Over the last five years, the news has become increasingly filled with stories about manufacturing shifting from China to Vietnam. Perhaps the most notable example of this was the revelation in 2010 that Vietnam became the primary supplier of Nike-branded footwear. At that time, Vietnam accounted for 37 percent while China remained a close second at 34 percent. Fast forward three years to 2013, and we see that Vietnam grew to 42 percent while China dropped to only 30 percent – widening the gap to 12 percent.
The Japan External Trade Organization published the chart below illustrating a key reason for this shift in production: wages. On average, wages for factory workers are about 3x higher in major manufacturing centers in China (shown left) compared to Vietnam (shown right).
This is significant for any labor-intensive product like footwear, garments, and electronics. After opening a $2 billion dollar smartphone factory in Vietnam in March of 2014, Samsung announced plans in November to develop an additional $3 billion dollar facility there to meet future production needs.
But other evidence of this major shift towards sourcing in Vietnam is also starting to emerge. Mitsubishi Heavy Industries announced in October of 2013 that doors for Boeing’s 777 jetliner would now be produced in Vietnam – before being delivered to Japan for final inspection. Direct deliveries to Boeing in the future currently depend on the factory’s ability to consistently meet quality expectations.
So what does this all mean for your company?
Sourcing Factor 1: Product Type
Trade data shows that Vietnam has proven to be quite capable of producing labor-intensive products like footwear and is now starting to win over major technology companies for significant investments in more technical manufacturing. However, as evidenced by Mitsubishi’s decision to inspect parts in Japan before delivering them to the end customer in the United States, there are concerns about the skillset and overall reliability of Vietnamese manufacturers. Capabilities and confidence in Vietnamese manufacturing are growing, but China still maintains a significant competitive advantage.
Importers looking to shift production from China to Vietnam need to consider the risks posed by a workforce that is relatively new and inexperienced with sophisticated product categories or with an industry like aerospace where technical precision proves mission critical.
If “the state of manufacturing in Vietnam today so closely parallels that of China ten or more years ago,” you need to consider whether or not your supply chain can sustain that kind of negative shock. Can you confidently bring your product to market in that kind of environment? What might you be taking for granted in China now that you may find yourself struggling to manage or live without in Vietnam? These are important questions to ask before considering sourcing in Vietnam.
Sourcing Factor 2: Your Existing Supply Chain
“Poor infrastructure and heavy bureaucracy” are key roadblocks to success in Vietnam, but large companies like Samsung and Mitsubishi Heavy Industries are well positioned to overcome these challenges and capitalize on lower labor costs. These companies are spending billions on massive development projects to provide the kind of infrastructure required for their business operations, and handling government bureaucracy is merely a part of developing that capacity.
Smaller companies looking to produce in Vietnam don’t have this same capability to transform things – to literally start from the ground up – and will have to rely more heavily on contracted partners to fill out their supply chains. Compared to China, this poses an elevated level of risk.
According to an American Society for Quality (ASQ)?2013 Manufacturing Outlook Survey, one third of the 1,250 manufacturing professionals who responded said they expected to be short on parts due to a problem with a supplier. 80 percent of respondents also reported having been negatively affected by a supplier in the past. As stated by ASQ, a key concern is to “put in place the pieces needed to continue operations in the event of a sudden disruption in supply chain and know the process.” This can be especially difficult in Vietnam where choices are limited and more difficult to find in the first place.
Vietnam’s fragmented manufacturing industry makes it harder to identify suitable suppliers, especially for those new to Vietnam. Lack of basic infrastructure is a main cause of this fragmentation. Contrast that with China where you can find just about anything you want – and usually more than a handful of viable options that aren’t too far away from where you need them. With well-paved roads, 7 of the world’s 10 busiest shipping ports, and a massive network of high-speed and commercial rail lines, infrastructure in China is extremely well established.
Here is one practical example highlighting how far Vietnam needs to go to catch up with China’s rail network:
- Taking a train in Vietnam from Ho Chi Minh to Hanoi requires covering 1726 kilometers of track in about 34 hours. Meanwhile, it is possible in China to get from Beijing to Urumqi in just over 32 hours while covering 3161 kilometers of track. That’s just about double the distance in the same amount of time. And while Ho Chi Minh and Hanoi are the largest cities in Vietnam, going from Beijing to Urumqi is like going to the middle of nowhere. It would only take about 6 hours to travel the same distance between major cities in China.
