(Yicai Global) Nov. 16 -- Southeast Asian countries have obtained much more export orders this year, arousing discussions on the transfer of industrial chains. The Yicai Research Institute will research the economic status of Vietnam, Thailand, Cambodia and Myanmar, major economies in Southeast Asia, respectively, and observe the transfer of industrial chains through typical cases.

Vietnam’s economy recovered rapidly this year after being severely impacted by the Covid-19 pandemic for two years. Its gross domestic product grew 8.8 percent in the first nine months, with a growth rate in the third quarter reaching 13.6 percent, a record high since 2011. Meanwhile, Vietnam’s export value climbed 17.3 percent from a year earlier to reach USD185.9 billion in the first half, and import value rose 15.5 percent to USD185.2 billion.

Such economic data has put Vietnam in the spotlight. Some people considered that Vietnam may become another ‘world factory’ after China. Therefore, we think it is necessary to analyze the economic and trade relations between China and Vietnam and the transfer of Chinese industrial chains to Vietnam.

The transfer of global manufacturing industrial chains to Southeast Asia has already begun. Vietnam, Thailand, Cambodia and Myanmar have their own advantages in attracting global industrial chains in different sectors, we learned.

China has always valued partnership with Southeast Asian countries and has played an important role in Southeast Asian economies through investment, trade, migration and entrepreneurship overseas.

1. Vietnam

1) Economy Shows High Growth

We research Vietnam’s economic situation by referring to Li Keqiang Index’s three economic indicators: new industrial power consumption, new railway cargo volume and new medium and long-term bank loans.

Vietnam consumed 22.6 billion kilowatt hours in September, up 18.6 percent from the same month last year, and 204.4 billion kwh in the first nine months, up 6.3 percent, according to a report from Electricity of Vietnam. Strong industrialization promoted the demand for energy and electricity.

Vietnam’s international railway cargo volume reached 1.1 million tons last year, growing 34 percent from 2020. The country’s railway network connects international rails, and its cargo trains can arrive in Kazakhstan, Russia, Mongolia, as well as countries in Central Asia and Europe, through transit areas in China.

As of Sept. 16, Vietnam’s credit increased 10.5 percent from the end of 2021, and most banks exhausted their annual credit line quotas, according to Vietnam National Bank. This reflects growing demand for funds in production and operation activities, a signal of economic recovery.

2. Vietnam's Current Situation of Export

Vietnam exported over USD10 billion worth of cellphone and parts in the first half, with first-half exports of computer and electronic products, mechanical equipment, as well as textile clothing and footwear each worth over USD10 billion. And all these exports made up 58 percent of the Southeastern country's total export over the period.

The United States was Vietnam exports' No.1 destination with a share of 31 percent based on statistics in the first eight months. China ranked second with 14 percent, followed by South Korea, Japan, the Netherland, Germany, India, Thailand, Canada and Cambodia.

1) Relocation of Textile Industry

Contract manufacturing of products from Nike and Adidas began in Vietnam as early as in 1990s', At present, some multinationals adopt so-called 'China+1' strategy, which means taking Vietnam as a supplementary part of supply chain while keeping Chinese businesses to quickly adapt to market changes. Chinese textile firms also began setting up plants in Vietnam.

Shanghai-based Texhong Textile Group began to set up industrial chain in Hải Hà since 2014 to build an industrial chain made up of raw material, spinning and cloth making. And Bros Eastern, a spinning mill from Ningbo, Zhejiang province, has formed an annual capacity of one million spindle yarn in Vietnam, accounting for 60 percent of the total capacity.

Shenzhou International Holdings and Huali Industrial Group, two Chinese contract manufacturing service providers, also set up production bases there.

2) Relocation of Home Furnishing Industry

The United States began to levy a 25 percent tariff on home furnishing products from China, prompting domestic firms to relocate industry chain overseas.

In recent years, Hangzhou, Zhejiang province-based Jason Furniture, Ningbo, Zhejiang province-based Loctek Ergonomic Technology, Hong Kong SAR-based sofa maker Man Wah Holdings and Markor International Home Furnishings have established plants in Vietnam.

Products made in Vietnam are mostly exported to the US, with Ningbo plant responsible for supplying Chinese market, Europe and other countries, Loctek told Yicai Global.

3) Consumer Electronics Firms Are Moving Assembling Works to Vietnam

Chinese contract manufactures of electronic products accelerated investments in Vietnam, following their clients of international giants such as Samsung, Intel and LG Electronics. Foxconn, Luxshare Precision Industry, Pegatron and Goertek have all set up plants there.

