Southeast Asia -The next favorite manufacturing destination for factories moving out of China!

The People’s Republic of China has been through a long journey from being one of the weakest economies to one of the strongest. Due to economic reforms made in the 1970s led by the Communist Party Leader, China has been enjoying an escalated growth rate in the past. At present, almost the entire world outsourced their manufacturing demand to China. In other words, we can say that the People’s Republic of China is ''The World's Factory''. The series of continuous economic reforms and turning events has made the world dependent on China. In this way, the People’s Republic of China has become the new economic powerhouse of the world. In the recent past, we have been the witness of competition in the form of the trade war between China and another economic powerhouse like USA to become the global economic leader. There have been several rounds of tariff retaliations between nations to economically discourage others. However, this outbreak of the Novel Coronavirus tested the world's dependence on China. After this pandemic, most of the nation is planning to reduce the dependency on China. Even, countries like Japan have also announced a special economic package for Japanese companies operating in China to shift their manufacturing unit from China. The European Union has been China's largest trade partner and China has been European Union's second-largest trade partner after the United States. But this pandemic pushed the world (including EU & USA) too far from China. Finally, with this coronavirus outbreak, most of the foreign companies have started moving its manufacturing from China to their domestic countries or other parts of the world. In same series, India has been developing a global market and a lucrative destination for the world. In terms of economy, India is the world's 5th largest economy with a nominal GDP of $3 Trillion. However, it has been observed that the production shift from China is being transferred to a relatively smaller economy in South East Asia like Vietnam that is ranked 45th in the world in terms of economy. Now, Southeast Asia is being the new favorite manufacturing destination for the factories moving from the People’s Republic of China. The list of the countries from South East Asia are as hereunder: 

For better understanding here is the list of companies sifted/shifting its manufacturing from China to South East Asia are as hereunder:

According to the survey conducted by the American Chamber of Commerce, South East Asia is the most favorite destination of US firms to move its production capacity out of China. We will try to analyze some reasons for South East Asia being the most favorite next destination. We will be discussing Vietnam as an example to figure out the factors forcing companies to select it as the next favorite destination instead of India. 

Infrastructural Development: Infrastructural Development is a critical factor for the fast-paced economy. Over the last three-decade, Vietnam spent a remarkable amount on its infrastructural development. Even though past-paced economic growth requires higher investment, Vietnam has invested almost double of the global average. Infrastructural development makes it easier to set up production in Vietnam.  Some notable factor in this regard is as hereunder:

Further, in comparison to Vietnam invest a substantial part of its GDP on its social infrastructure. Let's compare the spending of both the nation on social infrastructure: 

Global Supply Chain: Chinese supply chain management is well established globally. The companies can't make abrupt exit policies from china as somehow the companies are depending on the Chinese supply chain. It will not be a wise decision for any company to completely shut down the operation and alter its supply chain. Altering the supply chain will be a costly and time-consuming affair for the companies. Considering the supply chain management and dependency, the geographical location of Vietnam makes it favorable as it is very close to Shenzhen a manufacturing hub in China. In case the company shifts its manufacturing from China, it can smoothly get access to the supply chain. 

Currency Stability: The Vietnamese Dongs (currency) is pegged to the USD through an arrangement called the Crawling Peg System.  It makes Vietnamese Dong more stable in comparison to Indian rupees. The Indian Rupee is volatile to USD as India is following a free-floating method of currency exchange.

Cost of Starting Business: The cost of setting up a business in Vietnam is relatively less in comparison to India. Although India is improving its status in ease of doing business, still Vietnam is relatively better at an ease of doing business. Let's compare some practical aspects between Vietnam and India: 

Global Manufacturing Hub: Ho Chi Minh City of Vietnam is a manufacturing hub which offers synergy benefit to factories in terms of supply chain and other areas ( such as transportation cost etc.). It is always preferred by the companies to set up its manufacturing unit in the area having different synergy benefits. India must develop such kind of manufacturing hub to attract the companies moving out of China.

 Most Similar Export to China: Vietnam is holding number 1 position in comparison to China having more than 50% export in similar to Chinese export. Thailand, South Korea, and Taiwan are holding 2nd, 3rd and 4th positions in terms of similarity of export. India has only less than 40% similar export in comparison to Chinese products.

Some notable steps to be taken by India to be a favorite destination for factories:

Disclaimer: All information & views expressed above are my own and not representing any legal opinion. It would be better if you write to me on [email protected] for any further inquiries. You can also reach me at +91-8882214254.