Both countries pose their own unique challenges to foreigners looking to establish operations there, but the path is clearer in China. Tons of businesses have already set up shop and blazed the trail for mega corporations and small-time entrepreneurs alike. Potential foreign buyers and business owners of all sizes will have a relatively easier time finding guidance about China than for Vietnam. Let’s assume a couple of extremely broad internet searches is representative of this:
- Searching Google for the phrase “starting a business in China” yields 268 million results instead of only 63 million for those looking at Vietnam.
- And when searching for “Vietnam factory” – less than 30 million results turn up compared to 139 million of them for China.
- Online portals like Alibaba or Made in China used for identifying suppliers are overwhelmingly dominated by Chinese suppliers. For example, searching for “plastic bag” yields 8.9 million potential suppliers in China compared to only 59,000 in Vietnam. While certainly true that a “supplier” is not necessarily a manufacturer, China still has a significant edge over Vietnam when it comes to selection.
When it comes to raw materials, shipping, and other logistical issues, those looking to move production to Vietnam may find that geography and available service options prove to be significant limiting factors – and represent significant costs. But the companies willing to make these big investments in Vietnam and set up the entire supply chain are the ones that really stand to capitalize on the lower long-term costs compared to sourcing in China.
Sourcing Factor 3: Foreign-owned Manufacturers
Most manufacturers in Vietnam established for export are actually foreign owned. To those unfamiliar with Vietnam, this is perhaps an unexpected surprise.
Foreign ownership will, in many cases, mean that the time and energy spent learning the nuances of Chinese culture and manufacturing will not have gone to waste, since so many factories in Vietnam are operated by the Chinese and Taiwanese. This makes it easy to transfer existing QC checklists, specification sheets, or other documentation that might have been written in English and Chinese. You’ll generally find that these factories also employ Vietnamese staff proficient in both English and Chinese.
Furthermore, the foreign influence at these factories will often extend significantly beyond ownership all the way down to mid-level managers. Taiwanese-owned contract footwear manufacturers for major North American brands, for example, may employee as many as 200 Taiwanese alongside 10,000 local Vietnamese workers.
The Taiwanese and Chinese have made significant inroads into Vietnam and really laid the groundwork for large-scale manufacturing of labor-intensive goods. The larger your supplier is in China, the more likely you are to have considered moving operations to Vietnam to reduce cost and remain competitive in the marketplace. If you haven’t discussed this issue with your existing China-based supplier, it is definitely worth doing. You may be able to leverage moving to Vietnam during negotiation. Alternatively, you may be able?work with your Chinese supplier to keep some of the production processes in China, while outsourcing others.
If you’re sizing up Vietnam as a potential destination for production currently based in China, consider these key points:
- What kind of financial investment will be required to provide a stable supply chain? If, for example, you’re looking to place orders of plastic bags or footwear through trading companies you’ve identified online, then your transition to Vietnam may very well be seamless. However, if you’re looking to actually establish manufacturing facilities in Vietnam, try using the China of ten years ago as a prism for estimating how much work lies ahead for you.
- Vietnam isn’t ready for the moon, so put careful consideration into what you can reasonably expect to produce there. The lower cost of labor might obscure equally important concerns?like lower quality and reduced reliability.
- What is the availability of?local substitutes for components required to complete your product? They likely won’t be as easy to find or as quick to obtain as they are in China.
- Talk to your Chinese and Taiwanese suppliers or broader contacts in China to see what they have to say about Vietnam. The road in China is pretty well traveled at this point, but that doesn’t mean you can’t succeed in Vietnam – quite the opposite is true, in fact.
Above all else, remember that there will always be somewhere cheaper to produce your product. If your current manufacturers in China are still competitive – and profitable – then consider looking farther down the road to Vietnam or other countries in Southeast Asia. You might even consider sourcing in India where major manufacturing operations are now in the works.?Whatever competitive advantage you hope to gain with sourcing in Vietnam, first consider these three factors before leaving China.