China and its Southeast Asian neighbors need to enhance industrial cooperation

BEIJING, Oct. 9, 2022 /PRNewswire/ — By Beijing Review: In 2019, TCL, a Chinese consumer electronics company, began to build its new manufacturing base in Viet Nam. The new base has improved TCL’s production capacity with its products selling not only in Viet Nam but also to other markets in Southeast Asia and beyond.

In the first four months of 2022, the total foreign investment in Viet Nam surpassed $10.8 billion, up 88.3 percent year on year, according to its Ministry of Planning and Investment.

The country’s exports in the first quarter hit $88.58 billion, up 12.9 percent year on year, data from the Ministry of Industry and Trade showed.

Viet Nam’s rising status in the global supply chain has sparked discussion of the possibility that it will take away orders from China. In response, Wang Xiaosong, a research fellow at Renmin University of China’s National Academy of Development and Strategy, pointed out that China should adapt to the trend of some enterprises relocating their businesses to Southeast Asia.

“It is a natural process of industrial upgrading for China,” Wang told Beijing Review, adding that the development of near neighbors will facilitate mutual prosperity.

The strategy of relocating labor-intensive jobs to countries with competitive local resources that are much closer to target markets, while maintaining core and critical links in China, is motivating increasing numbers of Chinese manufacturers to take their operations overseas. For example, while TV assembly is the core business of TCL’s Vietnamese base, the company’s factories in China produce high value-added products such as display panels.

“The industrial relocation began in 2015,” Wang said. “Economic development has raised the cost of labor-intensive businesses in China so companies have turned their eyes to Southeast Asian countries with cheaper workforces.”

In addition, emerging markets in the region are also offering preferential policies to attract foreign investors. In Viet Nam, for example, firms making new investments in sectors including technology, footwear and automobiles are taxed at 10 percent for 15 years. This period also includes a tax holiday for the first four years and a 50-percent reduction in the corporate income tax rate for nine subsequent years, according to Bloomberg Tax.

Some companies have transferred due to non-market factors. Hanyu Group is a Chinese company producing drainage pumps. Three years ago, Hanyu’s products were included on the U.S. list of Chinese goods to be subject to added tariffs. Its U.S. clients told the president of company that he needed to take part of his operations overseas, otherwise they would turn to other suppliers. Consequently, he moved part of his assembly line to Thailand.

The COVID-19 flare-ups have also triggered concerns about a possible industrial chain exodus from China.

“Southeast Asian countries are unlikely to replace China as a destination for foreign investment,” Wang said, citing statistics released by Viet Nam’s Ministry of Planning and Investment.

Despite the 88.3-percent rise in foreign investment, Viet Nam’s newly registered capital decreased by 56.3 percent in the first four months of the year. It means few companies established new factories in the country and the increasing foreign investment came from companies already present there.

During the same period, paid-in foreign direct investment into the Chinese mainland expanded 26.1 percent year on year to $74.47 billion, according to the Ministry of Commerce.

China has complete industrial clusters, technological accumulation, and a huge market that cannot be replicated in the short term, he added.

“The growth of Southeast Asian markets is actually a boon for China,” Wang said. “We have close industrial chain connections with our near neighbors.”

Viet Nam, for example, imports upper stream core equipment, raw materials and supporting facilities mainly from China, which will create more opportunities for Chinese suppliers, he explained.

According to the General Administration of Customs of China, trade between China and Viet Nam hit $230.2 billion in 2021, with a year-on-year growth of 19.7 percent. China was Viet Nam’s biggest trading partner.

Wang suggested China to tap the potential of its less developed areas where the labor costs are relatively low and which could be new destinations for industrial shifting.