The global shipping industry is in a decidedly gloomy mood.

Shipping container rates have collapsed. Logistics executives foresee a freight recession dragging into 2024. Industry giant Maersk plans to cut at least 10,000 jobs as it struggles with falling profits and revenue amid overcapacity, rising costs, and lower prices.

There is one bright spot, though: intra-Asia shipping.

As manufacturers seek to diversify their supply chains by shifting certain production segments out of China, there’s been more demand for transporting raw materials and intermediate products within Asia.

In response, container ship operators are ratcheting up their Asia services. In the past few months, various companies have unveiled new shipping lines connecting Asian ports.

In May, MSC, the world’s biggest ocean freight player, upgraded and expanded several of its Asian routes to increase direct connections between China and ports across Southeast Asia. Other shipping companies, including Japan’s Ocean Network Express, Singapore’s Pacific International Lines, South Korea’s HMM, and China’s OOCL, followed suit with similar announcements.

“Countries like Vietnam, Bangladesh, Cambodia have seen manufacturing coming in,” said Sunandan Ray, CEO of US-headquartered global logistics and freight forwarding company Unique Logistics. “With that has come a fair bit of movement of raw materials into those countries, and there’s been intra-Asia trade developing.”

Vietnam’s rising importance in global shipping

One country has emerged as a critical node amid the reshaping of global trade flows: Vietnam.

The Southeast Asian nation has seen surging foreign investment as companies plan to build new factories there. To support that additional manufacturing activity, shipping companies have ramped up direct connections between Vietnam and the US, as well as around Asia.

Data from UK-based transport economics consultancy MDS Transmodal bears this out. In 2019, Vietnam had 13 direct shipping routes to the US. By the third quarter of 2023, that number had almost doubled, to 23. By contrast, direct shipping routes between the US and China have largely stagnated: 56 in 2019 versus 58 in 2023.

In the ranking of countries by number of direct shipping services to the US, Vietnam now places sixth—sharply higher than its 23rd-place position pre-pandemic. When it comes to the volume of goods criss-crossing the Pacific Ocean, scheduled deployed capacity between the US and Vietnam shot up 83% between 2019 and 2023. That compares with a 27% increase between the US and China over the same period.

“When we look at what’s happening in Vietnam, it’s quite remarkable,” said Antonella Teodoro, a senior consultant at MDS Transmodal, noting the speed of Vietnam’s rise in the maritime transport industry. “The quantum surprises me, rather than the fact itself—how much it is increasing, and how fast.”

Asia, manufacturer of the world

Shipping connections between Vietnam and its Asian neighbors are rising dramatically, too. MDS Transmodal’s database shows a near doubling of scheduled cargo capacity between Vietnam and Sri Lanka, and double-digit percentage increases with numerous other Asian countries. Between 2019 and 2023, Vietnam added nearly 90 additional direct routes to fellow Asian nations, with those to South Korea, Malaysia, and Thailand seeing the largest increases.

Still, China remains a linchpin in global industry and trade routes. For both the US and Vietnam, it’s the country with by far the highest number of direct shipping connections. Since 2019, Vietnam has added 46 direct shipping services with China—many more than with any other Asian neighbor.

This underlines the fundamental dynamic of the global friendshoring and de-risking trend: Governments and companies are diversifying beyond China, but they won’t be fully substituting the world’s industrial powerhouse anytime soon. One effect is that supply chains are getting longer.

“Vietnam is now an extra call in the route, rather than an alternative,” Teodoro said. “This shows there’s some intra-Asia movement that can confirm that Asia is becoming the manufacturer of the world. It’s not only China.”

China’s “port diplomacy”

To fully capitalize on the increased demand for intra-Asia shipping, however, Vietnam will need to invest in infrastructure.

That means boosting efficiency at ports to handle cargo quickly; widening channels to allow bigger ships to pass; having terminals that can deal with containers once they’re offloaded from vessels; and building robust rail links between ports and inland container depots.

Much of that investment could end up coming from China, which, along with Taiwan and South Korea, is often a key investor in such infrastructure, said Ray of Unique Logistics.

Already, China has significant ownership stakes in a number of ports across Asia, according to the China Overseas Ports tracker maintained by Zongyuan Zoe Liu at the Council on Foreign Relations.

They include a 49% interest in a project to build new berths at Singapore’s Pasir Panjang terminal, a 40% position in a deepwater port terminal project in Malaysia, and a 47% stake in a terminal project in Vietnam’s Saigon.

Writing in 2018, one Chinese academic described China’s investments in overseas ports as a form of “port diplomacy” (link in Chinese)—a nifty instrument in the country’s broader diplomatic toolkit giving it more global leverage, not least a greater ability to calibrate its economic coercion to achieve state objectives.

And as the shift of manufacturing out of China raises the importance of ports around Asia, Beijing could see it as an opportunity to make more investments in regional ports.

China has indicated as much. In 2021, China Merchants Port told Chinese industry outlet Shipping Exchange Bulletin (link in Chinese) that as global industry moves toward Southeast Asia, the state-owned port operator would “cautiously grasp suitable investment opportunities” in the region.