Chinese manufacturers returning home from ‘inefficient’ Vietnam despite US trade war tariffs
- Rising costs of labour and land in Southeast Asian nation, as well as inability to find ‘efficient’ workers, forcing some firms to reconsider fleeing Donald Trump’s tariffs
- President Xi Jinping agreed a tariff truce with his US counterpart at the G20 summit in Osaka, but firms now exploring options in Thailand, Bangladesh and Myanmar
As the US trade war hastens the surge of factories moving out of China and into Vietnam, some Chinese manufacturers are urging their peers to think twice before relocating, with one footwear factory owner having abandoned a 5 million yuan (US$728,000) factory in the Southeast Asian country after just one year.
Zhou Ping has run a footwear factory in Dongguan, a city in China’s manufacturing heartland of Guangdong, since the early-2000s. But in May 2017, Zhou and another factory owner took a two-year contract on a 1,200 square metre (12,916 sq ft) facility in Binh Duong province, just north of Ho Chi Minh City, with the intention of producing accessories for a US fashion brand.
“We thought it a very good idea at the time because, on the surface, Vietnam’s factory buildings and labour were much cheaper than Dongguan, and we saw more and more European and American customers placing orders in Vietnam. A large number of upstream factories had shifted there, so we set up four production lines and hired 110 local workers. At that time, there was no trade war, and [the term] ‘made in Vietnam’ was still far from being hot,” he said.
In October 2018, however, Zhou cut his losses in Vietnam due to rising costs and “cultural issues”.
“The gap in worker efficiency between China and Vietnam is the biggest problem,” Zhou said. “Vietnamese workers do not work overtime at all and most of them are not skilled, resulting in low yield rates and frequently delayed delivery times. I think it takes a great deal of time and expense to train skilled workers in Vietnam. Chinese [small businesses] of our kind can’t afford this cost, both in terms of time and money.”
Another Dongguan shoemaker, John Wang, invested 7 million yuan (US$1 million) in a Vietnamese facility in 2015, including purchasing land and factories in his Hanoi business partners’ names. Two years later, he stopped production and rented the factory to new arrivals.
Wang said he knows of six other footwear makers in Dongguan who have made the switch to Vietnam only to realise that it is not what they had expected, and who are now looking “to abandon the play”. A number of furniture and clothing factories also have similar experiences across the Pearl River Delta and Yangtze River Delta, two main manufacturing bases in China, according to local manufacturers and export traders.
“It is a big headache because foreigners actually cannot buy and own land,” Wang said. “I paid and invested in land, but it belongs to my Vietnamese friend, according to local law. It is a common and growing risk for small Chinese manufacturers.”
In recent years, costs have soared in China, compounded by US trade tariffs, while better educated, wealthier people in Guangdong are now less inclined to accept factory jobs than previous generations, resulting in labour shortages. The combination has seen many Chinese small manufacturers look to cheaper options overseas.
But the manufacturers complain that as well as not having China’s famed production capacity and labour efficiency, in Vietnam, they cannot safeguard their asset investments and have to put up with increasingly strict environmental and social security requirements – the same complaints that many foreign businesses have about manufacturing in China.
“Ho Chi Minh City has now started seeing a serious labour shortage. This proves that my decision to quit was correct,” Zhou added.
A senior executive of a Taiwan-owned original equipment manufacturer, which is a company that produces parts and equipment that may be marketed by another manufacturer, said that it had relocated a large portion of its production from Guangdong to Ho Chi Minh City, but that it is finding it difficult to source and keep staff.
“Now more and more Chinese factories are pouring in, and it is very difficult to stabilise the workforce, because the Vietnamese workers have become quick to quit jobs due to the current booming employment market,” said the executive, who did not wanted to be named, adding that the situation will worsen as more companies move into Vietnam.
“The cost of labour will rise sharply. Transportation logistics still lag behind, and the cultural gap is also large, which is a big problem for Chinese managers in managing Vietnamese employees. Moreover, environmental and workers’ rights protections are becoming stricter, leading many Chinese factories to get fined a lot. The ‘trial-and-error’ cost is getting higher and higher for new arrivals to Vietnam.”
Companies are now having to look to the more remote north of Vietnam for their second and third factories, seeking cheaper land and labour. In the south, it is now difficult to launch a single 1,000-person factory, according to Gao Jian, whose Vnocean Business Consulting Service have helped many Chinese enterprises move to more than 50 industrial estates in Vietnam.
Guangdong-based companies who have yet to face tariffs from the United States, but who are likely to do so in the future, are paying attention to the saturation in Vietnam.
After Chinese President Xi Jinping’s meeting with US counterpart Donald Trump in Osaka at the end of June, the US postponed plans to roll-out tariffs of up to 25 per cent on most of the remaining Chinese imports not yet subject to levies, valued at US$300 billion.
Many electronics goods, such as smart devices and smartphones, are included on the US$300 billion of Chinese goods. The “truce” has bought these companies some time, but one Guangzhou-based exporter of light-emitting diodes – who wished not to be named – is under no illusions that the tariffs will not stay away forever.
“Now we feel that the situation is very serious, and everyone is looking for a way to find a place to move,” said the senior executive. “We are planning to move half of our production capacity, or about US$50 million of sales volume yearly, in the near future.”
Thailand is politically stable, but labour costs are relatively high, Bangladesh is known to many US buyers, but is relative uncharted territory for many Chinese manufacturers, while Myanmar is “an advantageous market for Chinese state-owned enterprises”, but faces sanctions from the European Union and the US due to human rights issues, added the senior executive.
Shoemaker Zhou said that since he returned to Guangdong, so many companies have left that the cost of factory space, land and labour is falling.
“The latest situation in Dongguan is telling you the true side effects of the relocation boom,” he said.