Netherlands-Vietnam Chamber of Commerce (NVCC)

Events 30th May 2019

Joost Vrancken Peeters: Vietnam is the One in China plus One.

Nowadays I receive many questions from companies about the so-called “China plus One” strategy. In this article I will explain the concept of the China plus One strategy, the reasons why more companies are looking into it and the reasons why Vietnam is such a popular destination. In a next article I tell more about how to implement such a strategy.

Over the past three decades China has become a major production center and also a very important consumer market. Today the Chinese economy is still growing and offers many opportunities for companies to expand and grow. However,  more companies nowadays are looking more closely to their China operations. The obvious reasons for US companies of course being the growing tension between the US and China and the resulting trade war and tariff increases. But I US companies are not the only ones approaching me, , more and more European companies too want to discuss the China plus One strategy.

The China plus One strategy can best be described as the strategy whereby companies with an existing investment in China are also setting up a company or production facility in a ‘nearby’ location. The most popular nearby locations are Vietnam, Cambodia, Thailand and Indonesia. But why do international companies want to spread their investment across multiple countries, next to China. As stated above China still offers a lot of advantages as manufacturing base and of course as soon to be biggest consumer market it the world.

When asked about their motives, most companies mention a concern about the rising costs in China, predominantly labor costs. Many investments in China were driven by getting access to low labor costs and there is no doubt that China is no longer the lowest cost source. The minimum wages in most countries around it are lower. However, lower costs are not the only reason. Many companies also mention the risk of being active in a transitional economy.  China faces political, economic and social changes, which may bring pressures. Another motive is the changing business climate in China. Although China still welcomes foreign investment, it has also become more selective. And last but not least, some companies do not wish to be depended on one market and one production location. They want to take advantage of the growing middle class in most countries that are a member of the Association of Southeast Asian Countries (ASEAN).

What explains the popularity of Vietnam in the China plus One strategy? Most companies mention five reasons.

The first being the Vietnamese labour force. Not only because the wages are lower. Due to China’s ageing population, it is not so easy to find enough workers. Vietnam offers a young and dynamic workforce, even if this workforce  still needs to be developed into a skilled one. Another reason is that Vietnam is close to China. This means lower costs of transport and since production is nearby, manufacturers can limit delay times. A third reason is  that Vietnam is close to regional shipping lines, is rapidly improving its infrastructure and has more than 100 ports, many of them capable of handling deep sea ships. Vietnam also offers a relatively stable government and the government has worked hard to improve the business laws. Last but not least Vietnam is very active in free trade agreements.

As a member of ASEAN, Vietnam has access to several agreements ASEAN has signed. In August 2018, the EU and Vietnam agreed on the final texts for the EU-Vietnam trade and investment agreements (EVFTA). This EVFTA is expected to be ratified soon. The EVFTA contains full dismantling of nearly all tariffs except for a few tariff lines that are subject to duty-free tariff rate quotas. Moreover, the EVFTA also offers a modern and reformed investment dispute resolution mechanism which guarantees the respect of the substantive investment protection rules applicable to European and Vietnamese investors.

So, based on the above, it is not surprising that many companies set up a second facility in Vietnam. How to set up such a facility and the factors to consider will be the topic of my second article on Vietnam the one in China plus one.

This article was written by Joost Vrancken Peeters, chairman of the NVCC and partner Asia Practice at law firm Kneppelhout & Korthals.