Why Businesses Are Moving from China to Vietnam for Sourcing & Manufacturing
China has reigned as the undisputed manufacturing power of the world for decades. Companies from countries like Australia, the US, and Europe have historically relied on Chinese factories to produce everything from toys to textiles to electronics.
Recently there has been a major shift in global supply chains, driven by geopolitical tensions and tariffs being imposed between the US and other countries as well as the steady rise of manufacturing costs in China itself. These only worsened the supply chain vulnerabilities already exposed by the COVID-19 pandemic.
As a result of this, many businesses around the world are reconsidering their sourcing strategies, shifting their sights from China to South Asia, with a particular focus on Vietnam. This article explores why global businesses are committing to this switch, the industries leading this shift, and why Vietnam’s manufacturing future looks exceptionally bright.
Why Are Businesses Moving Away From China?
1 Tariffs and the US-China Trade War
One major contributing factor to why businesses are moving away from China is the increasingly tense trade war between them and the U.S. Initiated in 2018, the tariffs saw a 10% levy on hundreds of billions of dollars’ worth of goods exported from China to the U.S. These tariffs have doubled to 20% this past year and recently in retaliation to this, China increased import tariffs on U.S farmers to 15%. Tensions have increased since then, and China’s Ministry of Foreign Affairs has also expressed that it will not be backing down from this trade war any time soon.
A study by KPMG found that this rise in costs and signs that the trade war might not end soon has been a leading reason why 70% of surveyed businesses were diversifying away from China. Businesses operating from Europe are also facing stricter import regulations and compliance requirements, causing them to explore alternative manufacturing locations.
A study by KPMG found that this rise in costs and signs that the trade war might not end soon has been a leading reason why 70% of surveyed businesses were diversifying away from China. Businesses operating from Europe are also facing stricter import regulations and compliance requirements, causing them to explore alternative manufacturing locations.
2 Rising Manufacturing Costs
Over the past decade, China has experienced significant economic growth that has been beneficial to the economy but has also led to an increase in labour costs. Over the last two decades, China has seen its national minimum wage increase by over 200%. This, in combination with stricter international laws on environmental regulations as well as higher compliance standards, has further increased operational costs.
These rises in costs have made China less cost-effective compared to its South-East Asian neighbours for any labour-intensive manufacturing. As such, many businesses have started to seek more affordable alternatives.
These rises in costs have made China less cost-effective compared to its South-East Asian neighbours for any labour-intensive manufacturing. As such, many businesses have started to seek more affordable alternatives.
3 COVID-19 and Supply Chain Disruptions
COVID-19 disrupted the entire world, and that includes global supply chains in China. China imposed a zero-COVID-19 policy, which led to many factory shutdowns and severe port congestions, which disrupted the flow of goods worldwide.
This unprecedented shutdown highlighted the risks of over-relying on one single country as the sole manufacturing hub for some companies. This necessitated the diversification of supply chains to better protect these businesses from any future event like this.
This unprecedented shutdown highlighted the risks of over-relying on one single country as the sole manufacturing hub for some companies. This necessitated the diversification of supply chains to better protect these businesses from any future event like this.
In order to avoid any future issues like these, many global businesses have adopted the "China+1" strategy. This strategy aims to maintain a certain level of manufacturing presence in China while diversifying supply chains to reduce risks.
Many Southeast Asian countries such as Vietnam and Thailand have become attractive destinations for businesses looking to move. This strategy of keeping some level of presence in China helps companies take advantage of China’s established infrastructure while also reducing any risks and gaining the benefits of working in those other countries.
Many Southeast Asian countries such as Vietnam and Thailand have become attractive destinations for businesses looking to move. This strategy of keeping some level of presence in China helps companies take advantage of China’s established infrastructure while also reducing any risks and gaining the benefits of working in those other countries.
Why Are Businesses Choosing Vietnam?
