China or Vietnam for Product Sourcing?

Nearly four years — during a time when our international lawyers were seeing a big increase in Vietnam work from companies looking to diversify their manufacturing from China — I wrote a series of blog posts on sourcing product from Vietnam. Since that time, our Vietnam practice has steadily grown, until about five months ago when it exploded. In light of the rapidly increasing demand for information regarding sourcing product from Vietnam and in light of the dearth of such information, I am going to reprise and update those posts over the next few weeks.

This first post comes from March, 2015 and was — I believe –written from Ho Chi Minh City.

As my law firm’s Vietnam practice continues to grow, I have become fascinated with how companies decide on where to outsource their product manufacturing as between China and Vietnam, both for new products and for products currently being made in China. One of the reasons I am so fascinated by this is because so many factors must go into the decision and unless IP is paramount for the company, the legal issues are not usually central.

So I was delighted to read the post, 3 Key Factors for Sourcing in Vietnam, particularly since it is written by InTouch Manufacturing Services, a company I know to have substantial China sourcing experience.

That post starts out talking about how the media has been writing often of late about manufacturing shifting from China to Vietnam. It then notes that Nike now gets 42 percent of its product from Vietnam, as compared to 30 percent from China, widening the gap even since 2010. The post then presents the following wage chart from the Japan External Trade Organization showing that China factory workers make, on average, three times as much as factory workers in Vietnam.

The post calls this wage disparity “significant for any labor-intensive product like footwear, garments, and electronics.” It is, but as I am always saying, if wages were the only factor, every company would be looking to start sourcing in Afghanistan, South Sudan or Yemen, and of course they are not.

Most importantly though, this post analyzes from a sourcing perspective the following three key issues involved in choosing between China and Vietnam.

1. Product Type. The post notes that “Vietnam has proven to be quite capable of producing labor-intensive products like footwear and is now starting to win over major technology companies for significant investments in more technical manufacturing.” However, though “capabilities and confidence in Vietnamese manufacturing are growing … China still maintains a significant competitive advantage.”

The post rightly warns those looking to shift production from China to Vietnam to consider “the risks posed by a [Vietnamese] workforce that is relatively new and inexperienced” and suggests asking “what might you be taking for granted in China now that you may find yourself struggling to manage or live without in Vietnam?”

2. Your Existing Supply Chain. The post rightly points out that Vietnam’s infrastructure is not as good as China’s and this could be particularly problematic for smaller companies that cannot essentially fund their own infrastructure:

Vietnam’s fragmented manufacturing industry makes it harder to identify suitable suppliers, especially for those new to Vietnam. Lack of basic infrastructure is a main cause of this fragmentation. Contrast that with China where you can find just about anything you want – and usually more than a handful of viable options that aren’t too far away from where you need them. With well-paved roads, 7 of the world’s 10 busiest shipping ports, and a massive network of high-speed and commercial rail lines, infrastructure in China is extremely well established.

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Both countries pose their own unique challenges to foreigners looking to establish operations there, but the path is clearer in China. Tons of businesses have already set up shop and blazed the trail for mega corporations and small-time entrepreneurs alike. Potential foreign buyers and business owners of all sizes will have a relatively easier time finding guidance about China than for Vietnam.

This is very true and one of the things we are finding we are having to do for our clients looking to go into Vietnam is to connect them with appropriate people in Vietnam, far more often than we do for our clients looking to go into China.

3: Foreign-owned Manufacturers. The post discusses how so many of the “manufacturers in Vietnam established for export are actually foreign owned,” with a large portion of those owned or operated by Chinese or Taiwanese. Very true, and for more on that, check out this post, What’s Your Vietnam Strategy? on my time in Vietnam during last year’s anti-Chinese riots.

Interestingly, the post notes how this foreign ownership means that the time and energy you have spent “learning the nuances of Chinese culture and manufacturing will not have gone to waste. This makes it easy to transfer existing QC checklists, specification sheets, or other documentation that might have been written in English and Chinese. You’ll generally find that these factories also employ Vietnamese staff proficient in both English and Chinese.”

The post also wisely notes that with so many Chinese manufacturers themselves having set up in Vietnam, you should discuss with them how you “may be able to work with your Chinese supplier to keep some of the production processes in China, while outsourcing others.”

It makes for a really good read and I recommend you read it.

The same core things have remained the same for Vietnam, but there have been improvements on all fronts.

Product Type.  As expected, manufacturing in Vietnam is becoming increasingly sophisticated, to the point that it nears China standards for many products. Many of our clients that make clothing, shoes, furniture, doors and many sorts of housewares have been in Vietnam for years now, with great success and with rising manufacturing sophistication. Many of our clients that make kitchen appliances and electronics and more complicated household items (like door handles/locks) are either sticking their toes into Vietnam or are looking to do so.

Existing Supply Chain. China’s road and port transportation has improved since 2015 but it is still not even close to China in terms of capacity or reliability, especially for smaller companies. Vietnam has been discovered and even overrun with new manufacturing in the last few months and this is taxing its roads and its ports and its factories. Companies that have not experienced product delays in Vietnam for years are experiencing them right now and we expect that will only increase as more foreign companies that ship product to the United States (and even elsewhere) move production from China to Vietnam.

3: Foreign-owned Manufacturers. Still true. Many factories in Vietnam that cater to America and European and Australian companies are owned out of Taiwan.

One new thing about which you need to be careful these days is making sure your product made in Vietnam will actually be deemed to have been made in Vietnam for US tariff purposes. We are hearing of Chinese companies assuring their foreign buyers that they will ship their products to Vietnam (or Indonesia or Malaysia or Thailand or Hong Kong or Taiwan or Cambodia) and from there have them shipped to the United States and that doing this will make them “tariff free.” Having your made in  China products shipped to Taiwan or to Malaysia or to Thailand or to Vietnam or to anywhere else and then having those products shipped to the United States as though they are not from China can and does lead to massive fines and to JAIL TIME. Chinese factories are claiming either that this transshipping is either legal or that nobody ever gets caught, neither of which are remotely true. Do you really want to be legal advice about United States customs law from a Chinese factory with a massive incentive to sell you Chinese products and very little incentive to keep you out of jail?

US importers that falsely label the country of origin on their imports are subject to significant fines and penalties and to criminal prosecution. Lying about a product’s country of origin can subject you to 20 years in Federal prison. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, the US Government knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. The U.S. government is preparing to catch those who transship China products to avoid the new China tariffs and it will no doubt be tougher than usual on anyone they catch engaging in transshipping

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.