In an attempt to reduce its reliance on China, Apple is gradually shifting its device assembly process to factories in Vietnam and India. With clearer signals from Apple, Vietnam is expected to participate more deeply in the global value chain.
Vietnam Briefing highlights Apple’s benefits and challenges when relocating its production to Vietnam, thereby giving implications for foreign companies seeking a presence in this market.
Gearing up the relocation process
Currently, more than 90 percent of Apple devices, such as iPhones, iPads, and MacBooks, are made in China. Experts suggest that Apple’s heavy dependence on China brings potential risks, especially when the US-China trade war shows no signs of de-escalating. As a result, Apple is facing a high demand to diversify its supply chains to other countries in the region. Apple has assembled its products in Vietnam and India for many years. Nevertheless, against the backdrop of China’s COVID-19 restrictions, Apple’s transition process has become more evident than ever.
A JPMorgan analysis forecasts that the current figure of 95 percent of Apple products made in China will drop to about 75 percent by 2025. Instead, the tech giant plans to move its production chain to Vietnam and India. Accordingly, JPMorgan’s analysis estimates that Apple will relocate 20 percent of iPad, 5 percent of MacBooks, 20 percent of Apple Watch, and 65 percent of Air Pods to be manufactured in Vietnam by 2025.
In addition, Apple has moved 11 Taiwanese enterprises’ factories in its supply chain to Vietnam; several vital firms such as Foxconn, Luxshare, Pegatron, and Wistron have also expanded their existing production facilities in Vietnam. Around the time the media reported on Apple’s relocating process to Vietnam, Foxconn Corporation signed a contract with Saigon – Bac Giang Industrial Park Joint Stock Company (SBG) in August to lease an additional 50.5 hectares of land to build a new factory. After inaugurating this factory, Quang Chau Industrial Park is expected to create jobs for about 30,000 workers.
Apple’s relocating process is expected to turn Vietnam into one of its most important production centers, thereby boosting device production volume in this market.
Vietnam as a potential market
A big reason for Apple to shift production to other countries in Asia is because of China’s policy instability. However, Vietnam, while benefiting from the investment inflows redirection, has become the ideal destination for Apple for the following reasons:
A growing economy amidst uncertainty
Vietnam is a fast-growing economy and the third biggest market in Southeast Asia, making it the ideal destination for international investors. In particular, regional volatility withstanding, Vietnam’s economy remains a “bright spot.” According to Moody’s Analytics, Vietnam’s GDP will grow by 8.5 percent this year – the highest rate in the region and also exceeding Moody’s previous forecast.
Moreover, economists add that what began as a slow reopening of Vietnam’s economy earlier this year was now a rapid improvement in industrial production and export trade, fueled by uninterrupted inward foreign direct investment.
Positive signals from the Vietnamese economy
These positive signals from the Vietnamese economy are significant, especially in the context of rising regional instability and escalating inflation, which are expected to impact the region’s economic growth directly and persistently in the second half of 2022. For example, Moody’s Analytics’ assessment of the case of China and Hong Kong is pessimistic, predicting an increase of only 4.3 percent for China and even negative for Hong Kong.
Over the years, Apple has faced many difficulties due to increasing fuel prices, the significant influence of the Russia-Ukraine conflict, the COVID-19 epidemic, China’s zero-covid policy, and the uncertainty of the US-China trade war. However, Vietnam’s stable development, despite these turbulences, is a potential target for investors looking for investment opportunities in the region.
Geographic proximity to other high-tech supply chains in Asia
Vietnam and India are both top alternatives for Apple. Nevertheless, when it comes to pulling the production process out of China, Vietnam holds great location advantages. Vietnam is the closest country to the Chinese manufacturing hub – Shenzhen. Replacing China’s manufacturing ecosystem is time-consuming and costly, so relocating production to a neighboring country can ensure the process remains smooth.
Even if Apple wants to change its strategy, China can still be a supplier of raw materials to Vietnam with reasonable shipping time and costs. As noted above, critical companies in Apple’s supply chain are expanding their infrastructure in Vietnam, mainly in northern cities such as Bac Ninh, Bac Giang, and Vinh Phuc – potential areas for development of the consumer electronics industry and also near China. In addition, Vietnam is also geographically located near Apple’s supply chain hot spots, such as Taiwan, Japan, South Korea, and other Southeast Asian countries.
