Is "Made in Vietnam" suitable for your business?
Trade frictions – or we call it a “war” now – between the United States and China may have no winner in the short term, but other countries are likely to benefit. In recent months, manufacturing plants in mainland China have moved southward, building factories in Southeast Asia, buying factories or establishing partnerships with ready-made factories to meet the needs of U.S. customers to avoid tariff increase. Vietnam, the Philippines, Indonesia, Cambodia, Malaysia, and other countries have seen the influx of manufacturing migrations. Among them, Vietnam has the most concentrated visitors.
Compared with other countries, Vietnam has the advantages of relatively low labor costs, skilled labor techniques, relatively mature supply chain systems, more stable geopolitics, and stable economic growth. Therefore, Vietnam has also become the number one option to hedge China’s supply chain risks.
The labor cost in Vietnam ranges from 35% to 60% of the labor cost in China (depending on location and type of work). For labor-intensive enterprises, especially assembly factories which make low-value goods, it is a considerable cost saving. But we can also see that Vietnam's population is less than 1/14 of China's, and the population mobility is much lower than China. One of the most intuitive examples is that in Hanoi, which is closer to Shenzhen, due to the concentration of new factories, there has been a shortage of workers. Labor prices in some areas such as Bac Giang and Bac Ninh have even increased by about 30%. Regarding the status and trends of labor costs in Vietnam, we will have a separate article to do a detailed analysis.
In the 1990’s, Nike and Adidas started their garment manufacturing in Vietnam; then the electronics giants such as Samsung, LG, and Intel shifted their manufacture from China to Vietnam a few years ago. Their suppliers, such as Foxconn and Goer, also started producing Apple products in their facilities in Vietnam. In recent years, we have seen a fundamental improvement in Vietnam’s supply chain than from five years ago. Compared with several other Southeast Asian countries with labor cost advantages, Vietnam is more suitable for large and medium-sized export-oriented labor-intensive manufacturing enterprises. In contrast, small companies may find their supply of raw materials insufficient, and more companies will seek to import from China or other regions to meet their production needs.
The direct solution is to import raw materials and semi-finished products from China. China is Vietnam's largest trading partner. The common border and free trade agreements between the two countries make China a convenient source for the procurement of manufacturing-needed materials. Hanoi is less than 550 miles from Shenzhen. Trucks loaded with raw materials and semi-finished products can depart from Shenzhen and reach the factories in Hanoi in less than 48 hours. Even ocean freight takes no more than a week. When Chinese companies build new factories in Vietnam, they often deploy technical expertise staff from China as short-term emergency solutions. But a side effect arises – the massive use of raw materials or semi-finished products produced in China will make “Made in Vietnam” certificate difficult to obtain – especially when the Vietnamese government tightens its supervision. This problem is especially common in mobile phone and computer manufacturing. How to plan and manage the multinational supply chain of their products has become an urgent problem for many U.S. companies.
Vietnam is one of the fastest-growing economies on a global scale. In 2017, Vietnam’s GDP growth was 6.8%, 7.1% in 2018, and it is expected to exceed 7% in 2019. Since the United States and Vietnam reached a bilateral trade agreement in 2001, and the elimination of barriers including quotas, bans and import restrictions, Vietnam’s market economy has flourished. Although President Donald Trump has recently threatened to impose tariff penalties on Vietnam, the Vietnamese government has taken a very cooperative approach toward the threat. When Trump visited Vietnam in February, Vietnam signed over $20 billion in orders to buy products from Boeing and GE. The United States has used Vietnam as a model case to urge North Korea to denuclearize. Vietnam’s relationship with the United States is expected to remain on track for a long time. Many companies that have moved from China have also shown confidence in the stability of Vietnam.
In addition, the stability of the exchange rate between the Vietnamese Dong and the US dollar is a factor of stable confidence for companies that have long been sourced from China, as well as exporters from China.
But we also need to see that in addition to the shortcomings mentioned above, Vietnam’s investment and labor markets are not entirely ready for the booming manufacturing industry, such as short-term housing prices growing too fast, labor inefficiencies, irregularities in law enforcement and customs regulations have been highlighted. In some industrial parks near Hanoi, land prices have increased by more than 50% in the past 18 months. Companies complained that they are subject to the Customs custody when importing materials from China and getting export tax rebates is a painful process.
In the long run, Vietnam is likely to become the next manufacturing center after mainland China. In the short term, is your business suitable for moving the supply chain to Vietnam? This depends on the specific situation of the company. Feel free to contact us (firstname.lastname@example.org) for consultation and discussion.