Why Vietnam manufacturing is the Best alternative to China // Vietnam Sourcing guide for the Trade War
Vietnam is the best Alternative to China for Product Manufacturing. Are you interested to see how sourcing products from Vietnam compare to China? Do you want to know the pros and cons of sourcing products from Vietnam? Curious as to how a sourcing company in Vietnam works? We made this guide to help you out!
Sourcing products is a very complex task, and when you add the variable of a second country it just makes it even more complicated. Despite the difficulties, there are many reasons to look at Vietnam to source your products instead of China. China is a maturing market when it comes to industrialization and manufacturing while Vietnam is very rapidly growing its manufacturing base. As a result, Vietnam is the 3rd fastest growing economy in the world and is expected to keep growing for over a decade! When I compare the two countries I try to think of China as a large mature corporate behemoth and Vietnam as the small but promising and rapidly growing start-up. In this guide, we’ll go through the reason of whether it’s better to source from China or Vietnam for your next product.
How to View Sourcing from Vietnam
Generally, there are three ways to view sourcing from Vietnam:
A primary sourcing Destination
A secondary or backup destination
As a complementary destination, such as a China + Vietnam dual sourcing strategy
In this guide, we’ll go over what each of these means. There is no one right approach for everyone, so it’s important that you keep your product or existing supply chain in mind as you read. This guide also focuses on the benefits of Vietnam over China, when Vietnam competes with many other countries, including the rest of the ASEAN countries as well as India. It is a little simplistic to turn to source into a two-country comparison, regardless, I think comparing China and Vietnam is a good place to start to give some perspective and scale.
In case you’re looking, Cosmo offers services to source from Vietnam no matter how you view it. Whether you are looking at just Vietnam, want to compare or move your existing supply chain from China or have a robust, dual-sourcing strategy from 2 countries Cosmo can help you out. If you are unsure if your product can be made check out our guide of what can be made in Vietnam here, https://www.cosmosourcing.com/blog/sourcing-fba-products-in-vietnam. In this guide, we’ll go through what all three of these ways to view Vietnam mean.
China Vs Vietnam for manufacturing
While Vietnam’s manufacturing capacity can stand on its own, most people tend to focus on sourcing products from China first. It’s understandable given that China is the manufacturing epicenter of the world and can function as a one-stop shop. Anytime Vietnam manufacturing comes up it inevitably gets compared to China which is understandable as China is currently the top. Despite China's dominance Vietnam punches above its weight and has several advantages over China.
By the numbers!
Numbers can only tell so much, but there are several items that show Vietnam can outperform China for its size, For instance, Vietnam, despite being 1/15 the size of China produces 1/10 the total amount of exports of China.
Is Vietnam better for Sourcing?
Young skilled labor force
Vietnam not only has one of the youngest labor forces in the world, but they are very capable of performing complex manufacturing task. This includes high-level technical assembly such as semiconductor fabrication and smartphone assembly. On average, the cost of labor is half what it is in China. In addition, Vietnam’s labor force is 7 years younger than in China, and even though Vietnam has a population of 90 million, 54 million are between the ages 18 and 60 and are able to participate in the labor force.
Fewer restrictions and more free trade
While China is seeing more and more restrictions and regulations against its manufacturing sector, Vietnam's government is extremely proactive at pursuing free trade agreements around the world. Vietnam has trade agreements in place, or soon to be completed, with the EU (including non-full EU members Norway, Iceland, and Switzerland), South Korea, All of Southeast Asia, via ASEAN, Russia and more. They are actively negotiating a revival of the TPP (without the US) and already has a Bilateral trade agreement that stops short of being full free trade) with the US. The Trade and Investment Framework Agreement was signed by the US and Vietnam in 2007 and has been in effect ever since.
Vietnam, compared to China, has a smaller bureaucracy and fewer restriction on foreign direct investment. In fact, for several industries, Vietnam has removed all restrictions on foreign ownership of production and manufacturing facilities. Further Vietnam has relaxed restrictions and rules on foreign ownership and investment on hundreds of industries. If you are at the scale that you are considering setting up and owning your own manufacturing capabilities, then Vietnam is much, much more attractive than China. Having experienced both Vietnam and China I have often felt pushback from China when trying to source and do business, while in Vietnam I feel much more welcomed.
