Sino-US Trade Friction, Pandemic Make Vietnam an Attractive Destination for Manufacturing

Following the outbreak of the new coronavirus, large-scale automobile-related investment projects have been postponed or put on hold in 2020 in the Asia. This is not surprising given the current business environment, such as uncertainty about the future due to the shrinking automobile market and physical restrictions such as restrictions on overseas business trips. However, despite this situation the manufacturing industry, including automobile parts, is moving into Vietnam.

Even in September 2020, when this report was written, several auto parts companies announced plans to invest in Vietnam. On September 1, Sumitomo Riko announced that it will establish a new automobile hose production and sales subsidiary in Vietnam. On the following day, Furukawa AS of the Furukawa Electric Group announced that it established a new company in June 2020, which will be its third base in Vietnam. On September 11, Sumitomo Corporation's subsidiary Sumitronics, which engages in electronics manufacturing service (EMS) business, announced that it has established an EMS business company in Vietnam to locally manufacture in-vehicle devices and home appliances.

The Sino-US trade conflict is the reason why suppliers are announcing their expansion into Vietnam one after another despite the ongoing pandemic. The trade friction, which began in 2018 and has been protracted and deepening, has prompted companies to reconsider their high degree of dependence on China. As a result, Vietnam has become a promising candidate site for “China Plus One” policy in terms of investment environment such as location, quality of workers, competitive wage level compared to other countries, and market growth potential in the medium to long term. Although these projects were announced just recently, preparation works were likely to be already underway in 2019.

It is expected that the pandemic will further accelerate the expansion of these manufacturing industries into Vietnam. An example of this is Japan’s Ministry of Economy, Trade and Industry’s decision to announce an open call for participants “Support Project for the Diversification of Overseas Supply Chains.” In the first open call for participants of this project, announced in July 2020, which started with the aim of supporting ASEAN supply chains of Japanese companies based on the lessons learned from the outbreak of the new coronavirus. Of the 30 applications selected from the 124 applications, 15 named Vietnam as the investment destination. Of these, seven applications, which is half of the total, are related to medical equipment, but Yokowo's in-vehicle antenna business was adopted from the field of automobile parts. In the future, it is likely that the number of cases where auto parts makers select Vietnam as an investment destination when reviewing their global production system will increase.

The automobile industry of Vietnam, which has a market size of less than 500,000 units, has a fragile supply chain of automobile parts because of the full-fledged industrial agglomeration in neighboring Thailand. Vietnam approved Resolution 115/NQ-CP on August 6, 2020 to promote the development of supporting industries for the period 2020-2030. The government has set a goal of increasing the number of primary suppliers of industrial products, including automobiles, to 1,000 by 2025 and 2,000 by 2030, but the concrete measures for investment incentives are not well worked out. Even so, growing local assembly by automakers due to import restrictions on automobiles and incentives such as Vietnam’s utilization as a global parts supply base using FTAs are factors that are making the country a more attractive destination for the auto parts industry.

Vietnam: Recent Trends of New and Additional Investments by Major Auto Parts Suppliers (Announced in September 2020)