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Are Manufacturing Costs Truly Cheaper in Vietnam Compared to China?

                     Workers at a Samsung factory in Bac Ninh province, northern Vietnam

Many businesses have been enticed by the perception that manufacturing in Vietnam is cheaper than in China. However, it is crucial to examine the reality of manufacturing costs in both countries. In this blog post, we will explore the factors that have led companies to invest in Vietnam, compare labor costs and workforce dynamics, discuss the imperfect supply chain in Vietnam, and recap the findings on manufacturing costs in China and Vietnam.

Factors that led the companies to invest in Vietnam

Accompanying Clients to Establish Factories

The decision of companies to invest in Vietnam is driven by several key factors that make it an attractive destination for establishing factories. One significant factor is the practice of accompanying clients in setting up their manufacturing facilities. This approach offers numerous benefits and aligns with the evolving needs and challenges faced by businesses today.

Accompanying clients to establish factories in Vietnam provides companies with the assurance of stable orders from their main customers. By being in close proximity to their clients, manufacturers can avoid the uncertainty of relying solely on distant supply chains. This arrangement ensures a consistent flow of orders, mitigating concerns about the fluctuating demand and minimizing the risk of production disruptions.

The practice of accompanying clients helps companies maintain long-term relationships with their customers. In an ever-changing world, where factors like pandemics, political dynamics, and economic fluctuations can have a profound impact on supply chains, maintaining strong ties with clients is essential. By establishing factories in Vietnam, manufacturers can adapt to these changes alongside their customers, fostering collaboration and partnership in navigating potential challenges together.

It also enables companies to be well-prepared for the changing landscape of the global supply chain. As rising labor costs in China and the need for diversified production bases become increasingly prominent, Vietnam emerges as a favorable choice. Its competitive labor costs, favorable business environment, and growing infrastructure make it an attractive investment destination. By strategically expanding their manufacturing capabilities in Vietnam, companies can optimize their supply chain, enhance operational efficiency, and remain agile in an evolving market.

Labor Costs and Workforce Dynamics

Labor Costs Are Not as Low as Imagined

While Vietnam has long been perceived as a destination with significantly lower labor costs compared to China, the reality may not align with these initial assumptions.

Contrary to common assumptions, labor costs in Vietnam are not as low as one might think. The wages for assembly line workers in factories, including overtime pay and subsidies, range from approximately $230 to $390 per month. These wages are comparable to those in Guangdong, China, during the mid-1990s. Administrative staff in Vietnam earn around $460 per month, and those with better Chinese language skills can earn $615 to $770 per month. Considering various allowances, the overall labor costs in Vietnam are around 80-90% of those in China.

Differences in Working Hours and Overtime Pay Compared to China

When it comes to average wages and overtime pay in Vietnam, there are some noticeable differences compared to China. In Vietnam, the standard workweek consists of six days, with only Sundays requiring additional overtime pay. This arrangement tends to be more cost-effective compared to China. Moreover, recruiting workers in Vietnam can be relatively easier than in China.

Lower Production Efficiency Compared to China

There is a notable contrast in work attitudes between Vietnamese and Chinese workers. Vietnamese workers tend to lead a more relaxed lifestyle compared to their Chinese counterparts. They often take leaves, and it is rare to find someone who doesn't take any leave throughout the month.

Additionally, the high mobility of the workforce in Vietnam poses challenges in maintaining efficiency. It is uncommon for employees to stay in the same factory for a year in Vietnam. For jobs that involve complex processes, the principle of "practice makes perfect" holds true. If workers keep changing frequently, even with a sufficient labor force to fill the gaps, it takes time for them to become familiar with the workflow, which hampers production efficiency.

The Imperfect Supply Chain in Vietnam

Profitability of Setting Up Factories in Vietnam

The decision to relocate industries to Vietnam is primarily driven by economic motives aimed at maintaining or improving profit margins. However, it's important to note that the profitability of setting up factories in Vietnam may not be as high as initially expected.

