Do Vietnamese enterprises really benefit from the Trade War?

Export to US: Vietnam vs. China: 

Vietnam has a similar export manufacturing capability with China. There is a strong move to Vietnam  from our review of the top 4 US import items: 

Vietnam has a quite similar export manufacturing capacity with mainland China. For China, top 4 export items to the US including Electrical Machinery & Equipment; Machinery; Furniture; and Clothing represents 61% of total export value while it is 65% for Vietnam with the same items.

Given this similarity and the geopolitical landscape, the trade ward between US and China has resulted in a shift of import orders from China to Vietnam by the US importers. This happened at all four main import items especially Electrical Machinery & Equipment where import from Vietnam witnessed 87% growth over the first five months of 2019 compared to the same period last year while it is a decline of 13% with China, our data showed.

Export of Clothing (main items):

However, the main exporters are foreign-invested enterprises (FDI). Local companies only accounted for a small proportion of Vietnam’s export to the U.S. For example, for Clothing, Vietnamese companies only accounted for 16% of the export value for the last 12 months.

Although export value grew exponentially, it is mostly attributed to FDI companies based in Vietnam. From our daily business in helping our clients penetrating Vietnam, We observe a strong move by big players such as from South Korean and Japanese companies and especially Chinese (mainland and Taiwan) have established their facilities Vietnam to take advantage of the country’s open policy and FTAs.

South Korean clothing manufacturers is the biggest winner of US – China trade war, with 143 South Korean companies accounting for approx. 50% of the export value. Most of them are subsidiaries of giant South Korean OEM manufacturing corporations such as Hansoll, Sae-A, Nobland and Hansae. These corporations entered Vietnamese in early 2000s and have developed well-established supply chains. Some companies such as Hansae and Nobland even opened supporting factories such as fabric dyeing factory, packaging factory in Vietnam to support its main production.

Local companies’ presence in export remained modest at 16% throughout June 2018 – June 2019. Only prestigious local manufacturers such as Ha Phong, Gia Phu, Song Hong, L&T, etc. have sufficient capacity and experience to approach foreign buyers. The majority of Vietnamese companies are still small-sized and do not meet foreign buyers’ requirements regarding quality, quantity and cost.

Export of phones and parts:

It is clearer in another major export component: Phones and Parts. Almost none Vietnamese firms involved in the value chain

South Korean and Taiwanese companies contributed 98% of Vietnam’s total export of phones and parts, whose majority is composed of export from Samsung and Foxconn. Exponential growth (87%) of export value of electrical machinery, equipment in first 5m 2019 was also thanks to these two corporations. Samsung and Foxconn entered Vietnam a long time before President Trump initiated US – China trade war. To avoid high tariffs, these two corporations have cut production in China and raised their production output in Vietnam.

Vietnamese companies only contribute indirectly to export growth: Without enough raw materials, skills and supply chain, most local companies only manufacture mobile phone parts and accessories to supply for Samsung and Foxconn. Benefits to Vietnam is also very limited at increase in tax revenue, employement rate, etc.

Key Players in Furniture and Machinery sector:

Furniture and Machinery: again, top players by revenue are foreign invested. Each has a Vietnamese company on the top 5

Most companies that registered the highest growth value are from Greater China, United States and Japan. The production of these companies mostly serve foreign market; thus, their performance is directly influenced by the US – China trade war.

Meanwhile, very few Vietnamese companies witnessed exceptional revenue growth in 2018. Like clothing and electrical equipment and machinery industries, furniture and machinery also suffer from the lack of raw materials. Having to import goods, machinery parts from overseas, production cost of local companies might be much higher than that of FDI companies.

Summary of Highlights:

The C/O verification and inspection is a huge work for Vietnamese customs and regulators given the movement to shift their manufacturing to Vietnam and some of them who are playing around the C/O rules in having export to US. The authorities must urgently publish criteria and standards on the origins of Vietnamese goods. It is greatly important to crack down origin frauds from foreign companies in order to protect Vietnam from US’s sanction.

Only few Vietnamese companies engaging in the global value chain: Local companies typically import many of their materials from China for production. Many American customers continue to buy from their partners in China, or from FDI companies manufacturing in Vietnam. For example, to the same design of reflective clothing item required by an American buyer, Vietnamese partner can only sell at FOB $55/item, while Chinese companies are selling at $27/item. The reason is that Vietnamese companies have to import most of the raw materials (fabrics, reflective piece) from China. With tariffs added, Chinese companies can still provide at lower costs than Vietnamese companies.

Theses raised a question to our foreign investment policies with the incentives given to FDI companies. Vietnam has similar manufacturing capacity with China as both countries can leverage their cheap labor cost for labor-intensive industries. Vietnam is undoubtedly among the winning countries in US – China trade war. Positive impact of US – China trade war on Vietnam’s exports to the U.S. was clearly shown. However, majority of export growth is from FDI companies, particularly South Korean, Taiwanese and Chinese companies. We think that it is a time to consider incentives and various policies to attract foreign investments.

Opportunity for Vietnam is clear but realizing it for who to benefit will need a serious efforts from both policy makers and businesses: By increasingly integrating with the global economy, Vietnam are realizing higher benefits than ever. However, these benefits will be limited if the core problem is not solved. Lack of raw materials, skilled human resources and technology will continue to prevent Vietnam from reaching its full potential. Vietnamese Government should provide training and subsidies to local firms to raise Vietnamese firms’ footprint in total export.

 

FiinGroup

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