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Tuesday, August 16, 2022

Challenges ahead to engage in global value chains

By Dr. Xuan Nguyen (*)

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With Apple now preparing for its grand debut in Vietnam, Southeast Asia’s dynamic economy is catching the attention of businesspeople and academics worldwide for its remarkable transformation and the ability to adapt to changes in the global economy. However, alongside opportunities, the road ahead will certainly be full of challenges, especially from economies with a similar level of competitiveness. So, what should Vietnam do to continue attracting major corporations worldwide?

The arrival of global value chains

In early 2020, Apple dispelled all doubts over its global value chain diversification plan by officially shifting some 30% of its AirPods production capacity, equivalent to 3-4 million sets, to Vietnam (1). Last month, Apple commanded attention again when it revealed it was rushing the transfer of its iPad production from China to Vietnam—a move already underway since before the Covid-19 pandemic (2).

It is clear that Apple, the company with the leading market capitalization in the world, has been convinced by the outstanding advantage Vietnam enjoys: macroeconomic stability, low labor costs, unrestricted business environment and an “openness” to the world economy. Timing also plays a role as China is determined to pursue the zero-Covid policy, which is considered one of the causes of the price fever around the globe. In addition, the U.S.-China trade war has not displayed any signs of cooling down just yet. These are important prerequisites for Apple to diversify its production bases, with Vietnam emerging as an ideal destination.

Apple’s biggest rival in the production of handsets, Samsung, was even quicker, having developed infrastructure and launched a global value chain for mobile phones in Vietnam ages ago. In addition, Samsung also took full advantage of its production scale and expanded the export of its “Made in Vietnam” cellphones from 50% in 2015 to 60% in 2020 (with some 182 million units) (3) (4), while forming a domestic satellite supply chain. In other words, not only has Vietnam benefited from Samsung’s advanced manufacturing technology, but the country also has the opportunity to join this technology giant’s hard-to-access global value chain, considering how geographical barriers and skills are always a challenge for emerging economies.

Cheap labor: key to competitiveness

Why are the world’s leading technology firms competing to make Vietnam part of their global value chains? One of the top reasons is the cost of production. If a country with exorbitant labor costs is chosen, technological products will lose their edge. In Vietnam, technology firms benefit from the per capita income here, which is currently only 25% of that in China and 38% of Thailand, resulting in much lower labor costs (5).

For example, as per a recent report by Xing-Dollar-Meng (2021), in the average unit price of an iPhone X, around US$1,000 to be specific, Apple pays its Chinese partner some US$104, mainly for labor. Most of the rest includes the cost of components imported from the U.S. or a third country and costs related to sales services (delivery, marketing, after-sales, etc.) (6).

When labor becomes expensive, there will undeniably be a need to shift production, a premise for emerging economies such as Vietnam to welcome. This view is relatively consistent with the theory of Ownership-Location-Internalization developed by the famous economist, John Dunning. Specifically, investment capital (including global value chains) will go where ownership advantages, location advantages, and internalization advantages are created (Dunning, 1981). Among them, location advantages are interpreted to comprise all factors from production inputs and production processes, to product distribution and the market. Besides infrastructure, macroeconomic policies and the openness of the economy, cheap labor is also crucial. This explains why Vietnam holds a unique appeal among multinational corporations.

Global value chains from Vietnam: a win-win solution

It is apparent that the extensive engagement of Vietnam and many other emerging economies in global value chains has brought about multi-dimensional effects on the world economy. Such activity leverages the host country’s economic growth via employment and the benefits derived from technology transfer, the related ancillary industries and infrastructure, all necessary for producing and supplying products to the global market.

For multinational companies, the relocation of production to emerging economies such as Vietnam also offers great benefits, especially regarding revenue and profit. As shown in Table 1, the top five manufacturers stateside, whether active in telecommunications or apparel, only recorded some 37% of their revenue from exports in the statistics of the world’s largest economy in 2018. A considerable part, about 63% of revenue, was not recorded, mainly because these firms have succeeded in building global production and supply chains based in emerging economies. This business strategy is spreading globally and changing the thinking of the export theory: countries lagging behind in terms of technology have now become leading exporters of technological products.

Open the door for the road ahead

There are still many challenges ahead for Vietnam as it becomes more actively engaged in global value chains. There have been signs of large corporations diversifying production sites to minimize risks in the post-Covid-19 era. Citing Samsung as an example, the company has shifted a certain part of its mobile phone production in Vietnam back to South Korea (7). This is consistent with Strange’s statement (2022) that after Covid-19, major corporations will consider repatriating their production facilities or some of their production stages to ensure the supply chain continuity.

