Benefiting from Sino-US trade war, the once war torn country, Vietnam, leaning on manufacturing since the late 1980 expects another surge in GDP growth this year. Fueled by trade frictions, there has sparkled a hot debate over whether importers should relocate the production to Vietnam. Though many leading brands have been considering moving the supply chains to Vietnam for years, seldom do any really take the lead. The truth is, moving the whole supply chain from China to Vietnam isn’t as easy as it sounds.
Though Vietnam is believed by many as the “next China on the rise”, some brands are skeptical about Vietnam’s capacity to provide the same ecosystem of manufacturing and the same level of industry expertise as in China. Despite incentives like low labor costs, haven from US import taxes, free trade agreements with EU, etc, the road to Vietnam isn’t smooth.
5 Important Factors to Consider While Moving Manufacturing from China to Vietnam
1. Capabilities of manufacturing your products
The very first thing you have to consider while shifting your manufacturing to Vietnam is whether they’re capable of manufacturing your desired products. Though an emerging manufacturing power, Vietnam is dwarf in size compared with the manufacturing industry in China. In the northern neighbor China, you can easily find hundreds and thousands of suppliers for the same type of products, online platforms like Ailbaba, Global Sources, trade fairs like Canton Fair, Hong Kong Electronic Fair, China sourcing agents and innumerable amount of China wholesale markets make the sourcing process simply a breeze. At current stage, Vietnam definitely can’t offer the same level of diversity as China, however, some products do provide your business with more competitive edges while sourcing from Vietnam. Check our list of 11 trending products to import from Vietnam.
Comparison of manufacturing expertise
Though Vietnam do boasts a whopping number of manufacturers in a variety of industries, some manufacturing facilities might be newly established and lacked of experience with manufacturing your type of products, or exporting to your destination market. Products requiring high level of technical precision might be hard to shift to Vietnam.
Another important factor to take into account is the tools and molds. Do you have to transfer the custom molds your existing Chinese supplier designed into Vietnamese suppliers? In most cases your Chinese suppliers would refuse to transfer to their competitors. Having your injection molds designed and produced in Vietnam can be quite challenging as the country lacks of qualified tooling engineers. Make sure you have agreement with your existing Chinese supplier about owner ship of the molds, or you can produce the mold separately in mold injection company in China.
2. Costs for moving from China to Vietnam
Labor costs
The rising wages in China is a vital reason many importers come to think about moving production away from China. Since 2011, the salary for factory workers has increased over 60%, cutting off profit margins especially on some labor intensive products. Worse, with the new tariffs levied in products made in China, many American importers are looking for cheaper alternatives to China.
The wage of factory workers in Vietnam, in general, is only half of what it costs in China though varies depending on provinces. Besides, Vietnam’s minimum wage is growing steadily with an increase of 7.3% in 2017, 6.5% in 2018 and 5.3% in 2019. It’s no surprise that Vietnam’s labor cost is one of the most attractive factors to importers, however, is the cutting off in labor costs enough incentive to relocate your supply chain?
Relocating costs
Though labor cost is a major attraction for many businesses moving to Vietnam, however, it’s not the solely cost and there’re lots of other costs involved while moving the manufacturing from China to Vietnam. For example, the costs of transferring production lines, setting up new facilities in Vietnam, setting up new company, renting fees, allowances transfer skilled Chinese worker to Vietnam.
The monthly rent for factory buildings in industrial parks in the outskirt of Ho Chi Minh has increased to US$4 square meter, compared with US$3 last year. Besides, the cost for long term lease of industrial land also increase drastically from $60-$70 in 2017 to $90 per square meter now.
Costs for importing raw materials
The manufacturing industry in Vietnam relies heavily on imported machinery, raw materials and other components for your product production. Your supply chain might be vulnerable to increased costs of shipping, delays, tariffs, trade tensions and other unpredictable factors if it relies heavily on imported raw materials. Though Vietnam do have an advantage with its proximity location neighboring China, which means importing raw materials from China to Vietnam is relative affordable and fast.
Costs for quality control
Quality control, a quintessential part in any manufacturing process, ensures you get what you desire for. Many importers tend to hire professional third party quality inspection company for quality management. In China it’s easy to find third party QC provider operating massively in domestic markets, however, in Vietnam you might have to pay more for QC costs if your service provider doesn’t operative extensively in the country. A shortage of available inspectors or representatives might lead to some problems, for example, substandard quality issues, delay of delivery time, higher travel expenses, etc.
3. Infrastructure
China houses an extensive range of efficient, developed infrastructure system for import and export in Asia, i.e., 7 of the world’s 10 busiest shipping ports, well-paved roads and a massive railway network, which makes it simply an ease getting from one supplier to another, or transferring products from one place to another.
A lack of efficient infrastructure in Vietnam might lead to unexpected delays. A train from Shenzhen to Beijing (2,248 km) takes 10.5 hours, while a train from Ho Chi Minh to Hanoi (1,726 km) would take 34 hours.
4. Ease of doing business
According to the World Bank’s metrics, while it comes to the ease of doing business, Vietnam ranks at 68 while China at 78. Though lag behind in infrastructure, the regulatory environment for doing business in Vietnam is constantly improving in various aspects like cross border trade, contract enforcement, credit availability, etc.
5. Foreign owned factories
The larger your existing Chinese manufacturer is, the more likely they’re considering moving the manufacturing to Vietnam or already took a presence in Vietnam, which can make your relation to Vietnam much easier and smoother. The Vietnamese government is giving a range of incentives to attract foreign investments, i.e., special economic zones, 99-year leases, tax exemptions, etc. As many Chinese and Taiwanese also set up factories in Vietnam, it’s easy to work with them to keep part of the production in China while the other part outsourcing to Vietnam.