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CBRE Press Releases Production Shift From China To South East Asia Countries Trends And Benefits To Vietnam Industrial Market
 

Ho Chi Minh City (25 April 2019)

In 2018, CBRE recorded an increase in production shifting from China to alternative locations in Southeast Asia, including Vietnam. While this trend is not new to many as cost of production in China continues to rise which makes relocation seem like a financially viable choice to many manufacturers, there are some other major drivers that can be worth highlighted.

 

In fact, according to a recent survey conducted in November 2018 by the UBS Evidence Lab which collected responses from 200 manufacturing companies with significant export business or supply to exporters from China, key drivers for moving export production out of China include:

 

 

And relative to the size of their economies, Asean economies, especially Vietnam may be well placed to benefit from this production shifting given Vietnam key economic fundamentals e.g. GDP growth, foreign direct investment, inflation remain positive while the country continues to invest heavily into infrastructure and help manufacturers to get better access to key export markets by participating in several bilateral and multilateral trade agreements. These drivers are on top of Vietnam’s competitive land acquisition cost and labor cost (versus that in China and other neighboring countries) which have been underlying drivers for China plus One that several surveys that pointed out. 

 

Government heavy investment into major infrastructure projects

 

Vietnam government has spent billions of dollars to improve its infrastructure to help attract foreign investment. In fact, accordingly to statistics by Asian Development Bank & Bloomberg, Vietnam’s public and private sector infrastructure investment averaged 5.7% of GDP in recent years, the highest in Southeast Asia.

 

 

This direction has proven successful as improved major infrastructure projects such as new highways, expanded ports and airports, have enticed developers to follow with industrial parks being established or expanded in close distance to these infrastructures, and, in return, developers can offer this new infrastructure as part of their offering to attract occupiers from China (as highlighted in the above survey e.g. better infrastructure).

 

 

 

The table below indicates the number of new infrastructure projects across Vietnam & its implication to the number of industrial parks in close distance. Based on CBRE findings, these industrial parks achieved good occupancy with commitment from several multinational in which infrastructure connectivity played a major role in these occupier’s location decision.

 

Regions

Projects

Industrial park developments

Notable manufacturing projects attracted to these areas

Average occupancy (%)

North Vietnam

Hai Phong – Ha Long – Van Don highway

  • Amata @ Quang Ninh
  • VSIP @ Hai Duong
  • Thang Long 2 & 3 @ Hung Yen and Vinh Phuc
  • Dinh Vu, Trang Due and VSIP @ Hai Phong

 

LG Electronics & LG suppliers

Samsung Electronics & Samsung suppliers

Kyocera Milta, Panasonic, Nestle,Sumiden, Nikkiso, Toto, Fuji Xerox, Bridgestones, Chevron, Puma Energy, Idemitsu, Shinetsu

70% - 90%

Hanoi – Hai Phong highway

Hai Phong international container port expansion

Noi Bai airport expansion

Cat Bi airport expansion

Van Don new airport

Central Vietnam

Danang – Quang Ngai highway

  • VSIP Quang Ngai
  • Chu Lai – Truong Hai campus @ Quang Nam
  • VSIP Nghe An
  • Hemaraj Land & Development in Nghe An.

 

Truong Hai Automotive & its suppliers

URC Central, Liwayway, King Maker Footwear, Maystar Footwear, Xindadong Textiles, Freetex, Properwell.

