Hasbro, the maker of popular board games Monopoly and Scrabble, recently made business headlines when it announced that it would be accelerating efforts to shift operations away from China and transition to new facilities in Vietnam and India. Hasbro is ostensibly joining the broader trend of companies saying zai jian to Beijing, and xin chao to Hanoi as a growing number of foreign businesses become apprehensive about maintaining their factories in China in a post-Coronavirus world. Is it time to embrace Vietnam as the next big economic superpower?
The World’s Newfound Love for Vietnam
This year, supply chains have moved to Vietnam, and some of the world’s most celebrated brands are establishing a presence in the Southeast Asian country. Google plans to manufacture its Pixel smartphones in Vietnam instead of China. Chipmaker Intel is increasing its investments in the Saigon Hi-Tech Park. Universal Alloy Corporation, a global manufacturer of aircraft components, recently opened its facility in Da Nang. Nike now produces most of its shoes in Vietnam. Apple suppliers said they intend to establish new production capabilities in Vietnam. Samsung, LG, and many Japanese manufacturers have been moving factories from China to Vietnam.
Suffice it to say, Vietnam is the U.S.-China trade war winner, helping the economy survive and thrive in the Coronavirus-induced storm clouds.
Most major economies around the world are expected to record negative gross domestic product (GDP) growth. It is not surprising as the COVID-19 public health crisis has destroyed economies, decimated budgets, and forced everyone into their nests. China is recovering in the aftermath of the outbreak, but another country is performing just as well: Vietnam.
In the third quarter, the Vietnamese economy expanded 2.6% year-over-year, buoyed by strengthening exports. Last month, exports soared 18%, industrial production popped 3.8%, retail sales surged 4.9%, and foreign direct investment (FDI) increased to $13.76 billion. Consumer prices also climbed less than expected, with the consumer price index (CPI) jumping 2.98%; this is below the average inflation of the first nine months of 2020 and under the government’s 4% target.
Vietnam is the only other major Asian economy, besides China, to register positive growth this year. And this is not an anomaly either. Even before the pandemic struck, the Vietnamese economy had been booming, reporting quarterly GDP growth of between 6% and 7%, comparable to its neighbor to the north.
Observers attribute Vietnam’s handling of the Coronavirus as one of the reasons for its substantial rebound. Its nationwide lockdown lasted less than a month, social distancing rules were lifted in April, and life has generally returned to normal. Vietnam was successful because it was skeptical of both China and the World Health Organization (WHO). Officials refused to take any chances, and they acted early, from temperature screening at the international airport to suspending entry to all foreigners. Despite a population of about 95 million, it only has roughly 1,000 cases and 35 deaths. Its daily infections never topped 100. It pays to distrust a Communist regime.
Will the Red Dragon Play Dead?
For the most part, China has imposed rigid capital account systems to control the international balance sheet, the size of foreign exchange reserves, and the yuan exchange rate. This has made it difficult to determine just how much capital is fleeing the country. While China is following in the footsteps of other countries since the measures have been approved by the International Monetary Fund (IMF), it is harder for analysts to calculate if Beijing is attracting investors or repelling foreigners.
If it were still a magnet for foreign money, perhaps Beijing would not need to implement market-oriented reforms – the status quo would suffice. In addition to abiding by the provisions of the phase-one trade deal with Washington, President Xi Jinping and the Communists have appeared desperate for outsiders to invest in the country, recently opening up its bond market to the FTSE Russell.
Michael Every, head of financial markets research Asia-Pacific at Rabobank, warned that it would be impossible for the leadership to remove all of its controls because the system is “inherently fragile.”
“China is finding itself stuck in a paradigm, creating more and more problems and more and more side effects,” he told the South China Morning Post. “Yet there’s no easy way to remove those controls … that would be a disaster as all of China’s money would leave China instantly and its currency would collapse.”
In what looks like a desperate plea to stay, the State Administration of Foreign Exchange is now communicating with representatives from Samsung, BMW, and Microsoft. But when restrictions hinder returns on investments (ROI), businesses will be more focused on their bottom line. At the same time, China is a massive market, so it could also trigger retaliation against companies looking to tap an enormous economy. Companies are stuck between a rock and a hard place.
Made in Vietnam?
Will Vietnam be China’s successor? Despite protests, Beijing may not have any choice. Its economy is founded on a house of cards, its initial response to the Coronavirus was dreadful, and its leaders are trying to defy basic economics laws with perpetual interventions and bailouts. Multinational corporations had already started developing second thoughts with their presence in China prior to the pandemic, but COVID-19 served as a catalyst to make their considerations a reality. Soon, your apparel, your electronics, and your board games will no longer have the label “Made in China” but rather “Made in Vietnam.” This is just part of the new normal in the post-Coronavirus economy. Duìbùqǐ, China.
Read more from Andrew Moran.