One of the things we keep hearing is that small and medium sized manufacturing companies that manufacture in or outsource to China will soon be leaving China, mostly for Vietnam. China’s increasing enforcement of its environmental and labor laws, coupled with its rapidly increasing wages and its “dangerous products,” will lead a whole slew of Western manufacturing companies to leave China for Vietnam.

I disagree.

In a post entitled, “Why Vietnam is not the next China. Logistics,” the All Roads Lead to China blog, written by China logistics guru, Rich Brubaker, posits that will not happen because Vietnam “is missing the infrastructure…. specifically its logistics infrastructure.” All Roads sees Vietnam as having a “looong way to go” on this front. He notes that “75% of all exports leaving Vietnam on a plane are garments (39%), footwear (25%), and handicrafts (10%)” and the only reason to export such products via plane is because the seaports are inadequate. 3.137 million TEUS (twenty-foot equivalent units) left Vietnam seaports in 2006 as compared with more than 20 million TEUs from Shanghai alone. Getting goods out of Vietnam is expensive and time consuming.

My own unscientific sampling reveals that in most sectors of manufacturing, Vietnam’s manufacturing capabilities are just not there yet. I have asked around ten of my firm’s manufacturing clients and five or six manufacturing/product sourcing consultants where Vietnam fits in the manufacturing picture. All the manufacturers said Vietnam is not ready to manufacture their product and all the consultants said something along the lines of, “clothing and rubber duckies, yes. Much more than that, no.” This is not to say big companies like Intel will not be establishing their own manufacturing operations in Vietnam, but it does say we should not expect a wholesale transfer of manufacturing from China to Vietnam in anything approaching the near term.

Population is another limiting factor. Vietnam has around 85 million people, as compared to China’s 1.3 billion plus. China has been “the factory to the world” for quite some time, during which time it built up both a physical and a human infrastructure for manufacturing. Despite this, China suffers from a shortage of skilled labor in nearly all manufacturing sectors and in certain of its regions, a shortage of unskilled labor as well. There is no way Vietnam has the human capital to inherit China’s many factories.

Lastly, none of the reasons typically given for a China exodus to Vietnam make all that much sense. Though standing alone, China’s rising wages and increasingly stringent enforcement of laws make manufacturing more expensive in China than in Vietnam, adding in things like transportation charges changes that equation for most manufacturing. Equally importantly, as foreign companies pour into Vietnam and as Vietnam becomes more developed, there is every reason to believe Vietnam’s legal system and wage rates will develop as well, just as it has done over time in China. There is also every reason to believe that as the quantity of Vietnam’s manufacturing increases, the quantity of defective and dangerous products leaving Vietnam will increase as well.

What do you think?  Is doing business in Vietnam more difficult in China and, if so, what makes it so?

Manufacturing outsourcing to both Vietnam and to China will continue increasing. Obviously, there will be many companies that choose Vietnam for their manufacturing who would have chosen China a few years ago. There will also be many who are in China now who will choose to expand their manufacturing operations in Vietnam instead of China. But China will remain the overwhelming choice for manufacturing and few companies manufacturing in China now will up and leave for Vietnam. Vietnam is not a panacea and it is not a replacement for China. Not even close.

What do you think?