is vietnam an alternative for china manufacturing

is vietnam an alternative for china manufacturing?

amid a tightening labor market and rising wage demands, rising RMB ( the chinese currency) manufacturing in China isn’t as cheap as it used to be.

The new dynamic has some U.S. firms looking for the next frontier in outsourcing, and the search leads, in many cases, to Southeast Asian up-and-comer Vietnam. “Vietnam will be the next China,” said Josh Feinkind, president of New York-based RefinedKind Pet Products, which has been producing in Vietnam for eight years. “Though it may not overcome China in terms of production volume, it will be a major production player in Asia, especially in labor-intensive production.” such as shoe manufacturing wooden toys , furniture , etc.

The rapidly developing economy offers significant cost advantages and an eager, if inexperienced, workforce. But in a country that’s still acclimating to Western manufacturing methods and standards, companies have to accept some tradeoffs and be vigilant about quality.  Vietnam is attracting both companies with a history in China and those fresh to Asia. It’s often part of a “China plus one” strategy in which firms maintain production in China but add operations in another Asian country to spread out such risks as supply chain disruption.

Foreign direct investment in Vietnam has totaled between $10 billion and $11 billion annually for the last five years, up from essentially zero a decade ago, according to a U.S. Department of State 2013 Investment Climate Statement on the country.  The State Department attributed the growth to Vietnam’s open government policies along with political stability, an abundant labor pool and proximity to global supply chains. But it also warned of problems such as corruption, financial instability and a weak education system.

In China, partially as a result of the one-child policy, the supply of young workers is dwindling. And potential candidates aren’t always as enthused as earlier generations about factory jobs.  The upshot: Pay is climbing fast. Wages in China’s private sector increased 14 percent in 2012, according to the country’s National Bureau of Statistics.

In fact, by 2015, the cost for U.S. companies to manufacture goods in China is likely to approach that of staying at home, according to Southfield, Mich.-based consulting firm AlixPartners LLP. The calculation assumes continuation of historical wage inflation rates, strengthening of Chinese currency by 5 percent per year and single-digit increases in ocean-freight costs.

Vietnam, by comparison, can look like a bargain. Factory workers in Vietnam might make a third to half of the $300 a month that is typical in China, according to experts.  And there are reasons beyond lower wages to invest in Vietnam, said Robert Brown, a partner with the law firm Bingham Greenebaum Doll in Louisville, Ky.  “If I have someone who wants to set up factory, I can meet with ministers,” said Brown, author of Doing Business in Vietnam, published by Thomson Reuters/West. “It’s easier to get access to the right people. They’re eagerly looking forward to getting more Americans in.”

Still, Vietnam is experiencing skill shortages from the factory floor to the C-suite, and many workers lack even basic workforce readiness — let alone experience meeting the production-quality standards of American consumers. Companies that decide to manufacture in Vietnam can expect to invest in training.  Perhaps that’s one reason Vietnam is handing out tax incentives to foreign firms. In one prominent example, Seoul-based Samsung Electronics was granted four tax-free years and 12 half-price years for a $2 billion plant in northern Vietnam.

The country has drawn other big names, including Oregon-based Nike Inc. In fiscal 2013, contract factories in Vietnam accounted for 42 percent of footwear made by Nike and China accounted for 30 percent. Vietnam surpassed China as the largest producer of Nike footwear in 2010.  Intel Corp., the Santa Clara, California-based computer chip maker, opened a $1 billion plant in Ho Chi Minh City in 2010.

Feinkind has experienced both the positives and negatives of Vietnam. He once lost a $20,000 deposit with a small factory that first failed to meet his quality standards, then ran out of cash to make replacements for him.  He’s had trouble in both Vietnam and China finding plants that can produce high quality without high volume demands.  “Personally visit the factory,” Feinkind advised. “Make observations from how modern their machines are to what quality control procedures are in place to what their workers wear.”