China Business

China Defeats Vietnam In Sourcing Smackdown

China manufacturing versus Vietnam manufacturing

Just read an excellent post over at the Product Global blog (a blog you should be reading if you are involved with international manufacturing), entitled “Sourcing: An Ever-Shifting Landscape, Part II.” [Link no longer exists] The Post is on why China is almost always a better sourcing choice than Vietnam for SMEs (small and medium sized companies), even though Vietnam may be nominally cheaper.

The post starts with talking about how for the small business beginning offshore product sourcing, China offers a lot more than just low prices. The post then discusses how the US government’s decision to “monitor” Vietnam’s apparel exports for possible dumping violations has caused several large US retailers that were sourcing apparel products from Vietnam to switch their sourcing to other countries. “Anti-dumping measures can have brutal and unpredictable consequences on a company’s supply chain.”

It then astutely notes how something like trade tariffs can have a greater impact on small companies than big ones:

In this situation, a small business with a much simpler supply chain, involving one or a few factories in Vietnam, would be at great risk. Although large corporations with extensive supply chains in multiple countries will still lose some time in moving production elsewhere, they can react to these trade policy developments more quickly because they have vendors in other countries, more money, and more manpower to throw at the issue. The small company that is beginning offshore sourcing usually only sources from one country. Someone moving to Vietnam right away because they offered the lowest hard costs would now be facing a situation which could potentially threaten the entire supply chain and business. Even if they rushed to find sources in other countries to mitigate the risk, it would take months of lead time to find the right source, create and review samples, set up production, etc.

It then notes that China-US trade relations are not without their own bumps but “these bumps will be far less dramatic than those for countries newly emerging onto the international trade landscape.”  It concludes by discussing the cost-risk trade-off in choosing a country for product sourcing:

Cost is important. But so is risk. For pure risk purposes and the small business starting offshore operations, more stable trade relations is highly advantageous. It is certainly a reason why much of what we do today is in China. When our clients grow to a critical point and have stabilized their operations, then we can begin looking at other countries for new opportunities.

We agree, and certainly when we work with our own clients in helping them determine whether to source their product from China versus Vietnam, we discuss risk as a critical factor.

12 responses to “China Defeats Vietnam In Sourcing Smackdown”

  1. Hmm, but presumably much the same thing would apply if, say, you were a SME specialist paper producer in China hit by the latest targeted tariffs? In the past the dynamic with trade sanctions has had an “all or nothing” approach (Schumer-Graham etc) that tended to mean that the chances of anything happening would be minimal, as you had the unified opposition of all foreign companies engaged in trade. The only exception was the textile sector – and incidentally on that front surely SMEs would have been struggling to get the apparel quotas relative to the big firms under the current US restrictions (I freely admit to knowing nothing about how these quotas are allocated). Now that you’ve got the threat of sanctions targeted at specific indutries and a more agressive Democrat crowd in Congress, I suspect that there’ll be an awful lot less cohesive opposition from AmCham members in China – divide and conquer.
    Not saying that the article hasn’t got good points, but I suspect that the beneficiaries of this sort of thing would be more likely to be countries that Congress regards well (Philippines, Sri Lanka etc), rather than China.

