Keeping in mind the recent America-China trade war that has been set in place, it comes as no surprise that importers have started to re-evaluate their choice of having export partners located in China. The ongoing uncertainty about the future of economic relations with China adds an aspect of risk to the business that many importers do not find themselves comfortable with. Given this scenario, the second best option that comes to mind when looking for a country to successfully outsource is Vietnam, also sometimes known as the ‘other China’ for businesses looking to find a cheap market to outsource to.
Due to the abundant supply of labor willing and available to work at cheap rates, a government set up to welcome outsourcing and foreign business, as well as cheap and easy availability of raw materials makes Vietnam a rather attractive site for importers located all over the world. This becomes even more attractive given the relaxed state of business and commercial laws prevalent in the country- certainly nothing compared to those in the U.S.
So it makes sense if you as an importer want to relocate your business from China to Vietnam. However, the relocation isn’t as simple as just signing a new contract with a Vietnamese company. Several other factors will have to be kept in mind when you finalize your decision regarding whether or not to shift your dealings into another country.
The following guide helps you get your thoughts in order and consider some of the key aspects involved in relocating your business to Vietnam from China. Keep these in mind before you decide on whether or not relocation is the best strategy for you and your business.
Are there manufacturers available to produce your products?
One of the first questions that you should be asking yourself is that whether there are manufacturers available in the country to produce the product that you would like to produce. Now this is a rather straightforward thought, but one that businesses might tend to ignore. Also keep in mind that finding one or two suppliers isn’t really enough. Take this for example: when you search huge supplier search engine like AliBaba for producers of plastic bags, it will return a number in twenty or perhaps thirty located in Vietnam. Compared to this, the number of producers available in china would cross thousands.
This very straightforward example should clearly convey the idea that competitiveness in Vietnam is very little compared to that in china. For any type of product that you would like to produce, you are likely to find ten times as many producers in china than in Vietnam. This is because Vietnam has still a rather long way to go in terms of advanced and diverse industries that china has- especially in the case of high-tech products like aerospace parts which are extremely difficult to find in Vietnam.
According to the published reports of 2017 by the Vietnamese government, the following are among the top industries located in the country:
- Electrical machinery, equipment: $94 billion (USD).
- Footwear: $19.9 billion.
- Machinery, including computers: $14.6 billion.
- Clothing and accessories (not knit or crochet): $13.8 billion.
- Knit or crochet clothing and accessories: $13 billion.
- Furniture, bedding, lighting, signs and prefab buildings: $8.9 billion.
- Optical, technical and medical apparatus: $5.6 billion.
Inexperienced workforce in Vietnam
Another major consideration to keep in mind is that the workforce is Vietnam is much less experienced in terms of high-tech and large scale manufacturing than the workforce in china. Because the industry in Vietnam is not quite as diverse as that in china, workers have a very limited know how of operational management. This is particularly worrisome for businesses that produce goods using very sophisticated technology that the Vietnamese workers might not be able to handle as of yet.
Comparison of the cost of production in Vietnam vs. China
You might also want to keep in mind the tooling and equipment that you are using for the production of your goods. It is possible that the latest tools and equipment required by your business may not be available in Vietnam. Likelihood is that the company manufacturing goods for you in china has made a customized machine just for you- which would be extremely difficult to acquire from them unless explicitly stated in your contract. If you are not able to get your tools and equipment from your old manufacturer, then you must evaluate whether the new manufacturer in Vietnam has the capacity to build similar equipments for you.
Rising costs are a huge disadvantage for businesses located in china. Where cheap labor was once one of the main attractions to importers wanting to outsource to china, wages have increased by almost 60% in the past decade. This has considerably lowered the profit margin of labor-intensive industries located in china.
Compared to China, Vietnam has significantly lower wage rates coupled with an extensive supply of labor. This is definitely a plus point for businesses who were tired of the rising wage rates in china.
- Vietnam’s minimum monthly wage in 2019 ranges from $125 to $180 on average.
- China’s minimum monthly wage in 2019 ranges from $143 to $348, about twice as much as Vietnam.
- Minimum wages increased by an average of 5.3 percent in 2019, a lower increase than in 2018 (6.5 percent) and 2017 (7.3 percent).
Cost of relocation and facility development
Labor costs alone cannot help you determine whether it would be viable to shift your business from china to Vietnam. The cost of relocation and developing the right kind of facility will also play a major role.
Due to the ever increasing interest of foreign businesses in Vietnam, the cost of resources such as land is increasing day by day.
