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Can Vietnam or India challenge China’s manufacturing leadership in global electronics industry?

(Image credit: Future)

Many electronic manufacturers are planning to move their production bases to Vietnam and India due to the deteriorating trade ties between the US and China.

Can Vietnam or India replace China as the “new China” of electronic manufacturing?

Samsung closed its mobile phone manufacturing facilities in Shenzhen and Tianjin last year while expanding investments into Vietnam and also opened the world's largest mobile factory in India as part of “Make in India” initiative.

Nintendo, Apple, Sharp and Google are also planning to move part of their production to Vietnam.

Chinese smartphone maker Oppo has begun assembling printed circuit boards at its second plant in India and Xiaomi has seven manufacturing facilities in India. HMD Global plans to make Nokia phones in India by 2022 and there are talks about iPhones production in India.

 “The fear of tariff hikes by the US on China has resulted in companies’ decision to relocate factories and Vietnam is gaining,” Flora Tang, research analyst at Hong Kong-based Counterpoint Research, told TechRadar Middle East.

Vietnam has already signed dozens of free-trade pacts with several countries and economic blocs to have a much more favourable tariff policy on exports as compared to those from China or India.

Both India and Vietnam can become an attractive export hub to neighbouring countries and continents, she said.

For example, Samsung is already exporting millions of phones every month from India and Middle East Africa is one of the major destinations while Nokia in its hay days used to ship tens of millions of phones from its Chennai factory in India and Apple’s partner Wistron has also started shipping a few assembled older iPhones to European markets from India.

Why are companies picking Vietnam?

Vietnam, a hub for standard apparel and textile products, is also home to biggest footwear brands such as Adidas, Nike, Puma and Reebok.

Sourcing supplies from Vietnam is easier than in India as many mainland Chinese and Taiwanese companies own factories in Vietnam.

But Tang said that factories can assemble electronic products via SKD (Semi Knock Down) or CKD (Complete Knock Down) in Vietnam, but to source components locally is still difficult.

“Most of the components are coming from China, and thus prices of electronic components in Vietnam are 5%-10% higher than in China,” she said.

Moreover, she said that it has been increasingly difficult to hire labours in Vietnam since various manufacturers flooded in the country this year.

Not only did electronics manufacturers build new factories in Vietnam, but textile manufacturers also expanded investment there, she added.

“Following the increasing employment demands, Vietnamese labour wages continue to rise, and it is reported that the average labour wage in Vietnam has been 50% higher than that in 2014, though still lower than the labour wages in China,” she said.

Cheap labour

Average wages in China have increased due to the growth in the economy but the average wages in Vietnam are less than one-fourth of China while Vietnam is only one-tenth of the Chinese population.

“It’s no surprise that Vietnam’s low labour costs are one of its most attractive features to importers. Although Vietnam has a competitive edge over China in terms of labour and manufacturing costs, China still dominates in terms of population, manufacturing infrastructure, local components sourcing, labour skills and the overall manufacturing efficiency.

“It is more likely that Vietnam will grow to become a key complement to China in the global manufacturing industry, instead of a challenger,” she said.

According to Salary Explorer website, a person working in China typically earns around 29,531 ($4,130.81) yuan per month while a person working in Vietnam earns around 17,359,082 dongs ($747.46) per month and 16,725 ($233.061) rupees per month in India, inclusive of housing, transport and other benefits.

But when it comes to ease of doing business, the World Bank metrics says China is ranked 46, Vietnam at 69 and India at 77.

Despite the benefits, Tang said that there are risks and challenges that manufacturers need to be aware while moving factories to Vietnam. 

Explaining further, she said that Vietnam’s strengths in manufacturing lies in lower trade tariffs, lower corporate income tax, mature industrial zones and supporting facilities, lower manufacturing wages but the risk and challenges are soaring land rent prices, relying on China for import of components, incomplete national transportation system, government corruption, labour quality and working ethics.

