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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)

Automaker Products Purpose Overview
Sumitomo Riko Automotive hoses ・Trying to avoid risks by diversifying and decentralizing its supply chains, taking into account the Sino-US trade friction and the spread of the new coronavirus around the world. ・ Setting up a production system based on the “local production for local consumption” concept which promotes production and supply in the vicinity of consumers. ・ In December 2020, SumiRiko Vietnam, a manufacturing and sales subsidiary for automobile rubber hoses, is scheduled to be established. The subsidiary will be 100% owned by Sumitomo Riko. This will be the company’s second manufacturing base for this product in Vietnam. ・In October 2022, the subsidiary is scheduled to start operation. A total of 2.4 billion JPY is planned to be invested in the project. The number of employees is planned to be 560 people in fiscal 2025.
Furukawa Electric (Furukawa AS) Wire harnesses ・Increasing production capacity of aluminum wire harnesses for export to Japan and North America in order to meet the vehicle weight reduction needs of Japanese automobile manufacturers. ・ Building a mutually complementary system for global supply in consideration of business continuity planning (BCP). ・In June 2020, Furukawa Automotive Systems Vinh Long Vietnam (FAVV) was established. The subsidiary is 100% owned by Furukawa AS. This will be the company’s third manufacturing base in Vietnam. ・In August 2021, the subsidiary is scheduled to start operation. Sales revenue is aimed to reach 22 billion JPY in fiscal 2023.
Sumitomo Corporation (Sumitronics) EMS (electronics manufacturing service) ・Shifting production from China to Vietnam due to growing local demand and negative impact of the Sino-US trade friction on products exported from China to North America. ・Responding to anticipated growth of EMS business for automobiles and home appliances. ・In August 2020, Sumitronics Vietnam was established. The subsidiary is 100% owned by Sumitronics. ・In September 2020, the subsidiary was scheduled to start operation. Sales revenue is aimed to reach 10 billion JPY five years after starting operation.
(Created using various media sources) (HORII Takashi)
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