Sourcing from Vietnam: What You Need to Know
Rapidly becoming a go-to sourcing destination for international buyers in a growing variety of categories, sourcing products from Vietnam offers advantages but also challenges.
Vietnam manufactures and exports a vast array of products. The list includes clothing and textiles, footwear, consumer goods, plastic and rubber goods, plywood,flooring,furniture, packaging, coffee, electronics, construction materials, wooden goods, iron and steel. “Textiles, electronics, and agriculture are the crucial components that make Vietnam an integral partner to other countries in Europe and Southeast Asia,” according to Vietnam Insider.
While the country has a long-standing reputation as a source for textiles and agriculture, the upswing in Vietnam’s standing as part of the electronics manufacturing world is a relatively recent development, buoyed by industry giants such as Samsung relocating factories to Vietnam, supported by a broader push in the country’s public and private sector to improve manufacturing capabilities and infrastructure. Finance giant Nomura noted in a 2019 report that Vietnam has also benefited from US import substitution in electrical appliances since the beginning of the Trump-era trade war with China.
MOQs
Vietnamese manufacturers are more willing to accept smaller order quantities than those in China. Factories are often willing to produce 200 to 300 units, much less than a typical Chinese factory that generally requires 1000 pieces minimum. “This is great for smaller businesses or eCommerce startups requesting smaller production runs,” according to sourcing consultancy Sourcify.
Labor costs
Higher than India, Mexico or the Philippines, but lower than Indonesia and China. On average, Vietnam’s labor costs are half as much as China’s labor costs at US$2.99 (VND 68.000) per hour compared to US$6.50 (VND 148.000) per hour respectively, per a report from Vietnam Briefing’s in January 2022. This contributes to Vietnam’s increasing position as a more cost-effective alternative to its regional counterparts.
Ease of shipping
One major benefit to manufacturing in Vietnam is the shipping advantage, according to Sourcify: “Since the country is relatively small, most suppliers are located close to an airport or major port. All major freight forwarders and air couriers such as DHL and FedEx have facilities in Vietnam.”
Tariffs & restrictions
Vietnam has been perhaps the main beneficiary of the US–China trade war that began in 2018. As of June 2022, the US has tariffs of 19.3% applying to two thirds of Chinese exports. US Customs does not levy such tariffs, designed to stem anti-competitive practices, on Vietnamese goods, which is why many manufacturers have moved operations to Vietnam.
Beyond the US market, Vietnam has signed a number of free trade agreements (FTAs), including the EU–Vietnam Free Trade Agreement (EVFTA), the UK–Vietnam Free Trade Agreement (UKVFTA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which strengthen Vietnam’s competitiveness as a low-cost manufacturing export hub.
These trade agreements allow Vietnam to take advantage of reduced tariffs, both within the ASEAN Economic Community (AEC) and with the EU and US to attract exporting companies to produce in Vietnam and export to partners outside ASEAN.
Most goods are not subject to export taxes on leaving Vietnam, but there are exceptions and may be up to 45%, depending on the product category. These taxes are paid at outbound customs, with customs agents inspecting the goods as they depart the country to make sure the supplier has paid all the necessary duties. The forwarding agent pays any outstanding fees.
To ship a consignment, you will need a list of the products being shipped, correct labelling, and a bill of lading (for ocean freight)/ Your supplier and forwarding company can label and categorize your goods for easy shipping. Vietnamese manufacturers typically employ customs clearance agents who specialize in preparing he correct documentation.
Certain items cannot be exported from Vietnam or have particular restrictions. For example, the Vietnamese government has banned the export of petroleum and oil products to the US. Additionally, items such as chemicals and explosives require special export licenses.
Manufacturing facilities and locations
Vietnam has a number of different geographical areas where particular industries are concentrated. “If you tend to focus on one particular product, you should conduct quick research to see where you can exploit a decent amount of resources to serve your purposes,” according to VietReader.
To attract more Foreign Direct Investment, the country has established more than 220 industrial zones and 16 economic zones that benefit foreign investors greatly, says Vietnam Insider. Those benefits include:
- 10% tax rate locked in for fifteen years
- A 50% tax benefit for employees
- Four years of 0% corporate taxes
- A discount of 50% corporate taxes for up to nine years after a business has reached the first four years
A smart factory development project was launched on May 24 this year in the northern province of Vinh Phuc, as reported by VietNamNet. The project, a joint initiative of the Ministry of Industry and Trade, the People’s Committee of Vinh Phuc province and Samsung Electronics, aims to train 100 Vietnamese experts and provide consultation to help 50 businesses set up smart factories in 2022 and 2023. This smart factory project is the latest in a series of programs aiming to help Vietnamese businesses learn best practices and strengthen the country’s industrial development in key areas.
Factory migration
Rising property values have recently caused serious disruption to well-established factories, according to Investment Monitor. “In the early days, factories were established in the south, in and around Ho Chi Minh City. Demand for housing has now pushed property values to the point where the land on which the factories stand is worth more than the factory itself. As a result, many well-established operations are closing to sell the land, while at the same time, even those who want to stay in operation are being forced to move out by new zoning regulations.”
This has caused a migration of factories from the south to the north. A report by Hong Kong-based industry analysts Birnbaum & Father notes that while relocating plant and machinery is not difficult, particularly when government provides support, moving trained workers is far harder – “they cannot be moved.”
Human resources issues
Vietnam has a relatively large, well-educated labor force, making it an attractive hub for production. In addition, the government has provided various vocational education and training sessions to equip the workforce.
However, some skills are in short supply. “It is, for instance, very difficult to find local staff able to do 3D digital product development, which means that brands are still wasting a lot of money with having people hopping on a plane ten times per year to facilitate production,” said Greg Fleming of Elise Fashion, speaking to Just Style.
With an ongoing labor shortage and lack of skilled workers in specific industries such as IT, the government has put additional strategies and programs in place. For example, several incentives have been issued such as the recent approval of the vocational education and training strategy 202-2030 and the issuance of “Decision 17” on vocational training support.
Language & communication
Language is vital to effective communication and understanding, and as import/export service provider IMC Far East points out in an article on Vietnam-based sourcing agents, “Cultural differences present another standing problem due to some very different ways of doing and seeing business approaches. A good example lies in product quality which is often viewed in this part of the world as being something that can be sacrificed for higher quantity. This issue can lead to brand risk as customers who buy from Vietnam and receive poor quality products may go elsewhere. It is advisable to have a quality control unit on-site.”
Manufacturing in Vietnam offers close proximity to other Asia-Pacific markets, but can present challenges such as long supply chains and distance from other lucrative markets. Distance from the home office also presents a challenge with sufficient lead times for relocating key personnel, IMC Far East notes.
Setting up your business in Vietnam
“Regardless of whether a foreign company is involved in manufacturing, assembling, purchasing, or designing products in Vietnam, each business will have to develop its own individual model for sourcing the necessary goods, component parts, and raw materials that will determine their short or long-term success. Making the right decision is crucial since any misstep could be very costly,” says Vietnam Briefing in a May 2022 primer for foreign investors.
If your sourcing from Vietnam is successful such that you want to continue doing so long-term, you will sooner or later reach a point where you need to establish a permanent entity or base employees in Vietnam full-time to efficiently carry out work such as supplier searches and negotiations, export formalities, and quality control. You can set up a representative office or a limited liability company to create a sourcing platform in Vietnam. For import and export activities, you are required to form a trading company. Whichever option seems most appropriate, you should look for a qualified consultant or lawyer with expertise in Vietnamese export manufacturing.