Logistics and Infrastructure
Vietnam has a decent logistic and infrastructure network but it is not world class. Vietnam has one of the better systems in the world but it is not world class and falls very short of China, which is widely considered the best in the world. If Vietnam wants to take their industrial growth to the next level then they need to invest in new roads, Freight Rail, cheaper electrical grid, new ports and more. Unfortunately, in many cases, despite a lower cost from the factory in Vietnam, it is still cheaper to buy from China due to the lower transportation cost.
Another downside of Vietnam is that you can’t get everything you want from here. Vietnam, unlike China, is limited in what it can produce. However to be fair to Vietnam, most of what it can produce is very often cheaper or higher quality than what can be found in China, and with some industries like clothing, it's both cheaper and higher quality. If you are wondering what can be made in Vietnam, We made a guide for you [Link coming soon!]
In China not only can your item be found, but you can order it in almost any quantity. In Vietnam, the MOQ is often higher than in China and they are not as flexible. It’s a common practice when sourcing a new product to make a small order to test the market and then make a larger order when you are ready to commit. While it's still possible to do that in Vietnam it's not as easy as it is in China. For example, I had a client that needed 2,000 custom designed shirts made, so I contacted several factories that could make shirts. Many of the factories could make millions of T-shirts a year and supplied major retailers like H&M and Uniqlo. While they could handle that volume they couldn’t shift production to handle a smaller order.
Is China Better for Sourcing?
One stop shop
China is still a one stop shop when it comes to finding a manufacturer. If it can be made, it can be found in China. No other country anywhere in the world can offer this. When I source from Vietnam the first question I ask is “can it be made here?’, but when I source from China the first question is “what price can I buy it?” Even for products that can be made in Vietnam, the factories are often not designed to handle different scales. In China, smaller buyers can make a small purchase to test a product idea, and then expand to almost any size.
Access to raw materials
China also has better access to raw materials despite the fact China doesn’t have as great natural resources. Both China's Government and Chinese business are very aggressive in going to the source and buying the raw materials they need. A notable example of this is China controlling 90% of the rare earth metals that are essential in modern electronics. As a result, factories, by and large, have their back-end supply chain figured out so as a sourcing company we only need to talk to the end manufacturer.
When sourcing from Vietnam (and really anywhere outside of China) it’s not uncommon to have to find both manufacturers who can make the finished good, but also a supplier or the materials. In some cases, this can be a good thing as you have full accountability in the supply chain and control over what is used. For instance, we recently sourced high-end Italian wool for some apparel in Vietnam, while in China you have to take the factory at their word on the material they use or hire a third party inspection service.
China also has better infrastructure than Vietnam. That’s not to say that the infrastructure in Vietnam is bad, it’s pretty decent actually, but China has invested literally trillions of dollars to create possibly the best infrastructure in the world. Even though they have the largest ports in the world they are incredibly efficient. China has a freight rail network that connects the entire country, and over twice as much high-speed rail as the rest of the world combined. And even if it does come from terribly polluting coal plants, the electricity is cheap. In fact, China’s infrastructure and logistics network is so good that in many cases the saving in transportation cost makes up for the higher labor cost.
Difficult Bureaucracy and regulations
To say China has a massive complex and ever-changing set of rules and regulations is an understatement. China’s bureaucracy is massive and navigating it can sometimes feel like you are living in a Kafka novel. On top of its size and complexity, China also chooses which laws to enforce almost randomly. While it’s simple to set up short-term relationships and projects, it gets exponentially more difficult the more you wish to expand and can be a nightmare if you get to the level of setting up your own manufacturing. Foreign ownership, while possible is extremely difficult and can take years. China almost forces Joint Ventures with Chinese partners that may or may not be reliable.
Tariffs are only going to get worse
Tariffs have already hit $50 Billion worth of goods in China and the current administration seems intent to follow through with another $200 Billion soon. Even beyond the United States, other countries are looking to restrict the outflow of trade in an attempt to bolster their own competitive advantages. On the opposite end of this are countries like Vietnam that instead of getting hit with Tariffs are actively pursuing and signing free trade deals.