1 Trade and Export Agreements
Vietnam has several trade agreements which make it an appealing country to establish a manufacturing hub. These include
- EU-Vietnam Free Trade Agreement (EVFTA): An agreement made on June 30th 2019, it aims at increasing trade and supporting job creation on both sides. The agreement dictates the elimination of 99% of tariffs, reducing regulatory barriers and ensuring the protection of geographical indications.
- Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): It is a free trade agreement between 12 countries including Australia, Japan and Singapore. This helps open up new markets for any interested businesses while also helping any SMEs to establish in new export markets.
- Regional Comprehensive Economic Partnership (RCEP): Established in January 2020, this free trade agreement involves 15 countries and aims at reducing over 90% of tariffs over the next 10 to 15 years.
2 Cost-Effect Manufacturing
Vietnam offers significantly lower labour costs compared to China, with monthly wages being more than 20% lower, resulting in lower costs for businesses and their consumers.
The Vietnamese government has put policies in place to increase Foreign Direct Investment through tax incentives and a more streamlined regulatory framework, encouraging more long-term investment into the country.
The Vietnamese government has put policies in place to increase Foreign Direct Investment through tax incentives and a more streamlined regulatory framework, encouraging more long-term investment into the country.
3 Infrastructure and Logistics Improvements
For the decade 2020-2030, Vietnam has planned to spend 60-90 billion AUD more on improving its infrastructure in major cities such as Ho Chi Minh City, Hai Phong, and Da Nang.
These investments are primarily focused on building or expanding the following,
These improvements help improve the connectivity between industrial zones and shipping zones, helping save time during the transportation of goods.
These investments are primarily focused on building or expanding the following,
- Long Thanh International Airport
- North-South Expressway
- Seaports
- Urban road networks
These improvements help improve the connectivity between industrial zones and shipping zones, helping save time during the transportation of goods.
4 Business-Friendly Environment
Vietnam’s political and financial stability provides traders and foreign investors a secure environment. The government has made a number of economic reforms and has aimed to make Vietnam a haven for businesses to grow. These include,
This in combination with Vietnam’s strategic location offers proximity to major markets across Asia, further improving its standing as a manufacturing and export hub.
- Simplifying administrative procedures to establish foreign companies
- Introduction of Special Economic Zones with tax incentives
- Strengthening intellectual property rights to international standards
This in combination with Vietnam’s strategic location offers proximity to major markets across Asia, further improving its standing as a manufacturing and export hub.
Industries With The Highest Growth Potential
Vietnam has been rising as a global leader in manufacturing with significant improvements being noted across multiple industries. Any businesses interested in sourcing from South East Asia must understand the best growing industries and key strengths Vietnam offers.
Electronics
Vietnam has had a number of large investments from leading global brands, situating it as one of the world's most attractive electronics manufacturing hubs. Samsung has invested more than 36 billion AUD into its Vietnamese operations and has exported over 79 billion AUD worth of goods. They've invested in infrastructure related to fields like OLED screen development and AI integration, further improving Vietnam’s ability to manufacture electronic goods. Due to this increase in Vietnam’s technological capital, key Apple suppliers Foxconn and Pegatron have also started shifting their production from China to Vietnam.
Vietnam’s new government incentives and improved intellectual property protection rights have attracted semiconductor manufacturers looking for more attractive environments to manufacture in. As global demands for these chips increase, the number of businesses looking to source these electronics stands to benefit from the reliable and cost-effective manufacturing environment Vietnam provides.
Textiles
Vietnam is currently the second largest exporter of garments after China. The lower labour costs and tariff advantages have attracted many major companies, including Nike, Adidas and Under Armour.
Sustainability is a huge factor for many international clients. Knowing this, Vietnam’s textile industry has aimed at aligning its sustainability practices to the international standard. This protects its standings in its trade agreements and makes it very attractive to modern brands that prioritise ethical sourcing.