Vietnam as an emerging trading link
With a favorable geographical position, Vietnam has the potential to emerge as a regional trading hotspot. For instance, Vietnam has free trade agreements with East Asian countries such as China and Japan – Apple’s supply chain key actors. In addition, Vietnam owns the US’s Most Favored Nation (MFN) Status, simplifying the trading process between the two countries. Last and not least, Vietnam is a member of the Association of Southeast Asian Nations (ASEAN), which gives the country various benefits in regional economic integrations.
Abundant and low-wage workforce
With a population of nearly 100 million people, Vietnam’s abundant labor force is essential for the country’s economic development. Various factors related to Vietnam’s labour market are considered to be critical motivations attracting many foreign investments.
For example, Vietnam’s minimum wages held steady from 2020 to 2021 and range from approximately US$132 to US$190 a month depending on the region. The low-wage workforce is considered a traditional advantage of Vietnam in the period of market opening and attracting foreign investment. Further, in 2020, Vietnam’s labor force participation rate was 74.4 percent, significantly higher than 60.5 percent (globally) and 67.2 percent (Southeast Asia and the Pacific). According to Japan International Cooperation Agency (JICA), despite the impact of the pandemic or economic restructuring, Vietnam’s labor supply will remain stable in the short and medium term.
Challenges facing Apple
The workforce advantages might change soon
Recently, JICA predicted that Vietnam would soon lose its comparative advantage in cheap labor due to the effects of aging and rising labor costs. Accordingly, JICA suggested that Vietnam will face the challenge of limited labor reserves to boost aggregate supply in the long run. Vietnam’s population will age “extremely fast” by 2050, with only 60 percent of the working-age population remaining, and a portion of the inhabitants will be over 60 years old.
Further, wages will certainly increase. The data shows that Vietnam is one of the three East Asian countries with the largest increase in minimum wages, with an average annual growth rate of 8.8 percent between 2015 and 2019. Therefore, Vietnam will lose its current comparative advantage in low-cost labor in low-skill and labor-intensive industries.
This assessment significantly affects labor-intensive sectors such as electronic assembly, where automation will threaten low-skilled workers. In addition, even if Vietnam has a large labor force, the labor size of Vietnam is considerably smaller when compared to China or India, making competition more challenging.
As a result, the most effective solution is to increase labor productivity, yet this is a highly complex and time-consuming process. Currently, the number of skilled workers in Vietnam is not considered a comparative advantage, especially when compared to this number in China, Singapore, Malaysia, and Thailand; therefore, Apple and similar companies will need help finding enough skilled labor in the country.
In addition, Vietnam’s labor market picture is also affected by COVID as managers are struggling to bring their workers back to factories. At the end of 2021, in Ho Chi Minh City, the total number of workers in export processing zones and industrial zones decreased by 46 percent, to 135,000 people.
A foreseen significant change in Vietnam’s labor market is undoubtedly a factor that foreign investors should take into consideration.
Lengthy customs procedures
Senior leaders of Apple expressed their concern about customs procedures as it is lengthy and takes additional time than the common international practice to clear customs procedures for goods. Despite various proposals to be assigned a special priority business regime under the official program of Vietnam Customs that many other businesses are enjoying, Apple’s attempts were rejected by the customs agency for many reasons.
Implications for foreign businesses
Apple’s plan gives Vietnam the golden key to participate more deeply in the global value chain. The strengthening of Apple’s presence in the Vietnamese market is expected to increase orders for suppliers in Vietnam or call for foreign suppliers to open factories in Vietnam. From here, Vietnam is facing the opportunity to attract quality FDI inflows.
Foreign investors will pay attention to the comparative advantages the Vietnamese market offers, notably the abovementioned factors. However, Apple’s concerns with the Vietnamese market will also be the concern of many other foreign businesses. In various conferences and seminars, foreign enterprises and associations have been called for practical changes and received responses from the Vietnamese government. However, issues such as improving workers’ skills or amending regulations for foreign investors are still unfinished stories that cannot be resolved overnight.
Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Hanoi, Ho Chi Minh City, and Da Nang. Readers may write to [email protected] for more support on doing business in Vietnam.