Earlier today, in Goodbye China. Good Morning Vietnam. I wrote how China is still the place to manufacture all but the lowest end products. As is par for the course on this blog, I received a number of excellent comments that raised new issues warranting this new post.
The first came from Ashton Udall of the Product Global blog. Ashton is in Asia right now on a sourcing mission and he just did a post on this same topic, entitled, The Next Sourcing HotSpot: From China to…Madagascar?! This post talks about rising costs in China, but notes costs are rising everywhere. Ashton then notes the complexities involved in calculating manufacturing costs and how those costs vary from business to business, such that even Madagascar might make sense for some:
But what will many businesses do? Many will begin to look elsewhere for lower cost labor. Currently, there is no “next-China” on the horizon. Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa. Many of these destinations may make sense currently and will likely become more prominent in the future. But China is far from being dislocated as the epicenter of manufacturing soon. Remember, it’s not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination. This will not be easy, as demonstrated by the extreme case of…Madagascar.
The most exotic destination I’ve heard of a company moving to, to date, is Madagascar. That’s right–the exclusive home of the Dwarf Lemur and the Aye-Aye. One of my supplier’s other customers has actually set up a source in Madagascar to assemble product. Contrary to intuition regarding a supply chain like this, the company claims they are saving money. While I find it hard to believe, I know very little about their situation. I do know that supply chain flexibility and responsiveness must not be critical to the business model. Keep in mind that Madagascar has little to none in the way of a manufacturing base. This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar. They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China.
Reminds me of how I once worked many weeks on a project for a client looking to set up a food processing operation in the Gambia. Wage rates were absurdly low (I think it was around $25 per month). The facility was already set up and ready to go and would be given free to my client by the government. Shipping costs to get finished product to New York City were surprisingly reasonable. In the end though, my client backed down because the last two foreign owners of this same facility had seen it expropriated by the government.
The always insightful TwoFish (anyone who names a blog after a Dr. Seuss line is is presumptively insightful) asks for a comparison on the competitiveness of China’s interior as compared to Vietnam. Great question, but unfortunately beyond my ken. Also, I would think the answer to this would very much depend on the specific product. I can though say that my law firm’s international manufacturing lawyers have helped plenty of companies move their clothing or housewares manufacturing from China to Vietnam and they all have come to prefer Vietnam “in every way.”
One comment quotes me as saying “Vietnam’s manufacturing capabilities are just not there yet” and then asks me to use “my experience in China” to ask me when I “think Vietnam will be ‘there’? Another great question, but again, I have to bag off on it because I just do not know manufacturing or logistics well enough to answer. But, I am going to try to answer it very crudely and by analogy. In comparing Vietnam’s legal system to China’s, I would say Vietnam is about ten years behind. Perhaps it is in the same place in manufacturing? Then again, does the much smaller Vietnamese labor and consumer market (i.e. population) mean Vietnam’s manufacturing will develop on an entirely different track than China’s? Will not Vietnam be able to learn from that which China has done wrong and that which China has done right, so as to be able to develop faster and better?
Last, but surely not least, my friend from Fear of a Red Planet, to a certain extent answers all the above questions, by noting the following:
When I left Foxconn at the end of last year, word was they were bringing in 20,000+ Vietnamese for training in their Chinese plant who are going to form the nucleus for a workforce of 200,000+ that they are hoping to have working at their Hanoi operation. Sure, things are just kicking off there, but there’s no reason why anyone with deep pockets wouldn’t want to get in there early. China’s just a safer option for companies that can’t afford to lose out on their first deal.
FOARP is absolutely right to distinguish between the large companies going into Vietnam and, to a certain extent creating their own infrastructure there, and the smaller companies, which must rely on the infrastructure already in place. Where you go and how you go very much depends on who you are.
I had this very discussion yesterday with my firm’s lead China lawyer, Steve Dickinson, who is in the United States this week. We were talking about a US business that had come to us for help on a dispute it was having with one of its suppliers in Shandong province, where this US business is also based. This US business does around $10 million in revenue a year in China and it wanted us to meet with our Qingdao affiliated law firm to get a lawyer there to meet with and lean on the mayor of the city in which the Chinese supplier is located to force a successful resolution of the problem. The owner of this business was convinced his plan would work because he had heard of some huge company [whose name I will not mention] having done something similar a few years ago. We felt very strongly otherwise.
So when will Vietnam (or Mexico or Thailand or Malaysia or India or Pakistan or Brazil) replace China for manufacturing? It depends. . . .