As my law firm’s Vietnam practice continues to grow, I have become fascinated with how companies decide where to outsource their product manufacturing as between China and Vietnam, both for new products and for products currently being made in China. One of the reasons I am so fascinated by this is because so many factors go into the decision and unless IP is paramount for the company, the legal issues are not usually central.
So I was delighted to read the post, Three Key Factors for Sourcing in Vietnam [link no longer exists], particularly since it is written by InTouch Manufacturing Services, a company with substantial China sourcing experience. The post begins by discussing how the media has been writing often about manufacturing shifting from China to Vietnam. It then notes that Nike now gets 42 percent of its product from Vietnam, as compared to 30 percent from China.
The post presents a chart showing China factory workers make, on average, three times as much as factory workers in Vietnam and it calls this wage disparity “significant for labor-intensive products like footwear, garments, and electronics.” It is significant, but as I am always saying, if wages were the only factor, every company would be looking to start sourcing in Afghanistan and they are not.
Most importantly though, this post analyzes from a sourcing perspective the following three key issues involved in choosing between China and Vietnam.
1. Product Type. The post notes that “Vietnam is 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, though “capabilities and confidence in Vietnamese manufacturing are growing China still maintains a significant competitive advantage.”
The post rightly warns those looking to shift production from China to Vietnam consider “the risks posed by a Vietnamese workforce that is relatively new and inexperienced” and suggests asking “what might you be taking for granted in China now that you may find yourself struggling to manage or live without in Vietnam?”
2. Your Existing Supply Chain. The post rightly points out that Vietnam’s infrastructure is not as good as China’s and this could be problematic for smaller companies that cannot essentially fund their own infrastructure:
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 are not too far away from where you need them. With well-paved roads, seven of the world’s ten busiest shipping ports, and a massive network of high-speed and commercial rail lines, infrastructure in China is extremely well established.
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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 large corporations and small entrepreneurs alike. Potential foreign buyers and business owners of all sizes will have a relatively easier time finding guidance about China than for Vietnam.
One of the things we are finding we are having to do for our clients looking to go into Vietnam is connect them with appropriate people in Vietnam, far more often than we do for our clients looking to go into China.
3: Foreign-owned Manufacturers. The post discusses how so many of the “manufacturers in Vietnam established for export are actually foreign owned,” with a large portion of those owned or operated by Chinese or Taiwanese. Very true, and for more on that, check out this post, What’s Your Vietnam Strategy? on my time in Vietnam during last year’s anti-Chinese riots.
The post then suggests. that with so many Chinese manufacturers themselves having set up in Vietnam, you should discuss with your existing Chinese manufacturers how you “may be able to work with them to keep some of the production processes in China, while outsourcing others.”
What are you doing with Vietnam, Thailand, Indonesia, India, Taiwan, Malaysia, Mexico, or Bangladesh, or really any other China manufacturing alternative?