In the case of Pegatron, Apple’s leading partner in phone chips which is expected to soon produce iPhones for Apple in Vietnam (8), the firm has recently invested in a workshop worth up to US$1 billion in Indonesia, said to be capable of making MacBooks for Apple in the future (9). Obviously, global value chains are not a playground only for Vietnam in the coming years.

Then, what should Vietnam do to continue making extensive contributions to global value chains? As analyzed above, Vietnam has great advantages and holds a strong appeal among multinational corporations. Below are some points policymakers may consider in both the short and long terms to consider what makes Vietnam different.

First, it is necessary to ensure abundant, well-skilled and cheap human resources in the long term, with the key being urbanization and shifting production from rural to urban areas. This should be accompanied by a strategy of reasonable training in skills and languages for unskilled workers based on the actual needs of the target processing industries (technology, consumption, etc.). Shifting production is also consistent with reducing income inequality as the minimum wage mainly applied to industrial production has constantly risen over the years, according to Chao-Ee-Nguyen-Yu (2021), i.e. this strategy will bring dual benefits.

Second, it is a must to have a synchronous and consistent policy from the central to local levels to anticipate the arrival of foreign direct investment, especially global value chains. The specificity of value chains is the gathering of raw materials to serve the production. Thus there is a need for the host country to provide good support in terms of tax policies (including input and output tax exemptions through the expansion of export processing zones), infrastructure (connecting seaports and airports with easy procedures and affordable shipping costs) and direct aid for investors, especially the new and potential ones (through conferences and seminars, with the promotion of investment and trade done regularly).

Third, macroeconomic policies need to build up investors’ confidence via extensive international partnerships to create the most unrestricted corridor possible for “Made in Vietnam” goods to be circulated on a global scale. During the fight against Covid-19, a lesson has been learned that there must be cooperation between governments on information exchange and coordination to prevent the spread of the disease, thereby laying a solid foundation for investors to maintain and expand their production and carry out international trade with peace of mind. This is also the current view of researchers on global value chains (Strange, 2022). To be specific, governments should take the initiative to support manufacturers, especially those with poor competitiveness, since they will easily get tossed out of the economic cycle in case there are large-scale upheavals such as Covid- 19 (or, more recently, soaring inflation).

Vietnam is looking to attract half of the world’s largest companies (Fortune Global 500) by 2030 with very specific policies, including market expansion for “Made in Vietnam” products (10). Thus, within the next decade, there will certainly be remarkable changes in all aspects of the socio-economic life in Vietnam on its path of industrialization and modernization. It is no coincidence that recently, a leading Taiwanese investment fund, Jih Sun Securities Investment Trust, poured nearly US$150 million into Vietnamese enterprises. The leader of this investment fund described Vietnam as a charming destination for foreign investment with very bright macroeconomic prospects in the future.

If the policies to attract global value chains as mentioned above are implemented well and in sync, Vietnam can emerge as the destination for most of the major corporations in the world, not only for the outsourcing of technological products and consumer goods but also for other potential sectors such as high technology, manufacturing technology and energy, etc. Certainly, fairy tales about attracting foreign direct investment, particularly global value chains, will continue to be written in Vietnam, as we have “clement weather, a favorable terrain and concord among the people” on our side. It is only a matter of time until these utopian dreams come true.

(*) Senior Lecturer in Economics, Deakin Business School, Deakin University, Australia.

Dr. Xuan Nguyen will co-chair the 2022 Vietnam Symposium in International Business (VSIB 2022) to be jointly organized by AVSE Global and the Ho Chi Minh University of Banking in HCMC from October 31 to November 1, 2022.

(1) https://www.cnbc.com/2020/05/08/apple-airpods-being-built-in-vietnam—report.html.

(2) https://asia.nikkei.com/Spotlight/Supply-Chain/Apple-to-shift-iPad-capacity-to-Vietnam-amid-China-supply-chain-woes.

(3) http://www.businesskorea.co.kr/news/articleView.html?idxno=8785.

(4) https://www.koreatimes.co.kr/www/tech/2022/05/133_319040.html.

(5) https://www.worlddata.info/average-income.php.

(6) https://www.wto.org/english/res_e/booksp_e/05_gvc_ch2_dev_report_2021_e.pdf.

(7) http://www.businesskorea.co.kr/news/articleView.html?idxno=87598.

(8) https://www.reuters.com/technology/china-covid-controls-makes-apple-supplier-pegatron-emphasise-expansion-elsewhere-2022-06-15/.

(9) https://www.reuters.com/article/us-indonesia-pegatron-apple-idUSKCN1SY0TK.

(10) https://asianews.network/vietnam-aims-to-attract-half-of-fortune-global-500-by-2030/.

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