VietNamNet Bridge – Standard Chartered Bank has said Vietnam is emerging as the most preferred destination for companies planning to move production out of China.

An employee is at work at an electronics complex in northern Vietnam. Lower wages, a young and educated workforce and geographical proximity to China make Vietnam an attractive destination

The bank’s global research team said in a report released last week that China is shifting away from a growth model based on low manufacturing wages and is increasing automation as it moves up the value chain. This is opening up opportunities for low-cost manufacturing regions like ASEAN.

Vietnam is poised to be among the biggest beneficiaries of China’s move up the manufacturing value chain, cited by more than one-third of respondents of its latest survey.

Lower wages, a young and educated workforce and geographical proximity to China make Vietnam an attractive destination, particularly for more labor-intensive manufacturing segments. In addition, Vietnam is regarded as an attractive consumer market thanks to its fast-growing middle class and increasingly affluent population.

Respondents of the survey prefer to move to regions closer to their existing operations. Vietnam’s geographical proximity to China would allow them to continue to use their existing supply-chain network, enabling a seamless transition out of China.

“Our clients have consistently picked Vietnam as their top alternative destination to China over the past three years. In 2015, 36% of respondents who preferred to move manufacturing out of China said they would move to Vietnam, 25% chose Cambodia and 10% each chose Bangladesh and Indonesia,” the report said.

Respondents estimated that moving to Vietnam would provide an average cost reduction of slightly more than 19%, while moving to Cambodia would save 20% on labor costs. Moving to inland parts of China would provide smaller estimated savings of 16.8%.

Companies considering relocating from China appear to be predominantly low-end producers focused on garment manufacturing, based on their choice of alternative locations. Textiles, garments and footwear are a key export segment for Vietnam, accounting for around 24% of its exports.

Vietnam will benefit much from two major trade pacts in progress - the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP). Both agreements, when implemented, will give Vietnam and other ASEAN countries improved access to Japanese and U.S. markets.

Besides, Vietnam has been a key beneficiary of increased foreign direct investment (FDI) flows to the Mekong region. It accounted for over 7% of all FDI inflows to ASEAN in 2013 (14.4% excluding Singapore). Vietnam enjoyed the fastest growth in FDI among all ASEAN countries, except Myanmar and Laos.

Within the Mekong region, Vietnam attracts the second-largest amount of FDI after Thailand. The manufacturing sector is the biggest recipient, accounting for 70% of FDI flows to Vietnam.

“We expect this to increase further as more companies move production to Vietnam,” the report said.

In a survey conducted last year, foreign companies located in Vietnam noted that the large size of the domestic market was a key reason for their decision to invest in the country, the bank said.

SGT