[The Editors' Verdict] The Top Beneficiary of 'China Plus One'

Juyushin, Dean of Graduate School of Technology Management at Sogang University and Director of Kochai Economic and Financial Research Institute

Until now, China has been recognized by all as the "world's factory," serving as the center of the global supply chain. However, cases of China's supply chain status being shaken are increasing due to the US-China trade war and the COVID-19 pandemic. This is because global companies are seeking to diversify their supply chain portfolios from "China Only One" to "China Plus One."

From a fundamental perspective, the diversification of portfolios is a measure to prepare for "unpredictable uncertainties" such as the rapid escalation of US-China conflicts and the COVID-19 crisis. However, at its core lies the fact that the "costs related to production" in China have surged, putting pressure on the profits of global companies.

For example, let's look at China's labor costs. Over the past decade, under President Xi Jinping's policy of doubling incomes, China's minimum wage has risen sharply at an annual rate of just over 10%. In 2008, the average monthly wage of a general worker was $204, which was not much different from the 10 ASEAN countries. However, by 2018, it had risen to about $490, 1.5 to 2 times higher than the ASEAN 10 countries. Also, the average US tariff rate on China was 3.1% in January 2018 before the tariff hikes began, but by December last year, it had increased more than sixfold to 19.3%. This means it has become much harder for global companies producing in Chinese factories and exporting to the US to make profits.

So, where are the benefits of global supply chain diversification going? Regionally, it is ASEAN, and among them, Vietnam stands out. Especially, it is widely assessed that manufacturing supply chains centered on IT are moving to Vietnam. A representative example is Apple recently requesting Foxconn, the world's largest electronics contract manufacturer, to relocate the production lines of iPads and MacBooks from China to Bac Giang Province in northeastern Vietnam.

Why is Vietnam so popular? Experts cite cheap labor costs and low tariff rates, but first and foremost, the similarity of export items and export destination countries between Vietnam and China makes it the easiest to replace production compared to other ASEAN countries. For example, it is becoming the largest production base replacing China in wireless communication devices, mobile phones, and clothing. Second, Vietnam's government tax incentives for foreign-invested companies are a factor. Corporate income tax and dividend remittance tax in Hanoi, Vietnam, are 20% (nominal rate) and 0% (maximum rate), respectively, which are much lower than Shenzhen's 25% and 10%, the hardware manufacturing hub in China. Third, real estate costs for setting up production plants are relatively cheap. The monthly rent per 1㎡ of industrial complex in Hanoi was $0.2 in 2018, only 6.3% of Shenzhen's $3.2. Additionally, with a population of 100 million, Vietnam has a considerable potential market. Its geographical proximity to China also makes supply chain relocation advantageous, contributing to Vietnam's popularity.

These advantages have led to positive signs for Vietnam's growth and exports. From the first quarter of 2018 to the first quarter of this year, Vietnam's exports to the US increased by 49.4%, the highest growth among ASEAN countries. During the same period, China's exports to the US, which are competing with the US, decreased by 37.6%.

Vietnam is also showing promptness in concluding multilateral trade agreements. In addition to the Regional Comprehensive Economic Partnership (RCEP) signed by 15 countries on the 15th of last month, Vietnam has signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Free Trade Agreements (FTAs) with the European Union (EU), pursuing the "two rabbits" of export growth and foreign investment attraction. South Korea, which accounts for 35% of Vietnam's exports, also needs to respond quickly to the rapidly changing environment of the Vietnamese market through public-private cooperation.

Jeong Yushin, Dean of the Graduate School of Technology Management at Sogang University and Director of the Kochai Economic and Financial Research Institute