[Post-China Vietnam] ③ "China Alternative Market Rising... Strategic Approach Needed"

Jang Sang-sik, Head of Trend Analysis Office, Korea International Trade Association. Photo by Heo Young-han younghan@

"Investments by leading global semiconductor companies in Vietnam due to the US-China trade conflict are expected to continue for the time being. As Vietnam has emerged as an alternative market to China, a strategic government-level approach is necessary."

Jang Sang-sik, Head of the Trend Analysis Office at the Korea International Trade Association, stated in an interview with Asia Economy on the 14th at the 48th-floor conference room of the Comprehensive Trade Center located in Samseong-dong, Gangnam-gu, Seoul, that global companies will continue investing in Vietnam to secure a stable supply chain amid the US-China trade conflict. The advantages of Vietnam as a production base are highlighted by its macroeconomic stability, lower labor costs compared to major competitors, 15 free trade agreements (FTAs) covering 50 countries worldwide, and the Vietnamese government's active efforts to attract foreign direct investment (FDI). Therefore, global companies' interest is expected to persist for the time being.

However, although Vietnam emerged as South Korea's largest trade surplus country for the first time last year, it is unlikely that this trend will continue this year due to the global economic slowdown. This is because exports of key items such as semiconductors have turned downward after being hit directly by the global demand decline that began in the second half of last year. Jang said, "Vietnam has risen as part of the 'China+1' strategy to add regions other than China to the supply chain, but the reality is that supply chains, including parts procurement, still rely on China rather than Vietnam," adding, "It will not be easy for Vietnam to replace China in the future, and considerable time will be needed."

Below is a Q&A with Mr. Jang.

-China was South Korea's top surplus country in 2018 but dropped to 22nd place last year. What caused the sharp decline in the trade surplus with China to $1.25 billion last year?

▲In 2018, there were large surpluses not only in semiconductors but also in petroleum products, displays and equipment, petrochemicals, synthetic resins, optical devices, cosmetics, and semiconductor equipment. However, surpluses in these items have significantly shrunk now. This is because China's producer prices in petrochemicals, petroleum products, precision chemicals (battery materials), and machinery have risen sharply, reducing China's import demand. On the other hand, imports of battery materials such as lithium hydroxide and precursors have increased significantly, and the use of Chinese imports in medical, laptops, steel, and daily necessities has steadily grown. Recent changes in China's industry and consumption patterns have also influenced this. The increase in consumption of premium products, the patriotic consumption movement (Guochao), and strengthening of domestic supply chains due to conflicts with the US and other Western countries (supply chain internalization) are occurring, making it urgent to differentiate and advance core industries that can maintain a super-gap with China.

-With the importance of the semiconductor industry emphasized, major companies such as those in the US are building factories in Vietnam. Will this trend continue?

▲Dutch semiconductor equipment company ASML, which supplies extreme ultraviolet (EUV) lithography equipment, is reportedly considering building factories in Southeast Asia, including Vietnam and Malaysia, to reduce dependence on China. Last month, a US economic delegation composed of representatives from 52 companies across IT, defense, finance, energy, and pharmaceuticals?including Apple, Meta, Amazon, Boeing, Lockheed Martin, Citibank, Pfizer, and Netflix?visited Vietnam and proposed strengthening practical cooperation to expand economic, trade, and investment ties between the two countries. Investment in Vietnam is expected to continue to secure a stable supply chain amid the US-China trade conflict.

-Korea's exports to Vietnam have mainly consisted of mobile phone parts. Has there been any change in the performance of mobile phone parts recently?

▲According to industry estimates as of 2021, Samsung Electronics' smartphone production share by region is about 50-60% in Vietnam, 20-30% in India, 10-15% in Brazil, 3-5% in Gumi, and 3-5% in Indonesia. Since more than 50% of Samsung smartphones are produced in Vietnam, parts required there accounted for a high proportion of exports. Until last year, exports of semiconductors and displays continued to increase, but exports of wireless communication devices turned to a decline. In January and February this year, exports of semiconductors, displays, and wireless communication devices all sharply decreased. This reflects the impact of the global demand decline that began in the second half of last year. Samsung Electronics Vietnam's sales in Q4 last year were $14.8 billion, down 26.9% year-on-year, and net profit was $700 million, marking the lowest in eight quarters.

