If you are looking to start production on a new product or increase production on an existing one, you may be considering alternatives to manufacturing in China. While there are advantages to Chinese manufacturing, the number of challenges and costs for the region are continuing to increase. In order to mitigate risks and combat increasing costs, Vietnam is increasingly becoming a potential region of choice for those exploring moving out of China.
Located south of China along 2,000 miles of the South China Sea coastline, Vietnam has emerged as one of the preferred manufacturing locations in Southeast Asia over the past decade. Even through the pandemic lockdowns, Vietnam saw growth and shows no signs of slowing down.
Focused on textiles, apparel, electronics, and foodstuffs, Vietnam’s manufacturing exports to the U.S. topped $96.3 billion in 2021. The government has committed to being a high-income country by 2024, offering a greener, more inclusive economy. Manufacturing makes up 25% of this growing economy and predictions are that Vietnam’s GDP will grow 5.5% this year.
“Growing” is the critical word to remember regarding the manufacturing sector in this country. Vietnam is not a seasoned global manufacturing powerhouse like China, Taiwan, or Japan. Their commitment to competitiveness and transitioning their economy from agriculture to manufacturing is new. Education, infrastructure, and manufacturing quality are all in the “improving” category and are not at the standards set by other countries in the region with more mature manufacturing industries.
Vietnam, like any manufacturing hub, has its own unique set of pluses and minuses. In this article, we share six things anyone exploring Vietnam manufacturing should consider. We also recommend ways to see if this attractive Asian manufacturing location is right for your products.
1. Take Advantage of Lower Labor Costs in Vietnam
Lower labor rates are the primary reason why people choose Vietnam as their alternative source for manufacturing in Asia. In 2021, the average minimum wage in Vietnam was $2.99 per hour compared to $6.50 per hour in China. Low labor cost is why the dominant manufacturing industries in the country are shoes and apparel. As COVID-19 lockdowns lifted, Nike announced Vietnam would be their largest supplier.
However, one of the reasons why labor is cheaper is that workers are less technologically skilled. This may be advantageous if the cost of automation is too high or you need human-powered process steps. You should consider a partner in Vietnam if the manufacturing of your product involves a lot of labor. On top of favorable labor rates, Vietnam has some outstanding engineering talent.
2. Leverage the Vietnamese Government’s Commitment to Growing Trade
The reason why Vietnam is a growing manufacturing hub is the government’s commitment to transition from an agriculture-centered economy to one with greater diversity. They want to grow tourism and manufacturing to increase their domestic market. You and your potential manufacturing partners should take advantage of this focus and leverage it for your product’s production.
There are four aspects of the government’s plan for growth that impact companies who want to partner with Vietnamese manufacturers.
Work has begun on improving roads, rail, and ports to create the infrastructure needed to support the growth in manufacturing. Some areas are ahead of others, so make sure supplies can move freely to your facility and you can get your finished parts to port. The area around the capital of Hanoi has seen the largest investment, with electronics giant Samsung committing people and money to the region. There has also been strong infrastructure growth in the southern end of the country around Ho Chi Minh City.
By the end of 2021, Vietnam signed 13 free trade agreements, including a Bilateral Trade Agreement between Vietnam and the U.S. signed in 2001. Already a member of the Association of Southeast Asian Nations (ASEAN) trade group, the country signed the Regional Comprehensive Economic Partnership (RCEP) agreement that links 15 countries and 30% of the world’s population in one trade zone along the western side of the Pacific. What this means to you is that it will be easier for Vietnam factories to obtain raw materials and components from other countries in the region.
The central government uses taxes to attract foreign investment to the country to build their manufacturing sector. This strategy includes tax incentives for building and growing facilities, strategically defined tax holidays, and the establishment of high-tech and industrial zones with lower tax rates. If you aren’t building your own factory there, these don’t impact you directly. But they affect the costs of your potential manufacturing partners and might help them increase their capacity and capability.
The Vietnamese government recognizes that their most important asset is their people. To diversify their economy and create a vibrant domestic market, the country has to improve the skills and knowledge of their workforce. They have placed vocational training at the center of their development plans. This is starting to pay off with a steady increase in capability and a growing high-quality manufacturing labor force.
3. Enhance Your Commitment to Greener Manufacturing
The Vietnamese government is committed to growing a sustainable manufacturing sector. This initiative to stay green and have zero net carbon emissions by 2050 is a great opportunity for companies that also prioritize sustainability. The advantage of being a country that is growing its manufacturing sector is the ability to put cleaner energy production and manufacturing processes into its infrastructure from the start.
If green manufacturing is an integral part of your company’s DNA, this could be the deciding factor for your product’s production.
4. Make Sure You Can Find the Right Factory for Your Product
Sourcing the right manufacturing partner is something you need to do regardless of where you place your production. However, what is “right” changes from country to country. It’s vital to understand the strengths and weaknesses of each potential partner and also of each country.
One of the reasons China is such an easy choice for manufacturing is the overwhelming number of options available for production. According to the World Bank, Vietnam’s manufacturing sector generated $45 billion in 2020 (in 2015 dollars). China did $3.2 trillion. That difference is massive and points to the reality that Vietnam doesn’t have a solution for every need.
With fewer choices, you need to work with the right people who know the country to help you source the right partner. You also need to identify the technological needs of your product’s production and make sure you find a partner with the relevant equipment and experience. The same goes for quality control, which is still developing in Vietnam’s manufacturing industry.
5. Don’t Forget About Supply Chain
The COVID-19 pandemic has taught us many things. One of the biggest lessons learned has been that we cannot take our supply chain for granted. If you are considering moving your production to Vietnam, take a long, hard look at your supply chain and make sure that you can get your inputs — from raw materials to components — into the country and to your partner’s factory. Examine how much that will cost.
The good news is that Vietnam shares a large border and a coastline with China. The RCEP agreement mentioned above removes many barriers and reduces tariffs. Materials can also be obtained from regional suppliers like South Korea, Japan, Taiwan, Singapore, Indonesia, and the Philippines.
6. Understand the Developing Infrastructure and Bureaucracy
Vietnam’s two biggest challenges in building its manufacturing sector are that it is growing and it has a single-party, centrally controlled government. Infrastructure improvements lag behind demand and regulations. Government red tape can be cumbersome. Although improving, both should factor into your decision, especially how they may impact your schedule and how long it will take to get your product to market.
Find the Right Partners to Maximize Strengths and Avoid Weaknesses
Choosing a manufacturing partner is so critical that sourcing is a phase in the product development process. At the beginning of your sourcing journey, you should consider multiple locations for manufacturing, including Vietnam. Make sure you understand what technology you need, how much labor is required, and the needs of your supply chain.
Finding experts who understand the local market is even more important in Vietnam than in other countries. Because the manufacturing industry is still growing and there are not nearly as many factories to choose from, someone who knows the lay of the land is essential.
Finding those experts is easy with help from Gembah. Our team has experience in Vietnam and other countries around the world. We also provide the world’s first global marketplace for product development. You will find access to the right people and company to not only help you explore Vietnam manufacturing, but fill in your entire product development team.
The current reality is that although China is still the global leader in manufacturing, you have other options. And for many products, manufacturing in Vietnam may be the best choice. Reach out to our team, and let’s explore how we can help.