China ignored: Know why did Lego choose Vietnam for its first carbon neutral plant.

With businesses looking for other places for their factories to escape expensive tariffs, Vietnam has been considered as one of the key winners of the US-China trade war. Vietnamese Post correspondent Erika Na recently visited the nation, and her three-part series examines Vietnam’s progress over the last four years. She explores the effects on China’s status as the “world’s factory” in this second section. 

The first carbon-neutral factory for Lego, the largest toy manufacturer in the world by revenue, just broke ground in Asia. The US$1 billion project will cover 44 hectares (108 acres) when it opens the following year.

Modern technology will be used in the vast project, which will be powered primarily by solar energy, to mould, process, and pack the plastic interconnectable bricks produced by the 90-year-old Danish company. 

But unlike the renowned toymaker’s other Asian manufacturing base—its Jiaxing, China—factory, which opened in 2015—this one is being constructed in Vietnam. It will be the sixth global manufacturing centre for Lego.

“(The Vietnamese government’s) plans to invest in expanding renewable-energy-production infrastructure, and a collaborative approach to working with foreign companies who are seeking to make high-quality investments, were among the factors in our decision to build here,” Carsten Rasmussen, Lego Group’s chief operations officer, said in December 2021.

Less than a year later, in November, the groundbreaking ceremony took place in Binh Duong, Vietnam’s wealthiest province and home to the country’s biggest industrial estates.

Located just north of Ho Chi Minh City, Binh Duong has undergone a profound transformation over the past 20 years – from a rural province reliant on agriculture to Vietnam’s third-largest recipient of foreign direct investment, with the country’s highest per capita gross domestic product in 2021. Government statistics show that industries and services account for 97 per cent of the province’s economic output.

Already home to 30 industrial estates, Binh Duong is determined to keep the momentum going. In 2022, the province’s biggest industrial estate developer began constructing its seventh estate, spanning 1,000 hectares. It is here where Lego’s new factory is being built.

But despite similar choices by many companies to branch out their manufacturing operations, industry insiders say that Vietnam alone cannot supplant China as the so-called world’s factory. However, Vietnam is still ramping up the competition with China, which has been the main destination for international manufacturing investment in recent decades.

That competition is only expected to intensify as both the Chinese and Vietnamese governments vie to attract higher-quality foreign investors with various incentives. And they’re not alone. With the whole of Southeast Asia looking to carve out a piece of China’s manufacturing pie, analysts say China will be hard-pressed to maintain its once-undisputed dominance in the long run.

The deluge of investments and shifting of supply chains from China to Vietnam in recent years has indeed triggered concerns within China about losing manufacturing business to Vietnam.

Vietnam began receiving more attention from foreign investors in 2018 after the US-China trade war broke out and Washington imposed higher tariffs on manufacturers with operations in China. FDI into Vietnam increased by 9.1 per cent to US$19.1 billion in 2018, followed by a 6.7 per cent increase to US$20.38 billion in 2019. Investment from China and Hong Kong to Vietnam jumped by a particularly high margin that year, with 165 and 24o per cent increases, respectively.

That interest further increased when massive Covid-19 lockdowns disrupted production in Chinese factories. While the global pandemic initially stalled FDI inflow into Vietnam in 2020, investment aggressively flowed in again in 2021 with US$38.85 billion worth of newly registered FDI.

But while such factors have made Vietnam – and the wider Southeast Asian region – more attractive to investors, observers said China’s vast area, population and domestic market, along with Vietnam’s relatively underdeveloped manufacturing sector and lower-skilled workers, meant China’s status as the world’s factory would not be challenged.

Compared with Guangdong, China’s most populous and prosperous province and a key manufacturing hub in the south of the country, Vietnam has substantially more land – roughly 310,000 sq km (120,000 square miles) versus 180,000 sq km – but Vietnam’s GDP was less than a fifth as big in 2021 and its population is around 80 per cent of Guangdong’s.

That same year, China accounted for 30 per cent of global manufacturing output, while Vietnam was responsible for just 0.05 per cent.

In October, China announced 15 measures designed to attract foreign investment in manufacturing. They focus on hi-tech industries, equipment and key components, and they seek to encourage foreign investment in new energy and low-carbon technologies.

Le Hong Hiep, a senior fellow with the Vietnam studies programme at the ISEAS-Yusof Ishak Institute in Singapore, said that while Vietnam will never supplant China, the whole of Southeast Asia might be able to do so in the longer term.

“China’s population is shrinking and ageing, and US-China competition has been intensifying,” he said. “We also don’t know how long [President] Xi Jinping will rule and what kind of other policies he may introduce that may reduce China’s attractiveness as a destination for FDI after zero-Covid.

However, even if we disregard Xi Jinping as a driver, if we consider structural variables like the population, US-China competition, and to some extent the maturing economy of China, they cannot continue to act in the same way indefinitely. 

Other nations, particularly those in Southeast Asia, will make up the slack left by China as it rises up the value chain. Thus, according to Le, Southeast Asia may wind up playing a stronger role as a manufacturing hub that is more geared toward the lower and middle ends of the spectrum, while China may end up concentrating on higher-end services.

Because China loses some of its investment to Vietnam and other nations, he remarked, “Of course, in a way, it is a competition.” “But I believe that is how the market and the economy operate. Investors will quit you if you are not competitive enough and remain unattractive to them. Vietnam might experience the same scenario sooner or later. Investors can relocate to Cambodia, Myanmar, Bangladesh, or India if Vietnam is no longer a desirable destination. The game is that.

Advertisement

Author