Opportunity for Vietnam to Become Crucial Link in Global Supply Chain

Vietnam is poised to become a crucial link in the global supply chain if it can capitalize on the opportunities presented by the “friendshoring” trend - the relocation of production chains to friendly nations.

Vietnam has the potential to play a vital role in the global supply chain by leveraging the opportunities arising from the “friendshoring” trend 

"Friendshoring" trend

Despite the return of international supply chains to pre-COVID-19 levels in terms of shipping freight by sea or air, and the absence of container ships queuing outside major ports, logistics, manufacturing and other industrial sectors are still not operating as usual. The pandemic and geopolitical tensions have exposed the fragility of supply chains and placed a new emphasis on resilience. Meanwhile, cost continues to be key in a tough economic climate.

The changing approaches to supply chains are not solely driven by businesses. In response to geopolitical tensions and a new economic paradigm, strategic government policy underpins these changes in many parts of the world.

The past 20-plus years have been defined by unconstrained globalization, with ever-increasing efficiencies driving global business growth. However, this has now been tempered by a new focus on security and renewed protectionism in many parts of the world. Governments are looking to drive domestic productivity while safeguarding strategically important sectors – be that energy, food and pharmaceuticals, or the minerals and technologies needed to support high-growth future businesses such as semiconductors or electric vehicles.

Against this backdrop, “friend-shoring” could be a key driver of supply chains as industrial policy is deployed to help deliver domestic and foreign policy initiatives relating to energy security, new technology and the transition to net zero.

Mr. Jack Harkness, Director of Regional Industrial and Logistics Services at Savills Asia Pacific, stated that cost remains a powerful lever of location decisions. However, rising labor costs in China mean it is not as cost-effective as it once was, particularly when domestic incentives to re-shore and ongoing security concerns are factored in.

He added that many companies with facilities in China are looking to complement rather than replace existing plants. For example, Apple has announced plans to diversify away from China while Siemens has said it is looking at other locations in Southeast Asia.

Opportunities for Vietnam

Countries such as Vietnam and Indonesia could benefit if firms start looking for other low-cost production centers in Asia, particularly for labor-intensive and low-margin industries.

Mr. Harkness added that this process is being accelerated across sectors deemed strategically important to U.S. and European industrial policy. Furthermore, there has been skepticism around state influence of some Chinese tech firms, which suggests that the Western expansion of Chinese firms will be more constrained in the future.

According to John Campbell, Associate Director and Head of Industrial Services at Savills Vietnam, both the North and South regions of Vietnam have distinct characteristics. The North typically experiences high demand for electronics while the South showcases a more diverse sector, including manufacturing, logistics, FMCG, pharmaceuticals, and food and beverage industries.

In terms of nationality, there has been an increase in European companies, particularly German and French manufacturers. This demonstrates the positive impact of the EU-Vietnam Free Trade Agreement. Additionally, there is still strong interest from Asian manufacturers with electronics gaining attention in the North and manufacturers displaying confidence in the South.

Despite a global slowdown in the first half of the year, Mr. Campbell anticipated a much better second half. While new lease contracts were slower to be signed initially, many companies that were considering investing in Vietnam are still committed to expanding this year. The challenges faced in the manufacturing sector, such as a decline in the purchasing managers index and industrial production, are now being reversed. This has instilled more confidence in manufacturers, investors, and logistics companies leading to an expected better performance for Vietnam in the second half of the year. Mr. Campbell believed that by December, there will be a significant turnaround in the country's economic performance.

By Huong Giang, Vietnam Business Forum