Tim, the current CEO of Apple Inc. in the United States. Cook was the chief designer who outsourced all of Apple's manufacturing and made Apple the world's largest factory-free manufacturer. Once, in response to a question from a Japanese economic news reporter about how Apple selects the best merchants, Cook said: "The way we make products is to look at all countries to see what kind of skills they have, and then choose the best among them." This sentence shows that companies that organize and operate global value chains such as Apple generally assign tasks to companies located in different countries according to their comparative advantage.
A country's comparative advantage is not static. With the improvement of economic development and technological level, a country's comparative advantage will also change, which will lead to the reconstruction of the geographical layout of the global value chain. After more than 40 years of development, China's per capita GDP has exceeded 12,000 US dollars, entering the ranks of high-income countries. Compared with many developing countries, China no longer has a comparative advantage in low-tech and labor-intensive tasks.
China used to be the largest assembly base for Samsung mobile phones in South Korea, and the number of Samsung mobile phones assembled in China in 2015 was 15.6 billion units, accounting for 50% of Samsung's total mobile phone shipments that year. However, due to the continuous wage of Chinese workers, Samsung gradually moved the mobile phone assembly business to Vietnam. In 2018, the number of Samsung phones assembled in Vietnam reached 14.8 billion units, accounting for 51% of Samsung's mobile phone shipments that year;And the Samsung mobile phones assembled in China that year fell to 03.1 billion units. In 2019, Samsung closed its last mobile phone assembly plant in Huizhou, China, while Vietnam is gradually becoming the world's second-largest exporter of mobile phones.
The transfer of Samsung's mobile phone assembly line from China to Vietnam has also made some consumers uncomfortable. One of my students from Cannes, Africa, once told me that after he bought a Samsung phone made in Vietnam, he suspected for a long time that it was a "fake Samsung phone," because the phone had "Made in Vietnam" printed on the back. After listening to my class, he understood why Samsung phones were made in Vietnam, and he no longer suspected that he had bought a counterfeit phone.
According to the Japan Council for the Promotion of International Trade's 2021 survey of Japanese overseas companies, the cost of hiring an ordinary worker in a Japanese enterprise in China is $12,900 per year, including all expenses such as basic salary, overtime pay, bonuses, and social insuranceIn Vietnam, the cost of the same worker is $4,570 per year. The cost of an average worker in China is almost 3 times that of Vietnam. The full cost of hiring an engineer in China is $19,200 per year;And the total cost of hiring an engineer in Vietnam is $8,800 per year. Obviously, the gap between Vietnam and China, whether it is the cost of ordinary workers or engineers, is already very large. For foreign companies that mainly rely on low-skilled labor input, China's relatively complete first-class chain and industrial clusters, as well as good transportation and communication facilities, cannot make up for the impact of the huge gap in labor costs between the two countries on corporate profits.
The transfer of low-tech and labor-intensive processes from China to Vietnam is a phenomenon of restructuring the global value chain driven by economic factors, and is the result of market competition under globalization. However, the impact of non-economic factors such as the Sino-US war and the new coronavirus on the stability and reliability of global value chains has accelerated this process. So far, about $250 billion of Chinese exports to the United States have been subject to punitive tariffs of 25 percent. This dramatically increases the cost of manufacturing in China, assembling products, and then selling them to the U.S. for this global value chain operation. If Chinese companies pay this 25% tariff, all exporters will lose money;If U.S. buyers pay tariffs, their profits will undoubtedly be significantly lower;If U.S. consumers pay the 25 percent cost of the tariffs, they will reduce demand for Chinese-made products. Either way, it will not be conducive to Chinese companies exporting to the U.S. market. According to a recent report by the Consumer Technology Products Association, U.S. companies paid about $32 billion in tariffs on technology imports from China between July 2018 and December 2021. Because of the tariffs, U.S. companies have increased their purchases from countries such as Vietnam.
