Why did Lego choose Vietnam, not China, to build first carbon-neutral factory ?

Toy behemoth’s move reflects how like-minded multinational firms are diversifying supply chains away from what has been known for decades as the world’s factory . Lost investment dollars amid the US-China trade war and pandemic have sparked concerns within China, but analysts explain how Southeast Asia’s gains are limited.

Vietnam has been seen as one of the major beneficiaries of the US-China trade war with firms seeking alternative locations for their factories to avoid costly tariffs. Post reporter Erika Na recently travelled to Vietnam, and her three-part series looks at how the Southeast Asian country has fared over the last four years. In this second part, she delves into the impact on China’s status as the so-called world’s factory.

Lego, the world’s No 1 toymaker by revenue, recently broke ground in Asia on the company’s first carbon-neutral factory – a sprawling US$1 billion development that will span 44 hectares (108 acres) when it opens next year.

The massive undertaking, powered largely by solar energy, will feature state-of-the-art technology to mould, process and pack the plastic interconnectable bricks made by the 90-year-old Danish firm.

But unlike the iconic toymaker’s other manufacturing base in Asia – its factory in Jiaxing, China, which began operating in 2015 – this one is being built in Vietnam. It will be Lego’s sixth global manufacturing hub.

“[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.

“My expectation is that, so long as FDI flows in and workers are available, a slice of China’s exports will move to Vietnam. But this is limited in many ways,” said David Dapice, a senior economist with the Vietnam and Myanmar programmes at Harvard University’s Ash Centre for Democratic Governance and Innovation. “With 7 per cent of China’s population, [Vietnam] will not be able to displace more than a small fraction of China’s exports.”

Zhang Monan, deputy director of the Institute of American and European Studies at the China Centre for International Economic Exchanges in Beijing, said countries need a complete industrial system and huge domestic market to be able to serve as the world’s workshop, and those criteria put Vietnam at a disadvantage in replacing China.

The lack of an independent and complete industrial chain means that, for Vietnam, parts and semi-finished products are mainly supplied from China, and finished products are mainly sold to the United States – a model that Zhang said makes Vietnam’s industrial development highly dependent on foreign trade.

Maya Xiao, a senior analyst at Interact Analysis, a market research company based in the United Kingdom, said the processing of only a few links in the whole manufacturing process in Vietnam contrasts with the complete manufacturing industry ecology that has been built up in China.

Vietnam should be wise and carefully select the kind of investment they want to attract – Bruno Jaspaert, Deep C

Vietnam also lacks an abundance of skilled workers, relative to China. According to the Vietnamese government, 11 per cent of the country’s 51.4-million-strong labour force is considered highly skilled, whereas China says it has more than 200 million skilled workers, accounting for roughly 26 per cent of its total labour force.

“It’s impossible for Vietnam to become the world’s factory,” said Bruno Jaspaert, CEO of Deep C Industrial Zones, one of Vietnam’s biggest industrial zone developers, in Haiphong. “That is why Vietnam should be wise and carefully select the kind of investment they want to attract and be very, very creative in the way they want to attract it, because they will soon run out of people, energy and land that China will never run out of.”

Raising the quality of FDI has been on the Vietnamese government’s agenda since 2019, when the Communist Party of Vietnam’s Politburo issued a resolution calling on the country to attract more hi-tech and green technologies that add greater value in the production process.

Known as Resolution 50, it also touched on improving the quality of Vietnam’s labour force, with an ambitious aim to increase the percentage of skilled workers to 80 per cent by 2030.

However, a report issued by the Vietnam Association of Foreign Invested Enterprises in May said progress had been slow, with not enough hi-tech projects from the US and Europe attracted in 2021.

But Vietnam’s late arrival to the party, at a time when green energy and manufacturing are becoming increasingly important for exporters to European markets because of new European Union agreements such as the Carbon Border Adjustment Mechanism, which will levy additional taxes based on carbon emissions during manufacturing, could prove a boon.

Jaspaert said Vietnam “may have the recipe for success” if it focuses on issues such as sustainability, the United Nations development goals and environmental, social and governance criteria that are important to international investors.

“Also because for them, since they are only starting now, incorporating all of those new criteria and taking it into your new infrastructure is quite easy,” he said. “If you have a country that has been developed completely, and you have to start thinking of doing that … the costs are enormous. So, I think Vietnam is lucky in both timing and momentum at this moment.”

While both Zhang and Xiao say China will remain the world’s factory, they acknowledge that it is facing challenges.

“China’s manufacturing industry is indeed facing increasing challenges to attract foreign investment,” Zhang said. “Not only Vietnam, but also India, Mexico and even the US, Europe and others are competing for overseas manufacturing investment.”

Xiao said that both China and Vietnam would strive for high-quality foreign investment and must be selective about which industries and investors they attract.

“The Chinese government has launched policies to lift restrictions on foreign investment and facilitate FDI, with a focus on advanced technology,” she said.

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.

China’s population is shrinking and ageing, and US-China competition has been intensifying – Le Hong Hiep

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.

“But even if we ignore Xi Jinping as a factor, if we look at the structural factors such as the population, the US-China competition, and to some extent the maturing economy of China, they cannot do the same thing forever.”

As China moves up the value chain, other countries, especially those in Southeast Asia, will pick up what China leaves behind. So, Le said, China could end up focusing on higher-end services, while Southeast Asia could play a bigger role as a manufacturing hub more focused on the lower and middle parts of the spectrum.

“Of course, in a way, it is a competition, because China loses some of its investors to Vietnam and some other countries,” he said. “But I think that is how the economy works and how the market works. When you are not competitive enough, and you are not attractive to investors any more, they will leave you.

“The same thing may happen to Vietnam sooner or later … If Vietnam is no longer attractive, investors can move to Cambodia, Myanmar, Bangladesh or India. That’s the game.”

By Erika Na – The South China Morning Post – January 11, 2023