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Is Vietnam the Next China: Myth vs. Reality


Is Vietnam the Next China: Myth vs. Reality

The ongoing US-China trade war has brought a renewed urgency in recent months resulting in my crisscrossing this tiny nation from the northern capital of Hanoi to the country’s economic epicenter to the south, Ho Chi Minh City – formerly known as Saigon, and every stop in between. Once viewed as an emerging market with potential, Vietnam today is considered the hottest “go-to” sourcing destination as supply chains uproot from China and President Trump and President Xi continue to work out their disagreements.

However, despite logging thousands of miles of travel and spending days upon days conducting factory audits in the remotest corners of the country, I’ve discovered Vietnam’s manufacturing industry and export products may not live up to the hype as China’s best alternative.

Myth #1: Vietnam manufacturing is on par with China.

One striking difference I noticed immediately is that Vietnam’s manufacturing is at least 10-15 years behind China. On my factory tours, I witnessed outdated machinery, lack of modern equipment and saw few signs of the latest supply chain best practices, including LEAN certification standards and supply chain manufacturing principles in action. In my daily research on vetting manufacturers, I consistently come across poorly designed websites- if I am lucky to find one at all, sales pages listing professional contacts using Gmail and Yahoo accounts, and often encounter few staff members who can converse or speak English well. These deficiencies contribute to the challenging task of sourcing products meeting global export standards.

Myth #2: Vietnam’s pricing is cheaper than China.  

With labor about one-third of China, the cost of living and land is much cheaper than its northern neighbor, many falsely believe that Vietnam-made products automatically translate into big savings.

There are three contributing factors:

1. In nearly every industry, Vietnam lacks quality raw materials and must import them from China, thereby, increasing costs

2.  As new foreign direct investments set record highs, industrial park land costs have increased dramatically to coincide with this boom

3. Manufacturers (well aware that the US-China trade war has put American buyers in a corner) have raised their prices accordingly.

These all contribute to the drowning out of any major cost savings. In my experience, several times North American buyers have responded that my Vietnam price offer is wildly off the mark and not competitive with their current China suppliers, China tariff included. 

Myth #3: In Vietnam, you can expect to find everything as in China.

In the world of manufacturing and supply chain, I constantly hear: “Just start sourcing from Vietnam.” That would be all fine and dandy assuming an apples to apples comparison, but Vietnam is anything but China. Over the past two decades, China has perfected their manufacturing and supply chains to the point of employing robotics and automation churning out sophisticated products by the millions. Just take a trip to the hugely popular Canton Fair or attend one of the hundreds of trade shows and expos throughout the year; you will find every product imaginable, in every variant and color, too.

Furthermore, China has the most up-to-date and modern infrastructure—from container ports, highways, railways, and warehouses—to deliver goods globally. In contrast, Vietnam only in recent years has started to emerge onto the manufacturing scene, known mostly for light furniture, textiles, sewing, and electronics parts. 

Exasperated by the US-China trade war, Vietnam’s manufacturing industry has been red hot, however, it’s not an equivalent replacement for China. Buyers can expect less-than-stellar quality products and choices than what China offers, met with challenging business practices and frustration due to the lack of manufacturing transparency, data, and information. While Vietnam might be a manufacturing dream destination for many of your gains, it might be just that in the end: a pipe dream. 

Amid the US-China Trade War, Vietnam Emerging as a Rising Star

As the US-China trade war continues to escalate with no relief in sight, American businesses are scrambling to find solutions to avoid the hard swallowing 25% tariffs on imported Chinese goods. One silver lining from the protracted conflict is China’s neighbor to the south and, at one time, one of America’s staunchest enemies, Vietnam. War-torn and poverty stricken merely 4 decades ago, this Southeast Asian star is rising quickly and experiencing record performing 7% GDP growth. However, despite its potential can Vietnam live up to the hype as China’s best alternative?

It is without a doubt that Vietnam has been rising eyebrows the last decade as a low-cost manufacturing destination. Since early 2000s, supply chains have been shifting quickly to this small, Southeast nation. In recent years, foreign direct investment (FDI) from China, Taiwan, Japan, and South Korea have been pouring in, boosting its manufacturing base. For the last several decades Vietnam has been an export leader in textiles, electronics parts, machinery, and cell phones, with no signs of slowing down.