More seriously, when the United States imposes tariffs on Chinese products, it is based on the full value of the product, not just the parts made by Chinese companies contained in the product. Transporting foreign parts and components to China, assembling them into finished products, and then selling them to the United States is a standard model for multinational companies to use China as a manufacturing and assembly base. The tariff burden on this value chain** is multiplied in the manner in which the gross product value is levied, amplifying the negative effects of the 25% tariff imposed by the United States. In my book, The Mystery of China's Exports: Decoding the Global Price Chain, I measured the impact of the 25% tariff on iPhone X exports to the United States. The tariff on the full manufacturing value of the iPhone X is about $102, which is equivalent to 100% of the $104 cost of all parts and assembly services provided by Chinese companies included in the iPhone X. In other words, the U.S.** tariff rate on China-assembled iPhone X is 100% based on the value added of China's contribution to the iPhone X.
Manufacturing and assembling products in Vietnam and then exporting them to the U.S. not only significantly reduces labor costs, but also eliminates the 25% punitive tariff. Therefore, the transfer of the industrial chain from China to Vietnam with the United States as the market is an effective option to circumvent the US tariffs. After the start of the Sino-US war, Japan's Sharp and Nintendo have shifted their production capacity to serve the U.S. market from China to Vietnam. Apple's wireless headphones AirPods are among the products that have been subject to tariffs. China's Goertek is the main assembly plant for AirPods. In 2019, Goertek invested 2600 million US dollars, moved the AirPods production line to Vietnam. Walmart, which buys about $50 billion a year from China, also plans to move its global sourcing center to Vietnam.
An interesting phenomenon is that after the start of the Sino-US war, Chinese investment in Vietnam increased significantly. From January to June 2019, Chinese companies invested US$6.1 billion in Vietnam. However, in the 18 years from 2001 to 2018, China's cumulative investment in Vietnam was only US$9.7 billion. In the first six months of 2019, five of the top seven investment projects in Vietnam were from China. These 5 investment projects include 2$600 million investment, 2$100 million investment and Sailun Group's 2$800 million investment. The large-scale investment of Chinese companies in Vietnam shows that Chinese companies also have an incentive to use factories in Vietnam to circumvent US tariffs.
The super-globalization of the past few decades and China's reform and opening up policy have provided a good environment for multinational companies to allocate assembly, manufacturing of labor-intensive products, manufacturing of standard parts and other processes to Chinese enterprises through outsourcing or direct investment, thus forming a global manufacturing value chain centered on China. In my book, The Mystery of China's Exports: Decoding Global Value Chains, I have a detailed discussion of China-centric global value chains. However, the outbreak of the Sino-US war and the spread of the new crown virus around the world have made the diversification of the first chain an important direction for the reconstruction of the global value chain in the future. Whether it is the strategy of "China plus one" or "in China for China", the goal is to reduce dependence on China as the "factory of the world".
Last year, Austria and India issued a statement on strengthening the resilience of the ** chain, the core of which is the diversification of the ** chain;The 18-nation ministerial chain meeting led by the United States not only emphasized the security of the chain, but also called for the diversification of the chain. ECB President Christine Lagarde believes that chain diversification will be one of the three major factors to strengthen the resilience of the chain and lead the restructuring of the chain. At present, the so-called diversification of the ** chain is the "de-China" that has not been spoken.
Vietnam has the lowest labor costs among CPTPP members, and in 2019 Vietnam and the European Union signed a freedom** agreement, and Vietnam's working population aged 15-64 is about 70 million. Many of my students are from Vietnam. They told me that Vietnam is learning from China's model of reform and opening up, welcoming foreign investment, welcoming the first chain transferred from China, hoping to promote export growth by joining the global value chain, and eventually achieve industrialization. Vietnam's open investment environment and vibrant labor force are now the natural choice for many multinational companies to diversify their chains. Since Japan** proposed to strengthen the resilience of the ** chain in 2020, the Japan Council for the Promotion of International Trade is responsible for supporting the transfer of the ** chain of Japanese enterprises to Southeast Asia. Subsidies of up to 5 billion yen for new investments in the diversification of the ** chain of Japanese companies. Of the 103 industrial chain diversifications that have been approved by the Japan Council for the Promotion of International Trade, 40 projects are aimed at Vietnam.
The right time and place have made today's Vietnam a lucky one to reconstruct the global value chain.