Vietnam – When Sourcing From China Is No Longer Enough
- Sep 19, 2024
- 4 min read
Written by Laura Dow, Business Director
Laura Dow, Business Director at CPG, manages growth and its key components: business development, marketing, client success, and finance. In her role, Laura establishes company growth objectives, designs and executes strategies and protocols to enhance overall performance,
China has been amazingly enduring as a reliable low-cost manufacturer for decades now, and countless companies purchase a large proportion of their supply from it. However, recent geopolitical tensions and tariff increases have fueled the rise of the "China + 1" strategy, a process in which companies identify competitive alternatives to China sourcing to diversify their supply chains.
Instead of “getting out of China” completely, many companies are establishing additional supply chain operations in other countries to reduce their dependence on China and mitigate the risks associated with an over-reliance on one country. When choosing a new country, importers seek a competitive supply chain and hope for a long-lasting relationship.
While diversification is always a good idea, changing supply chains is a challenging process. It is time-consuming, resource-intensive, and risky. One does not make such changes lightly and careful considerations must be taken. Vietnam has emerged as one of the leading destinations for importers implementing the China + 1 strategy, and there are many good reasons for this.
Below, I will outline some of the pros and cons of sourcing and manufacturing in Vietnam, and also share with you some of my conclusions.
Advantages
Shifting sourcing and manufacturing to Vietnam presents distinct advantages, including:
Low labor costs: Especially compared to many other manufacturing hubs.
Strategic free trade agreements: For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU-Vietnam Free Trade Agreement, both provide favorable conditions for exports.
Rapidly improving infrastructure: Investment in ports, roads, and industrial zones has increased supply chain efficiency.
Proactive government policies: These provide additional incentives to attract foreign investment and develop key industries.
Proximity to China: Makes it easier to manage sourcing from both countries,
Established key industries: Vietnam supports numerous industries, including apparel, electronics, and machinery, offering a broad base for diversified sourcing.
Continuity with Chinese suppliers: Thousands of Chinese companies have invested in Vietnam operations. For those who have grown accustomed to working with Chinese counterparts, continuing to work with them in a different location makes sense. According to the Economist, 40% of factories in Northern Vietnam are Chinese-owned. China’s investment in Vietnam exceeded $8 billion in 2023, the highest of any foreign country, and was primarily focused on EV and renewable energy sectors.
Disadvantages
The following factors must be also considered when evaluating Vietnam as a reliable long-term source of products:
Narrower supply range: In Vietnam, some product sectors are not sufficiently developed. China’s supply chain is one of the most sophisticated in the world and it will take a long time for Vietnam to match this.
Higher first cost: Vietnam is not as competitive as China for most products but, on a landed cost basis, it is cheaper for many products when you factor in current US tariffs on China products.
Country risk: Vietnam is not as stable a source as it first appears.
Government structure: China’s geopolitical tensions with the Western world are mostly due to the fact it has a non-democratic government. Similarly, Vietnam is a one-party state led by the Communist Party of Vietnam (CPV), which is frequently called the most secretive party on earth. Political opposition is suppressed, and there are no freely elected national leaders. The resignation of numerous top leaders in the last year has led to political instability and concern for investors.
Corruption: Much of the political turnover is related to a massive anti-corruption campaign, known as Blazing Furnace, which forcibly removed top leaders from the government and the CPV through arrests, dismissals, and reprimands.
Human rights issues: While myriad issues exist (restrictions on free expression, dissent, and civil rights, to name a few), companies seeking to do business in the country must consider concerns over labor rights, including working conditions, wages, and the right to unionize.
Geopolitical instability: Numerous geopolitical considerations, such as the South China Sea Dispute, could impact trade routes and economic relations. Changes in US trade policy could also impact Vietnam, just as they have impacted US-China relations.
Economic instability: Vietnam's economy is highly dependent on exports and it lacks diversification. Any changes in global demand or trade policies in Vietnam’s main product sectors could have significant impacts.
A good idea for some, but it pays to be careful in sourcing
A sourcing shift to Vietnam can make sense economically, provided it aligns with your company's goals for price, quality, and long-term stability. The following strategies can help companies reap the benefits while mitigating the risks:
Thorough due diligence: Ensure your new suppliers are reliable and conform with US import and tariff requirements to avoid unwelcome surprises with customs.
Geopolitical pulse: Regularly assess the political and regulatory environment in the US about Vietnam to stay informed about medium to long-term potential risks that could impact your supply chain.
Continue to diversify: One shouldn’t shift from an over-reliance on China to an over-reliance on Vietnam. Greater diversification in sourcing and manufacturing locations can provide additional supply chain resilience.
Compliance and ethical practices: Ensure compliance with Environmental Social Governance (ESG) standards and engage in corporate social responsibility initiatives. As a first step, becoming acquainted with widely accepted international standards and their corresponding audits will enable companies to implement an action plan.
Strengthen relationships with local partners: Build strong relationships with local suppliers, government bodies, and industry associations to navigate bureaucratic and regulatory challenges effectively.
In the ever-evolving global trade environment, Vietnam presents a viable alternative to China, but companies must carefully weigh the advantages against the potential risks to make informed sourcing decisions.
Laura Dow, Business Director
Laura Dow, Business Director at CPG, manages growth and its key components: business development, marketing, client success, and finance. In her role, Laura establishes company growth objectives, designs and executes strategies and protocols to enhance overall performance, and oversees budgets and financial activities. Laura began working in China in 2006 as a Peace Corps volunteer in Sichuan province. She holds a Master’s in International Affairs and Chinese Studies from the Johns Hopkins School of Advanced International Studies (SAIS). Ms. Dow speaks English and Mandarin fluently.
