Covid-19 Vietnam Briefing

Countries on the frontline of the covid-19 outbreak – those with most immediate exposure to China, namely Hong Kong, Taiwan and Singapore – have been receiving deserved praise for proactive, transparent responses that have led to low infection rates and minimal mortality rates.

Taiwan, for example, shut down all flights to and from China before Beijing even announced the virus. Vietnam was likewise quick to react, grounding flights, shutting down schools and imposing border-crossing controls (Vietnam has a 1,280 km land border with China) when China announced its first death from the coronavirus on January 11.

As of March 16, Vietnam has confirmed 57 cases but 16 of those have been declared cured after Hanoi quarantined Son Loi commune in Binh Xuyen district, northern Vietnam, on February 13. The last of the Son Loi patients was discharged from hospital on February 23. Vietnam has so far recorded no deaths.

It is too soon to say whether Vietnam – or indeed anywhere – has dodged the covid-19 bullet. But, in terms of infection caseloads, the nation of some 90 million is containing numbers better than anywhere in the region on a per-capita basis.

It has been doing so through active testing, isolation and treatment. Vietnam has also mandated quarantine and testing for all passengers arriving from covid-19-affected areas, as the country reportedly gears up to manufacture 10,000 or more testing kits daily. Quarantine zones are being organized by the Ministry of National Defense.

The Vietnam Pivot

Vietnam – and for long before covid-19 became a staple of daily headlines – has been a red-hot destination for businesses disinvesting from the People’s Republic of China (PRC). On February 1, the European Parliament ratified the EU-Vietnam Free Trade Agreement, positioning Vietnam’s growing economy in a favorable position with a USD 18 billion economy.

The China-U.S. trade war has also been hastening the movement of business south from the PRC to Vietnam, with big tech names such as Samsung, Nintendo and Google relocating parts of their production to Vietnam and others such as Apple expected to follow suit. Samsung alone, prior to the coronavirus outbreak, already accounted for around one-quarter of all Vietnam’s exports in 2019, while overall electronics exports to the U.S. rose close to 80% in 2019 as products manufactured in China became increasingly less price competitive.

That is the good news – and it has to be noted that Vietnam is awash with good business news in a region plagued by uncertainty. The bad news is the complicated issue of Vietnam’s continued reliance on the China supply chain for intermediate products – think components in the textiles, household items and electronics sectors that are not made in Vietnam but essential to manufacturing and export of Vietnam products.

In the long run, this itself is good news for Vietnam, because if there is one certainty looking ahead, however the coronavirus supply-chain crisis plays out globally, businesses are going to look for alternatives to putting “all their eggs” in the basket of the PRC. Vietnam, as already noted, has been to the go-to destination for PRC-disinvestment and that trend can now only accelerate.

But to return to the immediate downside, Vietnam’s current challenge is not the impact of a viral outbreak that is so far locally under control than spillover effects from the economy’s reliance on China. Vietnam relies on China for its imports more than any other economy – 28% in total – while China is its second largest export market after the United States, accounting for some 17% of total exports.

In short, it is no doubt sensible to be bullish on Vietnam in the long term, while acknowledging that short-term pain is unavoidable. As one supply-chain manager told the South China Morning Post, big multinational companies, including Samsung, Nestle, and Procter & Gamble, warned that they may run out of supplies by mid-March, since they cannot source from China and the first half of 2020 will be tough for Vietnam, amid continued border closures, supply shortages and slumping demand.

As Trinh Nguyen, a senior economist for Natixis, has pointed out in a Twitter thread that received considerable attention, the shock to supply coupled with labor shortages will likely not only have knock on effects for China but also regionally and globally. This development, which is already taking place, will lead to a demand shock that will also likely be felt regionally and globally.

The Downstream Effect

The immediate business challenges facing Vietnam need to be faced, but long-term the country continues to be better positioned than any other regional economy to bounce back as the coronavirus pandemic is eventually brought under control.

Reliance on its giant neighbor to the north will not be easy to shake off and short-term the economy is likely to take some hits. Some 30% of Vietnam’s manufacturing components come from China, which also accounts for one-fifth of the country’s agricultural exports and a third of its tourism arrivals. The textiles sector also faces downstream component shortages.

All the same, business goes on. In the first week of March, Aeon Mall, a Japanese retail chain that first entered the Vietnam market in 2013, announced that it was investing USD 2 billion into expanding into the Vietnam market, with a 150,000 sq m retail complex in Hai Duong Province in northern Vietnam. In the same week, Samsung announced it was commencing work on a USD 220 million R&D center in Hanoi.

Meanwhile, as public health systems reel worldwide and supply chains falter, this is by no means the first health / financial crisis the world has faced, and it is worth bearing in mind that in 2003 Vietnam was the first country to removed “from the list of countries with local transmission of Severe Acute Respiratory Syndrome (SARS)” by the WHO.

That is not to say Vietnam will achieve a similar world first in dealing with covid-19, but so far it is making credible strides in containing and controlling the virus. In fact, it looks set – along with Hong Kong, Taiwan and Singapore – to be held up as a model for dealing with community transmissions of novel diseases.