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Can "Made in Vietnam" Replace "Made in China"? Must-Read Guide to Avoid Pitfalls

After the increase in tariffs on "Made in China" products by the Trump administration, many companies have shifted their procurement destinations to "Made in Vietnam". Particularly for companies operating under Delivered Duty Paid (DDP) terms, where the 25% tariff surpasses their profit margins, "Made in VN" has become a label to safeguard profits. However, successful procurement plans require careful due diligence to ensure desired outcomes. In this blog post, we will explain the five key considerations for sourcing in Vietnam, providing comprehensive insights for a well-rounded understanding of your procurement strategy.

Lower Unit Costs Driven by Labor Advantage

Let's begin by discussing the widely recognized labor advantage in Vietnam. For low to mid-range products, Vietnamese manufacturing offers a price advantage compared to China. For instance, in the initial round of quotations, Vietnamese factories provide prices 40% to 60% lower than their Chinese counterparts for the same circuit board assembly.

Currently, the overall labor cost in China is approximately double that of Vietnam. Even for complex assembly operations, where Chinese workers require around 100 repetitions to become proficient, Vietnamese workers need around 1,000 repetitions. This discrepancy mainly stems from differences in the learning curve rather than a significant disparity in capability. Moreover, with highly automated production processes, where over 80% is controlled by programmed systems, the cost of labor significantly affects product unit prices. This cost advantage is a primary attraction for foreign purchasers.

Instability Factors in Partnering Factories

The selection of a factory significantly impacts the overall procurement cost and stability. When choosing a factory partner, it is essential to consider internal challenges that may lead to project delays, which the client ultimately bears. Therefore, let's delve into the internal issues faced by Vietnamese factories.

Inexperienced Workforce

Vietnamese factories lack mature talent, resulting in difficulties in project management. Unlike China, where engineers with 10 to 20 years of experience are abundant, Vietnamese factories mostly employ engineers who have recently graduated. Due to limited exposure to the industry, they require basic skills training.

Cultural Differences

Language barriers and cultural disparities also pose challenges. While Vietnamese factories arrange English-speaking individuals to facilitate daily communication with clients, the limited number of locals fluent in English necessitates effective coordination with foreign engineers and business managers. This situation often leads to a communication gap.

Factory Management

Cultural differences also affect management approaches. In China, when an issue arises, the general approach is to address and rectify it promptly to minimize project delays. In Vietnam, there is a tendency to conceal problems, evade direct discussion, or remain silent. What takes two weeks to resolve in China may take two months in Vietnam. Though labor costs are lower in Vietnam, the associated management costs are significantly higher. An excellent factory minimizes client involvement, resolves 99% of the issues independently, and avoids repeating mistakes.

Limited Sourcing Options

Vietnam's geographic limitations result in fewer sourcing options. Due to its relatively small size, Vietnam has the advantage of being selective when it comes to foreign investments. This affects the availability of sourcing options for buyers.

Geographic Constraints

For instance, industrial parks in Ho Chi Minh City have limited space. Suppose there are 1,000 candidate enterprises for 300 available slots. In that case, factors such as registered capital, industry competitiveness, past sales figures, and expected export quotas in Vietnam become crucial considerations. As a result, strict scrutiny ensures only the top players in each industry gain entry.

Flexibility in Sourcing

Consequently, if your procurement needs are niche or lack substantial quantity advantages, large factories may not align with your requirements. Instead, smaller and more flexible factories may be better suited to complete your projects.

Supply Chain Support

Procurement projects are not solely dependent on the cooperating factory; their supply chain also plays a vital role. Addressing supply chain challenges is crucial.

Import Dependency

Some Vietnamese factories import even the simplest components, labels, or packaging materials from China. At times, the shipping cost exceeds the value of the goods.

Growing Local Support

However, this situation gradually improves over time due to the flexible nature of capital investment. Once local factories demonstrate stable demand, enterprises invest in meeting those requirements. Though establishing a complex supply chain system takes time and resources, with sufficient investment, it can be realized. Buyers must assess if Vietnam has a well-established supply chain for their project's specific products. If various components still need to be imported from China, potential profit margins may not be significant.

Trade Policies

Vietnam, overall, is a country with relatively liberal trade policies. Most day-to-day trading activities encounter no special restrictions. In order to promote the development of the manufacturing industry, the Vietnamese government has implemented various trade policies, such as import tariff exemptions, VAT exemptions, and preferential tax rates for corporate income (e.g., 50% reduction for four years or 25% reduction for two years). Industries like industrial production and services, automotive industry, electronics industry, etc., are prioritized in Vietnam's trade policies.

Vietnam has signed bilateral and multilateral free trade agreements with many countries and regions to attract foreign investment, including agreements with the United States, South Korea, Japan, the ASEAN Economic Community, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the recently signed EU-Vietnam Free Trade Agreement (EVFTA). In summary, Vietnam maintains a relatively friendly stance towards foreign trade.

In conclusion, many perceive Vietnam as the "China of 40 years ago," offering cheap labor and abundant business opportunities. However, it is important to note that operating in less-developed regions comes with difficulties, including intense competition and unregulated practices. Mature markets, at the very least, adhere to certain rules. Less-developed areas often operate under different norms.

There are several macro-level considerations to keep in mind. Firstly, Vietnam cannot completely replace China's manufacturing industry. Regardless of Vietnam's growth stage and scale, it is more likely to capture a portion of China's supply chain overflow and receive some of China's orders. The investment from Japan and South Korea into Vietnam is a historical inevitability and a result of geographical factors. Being small countries with limited domestic demand, their brand enterprises must adopt a global strategy to survive, which differs from China's approach to global expansion.

Buyers must consider their own circumstances and project requirements while assessing the key factors of procurement in Vietnam. Thorough research and detailed analysis allow for more controlled project execution. SVI Global is here to provide comprehensive solutions tailored to your procurement strategies.