- Vietnam’s supply chains are constantly evolving thanks to strong growth and its place in international trade.
- As Vietnam has emerged as an effective site for China plus, we are reviewing its peers and comparing them as alternative production sites.
- We conclude with factors unique to Vietnam and what investors need to know when considering the country as a place of production.
Vietnam’s supply chains have evolved considerably from what they were a decade ago. Today, supply chain shifts to Vietnam continue, aided in part by the trade war between the United States and China, as a growing number of companies seek ASEAN or other markets in which to invest. Among countries competing for investment, Vietnam has emerged as a very effective alternative country for relocation to Southeast Asia.
Vietnam’s continued foreign investment, competitive costs, free trade agreements, and liberal investment environment have made it an ideal location for China-based investors looking to cut costs and diversify business chains. supply. Nonetheless, foreign investors considering the Vietnamese market should have a clear understanding of the capacity and limitations of Vietnamese production.
The choice to relocate operations to Vietnam will not be without its share of challenges. Manufacturers need to plan how to realign their supply chains, what parts of production to relocate, and the ideal market entry strategy.
Processes to consider when moving include:
- Market research;
- Initial screening;
- Preliminary due diligence and long list locations;
- Detailed due diligence;
- Development of comparison models;
- Final site selections; and
- Organization of a visit.
Comparison of regional peers
Vietnam has undoubtedly benefited from it, but absorbing all Chinese manufacturing is too much of a task given Vietnam’s size. This has led the manufacturers to relocate to different countries to complete their operations in China. But how do other countries compare?
Aside from uncertainty about its political climate, investment concerns for Thailand generally revolve around how the country’s hard currency is affecting its overbearing tourism industry, as well as a slowing economy in the face of China’s economic slowdown. While Thailand’s infrastructure is better developed, labor costs are higher than Vietnam’s. Like Vietnam, Thailand is also dependent on international trade, however, its tourism industry, which is larger than Vietnam’s, has suffered a serious setback due to the pandemic. While Thailand is a great investment destination, its history of coups, protests, and the current political environment are factors that need to be taken into account.
Indonesia benefits from its proximity to Singapore and the investments of companies established there. However, it needs to better establish its commercial network to attract foreign investors. Indonesia’s infrastructure, bureaucracy and bureaucracy are still lagging behind Vietnam at the moment, but things are changing quickly and investors have to play the long game.
Cambodia sees significant investment from China. The government has unveiled several investment-friendly policies in an attempt to attract investment and it seems to be paying off. However, Cambodia’s transport infrastructure remains underdeveloped. In addition, its few ports are burdened with long port processing and customs delays. Nevertheless, it achieved a high GDP. The clothing, textile and footwear industry competes directly with Vietnam.
Bangladesh is the world’s second-largest exporter of ready-to-wear, behind China. Bangladesh’s advantage is its cheap labor. It also enjoyed duty-free or reduced-tariff market access for many developed and developing countries around the world. However, Bangladesh’s infrastructure has not been able to maintain and traffic in cities, such as Dhaka, is severely congested resulting in delays. In addition, conditions in the factories are poor, which has led to protests and deaths. More recently, at least 52 people were killed in a fire at a fruit juice factory in the capital Dhaka.
Myanmar has become a popular production base for labor-intensive industries. Several Chinese companies have set up light manufacturing facilities as Vietnam undergoes economic liberalization and implements investment-friendly policies. While Myanmar has low labor costs and minimum wages, its infrastructure is still developing and remains inadequate. Electricity remains prone to blackouts, while traffic can be notorious. In addition, due to human rights violations, some sanctions against Myanmar remain in place, while the UN has called for new sanctions against companies linked to the Burmese military. However, the current political situation in Myanmar following the military coup has scared investors and the situation is unlikely to improve in the short term, which could make investing out of the question for some.
While the World Bank had said that Laos could gradually become a key link in the regional value chain, the landlocked nation still suffers from an inadequate business environment. These include a shortage of skilled labor and infrastructure constraints. Services such as electricity, water and logistics need to be further developed and the long registration period of businesses has hampered its growth, although the government is working on such factors.
Although the Philippines’ growth has not been as strong as that of Vietnam, it is growing at a respectable rate and has a larger English speaking population than Vietnam. The country has some of the latest technology in places like Manila with an educated workforce. However, the costs of labor and electricity are higher than in Vietnam and the infrastructure is still not up to Western standards.
How is Vietnam doing?
Dustin Daugherty, head of the North American office of Dezan Shira & Associates, notes: “While Vietnam’s unique advantages as an investment destination for American companies have grown steadily over the past half-decade, it s tis still a rather unknown market for new investors. . Vietnam benefits from great regional diversity, and the North, Center and South all have particular competitive advantages for different sectors and types of businesses. In the Ho Chi Minh City region, a potential investor will find a vibrant mall with a deep and diverse supply chain, while the center of the country can offer cost advantages unmatched by either the North or the South.
In this context, we highlight four supply chain issues specific to Vietnam.
- Vietnam’s logistics and transport infrastructure: It is still behind China. While the government has invested in modernizing its transport network, Vietnam continues to depend on an inadequate road network and an outdated and slow rail system. The most important road connections consist of two lanes, which can lead to traffic jams. In addition, large cities, such as Hanoi and Ho Chi Minh, lack space, leading to severe traffic jams. However, Vietnam already spends up to 5.7% of its GDP on infrastructure. A total investment value of US $ 120 billion has been planned for PPP projects in the roads and power sectors.
- Vietnam’s port infrastructure: It is also lacking compared to its peers. It has 320 ports, although shipping full containers to Vietnam is not fully established. According to the World Economic Forum, Vietnam ranks 80 out of 139 countries for the quality of port infrastructure with an average score of 3.80 on a scale of 1 (lowest) to 7 (highest) between 2006 and 2018. This means that Vietnam ranks lower than the countries. like China, India, Thailand and Sri Lanka. In addition, the road and rail network around the ports remains underdeveloped, leading to increased costs.
- Customs procedures: When importing or exporting goods, customs are one of the most vital considerations in the supply chain network. Imported and exported goods are subject to applicable customs clearance standards. Companies should be aware of the relevant obligations to avoid unexpected price shocks. Customs processing can take time and goods can be blocked if the relevant documents or permits are not in place. Businesses should also consider requesting priority customs treatment to ensure minimal delays in their supply chains.
- Suppliers: Vietnam’s supplier market is still developing. Products requiring a high level of technical precision, like aerospace parts, for example, might be more difficult to find in Vietnam. A simple search for plastic suppliers, for example, on an online website yields a small number of potential Vietnamese manufacturers compared to China. Vietnamese businesses need to understand the capacity of the local market to meet their production needs.
Businesses need to look for ways to diversify and reduce their dependence on a single location as a production site or source of raw materials. While these changes are difficult, they are necessary and will require companies to adapt. Savvy investors have already worked with suppliers to diversify and companies can negotiate certain items, but in the short term costs are likely to increase. Investors need to play for the long term and view Vietnam as a long term investment in order to be able to manage risks. While Vietnam is at risk of being affected by the pandemic, its positive overall growth rate provides a partial buffer.
Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors across Asia from offices around the world, including Hanoi, Ho Chi Minh City and Da Nang. Readers can write to [email protected] for further assistance with doing business in Vietnam.
We also maintain offices or have alliance partners helping foreign investors in Indonesia, India, Singapore, The Philippines, Malaysia, Thailand, Italy, Germany and the United States, in addition to practices in Bangladesh and Russia.