I asked him a number of questions, so let’s look at what he had to say:
First, how did Vietnam manage the pandemic in 2020?
The government shut everything down early, in a very firm manner. And they keep enforcing their controls strictly (if one case is found, the whole street is shut down). It was approached a bit like a war. As a result, for people inside Vietnam, there is no need for social distancing. As of December 2020, people wear a mask in public places, but it doesn’t go much further than that.
What are the three types of factories we’re most likely to encounter there?
There are 3 key factory types and they can be distinguished by the different features and behaviors each has:
Type 1: those with a local owner
- Tries to avoid investing much money and the mentality is often short term focused.
- Is reluctant to buy the materials & accessories and has little ability in buying and controlling them (usually from China).
- It is not always easy to deal with them. Going on-site and seeing them face to face is often a must for them to trust the customer and to start working on a new project.
Type 2: state-owned companies
- They are often well-financed, they might have their own mills and their R&D centers.
- They are often a good fit for big buyers.
Type 3: foreign-owned companies
- Mostly Korean.
- Often well organized.
- Often a good fit for big buyers.
How do Vietnamese factories compare to Chinese ones, for ‘small’ buyers?
Vietnam in general is a bit like China 15 years ago.
On the marketing and sales side, Vietnamese manufacturers don’t make as much effort as Chinese manufacturers. Many of them don’t make any effort to chase new customers at all!
Suppliers often say “yes we can” even when that’s not the case, so buyers have to be careful and are generally advised not to start giving large orders to a new supplier and to ramp up their manufacturing in Vietnam over time instead.
Any tips on how best to work with locally-owned factories (type 1)?
One of the main issues is, they generally don’t want to buy the materials & accessories. Importers can still find ways to buy in FOB terms but often need to direct the Chinese material supplier, to organize quality control on the material, etc.
When production is underway, close follow up is important. To reduce risks, the buyer needs to do project management closely with them, needs to do a pre-production meeting before production starts, and to have a presence during production.
There are also positives. Many factory owners listen and want to learn.
The mentalities still have to evolve in certain aspects. Bribery is often seen as a normal way of doing business.
One big positive is the relative stability of prices. There are very few calls where the supplier says “the labor cost is going up, so I need to increase the price”. For the most part, the prices of Chinese materials drive the evolution of production costs.
So, is it often a must to get materials & components from China?
Let’s look at garment manufacturing in Vietnam in particular. About 80% of the materials for making garments are made in China.
There are fabric mills in Vietnam (mostly foreign and state-owned), but environmental concerns have started to make it difficult to set up new ones and some areas totally refuse to host fabric mills these days.
There is a large skills gap, too. Some private groups have the means to invest in a fabric mill but don’t have the people with the right skills. A mistake in the dyeing process leads to very expensive rework.
Factory owners often complain about the lack of reliability of local fabric mills. They often get a better deal when bringing it all over from China.
What’s the difference between North vs. South Vietnam?
It’s fair to say that they’re almost like two different countries!
The North is closer to China in terms of culture and environment and is more traditional.
The South is more business-oriented, more open. Most buying offices are in the Ho Chi Minh City area. The land and labor are also more expensive in the South, and young people there are less willing to work in factories, so there are factories moving to the North.
What has changed since the USA tariffs on many made-in-China goods?
At the time of the Trans-Pacific Partnership, a lot of American buyers transferred garment production to Vietnam. With the Trump administration’s tariffs, there was a lot of talk about production transfers, but that was not predominantly in apparel.
More recently, the European-Vietnam free trade agreement has been attracting European buyers. (However, if the fabric comes from China, in principle that agreement doesn’t apply.)
How does Vietnamese infrastructure compare to that of China?
Vietnams’ manufacturing infrastructure is still precarious and underdeveloped in many parts of the country. One can see a lot of construction all around the big cities.
There are some good (and even some very good) factories close to the main ports.
In some places that are not close to the ports or large cities, large trucks can’t get to the factory, so cartons are loaded on small trucks on the way to the port.