Vietnam’s manufacturing potential has been creating a buzz—and for good reason. One of the most dynamic countries in Southeast Asia, Vietnam’s population is just under 100 million to which a 70% of the population is under the age of 35. A young, vibrant, hungry and able population make for an attractively strong workforce. As labour prices and raw materials continue to climb in China, manufacturers are enticed by Vietnam’s low-cost labor often at one-third less to that of China.

Government stability, fostered by Vietnam’s communist government, is also an attractive condition many businesses require before investing whole-heartedly. Finally, geographically, Vietnam is blessed as sits strategically to the south of China and is at the cross-roads of some of the busiest maritime trading routes in the world and within easy access to its economically growing ASEAN neighbors. For these reasons, Vietnam is a standout among its peers.

Despite the country’s potential, however, when it comes to manufacturing investors are quickly discovering that Vietnam is no China. For one, the overall country’s infrastructure is underdeveloped and in bad need of repairs and upgrades: roads, bridges, ports and railways all lag many of its neighbors. To the government’s credit, there are major infrastructure and developmental projects in the works, such as commuter metro trains in both Hanoi and Ho Chi Minh City and updated shipping ports, however, Vietnam needs to press on in major ways if it wishes to compete in the 21 century global economy.

Though Vietnam boasts a young and energetic workforce, the reality is that the majority of its workers are low-skilled, lacking any modern manufacturing training and skill sets essential to meeting the current manufacturing surge. This phenomenon dates back to the historically poorly plagued educational system, including its outdated vocational training, facilities, and know-how. Third, production infrastructure, proper facilities, and quality raw materials are in short supply, compounding this problem. For these very reasons, Vietnam may not be the silver bullet many are hoping for.

Vietnam’s stunning export growth is backed by impressive numbers. In 2019, exports to the USA increased 28.8% compared to last year. The investment bank Nomura in one estimate credits the US-China trade war to boosting Vietnam’s economy 8%. Everything from telephone electronics parts, furniture, and automatic data processing machines have all seen an uptick. Light industry manufacturers such as textiles and electronic components have all benefited in recent months.

Though the lack of modern infrastructure has plagued Vietnam’s growth, in recent years the government has been investing heavily in industrial parks, answering the calls by large corporation demands and their needs for up-to-date facilities.

While Vietnam is rising as a quick alternative to China, obstacles could quickly derail this apparent boon. For one, in late June of this year American President Donald Trump, in a news briefing with reporters who asked what his thoughts are about the quick shift in manufacturing from China to Vietnam, remarked, “Vietnam is one of the worst offenders. Sometimes even worse than China.” He followed up by threatening that as president he would consider tariffs against Vietnam. If President Trump were, indeed, to follow through on his threat doing so would quickly sap Vietnam’s headlining potential. Moreover, as Vietnam nudges forward as an export leader, its neighboring countries are also quickly upping their manufacturing, technology and export industries in earnest, adding to the competition in the process.

Thailand, Cambodia, the Philippines, Malaysia, and Indonesia—all members of ASEAN— are ramping up their industrial competitive advantage. Finally, rampant corruption at both the provincial and national level as well as the increasing environmental destruction and pollution are cause for concern. The result is the lack in the ease of doing business; foreign direct investment and attracting skilled foreign expats to work in Vietnam are increasingly being jeopardized. Vietnam’s recent gains, though substantial, are fragile are at risk of unraveling at a moment’s notice.

Vietnam finds itself at an opportune crossroads at a time to reap the benefits made by the US-China trade war. This emerging market holds great potential which has already proven itself as an industry leading manufacturer in electronics, small parts, and textiles. However, despite Vietnam’s enormous strides in recent years, the country falls short in several key areas, mainly, skilled workers with modern training and know-how, outdated facilities, lack of quality raw material, and overall poor infrastructure.

Despite these deficiencies, with government leadership, input from business leaders, continued foreign investment, and the implementation of the rule of law and decreased corruption, Vietnam may not only be a convenient alternative to China but emerge as an economic Asian tiger in its own right.

Vinh Ho is a Manager at APAC Consulting