Vietnam vs China: Sourcing 2021 and Beyond
“China + 1” is a sourcing strategy that became popular in the past decade in response to the increased costs of doing business in the PRC. International buyers of all sizes, employed this strategy in order to diversify risk by not having all their production “eggs” in one “China basket”. Vietnam was often touted as the ideal “+1” because:
Global Sourcing: Is Vietnam the new China?
- it was less expensive than China (at first glance)
- proximity to China would make it easy to get raw materials from China into Vietnam (in theory)
- a stable government that put business first (perhaps)
- the underdeveloped pool of cheap labor (how long would that last?)
But as we look back at the past decade of Vietnam and China Sourcing, with a special emphasis on the US-China trade war era and the Covid years, we see that “China +1” has not been the slam dunk so many importers had hoped. Let’s look at some macro issues then dive into the micro aspects of sourcing from Vietnam.
Big Picture: Vietnam is not the “new China” for the Small to Medium-Sized Importer
- Yes, wages are lower than China, but they are on the rise
- Vietnam doesn’t have the internal base of sub-suppliers. Yes, raw materials can be imported, but duties are applicable and lead times are extended when you cross an international border.
- Let’s face it, Road, Port and Rail infrastructure is not on par w China
- Local factories are quick to learn, but it will take a while to train up on Quality Control and Project Management skills.
When you are a large importer buying millions of USD per month, scale allows you to overcome the above challenges and the minor cost savings do add up, making Vietnam a legitimate sourcing destination worth the headache IF you are a big buyer. Remarkably similar to the situation in China in the 1990’s.
Pockets of Opportunity for Small to Medium-Sized Buyers Going to Vietnam
Vietnam is more competitive in certain industries and can’t compete with China in all, or even most other industries. Furniture is a good example of how Vietnam is competitive in certain sectors and even small to medium size buyers have a chance at implementing the “China + 1” strategy in this particular industry. But it’s not easy. Here are some “rubber-meets-the-road” issues I have encountered when sourcing furniture in Vietnam, that most likely apply to a whole range of other products as well.
Due Diligence is important in China AND essential in Vietnam!
One of the most important steps in any sourcing endeavor is the due diligence to establish that the suppliers you’ve targeted are actual factories, have the ability and experience to actually produce the product you require (especially for your target market), and that they are a good fit for the buyer in terms of best value (price, quality, lead time). Plus, you need to make sure they are truly interested in your business.
In Vietnam, this last part can be the toughest to establish. While furniture manufacturing is an established industry in Vietnam as the raw materials come from readily available sources, the lower number of available factories (compared to China) allows them to be very picky about who they take on as new customers. They have the luxury of focusing on larger buyers with bigger, consistent orders. It can also require a long time for samples, especially custom-made samples or new products.
Placing the PO is not the end of the Sourcing Effort
As with most suppliers in SE Asia, the buyer needs to be prepared to take the lead on all project management activities as for updates on your production order.
Once you have selected your supplier and approved the samples, be certain to have a proper bilingual purchase contract (this may include codes of conduct, quality terms, warranty, tooling/mold issue and more. The PC is sometimes referred to as a “Purchase Agreement”, “OEM Agreement” or “Supplier Contract”) and purchase order in place before transferring any monies to the suppler. Confirm pricing, lead times, quality inspection and acceptance criteria and any penalties for missed deadlines or quality issues. Finally, make sure that all materials meet the requirements for the intended target market. In the furniture category, this includes accessories such as cushion or pillows that contain material that must pass fire retardant requirements for example.
Covid’s Impact on Vietnam Sourcing
The above points simply outline the “typical headaches under normal circumstances”. However, things in Vietnam are not anywhere near normal at the moment.
- Another round of Covid has closed many factories temporarily. Others have gone out of business.
- Responsiveness from suppliers is at an all-time low.
- Samples can take many months to receive.
Containers are stuck in ports. If you can get a container out, sometimes the cost of shipping is more than the value of the cargo inside.
Summary: China vs Vietnam Sourcing 2021
It’s quite a mess in Vietnam at the moment. And China isn’t much better. The smaller your order, the harder it is to source in either place, China being slightly easier in most cases.
I’m going to call it like it is…regardless if you are sourcing from China or Vietnam, you are absolutely insane if you do not have the following, most basic, items in place:
- Upfront Due Diligence to determine if the seller is legit
- Written and enforceable contracts.
- A Plan for ongoing Project Management
About the author:
Brian Garvin, American, Asia-based since 2003.
Managing Partner & Senior Business Advisor: www.AsiaBridgeLaw.com
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).