Additional articles from Trusted Source™ SourceJuice

China Got Expensive! Shall We Go to Vietnam?

2008-02-08

SourceJuice published an article at the beginning of the year explaining some main reasons why China is becoming more expensive. In the never ending search for low cost (but high quality!) labor, Vietnam keeps popping up as the new 'go to' place for manufacturing. So what's the deal with Vietnam?

China Briefing News has an excellent article by Chris Devonshire-Ellis titled Corporate America's China plus one strategy. The gist of the article is that China has what we might call a perfect storm of inflationary issues and that US companies are beginning to have a "China plus one" strategy more so than just a China strategy.

The economics theory behind "China plus one" works like this: as China is getting wealthier, and its population older, it is getting more expensive to manufacture there. Wages are rising and so are the prices of commodities - China is experiencing some worrying inflationary trends right now that are pushing up the prices of everything from a bowl of rice to apartment rentals. Added to that, China unified its corporate income tax system last year, bringing the previous low rates that foreign businesses enjoyed up in some cases from 15 percent to 25 percent. Certain tax incentives also have disappeared, making other Asian destinations now more attractive than the PRC for the receipt of foreign investment. To compound this, the United States has quota systems in place for Chinese textiles, agricultural products and a whole host of other items, meaning once those quotas are used - and the annual quotas have tended to have been reached after just 9 months - there are no more permissible U.S. imports.

While Vietnam may never be the internal market that China is, many multinational corporations (Intel, Dell, etc) are finding Vietnam quite hospitable as investment opporunities and thousands of Taiwanese and Korean small and medium sized businesses have been manufacturing in Vietname for years.

Bill Dodson, founder of Silk Road Advisors, sums up the issue best in his commentary China Plus-One in Vietnam, too?. While Mr. Dodson does not view Vietnam as the be all and end all, his summary is quite right:

Why, after all, would you want to locate a new export manufacturing facility inland in China and away from the increasingly expensive coastal cities of Shanghai and Guangzhou, when you can have exactly the same plant slap bang on the coast in Vietnam or India, with an English speaking workforce and better tax investment incentives? You wouldn't, and the savvy American boardrooms and entrepreneurs know this.

It would be interesting to hear from our readers whether they are currently sourcing from Vietnam, investigating doing so, not interested right now, and in general your experiences!

1» post by Tim Wieringa 2008-02-08 20:14:37

China is getting expensive, true. Vietnam is very difficult as well - in-loyalty of staff, greedy authorities, etc... in my network business people have good experience with Thailand (loyal) and Nepal (cheap)... why not try this?

2» post by All Roads 2008-02-18 10:20:04

This is something I covered on All Roads a couple months back, and to answer the question of inland China vs. Vietnam coast, the answer is simple. The country of Vietnam moves 20 million TEUs per year, and that is less than what moves up/ down the Yangtze. India has the same problem. Sure, if you are first to the market it is all fine, but once others are coming there will be no way to get your goods out because the logistics infrastructure is just not there. Sure, in 15 years, ports in Vietnam and roads in India may be completed, but that is not tomorrow... that is not next year. I urge you to look at the PPT I referenced on All Roads. It has an excellent look at the logistics behind Vietnam, and for the time being, it is not an encouraging one. r www.allroadsleadtochina.com

3» post by Paul Tittmann 2008-03-02 02:52:19

Supply chain issues will be a major negative for Vietnam for some time. A few hidden costs to add to an FOB China vs. FOB Vietnam cost comparison.... Inadequate transportation infrastructure = delays Longer shipping times = higher costs of inventory upstream suppliers not all local, mean you have to build up your component inventory. Customs - China is a piece of cake compared to Vietnam. Minimum order quantities much larger in Vietnam than China China capacities are much larger than Vietnam, generally, and more flexible. Sure, some industries make sense to consider Vietnam. There are no cross the border generalities. I do business in both countries. I always start in China when I have the choice.

4» post by The China Price and why China should buy Wal-Mart | SourceJuice 2008-05-27 20:07:47

[...] to labor and oil reaching all time highs, many are saying that the factory of the world will lose its customers to emerging markets like Vietnam, India, and even back to Mexico for many US companies. The pivotal point is that “customers” [...]

5» post by Etienne C 2008-10-25 03:38:01

Whether China is becoming too expensive or not depends on what you are looking for. All buyers looking to buy simple or low end, unskilled labor intensive, high volume products used to find in China the cheapest costs in the world. This is no longer the case. And the reason why this is no longer the case is that, for the last decade, the Chinese governement is pushing to move up the value chain and to add more value. New labor law, changes in VAT rebate policy, and many other policies have made it increasingly had for low end suppliers to survive. And with the difficult market in 2008, many went bust or closed shop. But when you look at higher value products, requiring skilled labor and a certain amount of technical design or innovation, you can see that China is becomning an increasingly good value. It is still hard to find the good suppliers and engineers, but it was the same at the beginning of the low cost textile era. So, move the low end stuff to other countries. But keep (or bring in) your high value-added products, with complex supply chain requirement to China, and you will make a killing. Etienne