Vietnam Sourcing: The New China?

Over the past decade, Vietnam has rapidly emerged as a major hub for global manufacturing, positioning itself as a strong alternative to China. As geopolitical tensions, rising labour costs, and supply chain disruptions reshape global trade, many businesses are turning to Vietnam as their new sourcing destination. But is Vietnam truly the "new China" for sourcing? Here’s a closer look at why Vietnam is becoming a preferred choice and the challenges that come with this shift.

Why Vietnam is Gaining Traction

1. Competitive Labour Costs: One of the primary drivers behind Vietnam's rise as a manufacturing powerhouse is its lower labour costs. Compared to China, where wages have been steadily increasing, Vietnam offers significantly cheaper labour, making it an attractive destination for companies looking to cut production costs. According to data, the average manufacturing wage in Vietnam is less than half of that in China. However, increase in raw material costs and operating costs increases the whole cost by 10% in comparison to Chinese costs.

   
   

2. Strategic Location and Trade Agreements: Vietnam's location in Southeast Asia makes it an ideal gateway for accessing major markets across Asia, Europe, and North America. Additionally, Vietnam has been proactive in securing free trade agreements (FTAs) with key economies, including the European Union (EU), Japan, and South Korea. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) further enhance Vietnam's trade prospects. These agreements reduce tariffs and provide better access to global markets, making Vietnam a more attractive sourcing destination.

   
   

3. Diversification Away from China: The U.S.-China trade war and subsequent tariffs have prompted many companies to rethink their supply chain strategies. Vietnam has benefited from this shift as businesses seek to diversify their supply chains to reduce dependency on China. The COVID-19 pandemic further exposed the risks of over-reliance on a single country, driving more companies to establish operations in Vietnam to create more resilient supply chains.

   
   

4. Government Support and Infrastructure Development: Vietnam's government has been actively encouraging foreign investment by offering incentives, improving infrastructure, and streamlining regulations. Significant investments in ports, roads, and industrial zones have made it easier for companies to set up and operate in the country. Cities like Ho Chi Minh City and Hanoi are becoming bustling hubs for manufacturing and export activities, supported by an improving logistics network.

    

Challenges in Sourcing from Vietnam

While Vietnam presents many advantages, it is not without its challenges. Companies must be aware of potential pitfalls when shifting their sourcing base to the country.

1. Capacity and Scalability Issues: Vietnam's manufacturing sector, though rapidly growing, is still relatively small compared to China. The country may struggle to match China’s scale and capacity, particularly in high-tech industries. For large-scale production needs, Vietnam’s factories might not yet offer the same level of sophistication or output that Chinese manufacturers can provide.

   
   

2. Labour Force Skill Levels: While labour costs are lower, Vietnam’s workforce is generally less experienced in certain advanced manufacturing processes compared to China. This can be a limitation for industries that require highly skilled labour, such as electronics and automotive manufacturing. Companies may need to invest in training and development to bring the local workforce up to the required standards.

   
   

3. Geopolitical Risks and Trade Policy Uncertainty: As Vietnam becomes more integrated into global supply chains, it also becomes subject to geopolitical risks. Tensions between the U.S. and China, for example, could spill over into Vietnam, affecting trade policies and market access. Additionally, while Vietnam enjoys several trade agreements, any changes in these agreements due to shifting political landscapes could impact the cost-effectiveness of sourcing from the country.

   
   

4. Environmental and Social Compliance: As global consumers and regulators become more concerned with sustainable and ethical manufacturing practices, Vietnam faces pressure to improve its environmental and labour standards. Companies sourcing from Vietnam must ensure that their supply chains comply with international standards, which can involve additional costs and oversight.

   
   

   
   

The Role of Vietnam's New Government and Its Relations with China

Vietnam’s political landscape plays a crucial role in its economic strategies and foreign relations, particularly with China. The new leadership under the Vietnamese Communist Party continues to navigate a complex relationship with its giant neighbour. On one hand, Vietnam relies heavily on China for trade and investment; on the other, it seeks to assert its sovereignty and reduce its economic dependence on China by diversifying its international partnerships.

1. Economic Cooperation vs. Strategic Caution: Vietnam and China share a significant economic relationship, with China being Vietnam’s largest trading partner. However, Vietnam has been careful to avoid becoming overly reliant on Chinese investments and supply chains. This is evident in Vietnam’s efforts to strengthen ties with other major economies through trade agreements and partnerships, such as its Comprehensive Strategic Partnership with the United States and its involvement in multilateral trade agreements like CPTPP and RCEP.

   
   

2. Territorial Disputes and Regional Tensions: The South China Sea dispute remains a significant point of tension between Vietnam and China. Vietnam’s new government has continued to assert its claims in the region, often in opposition to China’s expansive territorial assertions. This geopolitical tension influences Vietnam’s foreign policy and economic decisions, as the country seeks to balance its need for Chinese investment with its desire to maintain sovereignty and strengthen alliances with other global powers.

   
   

3. Navigating U.S.-China Rivalry: As the U.S. and China vie for influence in Southeast Asia, Vietnam finds itself in a strategic position. The new Vietnamese government is likely to continue leveraging this rivalry to its advantage, deepening economic and military ties with the U.S. while maintaining a pragmatic relationship with China. This balancing act allows Vietnam to attract investment and support from multiple sources, reducing its vulnerability to any single power and enhancing its appeal as a diversified manufacturing base.

The Future of Vietnam as a Sourcing Hub

Vietnam is poised to continue its rise as a key global manufacturing hub, but it is unlikely to fully replace China soon. Instead, Vietnam is becoming a crucial part of a diversified supply chain strategy, complementing rather than replacing China. For businesses, the decision to source from Vietnam will depend on balancing the cost benefits with the challenges of capacity, scalability, and compliance.

While Vietnam offers significant advantages as a sourcing destination, it is essential for companies to approach this shift with a strategic mindset. Understanding both the opportunities and the risks will be key to successfully navigating the transition from China to Vietnam as the new epicentre of global manufacturing. The evolving political dynamics and Vietnam’s relations with China will continue to play a critical role in shaping the country’s economic future.