Forecast for manufacturing overseas: China vs. Vietnam

Is Vietnam the new China in the manufacturing sector?  The short answer is not yet. But it does have potential to get there in the future.

China’s economy is changing. It has been for a while. While that may shuffle the cards in the country’s manufacturing sector a bit, it also opens up opportunities for countries like Vietnam to move into a position of being a low-cost manufacturing hub.

Capabilities and confidence in Vietnam’s manufacturing sector are growing and many companies are already starting or moving their manufacturing operations to the country. Recent events surrounding new tariffs and the potential of a trade war between the U.S. and China could of course shake things up even more and give more reason to drive manufacturing, at least for certain types of goods, out of China and into Vietnam.

However, manufacturing as a workhorse in Vietnam is still young and while there are many positives to Vietnam’s manufacturing sector that will likely continue to grow, for now China still holds a significant competitive advantage.

For a country to be competitive in low-cost manufacturing, there are a few economic areas that are generally needed: low labor costs, young populations, a supportive policy environment, quality infrastructure, minimum level of education for all workers, availability of engineers, economic growth, and a large internal consumer market.

In many of these areas, we feel Vietnam happens to fit the bill well. While the country’s infrastructure is not yet as strong as China’s, we feel it is still more stable than some other low-cost manufacturing leader candidates like Indonesia or India. Vietnam also has a more stable political environment. Because of this, some Chinese companies are moving manufacturing to Vietnam.

Licensing and operating have become much simpler than in China due to the Vietnamese government welcoming most sectors and market entry. However, a downfall that Vietnam has in its pursuit to transform into a low-cost manufacturing leader is the size of the country. A smaller population represents a smaller potential consumer market, which doesn’t help industry growth in becoming sustainable.

Yes, there are some situations where it makes sense to manufacture in Vietnam over China at this moment, but Vietnam is still years behind China. The country has a lot of potential for the future, but it is not for everyone, just yet.

Currently, Vietnam is better suited for larger companies who have more capability to overcome challenges the country still holds and capitalize on lower labor costs. The manufacturing industry here is fragmented, making it more difficult to navigate and find suitable suppliers and workers with the necessary skill sets. The trail has been blazed in China over the years making the path much clearer there. China’s strong infrastructure, that includes well-paved roads and some of the world’s busiest shipping ports, make it easy to find a handful of options for just about anything you need and not too far away from where you need them.

During China’s rapid economic growth a handful of decades ago, the country experienced a job boom. Even though there is a lot of potential for growth in other areas in Vietnam, it may not experience the same increase in jobs due to the rise of robots and automation. Times are different, but that won’t necessarily make it a less viable option for manufacturing though.

As China’s economy slows and it begins to shift more of its focus to medium and high-tech manufacturing, Vietnam is overall in a great position to secure its already proven capability in low-cost, labor intensive commodity type products like apparel, toys, textiles, shoes, and basic consumer electronics.

For businesses, that means they will eventually have even more options and opportunities to keep our products thriving.