Goertek set up plant in Vietnam about 10 years ago based on clients' needs. And the headset contract manufacturing firm based in Weifang, Shandong province told Yicai Global it plans to expand investments in Vietnam, with output from the country set to make up about 25 percent of its total capacity in next several years.

3. Factors Behind the Relocations

1) Geopolitics

Heightened tariff barrier intensified Chinese firm's relocation of industrial chains amid China-US trade friction, prompting many multinationals to prioritize plants construction in Southeast Asia.

2) Vietnam's Favorable Tariffs

In recent years, Vietnam signed free trade deals with Europe and settled trade dispute with the US. Moreover, it enhanced connections with Japan and South Korea and was able to provide convenience in market access and tariffs through signing of bilateral or multilateral free trade agreements with various members of the World Trade Organization.

3) Vietnam Financial Market's Attractiveness to Overseas Capitals

Vietnam's capital markets enjoyed quick development in recent years. As of the end of 2020, Vietnam's listed firms reached 745, with their total market capitalizations equal to 54.2 percent of the country's gross domestic product. Its bond markets are also growing continuously. As of the end of this August, the bond market was worth USD99.5 billion, up 31.6 percent on year.

And overseas capitals are being attracted to Vietnam at an increasingly fast pace with the assistance of capital market. As of Oct. 20 this year, 35,985 foreign investment projects in Vietnam had a total registered capital of more than USD435.2 billion, of which USD269 million is already in place, data from the Ministry of Planning and Investment showed.

4) Other Factors

Vietnam has a relatively stable political environment among countries in Southeastern Asia. And it features a sufficient and low-cost labor force with people aged below 25 years making up one fourth of its 99.1 million population. The Vietnam government spent a lot to improve and upgrade transport infrastructure, laying foundation for overseas investment.

2. Thailand

Thailand, at the center of the Association of Southeast Asian Nations, is the body's second-largest economy with a marked geographic advantage, a generally stable society and higher policy transparency and trade liberalization.

Many manufactures plan to make their producing facilities less concentrated in China by move some to Southeast Asia amid trade tensions between China and the United States. And Thailand is attractive to sectors where high-efficiency logistics and strict quality control are necessary thanks to its higher development level of infrastructure and supply chain.

1. Sustained Post-Pandemic Economic Recovery

We will refer to new industrial electricity consumption, new railway freight traffic and new mid-to long-term bank loans, three economic indicators in so-called Keqiang index, an economic measurement named after Premier Li Keqiang, to inspect Thailand's current economic situation.

Thailand generated 146,797.2 gigawatt hours of power in the first eight months and ranked first among ASEAN members by per capita household electricity consumption. And the country's electricity needs increased continuously with post-pandemic economic recovery and quick increase of overseas industrial investments.

Thailand's railway freight traffic has increased sustainedly since 2018, reaching 11.882 million tons in 2020. Thailand's railway freight costs reduced 25 percent as the China-Laos Railway opened to traffic at 2021's end, further increasing its freight traffic.

In the second quarter, Thailand's banking loans increased 6.3 percent on year, with a 8 percent year-on-year gain in business loans and a three percent YoY gain in consumption loans. And enterprise loans expanded in almost all business fields, indicating a good situation of economic recovery.

2. Solid Industrial Foundations Attract Overseas Business Investments

Thailand owns a good industrial base and industrial chain as it starts early in manufacturing industry. And it is of a key position in integrated circuit and auto production among the ASEAN members.

Auto and parts are Thailand's biggest exports with a value of USD21.3 billion, followed by computer and accessories at USD18.7 billion, 2020 data showed. Jewelry ranked third, with rubber products and chemical raw materials at fourth and fifth places, respectively.

1) Relocation of Auto Producing Sector

Many overseas vendors, especially those from Japan, began to build plants in Thailand since 1980. At present, it owns most advanced auto industrial chain in the ASEAN, and its active transitions to new energy vehicles have attracted Chinese electric vehicle vendors to make investments.

MG, a brand under biggest Chinese vendor SAIC Motor, recently planned to invest THB2.5 billion (USD69.6 million) to expand its existing plant in Chon Buri and hopes to realize production of MG's all-electric models in Thailand next year. EV giant BYD planned to invest THB820 billion (USD22.8 billion) to build its first overseas plant for passenger EVs in the country.

Thailand was third largest auto exporter in Asia, with South Korea and Japan at second and first place, respectively, as a large part of Thailand vehicle plants' capacity, or almost 60 percent, are for exports purpose.

