Vietnam - A Promising Alternative to China for Sourcing

Published on 28 Jun, 2019

China has been the epicenter for various exports such as electronics, textiles and garments. However, it may find it difficult to retain this position as large organizations look to shift sourcing activities to other countries. Several factors are responsible for China losing popularity as a trade partner: escalation of its trade war with the US, substantial increase in labor rates and shutdown of thousands of factories due to stringent environmental regulations.

Recently, the US increased tariffs from 10% to 25% (applicable from May 2019) on import of Chinese goods worth more than US$250 billion, making imports from the country costly. Additionally, over the last five years, monthly labor wage rates in China have risen significantly by 10–15%, reaching an all-time high. At ~US$350 in Shanghai, ~US$315 in Shenzhen and ~US$305 in Beijing, high rates have impacted the overall cost of production. Furthermore, Chinese authorities have shut down thousands of raw material, processing/finishing, small scale manufacturing and chemical plants across provinces in their bid to control air pollution; this has constricted overall supply from China.

These factors have rendered China a high cost option to trade with. However, the downturn for China has provided a great opportunity for other countries such as Vietnam and Thailand to increase their production as well as export capability. In this article, we have discussed why sourcing from Vietnam is an attractive option for large organizations in terms of procuring key products (such as metal and electronics components, garment and textile, furniture) and other low-cost consumer goods.

Why Vietnam?

Strong Economic Growth and Ease of Doing Business
Vietnam has catapulted from one of the lowest income country in the world to a lower-middle income country with GDP of US$241,272 million. At 6.8% in 2017 and 7.1% in 2018, the country has recorded strong economic growth vis-à-vis other ASEAN countries.

During 2014–17, Vietnam’s manufacturing output rose 14.5%, way above the 3.7% growth registered by its ASEAN counterparts, due to expansion in exports of electronics and machine tools & parts, among others. Vietnam’s global competitive ranking also moved up by several notches to 55, while its ‘ease of doing business’ score went up to 68 in 2017. Impressive economic growth, proficiency in manufacturing and ease of doing business have made Vietnam a favored destination for many large organizations.

Robust market growth across multiple categories
During 2013–17, the Vietnamese fabricated metals market grew ~10% to US$15 billion, driven by high demand from rapidly growing end-use markets. Additionally, the Manufacturing Purchasing Managers Index rose to 53.8 in 2018 amid growth in the overall manufacturing sector. Over 2012–17, the country’s electronics market expanded, reflected in its growth in the export turnover from US$22.9 billion in 2012 to more than $71 billion in 2017. The key export markets include China, the EU and the US. Textile; and garment exports also surged by 16.7% to US$30.2 billion in 2017, led by rising demand from the US, the EU, Japan, Korea and China.

With increase in FDI and collaborations with global companies; the electronics, metal components and textile markets will continue to gain the manufacturing and export share in future.

Low Cost of Labor
Labor rates in Vietnam are almost 50% less compared to China, making it cost-effective for the manufacturing of various components. So far in 2019, minimum monthly wages have increased by 5.3%, after rising 6.5% in 2018, and range between US$126 and US$180. The country has more than 57.5 million workers employed across various industries, including textile, agriculture, manufacturing and fishing. Manufacturing and construction sectors have the second largest pool of labor after agriculture and fishing, with majority of laborers residing in the Southeast (Ho Chi Minh City), Mekong and Red River Delta region.

The government is taking various measures to increase vocational and technical training, such as introducing new accreditations (Decree No. 49/2018/ND-CP), in order to equip the workforce with the skills required by large organizations.

High Availability of Suppliers
Since 2012-13, businesses in Vietnam, small, medium and large, have increased by 51.6% and currently stand at ~518,000. Of these, 2% or 10,000 are large companies, while the rest are small and medium-sized firms. Additionally, mid-size organizations have the technological capabilities to create highly sophisticated products and are well-versed in catering to export markets.

There are more than 6,000 textile and garment manufacturing companies in Vietnam, of which more than 84% are privately owned, 15% have FDI and 1% are state-owned. Furthermore, there are approximately 10,000 companies in the fabrication industry, wherein ~90% employ less than 50 workers. While there are only 1,000 electric and electronic component producers in the country, about 60% of these companies drive more than 50% of total business in the electronics sector.

Many of these companies are either already offering or have the potential to provide outsourcing services for various industries, such as textile, footwear and industrial components (casting, fabrication and machining). This makes Vietnam an attractive market for global sourcing.

Significant Growth in Exports
Vietnam, the 21st largest exporter in the world, shipped products and services worth ~US$220 billion in 2017 to various partner countries across the globe. During the last five years, its total exports increased at a CAGR of 13–14%. Vietnam’s main partners are the US (20%), followed by China, excluding Hong Kong, (14%), Japan (10%), Korea (8%) and Germany and Hong Kong (each accounts for 4%); the other 120 partners account for 40% of total exports. In garments and textiles, the country exports 90% of its products. In 2017, garment and textile exports to the US and the EU stood at 47% and 14%, respectively.

An upsurge in exports in key categories indicates opportunity for large organizations to expand sourcing from Vietnam.

An upsurge in exports in key categories indicates opportunity for large organizations to expand sourcing from Vietnam.

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Growth in exports is supported by the presence of logistics hubs across the North (Ha Noi – Hai Phong area) and South (the wider Ho Chi Minh city area, Dong Nai province, Binh Duong province and Ba Ria/Vung Tau). The government’s Master Plan of Railway Transport Development, with focus up to 2030, is expected to increase logistics capacity extensively. Some international routes will also be developed to link North Vietnam to China, Cambodia, Malaysia and Singapore.

Growth in exports, aided by the strong logistics network, is likely to lure global companies to procure from local manufacturers in Vietnam.

Strong Regulatory Support to Drive Growth in Manufacturing Industry
Another positive factor for Vietnam is the country’s free trade agreements (FTAs), primarily the EU-Vietnam FTA and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Currently, the Regional Comprehensive Economic Partnership (RCEP) is also under negotiation. Once these trade agreements take effect, Vietnamese exports will be freely accessible to many countries across the globe with fewer tariffs or restrictions.

The Government of Vietnam has taken multiple financial and regulatory initiatives, such as reforming its financial sector, streamlining business regulations, and improving the quality of workforce, to make the country investor-friendly. Over the last decade, it has offered several financial incentives to businesses setting up operations in the country. The country has a low corporate income tax (CIT) of 20% and no withholding tax on dividends remitted overseas. These benefits have made Vietnam a leading “sourcing economy” in South East Asia.

Robust growth in economy and exports, high availability of suppliers, multiple FTAs and low labor costs make Vietnam an attractive sourcing alternative for global organizations. With China’s diminishing importance as a global supplier, Vietnam is expected to emerge as a large turnkey manufacturing and sourcing destination within the next 5 to 10 years.