Vietnam has attracted 58 billion AUD of Foreign Direct Investment into its textile industry, which they used to modernise their production efficiency to better handle larger orders as well as improving the skill level of their labour.
Home Furniture
In 2020, China was beaten out by Vietnam as the primary exporter of furniture and goods to the U.S. market. Major international retailers such as IKEA and Ashley Furniture.
This is in part because the country has aimed at improving its responsible sourcing of raw materials. By securing certifications such as the Forest Stewardship Council, they can now put international consumers at ease by providing eco-conscious products. Clients and businesses can expect a quick turnaround for their home furniture, from order placement to final delivery due to their improved infrastructure and reduced logistical bottlenecks.
Electronic Vehicles
VinFast, Vietnam’s premier automotive partner, has positioned itself as a reputable player in the local market and has started looking at rapid global expansion. They have built battery and manufacturing plants in a few locations across Vietnam and are looking to open more to meet expected global demand.
Global manufacturers such as Toyota and Honda from Japan, Kia and Hyundai from South Korea, have also expanded operations into Vietnam to take advantage of its strategic location to better access neighbouring markets. To better accommodate these brands, Vietnam has built its EV infrastructure and introduced government incentives to lower costs. Businesses looking to diversify their sourcing from traditional automotive hubs will find it increasingly beneficial to make the switch to Vietnam.
Electronics
Vietnam has had a number of large investments from leading global brands, situating it as one of the world's most attractive electronics manufacturing hubs. Samsung has invested more than 36 billion AUD into its Vietnamese operations and has exported over 79 billion AUD worth of goods. They've invested in infrastructure related to fields like OLED screen development and AI integration, further improving Vietnam’s ability to manufacture electronic goods. Due to this increase in Vietnam’s technological capital, key Apple suppliers Foxconn and Pegatron have also started shifting their production from China to Vietnam.
Vietnam’s new government incentives and improved intellectual property protection rights have attracted semiconductor manufacturers looking for more attractive environments to manufacture in. As global demands for these chips increase, the number of businesses looking to source these electronics stands to benefit from the reliable and cost-effective manufacturing environment Vietnam provides.
Textiles
Vietnam is currently the second largest exporter of garments after China. The lower labour costs and tariff advantages have attracted many major companies, including Nike, Adidas and Under Armour.
Sustainability is a huge factor for many international clients. Knowing this, Vietnam’s textile industry has aimed at aligning its sustainability practices to the international standard. This protects its standings in its trade agreements and makes it very attractive to modern brands that prioritise ethical sourcing.
Vietnam has attracted 58 billion AUD of Foreign Direct Investment into its textile industry, which they used to modernise their production efficiency to better handle larger orders as well as improving the skill level of their labour.
Home Furniture
In 2020, China was beaten out by Vietnam as the primary exporter of furniture and goods to the U.S. market. Major international retailers such as IKEA and Ashley Furniture.
This is in part because the country has aimed at improving its responsible sourcing of raw materials. By securing certifications such as the Forest Stewardship Council, they can now put international consumers at ease by providing eco-conscious products. Clients and businesses can expect a quick turnaround for their home furniture, from order placement to final delivery due to their improved infrastructure and reduced logistical bottlenecks.
Electronic Vehicles
VinFast, Vietnam’s premier automotive partner, has positioned itself as a reputable player in the local market and has started looking at rapid global expansion. They have built battery and manufacturing plants in a few locations across Vietnam and are looking to open more to meet expected global demand.
Global manufacturers such as Toyota and Honda from Japan, Kia and Hyundai from South Korea, have also expanded operations into Vietnam to take advantage of its strategic location to better access neighbouring markets. To better accommodate these brands, Vietnam has built its EV infrastructure and introduced government incentives to lower costs. Businesses looking to diversify their sourcing from traditional automotive hubs will find it increasingly beneficial to make the switch to Vietnam.