One key factor impacting profitability is the higher material and transportation costs due to a lot materials have to be imported from China, which have reduced profit margins for businesses. Overall, the profit levels are not necessarily higher than those in factories in China. This can be attributed to the fact that labor costs haven't decreased significantly in Vietnam, and the production efficiency of Vietnamese workers is not on par with that of their Chinese counterparts. In discussions with some Chinese factories in Vietnam, it becomes evident that no factory in Vietnam has achieved the same level of production efficiency as mainland China.

Difficulty in Finding Reliable Upstream and Downstream Partners

Currently, the biggest challenge lies in the imperfect supply chain in Vietnam, making it more complicated to find suitable upstream and downstream partners. In mainland China, it's so easy to find suppliers. There are various channels available, and the process is transparent. In some cases, factories could find all the desired sources on a single street close to their China factory. However, in Vietnam, it's a slower process. It feels like going back to the situation in mainland China in the 1990s. Moreover, Chinese factories also face challenges related to limited networks and language barriers.

For the time being, factories still need to import raw materials from China. However, in the future, there are considerations to gradually seek local suppliers in Vietnam.

Recap the Findings on Manufacturing Costs in China and Vietnam

The below findings shed light on the cost dynamics that businesses need to consider when making decisions about production locations.

Labor Costs

China: Over the years, labor costs in China have been steadily increasing. The higher wages, combined with rising social security expenses, have impacted overall production costs.

Vietnam: While labor costs in Vietnam are lower than in China, they have also been rising steadily. However, the wage gap between the two countries still exists, making Vietnam an attractive option for cost-conscious businesses.

Material Costs

China: With a well-developed manufacturing infrastructure, China enjoys advantages in terms of raw material availability and pricing. The presence of established supply chains and a wide range of suppliers contributes to competitive material costs.

Vietnam: The availability of raw materials in Vietnam is somewhat limited, and the reliance on imports from China is still prevalent. This dependency on imports can result in higher material costs and potential supply chain disruptions.

Overhead Costs

China: The overall cost structure in China includes various overhead expenses, such as land and utility costs, taxes, and regulatory compliance. These factors can contribute to higher overhead costs for manufacturers.

Vietnam: Compared to China, Vietnam generally offers a more favorable environment in terms of overhead costs. However, certain challenges related to infrastructure, bureaucracy, and administrative processes may still be present.

Productivity and Efficiency

China: Chinese factories have a long-standing reputation for their high productivity and efficiency levels. The well-established manufacturing ecosystem, skilled workforce, and advanced technology contribute to streamlined operations and optimized production processes.

Vietnam: While Vietnam has made significant progress in recent years, the country's manufacturing sector still faces challenges in terms of productivity and efficiency. Factors such as a less experienced workforce, limited access to advanced technology, and less developed infrastructure can impact manufacturing performance.

Tariffs and Market Access

China: Exporting goods from China to the United States often incurs import tariffs, affecting the overall cost structure for businesses. These tariffs can impact competitiveness and the profitability of exporting to the U.S. market.

Vietnam: With its participation in trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), Vietnam enjoys certain tariff advantages when exporting to the United States and the European Union. Reduced import taxes make U.S. orders more attractive for businesses operating in Vietnam.

Overall, the perceived cost advantages of manufacturing in Vietnam compared to China may not be as significant as initially imagined. However, Vietnam still remains an appealing option for businesses seeking lower-cost alternatives and opportunities to diversify their production bases. Additionally, the tariff advantages of exporting to the United States make Vietnam an attractive consideration for US businesses. This is especially true for product categories that face higher tariffs when exporting from China to the US, as well as for products that rely less on imported raw materials, involve simpler production procedures, and have lower requirements for a highly skilled workforce.

As you consider your manufacturing options, SVI Global invites you to explore the possibilities that Vietnam has to offer. With our extensive sourcing expertise on the ground in Vietnam, we can assist you in setting up your manufacturing operations and help you leverage the advantages and opportunities available in this dynamic country. Whether you are looking to optimize costs, diversify your production bases, or take advantage of tariff benefits, SVI Global is your trusted partner. Contact us today to discuss how we can support your manufacturing goals and propel your business forward in Vietnam.