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Global supply chain heads to South East Asia

When factories shut down in China during the COVID-19 outbreak, many big companies were able to weather the production dip.

Several multinationals had already taken steps to expand operations into Vietnam last year, in order to avoid new tariffs on goods exported from China to the U.S. More are set to follow suite, in the hunt for alternative markets for production as prices rise.

Data from the U.S. Census Bureau show a 35.6 percent surge in goods imports from Vietnam last year, compared with a 16.2 percent contraction in goods imported from China. ‘Data for this year will be distorted by the effects of the coronavirus on global supply chains, but the trend of manufacturing moving from China to South East Asia will continue,’ says Stuart Ross, head of industrial for South East Asia at JLL.

‘Vietnam remained to be a promising market since the trend of factory relocation out of China began. Although the Covid-19 epidemic is currently causing difficulties for investment decisions or relocation activities, international property developers remained confident of increasing land prices as they are well aware of long-term potential in Vietnam’s industrial segment.’, Stephen Wyatt, Country Head, JLL Vietnam.

According to JLL’s latest market report, the Northern areas have attracted the majority of those who wanted to diversify their manufacturing portfolio outside China, thanks to its relatively developed infrastructure and proximity to China. The average land price in 1Q20 reached USD 99 per sqm per lease term, up 6.5% y-o-y. Ready-built factories - a SMEs’ favorite – kept the rent stable, ranging from USD 3.5 - 5.0 per sqm per month in 1Q20 and have been fully occupied.

Industrial landlords in Southern areas have become more confident to raise their land prices due to increased number of inquiries. The average land price in 4Q19 achieved USD 101 per sqm per lease term, up 12.2% y-o-y. Ready-built factories recorded an average rent ranging from USD 3.5 - 5.0 per sqm per month. However, logistics/infrastructure development cannot accommodate with such increase in land price as development process for significant changes still take place slowly, potential investors therefore starting to seek for other alternatives.

Under the Covid-19 impact, the postponement of ongoing leasing negotiations and new requirements will be more apparent if the situation does not improve soon. However, the market is likely to recover and grow rapidly after the epidemic is well under control. The disruption in the global supply chain caused by the epidemic is urging businesses to diversify manufacturing portfolios, as they are too dependent on one country.

Covid-19 is just catalysing the process of shifting production, which has taken place since the trade tension last year. Therefore, on the bright side, SEA as a region and Vietnam in particular, benefits and affirms its position as one of the promising destinations in the future.

China, meanwhile, is committed to growing value-add industries. It is a world leader in solar panels, 5G networks, artificial intelligence and battery manufacture. The authorities would rather see these high value – and therefore high tax-generating – businesses thrive. Lower-value manufacturing often generates more pollution, and China is keen to improve the environment in its cities. A move to cleaner, less space intensive manufacturing will also free land for rezoning, such as much needed residential.

‘Not all manufacturing can be easily be outsourced to Vietnam. Although manufacturing wages in China are now more than three times those in Vietnam, skill levels of Chinese workers tend to also be higher. The sheer scale of China cannot be replicated given that there are more migrant industrial workers in China than people in Vietnam. Furthermore, a large chunk of manufacturing is to serve the domestic Chinese market.’ Stephen adds.

According to JLL experts, in the longer term many, businesses are likely to rethink their supply chains to ensure continuity of their operations and to mitigate risks of future shocks. Coupled with initiatives to improve the sustainability performance and limit the environmental impact of wider operations, retailers may opt to produce and house more stock locally. 

More insights can be found in the latest Vietnam Property Market Brief 1Q20

Get the latest on JLL's response to COVID-19 here.

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