These strategic improvements are significantly amplifying Vietnam’s competitiveness as a global sourcing and manufacturing hub. By leveraging these investments and Vietnam’s constantly evolving business-friendly environment, international firms can achieve a high-degree of cost savings and increase their long-term growth.
Looking to Make the Switch?
As global sourcing continues to shift, businesses that proactively diversify their supply chains gain significant competitive advantages. Vietnam’s robust infrastructure, favorable trade agreements, growing technological expertise, and welcoming business climate make it the ideal alternative to traditional sourcing hubs like China.
The Sourcing Co specialises in seamless transitions, leveraging our on-the-ground presence and deep understanding of Western market expectations to simplify the complexities of international sourcing. From product development and manufacturing management to quality control and global logistics, we ensure your move is smooth, efficient, and profitable. Contact us today and take the first step towards a resilient, cost-effective, and future-proof supply chain.
The Sourcing Co specialises in seamless transitions, leveraging our on-the-ground presence and deep understanding of Western market expectations to simplify the complexities of international sourcing. From product development and manufacturing management to quality control and global logistics, we ensure your move is smooth, efficient, and profitable. Contact us today and take the first step towards a resilient, cost-effective, and future-proof supply chain.
Sources
Tariff increases to 20%: https://www.bbc.com/news/articles/cdxqeg51y36o
Minimum wage up 200 in China:: https://www.hhs.se/contentassets/249bdc81268543db9e223585f4d53e5a/minimum-wages-and-employment-in-china.pdf
Labour costs being lower than China:
https://www.isis.org.my/2024/07/23/is-vietnam-losing-its-appeal-for-chinas-manufacturers-bypassing-us-tariffs/
Infrastructure improvements:
https://vietnam.opendevelopmentmekong.net/en/topics/infrastructure/#:~:text=Recently%2C%20the%20Vietnamese%20government%20approved,transport%20infrastructure%20between%202021%2D2030.
Samsung investment into Vietnam:
https://vir.com.vn/samsung-calls-for-investments-in-new-areas-122817.html
Textile FDI in Vietnam:
https://www.fibre2fashion.com/news/industrial-textiles-news/3-500-fdi-garment-textile-projects-in-vietnam-worth-37-bn-vitas-298325-newsdetails.htm#:~:text=Vietnam%20has%20attracted%203%2C500%20foreign,garment%2Dtextile%20industry's%20export%20turnover.
Vietnam beating China as the largest exporter of wooden furniture to the U.S:
https://traccc.gmu.edu/wp-content/uploads/2022/03/The-Vietnamese-Furniture-Industry-A-Trade-Discrepancy-Analysis.pdf
Minimum wage up 200 in China:: https://www.hhs.se/contentassets/249bdc81268543db9e223585f4d53e5a/minimum-wages-and-employment-in-china.pdf
Labour costs being lower than China:
https://www.isis.org.my/2024/07/23/is-vietnam-losing-its-appeal-for-chinas-manufacturers-bypassing-us-tariffs/
Infrastructure improvements:
https://vietnam.opendevelopmentmekong.net/en/topics/infrastructure/#:~:text=Recently%2C%20the%20Vietnamese%20government%20approved,transport%20infrastructure%20between%202021%2D2030.
Samsung investment into Vietnam:
https://vir.com.vn/samsung-calls-for-investments-in-new-areas-122817.html
Textile FDI in Vietnam:
https://www.fibre2fashion.com/news/industrial-textiles-news/3-500-fdi-garment-textile-projects-in-vietnam-worth-37-bn-vitas-298325-newsdetails.htm#:~:text=Vietnam%20has%20attracted%203%2C500%20foreign,garment%2Dtextile%20industry's%20export%20turnover.
Vietnam beating China as the largest exporter of wooden furniture to the U.S:
https://traccc.gmu.edu/wp-content/uploads/2022/03/The-Vietnamese-Furniture-Industry-A-Trade-Discrepancy-Analysis.pdf