Beyond Tariffs, prices of goods exported from China have been increasing little by little each year. To be frank this is because of a few overall positives trends in China such as raising wages, and stricter environmental regulations. Nonetheless, China has been slowly moving away from the “Cheap” manufacturing base.
Counterfeiting and trust
By far my clients biggest concern when sourcing from China is having their item getting ripped off or counterfeited. For years, China has been notorious for stealing designs, ignoring patents and in some cases cloning entire businesses. For FBA clients, it’s not unheard of for a Chinese based supplier to figure out where the product is being sold, and hijack a listing. You need to go above and beyond to make sure that you have protections in places such as hiring a sourcing company that makes NDA’s mandatory in all contracts and forbids both its own employees and the factories it works with from selling even unrelated products online.
‘Chabuduo’ is a Chinese word that roughly translates as “close enough” and the concept is all too prevalent in Chinese manufacturing. When you source products you need to be extremely vigilant and makes sure that the product isn’t made cheaper than you expected and that they cut corners. It’s all it common that suppliers will only do what is absolutely necessary, and not one bit more, to make your product. There are many ways this concept manifest itself, in an end product. For instance, you may get a sample made of one material and the final product made of another, or have internal components that are not at all what they should be. If you want to make sure that your product is legit and up to your standards it may be in your best interest to hire a sourcing company to help you out.
Vietnam as a backup supplier
Many people are already sourcing from China, but with major changes going on many people are starting to look elsewhere for suppliers. For larger companies, it's a common practice to audit their supply chain and find backup suppliers so that they can quickly adapt to changes in the market. Having a robust supply chain is essential for companies that want to make sure that they can deliver the best service to their customers.
Regarding robustness, the best way to protect yourself from as much as possible from risk is to diversify your supply chain as much as possible. This isn’t something only large companies can do, it’s starting to become much more common with companies of all sizes, including smaller companies. This allows them to have the absolute best supplier possible and allows them to move quickly to keep their supply chain moving.
The best way to accomplish this is to figure out what your current China-based supply chain is to replicate it as closely as possible in Vietnam. Once you find similar or suitable suppliers then get quotes and make a full and detailed list of suitable suppliers. You need to update this list regularly so that you can have maximum robustness in your supply chain. If you are interested in this service this is something that Cosmo can do for you. Cosmo has been helping clients find suppliers in Vietnam since 2014.
China + Vietnam Sourcing strategy
Many buyer and companies do not like to put all their eggs in one basket, as a result many multinationals, as well as larger volume FBA sellers, have adopted a China + Vietnam Strategy. By sourcing and buying the same or similar products from both China and Vietnam at the same time you are able to take advantage of the best features of both countries as well as hedge your bets against any major changes in one country. WIth recent tariffs slapped against China, FBA buyers and major companies that use this policy were able to quickly shift production to Vietnam without any noticeable impact on their sales or supply chain.
The China + Vietnam Sourcing strategy started with the clothing and footwear industries, which has used it for years now. The dual sourcing strategy is expanding quickly to several other industries. Even if you are already buying or manufacturing in China and do not plan to move, it is still valuable to assess the Vietnamese landscape to determine if you can do better here. Having a list of suppliers in Vietnam can also give you a backup plan if things were to suddenly change in China. It’s important for a company to be robust and have redundant operations strategies in place so that you can ensure the best service for your customers.
COSMO SOURCING, YOUR VIETNAM SOURCING COMPANY
If you’re looking for a partner in Vietnam then check out Cosmo Sourcing. Cosmo has a dedicated unit for Vietnam sourcing. If you are interested feel free to reach out to me at firstname.lastname@example.org or ask me any questions you may have. Cosmo has been sourcing in Vietnam since 2014 and has worked with several clients to find products and partners in Vietnam. Cosmo is one of the only Sourcing companies that have expertise in both China and Vietnam and can actively source and compare product in both countries. Thanks for reading and we look forward to working with you!