63% - 90%

Danang airport expansion

Lien Chieu & Tien Sa port expansion

South Vietnam

HCMC – Long Thanh highway & national road 51 expansion, Hanoi highway expansion

Industrial hub with several industrial parks being expanded in Hochiminh City (One Hub Saigon @ Saigon High Tech Park), Dong Nai (Amata Express City), Binh Duong (Mapletree, VSIP3,

Warburg Pincus – Becamex) and Long An (CFLD Industrial Township)

Intel, Samsung CE, Bosch, Nidec, Lixil,  Schneider Electric, SMC, KYC, Bayer, Cargill, Pepsi, Nestle

80% - 90%

Ben Luc – Long Thanh highway

Ben Thanh – Suoi Tien metro line No1

Hiep Phuoc port expansion

Cat Lai port expansion

Source: CBRE Vietnam

 

Vietnam active participation into bilateral and multilateral trade agreements & US – China trade war acts as a PUSHOVER

 

Vietnam have signed many agreements, including bilateral and multilateral agreements, with many nations. These include five free trade agreements within ASEAN, six more others with partners, including China, South Korea, Japan, India, Australia and New Zealand and four bilateral free trade agreements, including Vietnam – Japan FTA, Vietnam South Korea, CTPP and Vietnam – Europe FTA which expected to be signed in 2019. 

 

Key benefits from these trade agreements is that they allow removal of duties among membership countries which help attract more manufacturers to set up production in Vietnam to retrieve tax benefit when they export to those markets.

 

U.S. tariffs upon China coming on the on-going trade war between these two countries is equivalent to a scenario of Vietnam essentially possessing a free trade agreement with the US and Vietnam also poses a LOWER RISK TO TRADE WAR than China.

 

 

Under the assumption that all Chinese products would be subject to an additional 25% tariff, when Chinese products are hindered from export via that level of tax, effectively it is equivalent to a scenario of Vietnam essentially possessing a free trade agreement with the US. It also means, in the short term, that Vietnam key exports like textile and garment, footwear, mobile phone, consumer electronics, wooden furniture, fisheries, bags, suitcases, and machinery could find better access into the US. By reviewing the tariffs list by product type, we see so far that TVs, mobile phones and several wearable technology items are not yet included in the current tariff list and occupiers in these sectors, especially BIG OCCUPIERS would look to relocate part of their supply chain to Vietnam to mitigate the trade war risk as well as to tap on the country remained competitive cost.

 

  • Apple production in Vietnam: The number of factories in Vietnam listed in Apple supplier list increased from 16 in 2015 to 22 in 2018. All of them are FDI companies. We noted that recently an Apple supplier (GoerTek) decided to move its AirPods production base (wireless earphones) to Vietnam.

 

  • Samsung production in Vietnam: Samsung Electronics Co Ltd, the world’s biggest smartphone maker, said late last year it would cease operations at one of its mobile phone plants in China. (Source: Reuters). Localization rate jumped from 34% of total product value in 2014 to 57% in 2017. Currently 29 Vietnamese companies act as Samsung’s Tier-1 supplier (target: 2018: 35, 2019: 42, 2020: 50).

 

  • LG Electronics Inc said it would stop producing smartphones in South Korea and move manufacturing to Hai Phong, Vietnam. The move will boost annual production capacity of its smartphone plant in Vietnam by 83 percent to 11 million handsets from the second half of 2019 (Source: Reuters).

 

In closing, looking at the remainder of 2019 and for the full 2020, CBRE sees an increase in industrial supply across Vietnam to benefit from this production shifting from China.

 

To well position themselves to cater to increasing demand, foreign developers would look for local partners with experience and big land bank to help fast track their market penetration as recently shown in a joint venture between Becamex and Warburg Pincus to form BW Industrial that can offer ready built & built to suit factories and warehouses in strategic locations in Vietnam e.g. 2 million sqm in 8 different sites in 5 key industrial cities including Bac Ninh (North Vietnam) and Binh Duong (South Vietnam). Also, as market and occupiers are getting more sophisticated, developers would need to provide a variety of products including, land lease, ready built factory & warehouse, built to suit facilities and Sale & Lease Back to bring more value to their clients.

 

For ready built factory in certain strategic locations, CBRE also sees that products specification can evolved from traditional and conventional single story to multiple floors factories, ranging from 02 floors to 6 floors. While high rise stock in the market is still limited, this could be a new trend as Vietnam desires to attract higher technology and light industries which demand high spec quality industrial spaces.   

 

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