That’s why a Vietnamese supplier’s location is a key consideration in the sourcing process. The further away, the harder the access, and (in general) the lower the workers’ skills.
Fortunately, this is all changing fast, with more and more highways being built around the country.
Does the Vietnamese government offer incentives and support to its manufacturers?
The incentives from the government for textile corporations, in particular, varies on the location and the scale of the factory. Here are some incentives that are currently in place to spur manufacturing in Vietnam (in Dec ’20):
Income Tax Reduction
A preferential tax rate of 10% for a period of 15 years applies to:
- Newly-established enterprises in areas with extremely difficult socio-economic conditions such as Son La, Cao Bang, Bac Kan, Ha Giang, and more…
- Projects with minimum investment capital of 6 (six) trillion VND, disbursed no more than 3 years after being granted investment certificates and employing over 3,000 employees after 3 years at the latest.
Export & Import Tax Exemption
Tax-exemption applies to:
- Goods imported for processing for foreign parties are exempt from import tax, and when returning products to a foreign party, they are exempt from export tax.
- Exported or imported goods that are under customs supervision, if damaged or lost, inspected or certified by a competent agency or organization, shall be considered for tax reduction corresponding to the loss rate. actual loss of goods. The customs office shall base itself on the number of lost goods and the actual loss rate of the inspected and certified goods to consider tax reduction
Investment Incentive Policy on Land
Land and water surface rent exemption in the following cases:
- Investment projects in fields of special investment incentives are invested in socio-economic regions with special difficulties.
- Investment projects on construction of houses for workers in industrial parks and export processing zones that are leased land by the State or leased land from investors to build and operate the infrastructure of industrial parks and export processing zones for complying with the planning approved by the competent state.
Investment Incentives for Industrial & Economic Zones
Land rent reduction in some cases:
- Investors who are leased land by the State to invest in the construction and commercial operation of infrastructure of industrial parks, industrial clusters or export processing zones are entitled to land rent exemption after the period of land rental exemption during the construction period. (The investor in the infrastructure construction and business shall enjoy the preferential rate according to the investment incentive area as each district has a different incentive policy.)
- The industrial park is located in geographical areas on the list of geographical areas with difficult socio-economic conditions under the investment law.
- Investment costs for construction, operation or lease of condominiums and social infrastructure works serving workers in industrial zones or economic zones are deductible for calculation of Income-tax.
- Investors and enterprises whose investment projects in industrial zones or economic zones are supported by competent authorities to carry out administrative procedures for investment, enterprise, land, construction, environment, labor, trade under the “one-stop-shop” mechanism, support for labor recruitment and other related issues in project implementation.
Manufacturing in Vietnam continues to grow in attraction for buyers from around the world, especially when viewed through the lens of reducing the risk of relying solely on China or the US/China trade war.
It may surprise you to see that Vietnam is more developed than many other SE Asian countries, but there is also still quite a strong reliance on materials and/or components from China, so uprooting an entire supply chain to Vietnam is not really feasible yet for most products.
P.S. Want to learn more about Vietnam?
Listen to this episode of the podcast where we discuss the choice of manufacturing in Vietnam, China, or India and some of each location’s unique situations:
You will also like these blog posts I wrote over on QualityInspection.org:
- 9 Things Only a Large Company Can Obtain in China/Vietnam
- Transferring Production from China to Vietnam to Avoid Tariffs
- What If Your Chinese Supplier Offers To Make Your Product in Vietnam?
- Sourcing Manufacturers: What Type To Choose For Your Production In China/Vietnam?
- Supply Chain Risk Management, Part 5: Moving Manufacturing to Vietnam, Thailand, Malaysia, or India (Pros & Cons)
This free eBook shows importers who are new to outsourcing production to China or Vietnam the five key foundations of a proven Quality Assurance strategy, and also shows you some common traps that importers fall into and how to avoid or overcome them in order to get the best possible production results.
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