Over the past few decades, China has been the preferred destination for global businesses looking to establish manufacturing facilities and sourcing supply chains. However, in recent years, many companies have started shifting their focus towards Vietnam and Thailand. There are several reasons why this is happening, and in this essay, we will discuss the top five reasons for this shift.
1. Labor Costs
One of the most significant factors driving the shift from China to Vietnam and Thailand is the difference in labor costs. While China used to have a comparative advantage in terms of low-cost labor, this advantage has eroded over the years. Labor costs in China have been rising steadily, and the country is no longer the cheapest option for manufacturing. In contrast, labor costs in Vietnam and Thailand are lower, making these countries more attractive for businesses looking to minimize production costs.
According to a report by the Japan External Trade Organization (JETRO), the average monthly wage of a factory worker in China was $645 in 2020. In contrast, the average monthly wage for a factory worker in Vietnam was $196, and in Thailand, it was $331. This significant difference in labor costs has made Vietnam and Thailand attractive destinations for businesses looking to cut costs.
2. Government Policies
Another reason why supply chains are shifting from China to Vietnam and Thailand is the government policies in these countries. Both Vietnam and Thailand have taken steps to create a business-friendly environment and attract foreign investment. In recent years, both countries have implemented policies that offer tax breaks, investment incentives, and streamlined regulatory processes.
In Vietnam, the government has implemented a series of economic reforms aimed at liberalizing the economy and attracting foreign investment. The country has implemented policies to reduce bureaucracy and create a more transparent and efficient regulatory environment. Vietnam has also signed several free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which has increased the country’s attractiveness as a manufacturing and sourcing destination.
Similarly, in Thailand, the government has taken steps to improve the country’s business environment. The government has implemented policies to reduce bureaucracy, improve infrastructure, and attract foreign investment. The country has also implemented a series of tax incentives aimed at encouraging investment in specific industries, such as high-tech manufacturing and research and development.
3. Geopolitical Risks
Another factor driving the shift from China to Vietnam and Thailand is the geopolitical risks associated with doing business in China. In recent years, the US-China trade war and the COVID-19 pandemic have exposed the risks associated with relying heavily on China for manufacturing and sourcing. Many companies have realized the need to diversify their supply chains and reduce their reliance on China.
Vietnam and Thailand are viewed as more stable and predictable investment destinations compared to China. These countries have stable political environments and are less likely to be affected by geopolitical risks. By shifting their supply chains to these countries, businesses can reduce their exposure to geopolitical risks and ensure business continuity.
4. Proximity to Raw Materials
Another reason why businesses are shifting their focus to Vietnam and Thailand is the proximity to raw materials. Both countries are located in the heart of Southeast Asia, a region known for its abundant natural resources. Vietnam and Thailand have access to key raw materials such as rubber, palm oil, and natural gas, which are essential for many industries.
China, on the other hand, relies heavily on imported raw materials, which can be subject to trade restrictions and tariffs. By establishing supply chains in Vietnam and Thailand, businesses can reduce their dependence on imported raw materials and take advantage of the abundant natural resources in the region.
5. Market Access
Finally, another reason why supply chains are shifting from China to Vietnam and Thailand is market access. Both countries offer access to large and growing markets, making them attractive destinations for businesses looking to expand their customer base.