-Contrary to expectations, Korean companies reduced investment in Vietnam in Q1 this year. Why?

▲In Q1 this year, foreign direct investment (FDI) in Vietnam was $5.45 billion, down 38.8% year-on-year. Korean investment in Vietnam was $470 million, a sharp drop of 70.4% compared to the same period last year. The decline in investment is attributed to a combination of factors, including the global FDI decrease trend, deteriorating global economic conditions dampening investment sentiment, and difficulties in financing due to high interest rates. According to the Export-Import Bank of Korea, South Korea's overseas direct investment (total investment basis) in Q4 last year fell 54.8% year-on-year to $13.96 billion. Since the second half of last year, the global economic downturn has also worsened Vietnam's economic indicators in Q1 this year. Vietnam's Q1 economic growth rate was 3.32%, the lowest in 13 years. Prime Minister Pham Minh Chinh stated, "Vietnam cannot avoid the effects of global economic slowdown, monetary tightening by countries, and demand reduction." The State Bank of Vietnam (SBV) has cut policy rates consecutively this month following last month to stimulate the economy. On the 15th of last month, SBV made a surprise 1 percentage point cut, becoming the first developing country worldwide to lower rates, and this month it cut the refinancing rate, which can effectively substitute the benchmark rate, by 0.5 percentage points. Despite additional rate cuts, it is expected to be difficult for Vietnam to achieve its economic growth target of 6.5% this year.

-Strengthened local regulations in Vietnam are cited as factors limiting investment by Korean companies. What difficulties are there?

▲The biggest difficulty local companies face is the issuance of work permits. To obtain a work permit, the Vietnamese government requires a detailed explanation that the job cannot be performed by Vietnamese workers. To get a work permit as an expert, applicants must meet requirements of a degree and three years of experience, but the review process is strict and time-consuming. This issue affects not only Korean companies but also other foreign companies operating in Vietnam. Currently, the Korean Embassy in Vietnam, the Korea Chamber of Commerce and Industry (KOCHAM), and foreign chambers of commerce are continuously requesting improvements from the Vietnamese government.

Additionally, rising local labor costs have led to India and Indonesia emerging as alternative countries. Vietnam's minimum wage rose 6% last July, and the wage increase rate this year is expected to be 7.9%, higher than in India and Indonesia. Particularly, Vietnam's semiconductor industry is still focused on packaging, with necessary parts procured from foreign-invested companies in Vietnam or overseas such as China. Vietnam focuses on low value-added export finished products and lower assembly packaging in the semiconductor global value chain (GVC), with most high value-added fields conducted outside Vietnam, which is also a limitation. Another complaint from foreign-invested companies in Vietnam is logistics costs. Most transport is by land, but highways account for less than 5% of roads. Although the government is working to improve logistics infrastructure, land clearance and financing remain challenging.

Jang Sang-sik, Head of Trend Analysis Office, Korea International Trade Association. Photo by Younghan Heo younghan@

-The trade deficit with China continues. Could Vietnam be a breakthrough?

▲The Vietnamese government expected exports to increase by 6% this year compared to last year, but it seems difficult to achieve this due to global demand decline. Vietnam's exports to the world until March were $79.17 billion, down 11.9% year-on-year, and South Korea's exports to Vietnam until February this year were $7.9 billion, down 25.5% year-on-year. It will not be easy for Vietnam to completely replace China in the future, and considerable time will be needed. Compared to China, Vietnam has advantages such as lower labor costs and more flexible labor laws supporting foreign companies, but China leads Vietnam in production capacity, production infrastructure, logistics, and technology, making it difficult for Vietnam to fully replace China.