In recent years, as China's demographic dividends have gradually disappeared, production costs have continued to soar. Coupled with mounting environmental pressures, many Chinese and foreign-invested companies have opted to relocate their factories from China to Southeast Asia, where labor costs are lower. As U.S.-China trade frictions intensify, the deterioration of the global trade environment is also driving more companies to move to Southeast Asian countries. However, the business environment in Southeast Asia is not as good as expected. The tide of industrial transfer does not mean that China's competitiveness in the world's manufacturing sector has disappeared however. In recent years, many companies have encountered difficulties after relocating their factories to Southeast Asia, and there are some typical cases in Vietnam and Cambodia.
According to Ken Loo, Secretary General of the Garment Manufacturers Association in Cambodia (GMAC), 70 garment factories in Cambodia have closed down so far. This is double the amount of 35 factories that had closed down last year. The main reasons of this is that, (1) The increase in labor costs. Cambodian labor wages rose from $40/month in 1997 to $182/month in 2019. If employee benefits and various subsidies are included, the cost will be about $210 a month. Labor costs now are rapidly filling Cambodia's previous cost stagnation, compared to Bangladesh, Sri Lanka, India, Myanmar, Pakistan, and Laos, which have lower labor costs in the garment industry. (2) The supply chain is far from being perfect. Currently, the infrastructure and supporting facilities of Cambodia's industrial manufacturing industry are relatively weak, which leads to high overall costs. (3) Workers have low efficiency. According to industry analysts, the productivity of Vietnam and Indonesia’s factories are about 80% of China's, and the productivity of Cambodian garment factories are only about 60% of China's. (4) Worker protests that increase the difficulty of business operations. (5) There is also much uncertainties, and whether the future export price advantage can remain at its current levels remains doubtful. Furthermore, tax incentives that are mainly from the European Union may be cancelled. It is also possible for some garment companies to relocate their factories out of Cambodia because of concerns about this policy.
After the outbreak of U.S.-China trade friction, other Southeast Asian countries like Vietnam and Malaysia have benefited more compared with Cambodia. These countries are benefiting from the relocation of the manufacturing industry, which includes electronic and furniture products, out of Mainland China. Recently, a research report by Nomura Securities pointed out that due to the tariffs imposed by both China and the United States, 52% of the goods have an import substitution effect. Vietnam is the biggest beneficiary and this can possibly increase the country's GDP by 7.9%. This prompted many people to start planning on investing in Southeast Asia in order to avoid the risks of the U.S.-China trade war. However, Anbound researchers believe that these smaller Southeast Asian economies such as Vietnam are facing both opportunities and challenges, and if the situation is not managed well, it could lead to greater risk.
Taking Vietnam as an example, the country may soon face the risk of rising costs. As an export-oriented economy, a large number of concentrated exports will lower the prices of export commodities, while a large number of concentrated imports will push up the prices of imported goods. As such, imported inflation will then become an inevitability. Facing rising inflation, workers might strike and protest, and the solution to this is to raise their wages. For political purposes, the Vietnamese government may support workers in demanding for higher wages. The Vietnamese government may not be able to control the rapid rise of costs and imported inflation. It should be pointed out that this is a disadvantage inherent in smaller economies, and cannot be resolved by merely adjusting one or two policies. The domestic market of these economies has a relatively small population, and with wages rising quickly, the resulting cost will soon catch up with China. By then, these economies will also lose the most important advantage of undertaking China's industrial transfer.
It is also worth noting that Vietnam's economic growth has been positive in recent years. In 2018, its GDP growth rate was as high as 7.08%, far exceeding market expectations. But one result of rapid economic growth is that Vietnam has also entered the stage of rapid urbanization. Nowadays, some cities in Vietnam are already engaged in aggressive real estate development. Many high-rise buildings have been constructed in the cities, but there is a serious lack of supporting fundamentals to accompany the real-estate boom. This is an indication that Vietnam is moving the wealth created by manufacturing over to the real estate industry. Following this logic, Vietnam will quickly enter a development bottleneck. In addition, statistics show that in the first quarter of 2019, Vietnam attracted US$ 10.8 billion worth of foreign investment, a substantial increase of 86.2% year-on-year, a record high in the same period in three years. Large-scale foreign investment can promote the domestic economy, but it also makes the Vietnamese economy substantially outward-facing. If foreign capital is invested in the capital market, it will also increase the volatility of foreign capital entering and leaving the market. Since Vietnam is a relatively smaller economy, with high degree of economic extroversion, any possible negative results or outcome might occur in a rapid and impactful way.
In sum, small economies in Southeast Asia such as Vietnam may be benefitted for short-term
in the restructuring of the industrial chain and manufacturing transfer. However, due to their small economies and limited market capacity, they will soon be flooded by foreign investment. If such economies only conduct export processing and urbanization, the costs will rise very rapidly. Once the cost and asset prices rise, these countries will see problems appearing faster comparing with China. Problems such as the rising wage, inflation, house prices and so on might arise. In addition, it should be pointed out that while China is facing a large number of enterprises moving out due to cost problems, this does not mean that China's industrial advantages have been completely lost. China is currently undergoing an adjustment of its economic structure. Even in this particularly challenging period for China, its comprehensive competitiveness in the industry and market space are unmatched by Southeast Asian countries. It should also be pointed out that in a world where overproduction is rampant, manufacturing industries moving from China to Southeast Asian countries, such as Vietnam and Cambodia, will make way for production capacity that will in turn create more surplus for the world's production capacity, possibly causing an eventual global economic crisis. Once such a crisis breaks out, these small economies will be hit harder.
Final Analysis Conclusion:
Small economies such as Southeast Asian countries will benefit from the U.S.-China trade dispute in the short term, but because of their smaller market, this effect may soon reach their maximum benefit, while the risks of rising costs and overcapacity will soon follow.
