The Long Winter
By Diep Thanh Kiet
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| Wood processing at Scansia Pacific Co. in HCM City. Vietnam's labor-intensive industries on the opportunities available in the future, even if these sectors receive merely 10% of China's orders. |
Vietnam is enjoying a valuable opportunity to generate more orders for textile, garment, wood and food producers. However, translating opportunities into real improvements requires policymakers to rigorously implement the prescribed policies.
In the 1960s and 1970s, Japan’s economic miracle hinged on labor-intensive industries, which benefited from cheap labor. In the 1970s and 1980s, when labor costs soared in Japan, order for labor-intensive products shifted to Korea and Taiwan instead. Since then, Japan has focused on capital-intensive sectors aimed at producing electronics and consumer goods. Such industries as steel, motorbike and car manufacturing have subsequently emerged, as have sectors which produce hi-tech products.
In the 1980s and 1990s, when labor costs soared in Korea and Taiwan as well, orders for labor-intensive products flooded into China and Vietnam. At present, both Korea and Taiwan are embarking on the production of hi-tech items such as electronic chips and information technology products.
Some experts contend that countries with gross domestic product (GDP) per capita of more than US$3,500 will struggle to shelter labor-intensive sectors such as footwear and apparel production from decline. These industries may be relocated instead to lower-income countries.
China’s GDP per capita has exceeded US$3,000 and may soar to US$4,000 in late 2010. In theory, China will have difficulty maintaining an edge in labor-intensive sectors such as apparel, footwear and woodwork production.
Meanwhile, China is making more electronic products and cars and is venturing into hi-tech industries. Besides, the country is revising the yuan exchange rate in response to pressure from the U.S. and the European Union. China’s competitive advantage may be eroded, which leads to the relocation of orders for textiles, apparel, footwear and woodwork to countries with lower labor costs.
Given its advantageous geographical location, Vietnam will be an enticing choice for many customers. However, the script may unfold differently this time around.
Great opportunity for Vietnam?
Recent changes clearly bode well for such local industries as textiles and apparel, footwear, woodwork and food processing. If the footwear industry manages to receive 10% of the orders currently bound for China, which involve the export of eight billion pairs of footwear annually, it will have to expand its productivity by more than twice. Vietnam’s textile and apparel industry, meanwhile, exported merely US$9.2 billion, far lower than China’s US$150 billion in the economically tumultuous year of 2009. If 10% of the orders which China currently receives flow to Vietnam instead, the latter will have to boost its productivity by 2.5 times. Likewise, Vietnam’s woodwork export in 2009 trailed far behind China’s, US$2.55 billion compared with US$24 billion.
Given their current capacity, Vietnam’s labor-intensive industries are unlikely to effectively capitalize on the opportunities available in the future, even if these sectors receive merely 10% of China’s orders.
China’s approach
Vietnam’s rivals abound, including Indonesia, Myanmar, Bangladesh, Pakistan and some other South Asian countries. To aggravate matters, China has adopted measures to curtail the wane in orders, especially as it needs to create jobs for a vast number of citizens, a task which the electronics and auto industries alone cannot accomplish. What are these measures, then?
Rezoning: Orders are received in the east and processed in the west, where labor costs remain low. This measure will not affect customers.
Moving upstream: Faced with ferocious competition, China will transfer some orders to other countries. However, customers may still insist that producers in other countries use Chinese inputs. Chinese producers can also set up factories in other countries to keep control of the production chain. Meanwhile, China will boost the production of equipment with low prices and acceptable quality. Notably, China has exerted efforts to seize natural resources such as land and establish material production factories amidst the economic downturn.
Productivity improvement: China has launched measures to improve national and sectoral productivity to curb inflation. As a result, its traffic, port and telecom infrastructure is excellent. Thanks to increased automation, managerial solutions and a disciplined workforce, China can efficaciously tackle the upcoming challenges.
Old scenario?
Despite the numerous challenges facing its path to further development, China is likely to effectively tackle them and, in so doing, alter the growth paths of other countries. Countries less developed than China may not have a chance to enter the next phases of growth. This means many countries will be stuck, either for a long time or eternally, at subcontracting. Figuratively speaking, winter may never pass and spring may never come.
• These countries may remain subcontractors if customers insist on the use of cheap Chinese inputs. If its inputs are always in high demand and high technology is adopted, China can invest in and develop new materials with high added value. Furthermore, China has ample material supplies and is able to deter competition effectively.
• China has a diverse and highly stratified economy which can provide a vast array of products to the world and affect the traditional development path. Less developed countries will therefore find it hard to produce electronics, cars and hi-tech items capable of competing with China’s offerings.
• Vietnam and other ASEAN countries will not benefit as much as China from the China-ASEAN Free Trade Area, in effect since January 1, 2010.
Solutions for Vietnam
While there is a solution to practically every problem, no measure can work wonders if not implemented thoroughly. Most domestic sectors have fleshed out specific measures, but how these solutions are implemented remains in doubt. For example, Decision 55, issued by the Prime Minister in 2000 and aimed at accelerating growth in the textile and apparel sector, and Official Letter 39, issued by the Ministry of Industry and Trade in 2008 and aimed at developing material sources, sector capacity and human resource quality for the same industry, have yet to bear fruit.
It is time for senior managers to reassess their sectors and embrace effective measures to counteract the effects of China’s strategies. Unless the measures are launched effectively, Vietnam will find it hard to move away from subcontracting and turn into a developed, industrial nation, regardless of how many additional orders it receives.