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China Too Expensive? Who You Gonna Call? I Say Vietnam.

Posted in China Business

As China wages and costs continue to rise, many of my firm’s clients in low-skill industries are beginning to talk about moving out, either entirely or partially. The big discussion is to where.

When asked for my opinion (as I was by an Israeli textile company today), I virtually always suggest Viet Nam. I let them know that I have a bias towards Viet Nam because my firm has done considerable business with that country and it is one of my favorite places to visit in the world. But then I tell them that the same reasons I like going there are good reasons to have a factory there. In multiple surveys, Vietnam comes in first on business optimism and I just plain like a country where the overwhelming majority of its citizens believe tomorrow will be better than today.

I contrast that with many of the countries with which Vietnam is seen to compete and I say that if I were to be building a factory right now, I would be focusing more on where the country is going to be in 3-5 years than on where I can save $50 per worker per month. I also think it good to locate in a country where you can bring in your regular managers without having to pay extra for combat duty. 

Global Sources just did an article saying pretty much the same thing:

Beset by rising costs, the labor shortage and policies discouraging low-value industries, China’s export manufacturers are setting up production lines in Southeast Asia. But relocation has its disadvantages.

An increasing number of China companies are constructing factories overseas, mostly in Vietnam and Indonesia, to take advantage of lower costs and more favorable trade policies there. Although the exact number of factories that have established offshore factories is not available, many enterprises manufacturing household appliances, automobiles, TV sets, footwear, textiles and apparel have made the move in recent years.

According to the article, monthly salaries in Vietnam are about “three-fifths of those in China” and “an assembly-line worker in Vietnam earns roughly $101 per month, 53 percent lower than in China.” Electricity costs in Vietnam are also “40 percent lower than in China.”

The article then quotes me on how China’s less than welcoming attitude of late towards low-skill/high pollution industry is also causing foreign companies to give Vietnam a really close look: 

The push to relocate does not only come from the pressure to keep costs low and avoid trade sanctions, but also from Beijing itself. The national government is encouraging suppliers to expand their business overseas, particularly those engaged in low-value manufacture, and highly polluting and energy-consuming industries.

“China’s government has been very clear on this,” said Dan Harris, lawyer and writer of the China Law Blog. “It wants to see China moving up from low-end, high-pollution products and it has instituted policy after policy to help bring this about. And slowly but surely it is working. It is definitely much tougher now than it was five years ago to get approval to go into China with a low-end, high-pollution factory. It is also considerably more expensive to have such a factory in China today than it was five years ago. The tax subsidies are gone. Wages are up. Many of these sorts of companies are looking elsewhere.”

I am going to be making yet another trip to Vietnam (both Saigon and Hanoi this time) before the end of this year and if anyone would like to meet me there, please press the contact tab above and let me know and I will do my utmost to schedule it. 

  • http://www.allroadsleadtochina.com All Roads

    Dan,
    to be successful in Vietnam, it basically means you need to be able to secure a inflation resistant labor pool, and have your own port. Sure more firms are moving there, but when that happened 3 years ago, Vietnam saw 25 % inflation. It simply lacks the capacity or depth that China has when it comes to amassing the resources it needs, and that is why (after the great recession – when China’s costs came back down) Vietnam’s allure wore off and buyers moved back to China.
    Will that always be the case? No, in 5-8 years Vietnam’s port investments will bring online a surge in port capacity, and that will help them. Until then, firms will continue to find limits, and until then my suggestion would be to find a place that (at the minimum) has access to road passage back to China…
    R

  • han

    Dan,
    You have something. But why not Africa or India? As far as I know, thire wages and costs are lower. One huge advantage that you can’t ingore is in China you can find most of your suppliers, which like India or Vietnam they don’t have. We all learned division of labor can reduce costs.
    Even in China, wages and costs in west is lower than in east. It is much easier to find enough labors in the west. But why most factories didn’t move to there? Suppling chain is one of their biggest worry.

  • Mike

    The increasing connections with Vietnam, the huge potential there and other factors such as being China’s seat for their place in ASEAN has always made me think Nanning is a city to watch. It always gets passed up and that’s good in some ways. Maybe only the right people will notice.

  • Jimmy Chen

    Vietnams supply chain is better than generally realised. Only a handful of professional firms there at present, its a difficult market to operate in so best stick with those that know it. But its getting better and the logistics are not as bad as All Roads guy suggests – maybe he should spend more time out of Shanghai. Its easy to be critical when you’re living in the worlds number two port by volume of TEU as he is. Not all of Vietnams USD96billion GDP can be wrong surely?

  • Had It

    We are in the process of moving our operations from Bangladesh to Vietnam. These latest riots were the last straw. We underestimated the value in political stability and the way the populace views Americans. We will never again locate in a country that hates Americans and Westerners. We simply did not realize how much that would end up mattering and we made a mistake by coming here in the first place. There is more to picking a country than wage rates.

  • http://www.kynnexnow.com Joseph

    Dan,
    I am seeing the same trend. With the rapidly escalating price of labor in China local manufacturing companies are starting to realign their footprints. However, I am perplexed by come of the comments about the supply chain being mature. Of course this would definitely be market/commodity dependent.
    So, now my question, I am considering opening up a small wire harness and cable assembly house in Vietnam ~ where do I start?