2) Sector of Electronics Manufacturing

Thailand is the largest assembler of electronics in Southeast Asia. The exports of its electronics manufacturing sector account for 25 percent of this nation’s total [exports] and also contribute to 15 percent of its gross national product. And the assembly of chips, hard disk drives and end products is Thailand’s major industry. The world’s big-four data storage drive makers namely Western Digital Corporation, Seagate Technology Holdings, Hitachi and Toshiba [Corporation] have all built their plants in Thailand.

Thailand has kind of substituted [replaced] China in the field of accessories for hard drives. During the first quarter of 2020, part of China’s production lines for hard drives halted their operation due to Covid-19, which resulted in the year-over-year rise of 23.5 percent in the number of corresponding orders earned by Thailand. Nevertheless, with Covid-19 outbreaks in China being swiftly under control and resumption of production, Thailand’s number of orders also declined to the normal level.

3) Sector of Garment Making [Textile Industry]

The textile sector is also one of the Southeast Asian country’s pillar industries, with a coverage of the entire industry chain from fibers to ready-to-wear clothing, which also secures the 2 percent market share regarding the world’s garment exports. Multiple internationally renowned brands such as US sports goods titan Nike, German multinational sports apparel maker Adidas and US worldwide clothing retailer Gap have all outsourced their production to Thailand. The Southeast Asian country itself also has the large-sized local [homegrown] enterprises including High-Tech Apparel and Hong Seng Knitting.

At present, Thailand is pursuing the high-end transformation of its textile industry, so as to hike the value-added of its products. For instance, developing flame-resistant, anti-bacteria textiles as well as those, on which the temperature can be modified.

3. Outlook

1) Favorable Tariffs

Investing in Thailand enables firms to enjoy preferential tariff treatments specified in trade agreements. Thailand has signed eight multilateral and bilateral free trade agreements since becoming an official member of the World Trade Organization, involving the Association of Southeast Asian Nations, Australia, New Zealand, Japan, India, Peru and Chile.

[Certain] Thailand exports also enjoy generalized system of preferences of the United States, Switzerland, Norway and Russia. And the US is the main destination of Thailand exports entitled to GSP.

Thailand is negotiating five trade deals at present, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

2) Infrastructure Advantages

Thailand ranked 42nd by infrastructure last year, higher than India's 49th and Indonesia's 57th, the World Competitiveness Rankings Yearbook from International Institute for Management Development in Lausanne, Switzerland showed. Thailand also had a higher ranking than Malaysia, Indonesia, Vietnam and India in Logistics Performance Index from the World Bank.

The country began to advance digitization of infrastructure in recent years to attract high and new tech industries. Local mobile carrier AIS and Chinese firm ZTE co-built Thailand's first fifth-generation network innovation centers to jointly develop 5G networks.

Giztix Express, a Thailand logistics digitization platform, is also providing digital tech services to local transport and logistics systems to lower overall transport costs. And WHA, BYD's local partner for plant construction, is committed to building a digital industrial park.

Thailand's industrial development perspective also face some restraining factors despite these positive ones.

Utility costs are generally higher in Thailand due to short supplies of electricity and water. Apart from Vietnam, other Southeast Asia countries actually had a higher industrial electricity and water fees than in economically developed Chinese areas.

Thailand had higher average wage than Vietnam with further increases likely with gradual decline of labor forces. Thailand is populated by about 70 million at present but its fertility rate already fell to level same as Switzerland and Finland. And the United Nations expected people aged above 60 years will make up over one fourth of Thailand's population by 2030.

The country also lacks high-end talents and is therefore set to be difficult to become a viable alternative to China in cutting-edge areas like aerospace, medical devices and industrial automation.

3. Cambodia

Cambodia is growing into one of the developing countries with the most potential in development in the current world. Located in the belly of Indo-China Peninsula, Cambodia is an important transportation hub in the Southeast Asian regions and this country has held the significant position on the “Maritime Silk Road” since a long time ago.

Since its implementation of the policy of free [market] economy in 2000, Cambodia has lured a huge amount of foreign investment. The globe’s industry chains have begun to transfer [shift] against the backdrop of the Sino-US trade friction and the foreign capitals [investments] has also further accelerated their steps of constructing plants in Cambodia.

1. Current Economic Situation

The Yicai Research Institute [We] used the three economic indicators of the Li Keqiang Index, namely new industrial electricity consumption, new railway freight traffic and new medium to long-term bank loans, to examine Cambodia’s economic situation.