  2. Dan, Thanks for the post. A few more thoughts…Quota use in China is now picking up–companies are already moving back to China operations because of the US’ monitoring of Vietnam, also because of the dip in quota allocation at the end of 2006 in China (because many were moving to Vietnam), the improved ability of companies to predict quota usage, etc. The difference I see between SMEs and bigger businesses in this respect, is the ability for bigger businesses to constantly go after low-cost production in several countries depending on the ever-changing regulatory environment. Look at Li&Fung, their ability to source from so many different environments is very impressive–but their able to do that through decades of experience, networks, IT, etc.
    But, an SME doesn’t have the same ability to play that game. Most SMEs initiating their sourcing operations and emergence onto the fashion scene will be trying to compete in areas of design, business model, and within niche markets, because it will be difficult to beat out the big guys on cost and volume. Thus, it helps to start with a source in which A) most of their competition is there as well and will be affected by the same changes in trade policy, and B) trade policy is a little more predictable and won’t end up becoming catastrophic quickly. With small and new companies, there’s only so much bandwith to go around. It’s helpful to get your supply chain as stable as possible and focus your attention where your competitive advantage is (design, niche market, etc…), rather than trying to capitalize on the lowest costs in more unpredictable environments. By comparison, China offers A and B, thus it’s a good place to start and grow from in most product categories. Let the big guys make the mistakes and forge the path in new destinations. As your company grows, you can look to reap those same rewards much more quickly and cheaply.

  3. Cheap labor was a good enough reason to outsource to China in the first place, now the cheap labor in Vietnam is not enough?
    What kind of “added value” are you getting in China? Yes, the infrastructure is much better, but the little emporers are nearly worthless as employees, so much so that expat hiring is on a markedly upward slope when ideally it should be decreasing drastically if local talent was up to the task.
    Vietnam also does not have a “one child” problem and has not shown itself to be a political threat to anyone but China.
    While I am taken to task for wanting to contain and hold down China, can the same be said for the rest of you not wanting to see other Asian countries develop on their own with the help of quality outsourcing?

  4. Duncan —
    You certainly raise some good points, but at the same time, I have to believe that a country like Sri Lanka is rife with all sorts of risks beyond quotas.
    Ashton, I would love for you to respond to Duncan directly on this.

  5. Ashton —
    Good points. I am always marvelling at how huge companies can go into a place like China without really being concerned about making huge mistakes. I have seen huge companies brush off $5 million mistakes as a small cost of entry, whereas a small company cannot afford a $500,000 mistake.
    This is just one of the reasons why small companies cannot afford to blindly copy what MNCs do.

  6. “Who does not want “to see other Asian countries develop on their own with the help of quality outsourcing?””
    Well, promoting China as the one-stop, ONLY place to outsource does these other countries a great disservice. If you’ll remember, China fixed its currency exchange rate primarily not to bring in more outsourcing directly from the US but to suck in low-end outsourcing from ASEAN, Mexico and central america.

  7. Always happy to oblige…
    Duncan–
    You made a few comments, but I’ll take on the last one first. In regards to countries, such as the Philippines and Sri Lanka, benefiting from the monitoring of Vietnam’s situation, there is no question that they are. Exports have risen considerably in the last few years. They have gained the most in specialist categories, particularly those with stricter quota restrictions in China. But we’re seeing much more activity in China now as well. I suppose I’m thinking more from the point of view of a small company sourcing product in Asia. In a time-sensitive industry like apparel, lead-time plays such an important role and can cost a company quite a bit if they stall. For those pulling orders from Vietnam to go elsewhere–do you buy your quota allocations quickly to make sure you get them and go back to China where you know you can get your product made? Or, do you go to another country where the risk is higher with respect to quality, turnaround time, etc? I think, for the SME in most cases, the risks going elsewhere will generally outweigh the increases you face in quota cost. Not sure if I answered all of your question/statement, but let me know if I should comment further.

  8. “nh —
    So are you saying we should analyze these issues using something other than a business analysis?”
    Business do political favors for countries they wish to enter, as do the parent governments of businesses. Thus the US, UK, and the rest of the EU have recklessly allowed massive technology transfers to China against the better judgement of national security people.
    So strategic and humanitarian consultation should be consulted as well and Vietnam, as well as Indonesia and Malaysia are very viable options for more than just business reasons.
    Some of the US’s worst international behavior has been committed on behalf of corporations. Or have you forgotten the treatment of fledgling Latin American democracies because they wanted to nationalize their natural resources to the detriment of US corporate bottom lines. Or the creation of Saddam Hussein?

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