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Businesses bracing for breaks in China-Vietnam trade network

Traffic is scarce at some points along the border.

HANOI -- With Sino-Vietnamese tensions still running high a month after a territorial dispute flared up in the South China Sea, companies operating in Vietnam are making contingency plans for a disruption of the logistics network linking the two sides.

     Some had feared that customs inspections would be tightened. But business appears to be continuing as usual, and truck traffic remains brisk at the Huu Nghi checkpoint. Still, fewer travelers are crossing the border, and immigration offices are nearly deserted. The conflict is starting to affect tourism and the distribution of everyday goods.

     "In the worst-case scenario, we'll have to consider manufacturing without China," says Hitoshi Fujiwara, a Fuji Xerox director who handles the Japanese company's Vietnamese business.

     Fuji Xerox built a printer factory in the city of Haiphong last November at a cost of 9 billion yen ($87.4 million). The facility will become a major production base, churning out 2 million units a year in 2015, but 30% of the needed components are imported from China by land. Production will screech to a halt if the company cannot secure these essential parts.

     "Once the problems become apparent, it'll be too late," Fujiwara says. Fuji Xerox has begun drawing up a number of possible scenarios and will soon lay out steps to take, including switching to buying Chinese-made parts from Thailand or elsewhere in Southeast Asia.

     Japanese logistics companies report a sharp uptick starting last month in discussions on changing suppliers, but businesses are struggling to come up with effective solutions. Securing parts within Vietnam is difficult, and shipping by air is expensive. The political turmoil in Thailand, a major manufacturing center, has left the situation there uncertain.

     The components pipeline from China to Vietnam has swelled in part because the industrial base of the Southeast Asian nation has not yet matured.

     To avoid such China-related risks as rising labor costs, strikes and anti-Japan riots, Japanese companies have rushed to shift production to Vietnam. But parts and materials makers have not caught up. The result is a system in which finished products are assembled in Vietnam from components made in China.

     Exports from China to Vietnam have ballooned nearly ninefold in the last 10 years, with parts supplies likely accounting for much of this. The textile and garment industry relies on China for 70% of such items as cloth and thread.

     "They can't totally avoid China-related risks," says Ryo Ikebe, associate professor at Fukui Prefectural University's Research Institute for Regional Economics and an expert on the division of labor between the two countries.

     Businesses are watching to see how Chinese authorities respond. Vietnam is a major customer for China, providing it with a massive trade surplus. In light of this relationship, some are optimistic about the situation, finding it hard to believe that trade between them would be cut off.

     But Beijing has announced that it has halted some communication with Hanoi, and more than 4,000 Chinese laborers in Vietnam have been recalled home. Further economic sanctions remain a possibility.

     Riots in Vietnam are another factor forcing businesses operating in China to rethink their "China plus one" strategies, which entail hedging against risks in China by spreading out production and other operations to other countries.

     Work has finally resumed on an integrated steel mill being built by Taiwan's Formosa Plastics in the province of Ha Tinh, but scars remain after clashes on May 14 between Chinese workers employed by a subcontractor and Vietnamese. The bulk of the roughly 4,400 Chinese workers there returned home on a vessel dispatched by the Chinese government.

     The first furnace was slated to start up at the end of next May, but it will likely fall behind schedule. Formosa Plastics estimates the damage at $3 million, and each one-day delay will lead to some $10 million in lost sales, according to the company.

     Taiwanese businesses suffered the most damage from the riots, with signage in Chinese characters and large numbers of Chinese managers on-site bringing them into the demonstrators' cross hairs.

     Japanese companies were not spared, either, with about 25 suffering damage in such locations as the province of Binh Duong, where 20,000 demonstrators stormed plants run by some 400 companies. Although 98% of companies have restarted production, according to the provincial government, the damage suffered was not insignificant.

Kazunari Yamashita in Taipei, Ken Kuwahara in Guangzhou, and Atsushi Tomiyama in Tokyo contributed to this article.







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