With the constant improvement in Cambodia’s electricity-related infrastructures, the amount of power generated by this Southeast Asian nation has been growing quite rapidly since 2015. In last year, the total power of electric generators in Cambodia was 3,033 megawatts, supplying 75 percent of the country’s electricity consumption, as the corresponding remainder still depended on imports.

Currently, Cambodia only owns two railways linking the country’s south and north, whose length tallies 655 kilometers. Due to the long period of wars in early years, Cambodia’s railway infrastructures are kind of backward and its freight and passenger traffics have further slumped under Covid-19’s impacts over the recent years.

Cambodia’s total loans have continued to grow. Its loans amounted to USD356.2 billion [in total] during this year’s first eight months, as per data dislcosed by the Cambodian bureau of statistics. And the growth in loans indicates that the country’s business activities are gradually recovering from Covid-19’s impacts.

2. Development of Sectors

In this year’s first eight months, Cambodia’s exports rose by 26.3 percent year-over-year to USD15.6 billion. The clothes, footwear and travelling [tourism]-related items contributed about half of such sum, according to General Administration of Customs of Cambodia [not sure about its official English name], which added that major destinations of Cambodia’s exports are China and the US.

1) Vehicle Manufacturing

As of the end of last year, Cambodia boasted a total of nine registered vehicle-assembling plants and parts and components factories, whose overall investment exceeded USD250 million. The brands of autmobiles assembled by these facilities include South Korea’s Hyundai, the US’ Ford and Japan’s Isuzu, according to Cambodia’s Ministry of Industry, Science, Technology and Innovation.

The relevant authorities in Cambodia have also greenlit a project about the vehicle-assembling plant, whose investment is worth USD15.6 million, which will assemble Dongfeng-, Soueast- and FAW-branded vehicles from China [ in future]. Moreover, Chinese tyremakers Sailun Group and Jiangsu General Science Technology have both built plants in Cambodia.

2) Electronics Sector

From this January to August, Cambodia’s exports of electronics tallied USD1 billion, accounting for 6.4 percent of its total exports. There is still a huge gap between the size of Cambodia’s electronics sector and that of Vietnam’s, however, in recent years, many electronics manufacturers have also chosen to invest locally in Cambodia.

Last year, Japan’s biggest keyboard maker Minebea decided to inject USD100 million to expand its plant in the Phnom Penh Special Economic Zone.

3) Sector of Clothes Production

The clothing production is the pillar industry of Cambodia. The number of its registered garment plants nationwide surpassed 1,200 units in last year, contributing USD10 billion to its exports, making up a proportion of 63 percent. Multiple clothes companies including US clothing retailer Gap, Japanese fast fashion retailing brand Uniqlo and Spanish apparel retailer Zara have all set up their factories in Cambodia.

3. Outlook for Industry Transfer

Cambodia joined the Association of Southeast Asian Nations in 1999 and became a member of the World Trade Organization in 2003. With the signing of the ASEAN-China Free Trade Agreement, China has imposed zero tariff on most products exported to Cambodia since 2010.

As one of the least-developed countries, Cambodia also enjoys generalized system of preferences from 28 countries and regions including the US, the European Union and Japan, especially that the US has granted more generous quotas and tax cuts for textile and garment imports from Cambodia.

Cambodia has few restrictions on foreign investors. It allows foreign investors to wholly own businesses in the country and hire foreigners for key positions. In addition, it does not impose foreign exchange controls, allowing free fund inflows and outflows.

Young age is a notable characteristic of Cambodia's population, of which over 50 percent are aged 10 to 35 years old, with its current labor force population of about 7.5 million keeping an annual growth of 2.7 percent. Its labor force is relatively cheap. In 2019, the government raised minimum wage in clothing and footwear manufacturing industry to USD190 per month.

Factors discouraging industrial relocations are not a few though. The [transport] infrastructure is imbalanced, with shares of highway at over 60 percent, and railway and waterway transport are quite limited. Also, water and power supplies are short, resulting in higher utility costs.

Worker strikes are frequent in Cambodia due to lower wages. And the country had a higher reliance on raw material imports, making it vulnerable to production halt amid snarl of global supply chain. All these factors increase investors' concerns.

4. Myanmar

Myanmar, the biggest country by area in the Indo-China Peninsula, is attracting foreign investment thanks to its large workforce, cheap labor costs, abundant natural resources and strategic geographic location. Despite some setbacks in recent years, the Southeast Asian country still has huge potential for growth.