China is top recipient of foreign funds

(Image credit: Future)

Foreign Direct Investment (FDI) into Vietnam increased 86.2% year-on-year to reach $10.8 billion as of first quarter of this year while the value of Vietnam’s exports to the US grew by 26% year on year to $13 billion.

According to a UN report on world investment flows (UNCTAD), US and China continue to be top recipients of foreign funds while India is in the tenth spot and Vietnam in 21 spot.

FDI into India in 2018 increased by 6% year on year to $42.3b compared to $39.9b in 2017 while FDI into China in 2018 increased by 3.71% year on year to $139.04b compared to $134.06b and FDI into Vietnam in 2018 increased by 9.92% year on year to $15.5b compared to $14.1b.

Rohit Bachani, co-founder of Dubai-based Merlin Digital, said that the trade tariffs will not impact their businesses as their focus is on Middle East, India, Africa and Western Europe.

“We have tie-ups with 61 OEM bases in China. As we are in a niche business of producing advanced and micro-sized gizmos, I don’t think that Vietnam or India is ready for that. We need the support of South Korea, Taiwan and China. I still think that China is still 10 to 15 years ahead of Vietnam and India,” he said. 

Benefits of India

Counterpoint Research’s Tang said that global manufacturers are also expanding production capabilities in India, stimulated by the growing domestic demands, as well as government’s “Make in India” initiatives and the “Phased Manufacturing Programme” policy.

“Given the population size and market growth potential of India, it has become the priority on manufacturers’ global development list. For smartphone sales, for instance, India is one of the fastest-growing markets around the globe, she said.

Moving forward, she said as China market is getting increasingly saturated, India will become more critical for companies seeking growth and expansion.

“For these companies, to manufacture products locally is a wise move to avoid the risk of tariff hike. This can also help them to optimise the long-term production costs and profitability in India,” she said. 

In the near term, she said that India is still lagging in terms of infrastructure, energy supply, labour skills and literacy when it comes to the comparison with Vietnam where industrial zones and supporting facilities are mature.

Also, she said that India has a federal structure and the regulations, languages, norms and cultures vary across different states of India and this poses a big challenge to the organisation management for foreign manufacturers.

Adopting different strategies

In terms of national policies to stimulate local production, Tang said that India and Vietnam governments are taking different strategies.

“India government is acting tough and forcing local production by imposing higher import tariff on companies, while the Vietnam government attracts FDI by offering corporate income tax incentives.”

However, compared to India, she said that Vietnam has the essential limitations on population size, domestic market demands and the national territory area.

Vasant Menghani, CEO and founder of Dubai-based Touchmate, said that China has become expensive to manufacture and it is no more an emerging market, it is now a mature market.

“We have a factory in China to produce fast-moving products such as tablets and smartwatches and tie-ups with other factories for moulding and casting. Now with Modi as the Prime Minister of India, it is his dream of ‘Make in India’ policy.

“We have plans to manufacture tablets and smartwatches in India next year as the country will become aggressive. India does not have the expertise and skills in manufacturing PCBs and motherboards right now,” he said. 

Menghani said that India and Vietnam can compete with China within ten years but China will still be number one, followed by Vietnam and India.

Don’t put all your eggs in one basket

Given the population size and domestic market consumption in India, in the long run, the manufacturing industry in India will have the potential to emerge and grow into as strong as “today’s China”,” Tang said.

Even if China and the US finally agree, “I think global manufacturers will continue to diversify their sites of production. Under today’s international political context, it will be risky for any globalised companies to ‘put all production lines in one country’. This refers to not only in China.

“Both India and Vietnam have had trade disputes with the Trump administration recently. In June, Trump threatened to impose trade tariffs on Vietnam and, meanwhile, ended the preferential trade treatment for India. To have globalised manufacturing capability will be increasingly important for manufacturers to avoid losses under the international trading disputes,” she said.

As for China, “we expect it to develop 5G, AI, cloud computing and other cutting-edge technologies to build a smart manufacturing ecosystem in the country, and will also heavily invest in the R&D of semiconductors design to alleviate its reliance on the US,” she added.