue amidst the trade war with the U.S.

But the story does not end there.

I went to China last month and visited construction material manufacturers in Guangdong, and was shocked by what I saw: they had all adopted the latest technologies.

At Foshan’s tile manufacturing factories, equipment based on robotics and artificial intelligence (AI) is no longer rare. A few years ago, in stark contrast, workers used to work in a sea of dust there.

Changes are occurring in technology and intellectual property compliance in China. Chinese businesses are radically transforming under international pressure, including from the U.S., as the West wants the Chinese government and its businesses to play the global game by conforming to technical standards.

That is when it hit me: Many Chinese enterprises are accelerating the pace of replacement and extinguishing old technologies because of the impact of the Trump-Xi war.

A porter carries goods imported from China at a border gate with China in Mong Cai, Vietnam April 12, 2018. Photo by Reuters/Kham

Upgrading and disposing of old technologies are not something new for the manufacturing sector and China has been doing this for years. But now, caught between reforming and surviving and not changing and perishing, businesspeople have unleashed a wave of reform. Disposing of old technologies is therefore more pressing than ever for the world's factory.

Stepping out of their factories, a question came to my mind: As China rises up the value chain, where do their old low-quality technologies and machinery and the products they produce go?

It made me think of a phenomenon. In the last two years land rents at industrial parks in HCMC and surrounding provinces such as Binh Duong, Dong Nai, Long An and Ba Ria - Vung Tau have risen sharply. Demand from Chinese mainland enterprises is substantial. They are willing to pay very high prices for good locations in the parks. Of course, machinery and equipment, and even human resources are brought from their country.

The owner of a large construction materials manufacturer in Guangdong recently told me that Vietnam is China's second largest market for building materials after the U.S. I am surprised a small market like Vietnam accounts for such a large proportion of our neighbor’s exports.

I was intrigued. Nearly 20 years ago China banned motorbikes and its cheap production lines moved to Vietnam. Is this happening again?

How many of us have seen the big picture? Last week I attended a workshop in HCMC where experts analyzed the opportunities and challenges for the Vietnamese economy and businesses in the context of the U.S.-China trade war.

Many were excited about the prospect of foreign investment moving out of China to other countries, including Vietnam, and opportunities for Vietnamese businesses when the U.S. forces China to play the new game, but also worried about the flow of Chinese investments and goods into Vietnam to avoid the tariffs.

Juxtaposing this with my own experiences, I ask myself: "Are these the only issues for Vietnam?"

For me, the trade war has been affecting Vietnam in a different way and not as currently being speculated. But I have not seen any authorities talk about or provide advice to businesses and the public about the possible consequences of this war.

As a businessman, I expect the government and policymakers to identify the concealed part of the iceberg, share more information with businesses and warn about the possible consequences of the war to prevent the country from becoming anyone’s backyard.

*Dinh Hong Ky is a business executive based in Ho Chi Minh City. The opinions expressed are his own.