As part of a wider study on how major economies in Southeast Asia, including Vietnam, Cambodia, Thailand and Myanmar, are becoming key links in international supply chains, the Yicai Research Institute takes a closer look at the economic and trade relationships between Myanmar and China and the factors behind the shift in industrial chains.

The pandemic and political turmoil have taken their toll on the Myanmar economy in the past two years. But business confidence is on the rise as the domestic situation stabilizes and Covid-19 flare-ups come under control.

Economic Situation

The Yicai Research Institute used the three economic gauges of the Li Keqiang Index, namely new industrial electricity consumption, new railway freight traffic and new medium to long-term bank loans, to examine Myanmar’s economic situation.

Although Myanmar boasts a huge railway network, it is in poor condition. However, spurred by the opportunities offered by China’s Belt and Road Initiative, railway transport has improved recently.

Some 2,000 tons of cargo are cleared each day through the border post between Myanmar and China’s southwestern Yunnan province since an expedited customs clearance mechanism was introduced on April 1.

However, since the beginning of the year, Myanmar’s power supply has been erratic due to damaged power lines and big hikes in the price of natural gas. This has led to wide-spread power cuts, making it difficult for factories to operate.

There is no data available for Myanmar’s credit supply, indicating that the country’s finances are heavily restricted and the banking system is close to paralyzed.

Relocation of Industrial Chains

The manufacturing sector has attracted foreign investment, mainly in automobiles and textiles. Unlike Vietnam, companies that relocate to Myanmar are mostly labor-intensive industries.

Textiles

Garments are one of Myanmar’s main industries. There were 606 textile mills in the country as of August 2020, half of which were backed by South Korean or Chinese capital.

However, in the past year, nearly 150 clothing factories have shut down, putting about 200,000 workers out of work. Of these, 28 burned down and 50 closed permanently.

A number of global apparel brands, such as Sweden’s H&M, the UK’s NEXT and Holland’s C&A, all pulled their businesses out of the country in March last year and shifted to other nations, in particular Vietnam.

Autos

Myanmar’s car manufacturing mainly focuses on vehicle assembly using semi-finished kits. A number of auto firms set up plants in Myanmar after 2018 when the country banned the import of secondhand and right-hand-drive vehicles.

In 2018, Chinese new energy vehicle manufacturer Yudea Group linked arms with Myanmarese automaker Khaing Khaing SangDa Group to assemble and produce gasoline-electric hybrid vehicles. The following year, Chinese carmaker Gold AYA Motors International Group built a plant in Myanmar with an annual capacity of over 5,000 vehicles.

However, a number have also moved away. Japan’s Suzuki Motor terminated the operations of its two auto assembly plants in the country on July 1. While Japan’s Toyota Motor has also halted construction of a new facility in the Thilawa Special Economic Zone, near Yangon, Myanmar’s largest city.

Electronics

As a member of the Association of Southeast Asian Nations, Myanmar has benefited from the relocation of global electronics manufacturing to the region. It has started to make electronic devices and electrical appliances.

However, in general, there are only a few foreign investors that are investing in Myanmar’s electronics sector and its electrical products remain at the low-end of the industrial chain.

Factors Behind the Shift

During the first four months, Myanmar attracted over USD407 million of foreign investment, 54 percent of which came from other ASEAN countries. China was the biggest investor, accounting for 13 percent at USD51 million.

The ready supply of available labor and the relatively cheap cost are the main factors attracting foreign investment. Myanmar had a working population of 24.7 million in 2019, almost three-times that of Cambodia, according to World Bank statistics. Labor is also quite cheap, with the average monthly salary in the manufacturing sector being around USD117.50, much less than in Cambodia and Vietnam.

Water costs are low at just USD0.04 per cubic meter. However, due to the ramshackle grid, electricity prices are high. Only half of the country’s households are connected to the grid, and blackouts during the dry seasons are particularly frequent, even in Yangon, the country’s economic hub.

As an underdeveloped country, Myanmar can enjoy preferential duties from over 30 developed nations, including the EU, the US and Japan. Although its garment sector in particular benefits from generous tax waivers through the Generalized System of Preferences, the US and EU have revoked this privilege multiple times as a way of implementing economic sanctions on the country.

Myanmar is transforming from an agricultural economy towards one more focused on industry and services. The country has the potential to become an integral part of regional supply chains and grow into a significant logistics hub thanks to its strategic geographic location and abundant resources.

Editors: Dou Shicong, Shi Yi, Kim Taylor