There have been countless articles written on how the end of cheap China will mean the end of foreign companies going to China, but that has barely happened at all. This article, “Analysis: Investors make $100 billion bet on China’s drive up value chain,” by Kevin Yao of Reuters, nicely encapsulates what is going on out there by way of foreign direct investment (FDI) into China.
Essentially, FDI has slowed a bit, but is still massive and all of the talk of companies going into places like Indonesia or Vietnam has been to a large extent just talk. This is what I have been seeing as well and I have to admit that it is NOT what I have been predicting:
- The End Of Cheap China, Part VI. Vietnam, Burma/Myanmar, Globalization, The Next Big Thing, And Falling Wages.=
- China Too Expensive? Who You Gonna Call? I Say Vietnam.
- Vietnam Over China For Small-Scale Manufacturing. Why Didn’t I Think Of That?
I am particularly surprised at how so few of my law firm’s clients have moved over to Vietnam, especially those in industries, like clothing, shoes, and pet toys where to me it makes complete sense for them to do so. I am even more surprised at how few of our new clients going into Asia for the first time are looking to countries other than China for their manufacturing.
And I have a new theory as to why this is the case. My theory, which may be less a theory than a fact-based observation, is simply that these companies do not know how to go into any country other than China. I will call this the “I would love to, but…” theory.
Let me explain.
My law firm represents a large number of clothing and shoe companies, most of which are fairly well known brands and have fairly high margins, but most of which are not massive. In the last year or so, these companies have seen an increase in bad product from China. The typical scenario goes something like this:
- Chinese company provides US company with bad product.
- US company refuses to pay whatever is still owed for the bad product.
- Chinese company goes ballistic and threatens US company that it will do horrible things to it if US company does not pay.
- US company complains to me and I suggest that now might be a great time for US company to just walk away from China and set up manufacturing in a place like Vietnam.
- US company says that it has heard great things about Vietnam and it would love to go there but it has no clue how to do so.
- US company then strikes a deal with Chinese company and keeps producing in China, slowly diversifying to other Chinese manufacturers.
So why does the US company not go to Vietnam? Simply because it lacks the people in its organization with any Vietnam expertise and because there is no clear and easy path for SMEs to get into Vietnam. The path is less than clear because Vietnam lacks a “soft infrastructure” of well known and highly regarded experienced consultants with offices in the United States. Vietnam also lacks a network of people (and even seminars) in the United States who can talk of their Vietnam experience. There is at least a couple of how to do business in China seminars in every good sized American city every year, but one on Vietnam anywhere is a rarity. Vietnam is simply too much of an unknown.
So for SMEs, there is this massive knowledge and fear gap regarding places like Vietnam and that gap is creating an “I would love to” Catch-22.
That’s my new theory.
What do you think?