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Why did Apple and Xiaomi move production to Vietnam

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Apple will continue to move iPad production to Vietnam, after Covid-19 ban orders in Shanghai caused major supply chain disruptions.

Regarding the MacBook, Apple asked the supplier to set up a trial production line in Vietnam. However, progress in mass production has been slow, mainly due to disruptions related to Covid-19 and the need for larger supply chains for computer manufacturing.

According to Nikkei, Vietnam is Apple’s most important production center outside of China, with a wide range of local products, from iPads to AirPods. A source revealed to the Japanese newspaper that Apple “has big plans for Vietnam.”

Earlier, Xiaomi had confirmed production at a factory in Thai Nguyen, operated by its partner DBG Technology. According to Reuters, in recent years Vietnam has become a regional production center for global electronics companies. The value of smartphone exports, especially from Samsung, increased by 12.4% in 2021 to reach $57.5 billion. Xiaomi said it will soon export “Made in Vietnam” smartphones to other Southeast Asian markets, including Malaysia and Thailand.

Xiaomi is not alone when it comes to moving production from China to Vietnam. Global electronics suppliers are looking to diversify production outside of China to get closer to overseas customers, to take advantage of the rapidly growing demand for complex components. It’s a smart move that could allay concerns about supply chains relying too heavily on a single location amid geopolitical tensions and supply shortages.

On August 17, Nikkei reported that Luxshare and Foxconn, two partners of Apple, have started trial production of the Apple Watch in North Vietnam.

Vietnam is one of the few Asian countries that did not suffer an economic downturn in the two years of Covid-19. This year, Vietnam’s GDP is expected to increase by about 5.5%, according to the World Bank.

The results of domestic economic activities before and after the epidemic have attracted the attention of a number of large companies. For example, the German auto supplier Brose – which owns 11 factories in China – chooses between Thailand and Vietnam as a new production site. In December 2021, the Danish company Lego announced that it will build a $1 billion factory near Ho Chi Minh City, one of the largest European investment projects in Vietnam to date.

“Currently, it seems that medium-sized companies are trying to enter the Vietnamese market or move operations out of China on a larger scale,” said Daniel Müller, Director of the German Business Association for Asia and the Pacific.

Why do companies leave China?

They want to find an alternative to China for many reasons. For example, rising wages in China have made the country less attractive to low-cost manufacturers. Annual salaries have increased from about $5,400 in 2010 to more than $13,847 in 2020, according to research firm Moody’s Analytics.

From a geopolitical perspective, relations between China and European countries deteriorated after the European Union imposed an embargo on human rights issues in Xinjiang. Soon after, Beijing hit back at EU officials when the investment treaty was put on hold.

In 2022, China’s coronavirus policy has plunged the global supply chain into chaos as manufacturing activities lie dormant in cities under lockdown. This has shaken companies’ confidence in China as a reputable manufacturing base. Shanghai has just resumed after months of lockdown, while some parts of Beijing are in the same situation.

All of this is weakening the economy and China may miss its growth target this year. According to the World Bank, in the first three months of 2022, the domestic GDP increased by 4.8%, less than the official target (5.5%).

Even before the pandemic hit, they had seen companies, especially in the labor-intensive manufacturing sector, begin to move to other countries, including Vietnam, said Raphael Mok, director of Asian risk at Fitch Solutions.

Vietnam: an important supply site

Vietnam is a more attractive destination for investors thanks to its fast-growing middle class and strong investment in infrastructure. After many furniture and textile companies in China moved to Bangladesh and Indonesia in the past decade, the current shift is mainly related to companies that produce consumer electronics such as smartphones and tablets.

From 2013 to 2015, some Japanese printer companies such as Fuji Xerox, Kyocera, and Canon announced plans to move production lines to Vietnam due to the rapid increase in labor costs in China. In 2014, Samsung said it would build a $3 billion smartphone factory in Vietnam. According to Nikkei, the number of Apple suppliers in Vietnam has increased to at least 22 from 14 in 2018.

The trade conflict between the United States and China intensified in 2018 under former US President Donald Trump. In 2021, the current administration of President Joe Biden has pledged to restructure the global supply chain in response to Beijing’s non-market trade practices. As more and more production lines move from China to Southeast Asia, Vietnam has emerged as a potential candidate.

In recent years, Chinese smartphone companies such as Huawei, Oppo, and Xiaomi have been expanding production in Vietnam. China’s share of the global smartphone market has fallen from 75% in 2016 to 67.4% in 2021, while the share of phones made in India and Vietnam is gradually increasing, according to research firm Counterpoint.

According to Gartner, in 2021, smartphone export orders from China and Hong Kong amounted to $160 billion, accounting for about 60% of the market share, while Vietnam was $39 billion, accounting for about 15% of the market share.

Nikkei recently reported that Apple will move some iPad production from China to Vietnam after supply chain disruption due to the Covid-19 lockdown.

Vishrut Rana, an economist at S&P Global Ratings, told CNBC that the level of interest in manufacturing in Vietnam is huge. “Vietnam has emerged as a very important supply point for consumer electronics,” he said.

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