[Newsphopick=Kingsley Lim] A wave of manufacturing firms from China have shifted their factories to Vietnam in recent years. Apart from that, there is a trend towards sourcing from Vietnam instead of China. More recently, the US-China trade war has been a motivating factor in moving production to Vietnam. This begs the question – why is Vietnam gaining such popularity as a manufacturing hub in recent years?
For many importers, they have made the jump to relocating their supply chains from China. The recent coronavirus further drove home the idea that supply chains must be diversified. As the coronavirus pandemic spread across the world, importers from the US and all over who depended on China’s manufacturing prowess, experienced a standstill in the supply chain. As businesses, industrial companies and factories shut down due to the coronavirus-induced lockdown, so did supply chains.
At least a couple of months, China went into a full lockdown mode. This made getting raw materials and goods from China extremely difficult. In an annual report which I had just read, the goods which were delivered to another country was left stranded at the port as everything came to a standstill. While the goods had already reached its destination, its customers were not able to receive them and hence pay for them. This caused a delay in payments from the customers, which resulted in the write down of trade receivables.
This is not a solitary experience of a manufacturing company. Many have experienced the same fate – and this has forced manufacturing companies and importers of goods to look for different ways to diversify the supply chain. Instead of relying on China solely for manufacturing, the idea is that if the supply chain is diversified, one could get supplies from one country if the other is affected.
Chinese companies have also benefitted from having factories spread out in a few locations. Again, diversification is at play. With the Trump instigating hatred on China on a level not seen before in world politics, there is a sudden impetus to avoid the tariffs levied on goods of Chinese origin.
The case for Vietnam
Consider the case of Nike. Nike had used Vietnam to manufacture 47 percent of the goods that it sells. This is in stark contrast to China’s 26 percent. As the coronavirus pandemic hit China, Vietnam remain relatively unscathed. This made sourcing from Vietnam a boon as the country was able to provide Nike-branded products while the whole world came to a standstill. This is one of the tangible benefits of diversification.
While Vietnam is touted as the ‘next China’, many are still sceptical of the country’s ability to deliver the same level of manufacturing expertise offered in China. One factor that is placed under heavy consideration is whether Vietnam has the ability to manufacture a product. A simple search on Alibaba, a sourcing website proves this point. Plastic manufacturers are abundant in China but in Vietnam, many do not have the same capabilities to produce plastic products.
The diversity of manufacturers in China is quite obvious. If you want to manufacture in China, there will be thousands of factories who would be willing to take on that job. But in Vietnam, there are less. Nonetheless, Vietnam is growing and for now is a great place for the manufacturing of machinery, footwear and garments.
It is my opinion that Vietnam will not have the same level of expertise as China but it will eventually climb up that trajectory. For now, Vietnam ranks 120th out of 130 countries in terms of “know how”. The breadth and depth of Vietnamese labour is behind that of China’s. As such, the country would have to find ways to train its labour pool.
However, all is not lost. The single biggest factor for shifting production to Vietnam is the low cost. China’s labour costs have risen by 60 percent since 2011 and this has inadvertently resulted in low profit margins on labour-intensive goods. With the new tariffs, China is proving to be an expensive place to manufacture.
In Vietnam however, monthly minimum wages are between US$125 and US$180 per worker. In places like Hanoi and Ho Chi Minh City, one could expect these rates to be higher. But by and large, Vietnam’s labour costs are about half that of China’s.
Apart from that, Vietnam’s labour wages have been relatively stable in recent years, growing by between 5 to 7 %. Hence, for companies which are in it for the long haul, Vietnam is a great place for tapping into its low cost labour market. As such, what observers have been noticing is a general movement of the supply chain from China to Vietnam. American companies are also more willing to source from Vietnam for its products. In the long run, this is a good thing as you never know when another virus might strike.