- The average cost to rent an industrial land on a long-term lease at a Vietnamese industrial park in 2018 increased to $90 per square meter (10.76 square feet), up from $60 to $70 in 2017.
- The monthly rent for existing factory buildings in industrial parks near Ho Chi Minh City has risen to $4 per square meter, up from $3 last year.
Other costs can include, among many others:
- Paying for and converting the industrial plants to manufacturing sites.
- Transferring automated production lines from china to Vietnam.
- Paying allowances to send skilled Chinese workers to Vietnam.
Cost of components and imported materials
The self sufficiency of china in producing and using its own components for the manufacture of goods is one big advantage that it has over its competitors. Even if you decide to shift to Vietnam, you might still have to import a large chunk of the materials and components required in the manufacturing process from china because Vietnam cannot yet produce those things. This means added costs and increased vulnerability to changing tariff and import laws for Chinese components and materials.
Increased costs automatically imply lower profit margins. However, one good thing is the closeness of Vietnam to china which reduces transport cost, as compared to many of the other ASEAN countries.
Among the materials that Vietnam will have to import are:
- Vietnam’s garment industry imports 70 to 80 percent of textiles used in the production of from China.
- Vietnam’s electronics industry imports manufacturing inputs worth up to 77 percent of the total product value.
- Vietnam’s pharmaceutical industry imports 85 to 90 percent of materials.
- Vietnam’s plastics industry imports manufacturing inputs that account for 70 to 80 percent of production costs.
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Quality control costs
A large chunk of importers use the services of a third-party inspection team to look after the quality of products being manufactured in china. Since there is an abundance of third-party inspection teams in china, the cost of acquiring these services is low. However, these third-parties are not very likely to have global networks, especially in Vietnam.
Availability of infrastructure and the ease of doing business
It goes without a doubt that the availability of the latest infrastructure, including seven of the world’s ten busiest shipping ports, makes business operations in china work like a dream. China has developed itself over the years as a country that’s highly suited to import-export infrastructure, as well as other facilities that make business activity flow smoothly in the country.
Compared to this, Vietnam may be a much different picture. The infrastructure and services available are limited, causing longer lead times and generally a slower pace of business.
- Increased cost of travel if the inspection team has to cover a large distance to reach the manufacturing site.
- Longer lead time required to schedule time for product inspection. Compared to Vietnam, inspection teams can reach the site in china in a matter of a few days.
However, keep in mind that Vietnam actually ranks better than china in the ease of doing business scale: a ranking of 68 compared to 78 of china (according to World Bank’s metrics.) Vietnam has also shown considerable progress in many areas including:
- Electricity supply throughout the country which system in place to cater to outages automatically.
- Availability of credit by adapting a new civil code that offers larger options for collateral assets.
- Enforcing strict contract enforcement and protection of property rights.
Hence even though physical infrastructure in Vietnam may lag behind china, the rule of law and regulatory bodies are much stronger amounting to a more confident investment.
Foreign investment in Vietnam
You may be surprised to find that many of the export oriented businesses in Vietnam are actually foreign owned, China being a huge stakeholder. Thus if you are worried about having a smooth transition for china to Vietnam, it is more than likely that a large manufacturer in china already has a few branches operating in Vietnam. This will make the switch extremely convenient. It might also interest you that there is an abundant supply of Chinese labor in the Vietnamese workforce, which means that you will not have to worry about translating or converting your QC checklists, specifications or any other documents because the workforce will be well-versed in English and Chinese.
Foreign direct investment is a major determinant of Vietnam’s GDP, amounting to a growth of as much as 9% in the past year. With the government’s plan of offering tax exemptions to further promote foreign investment, it is likely that you will find your own Chinese manufacturer somewhere already present in Vietnam. Talk to your manufacturer and discuss your plans in order to inquire clearly about his future outlooks.
Conclusion
It can be said without a doubt that Vietnam is one of the most rapidly growing export-oriented markets in the world. Even though it lacks the infrastructure presently to compete with china, the growing foreign investment in the country is likely to take care of that as well.
To sum up the above discussion, ask yourself the following questions if you wish to relocate from china to Vietnam:
- Can you easily find manufacturers to produce your product in Vietnam? Would there be any potential compromise on quality? What are the risks involved?
- Do you have the financial investment available to carry out the shift, keeping in mind the rising resource costs in Vietnam?
- Is there an availability of local components and parts required in the manufacturing process? What is the cost of importing them from China?
- Can your Chinese partners help you relocate to Vietnam without facing any major disruption?
Do make sure to carefully weigh the pros and cons involved in the transition and then decide whether or not the shift is actually profitable for your business.