South Korean companies are still expanding their operations in Vietnam, largely driven by the shifting of global production bases from China to Vietnam due to rising production costs and other geopolitical factors. There has also been an increasing trend to expand production in Vietnam as a way to diversify risks, given the higher risks associated with production in China due to the escalating US-China conflict. However, there are also concerns about the risks associated with excessive concentration of production in Vietnam.
Vietnam replaces China—an ideal goal？
South Korea’s direct investment in Vietnam began in 1992 when diplomatic relations between the two countries were established, as reported by the Korea Export-Import Bank. In 1994, 44 new corporations were established in Vietnam. By 1995, the amount of direct investment had reached $18.45 million, leading to a rapid increase in direct investment in Vietnam in the mid-1990s. At that time, labor-intensive industries such as shoes, leather, and electronic components in Korea were moving their production bases overseas due to rising labor costs. While the majority of these companies relocated to China, some chose to invest in Vietnam, such as Taekwang Industrial, which produces sports shoes for the Nike brand and entered the Vietnamese market in 1994. However, due to the confusion caused by the Asian financial crisis in the late 1990s, investment in Vietnam cooled down. Starting in the late 2000s, some Korean companies began to leave China due to rising production costs, and started looking for alternative production bases. Many of these companies turned to Vietnam. When the Trump came into power, trade tensions between the US and China increased. However, because many Korean companies had already started moving their production bases, the direct impact of the US-China trade tensions on these companies was relatively small.
Many Korean companies, including Samsung Electronics, have turned to Vietnam as an alternative production base to China. The following reasons have been identified for this shift in production: Firstly, Vietnam is geographically advantageous. As it is located adjacent to China’s southern region and not far from Korea, supply chains for raw materials and parts can be effectively utilized between the three countries. Secondly, Vietnam’s political and social stability provides an attractive environment for foreign investment. Thirdly, the Vietnamese government has implemented favorable policies to attract foreign enterprises, though it should be noted that such incentives for labor-intensive industries have been reduced. Fourthly, the wage level in Vietnam is considerably lower than in China, though it was rising in last 10 years. Vietnam has a highly educated population with a younger demographic, providing a relatively low-cost source of highly skilled labor. Finally, as Vietnam shares a Confucian and Han cultural heritage with Korea, it enjoys a high degree of affinity with Korean businesses. Vietnamese workers are known for their diligence and strong work ethic, which is also valued by Korean firms. Actually, many Korean companies have relocated their production bases to Vietnam, seeking to diversify their production portfolio and reduce exposure to risks associated with a reliance on a single manufacturing base.
Potential risks in Vietnam
South Korean firms have been concentrating their expansion efforts in Vietnam, among the ASEAN countries, as a “China+1” strategy. Nonetheless, the situation on the ground is changing for some of them.
Indeed, the proportion of South Korean direct investment in Vietnam, as a percentage of its overall direct investment in ASEAN, reached nearly 50% in 2018 and 46.2% in 2019. However, this figure has declined to less than 30% since 2020, although it did not become extremely high as Singapore. In contrast, direct investment in Indonesia, a regional power, has surged in 2020 and 2021. Hyundai Motor, for example, built a complete automobile factory. LG Energy Solution established a battery factory in Indonesia, attracting large-scale direct investment. The reason for investing in Indonesia, rather than Vietnam, lies in the size of the Indonesian automobile market and the abundance of natural resources used in car batteries. Furthermore, the risks associated with doing business in Vietnam are becoming more recognized. In this regard, the Korea International Trade Association released a report in January 2021 on the theme of “Vietnam: Beneficiary of Supply Chain Diversification-Opportunities or Risks?” The report classifies the risks for Korean companies with production bases in Vietnam into “Trade Risks” and “Market Risks”. “Trade Risks” are reported out as the following:
1.Anti-dumping and countervailing duty investigations on imports from Vietnam are increasing in various countries.
2.Vietnam is considered a non-market economy and is therefore at a disadvantage in the determination of anti-dumping and countervailing duties.
3.The U.S. Department of Commerce has made a preliminary determination to impose countervailing duties on Vietnam-made tires for alleged currency manipulation.
4.Vietnam is likely to be investigated as a transit point for circumventing anti-dumping and countervailing duties on Chinese products.
On the other hand, the market risk associated with South Korean businesses that have taken Vietnam as the main profitable market includes:
1.Direct investments by various foreign companies in Vietnam are expanding, leading to intense competition to secure production sites such as factory land.
2.The degree of dependence on imports of core components from China is high.
3.There is a shortage of skilled workers, and insufficient accumulation of high-level human resources.
4.The market size of Vietnam and ASEAN is limited compared to that of China.
The Vietnamese government had effectively contained the spread of COVID-19 until the spring of 2021. However, as the number of infections increased domestically, the government implemented stringent measures such as restricting employee attendance. As a result, many enterprises were forced to experience reduced factory operating rates and halt operations.
End
The expansion of South Korean manufacturing companies in Vietnam has seen a waning trend in the large-scale investment projects. However, additional investments and those from related companies remain active. Nonetheless, China remain the primary suppliers for South Korean manufacturing firms. But the US-China trade frictions and the rising production costs in China will likely result in a decrease in its dependence. Therefore, South Korean companies are likely to maintain a high level of interest in Vietnam in the future. On the other hand, South Korean companies have faced the risk of concentrating their production in Vietnam during the COVID-19 pandemic. In the future, there is expected to be an increase in the number of moves, mitigating risks by diversifying production bases to ASEAN countries and India.
Major Teng is a research fellow at Asia Pacific Regional Development Institute of Hong Kong and he focuses on East Asian studies and China-Japan comparative politics research.