Director of Vietnam Outsourcing: “Vietnamese industry from OEM to finished products – difficult but can be done!”

LTS: Original equipment manufacturing (OEM) is a popular segment, bringing good profits to many Vietnamese small and medium enterprises.

How is the COVID-19 pandemic challenging Vietnamese OEMs, and what is the future development direction of this industry?

Welcome readers and WE to exchange this content with Mr Daniel Pham - Director of Vietnam Outsourcing, a company specializing in trading metal components.

Vietnam Outsourcing is actively supporting local factories on their journey to join the international supply chain. Please share more about the company's activities. What are the advantages and disadvantages of doing OEM in a place so close to China?

Vietnam Outsourcing has been operating in Vietnam for 5 years, officially opened a representative office in 2019, and the parent company in the UK has been on the market since 2002.

Our main job is to hire Vietnamese factories to produce mechanical components for export to foreign countries, mainly to the US and European markets. In China, there is also China Outsourcing that has done similar work for nearly 20 years.

The geographical location near China gives Vietnam many advantages: some orders of Vietnam Outsourcing are transferred from China, and Chinese experts provide regular support (when there is no COVID-19 epidemic).

Chinese factories still possess strong advantages over Vietnam: available materials, large domestic market, optimal production thanks to long-term accumulated experience. Therefore, Vietnam Outsourcing always has to consider choosing the right products to bring back, ensuring it can compete with China in terms of quality and price.

Recently, we hear a lot about the trend of shifting production out of China. This trend has been around for a long time, until the time of President Trump, it was stronger due to the trade war, then the epidemic broke out. The United States and Europe want to redirect investment to developing countries like Thailand, Vietnam, Cambodia, to avoid dependence on China – or, as the Biden administration often puts it, “build a sustainable supply chain.” and flexible”.

Demand from foreign investors is abundant, but whether Vietnamese enterprises can catch that wave is another matter. Apart from a few businesses that took advantage of the good opportunity, most-watched it goes by with regret.

How has COVID-19 affected the mechanical component supply chain and company operations? How has Vietnam Outsourcing responded to the pandemic, sir?

An epidemic or any change in the world will directly affect Vietnam Outsourcing because 100% of our products are for export. The influence has started since 2020 but is especially strong after Tet 2021. Material prices have fluctuated greatly since the beginning of the year: steel increased by more than 70%, copper doubled, aluminium increased by approximately 50%... Time Cargo transportation is also much longer than before, logistics costs – especially ocean freight – increase many times.

Due to often "standing between" suppliers and customers, Vietnam Outsourcing faces daily challenges caused by diseases.

To respond, we have no secret other than to ensure the principle of transparency and sincerity when negotiating with customers as well as suppliers. When prices fluctuate due to logistics, due to an increase in input material prices, Vietnam Outsourcing is always open to share the situation with customers. For example, if the price of an item is 100 USD, in which the material is 40 USD, then when the material increases by 100%, the corresponding selling price will only increase by 40%. At the same time, we commit that when the price of materials decreases, we will adjust the selling price.

During this period, everyone was confused and panicked by the unpredictable fluctuations of the market. Therefore, we must understand customer psychology and communicate skillfully and flexibly.

Recently, we worked with a Vietnamese factory, they quoted an increase of 80% compared to last year, then reduced to 60% after an intense negotiation process. It took us a lot of time and effort to convince the European customer to set the price.

But two or three days later, the supplier "bombed" more with a 50% prepayment requirement, posing a completely different problem for us. Continued an intense negotiation process, to come to an acceptable agreement of 20% advance.

Thought it was quiet, but no, the supplier said it took 4 months to deliver the goods, while currently it is delivered monthly. Then "all of a sudden" they want to fix some other terms in the contract.

Such constant change makes it difficult for us to communicate with customers.

Vietnamese suppliers tend to report bad news in a trickle, perhaps they think it is clever and customers will be less shocked. But actually backfired – especially in a sensitive time like today. This is not like receiving a Christmas gift but dividing it into many packages so that the recipient is happy every time he opens it.

They should have "packaged" all the bad news into one negotiation, listed it all, and then sat down together with sincerity, transparency and goodwill to find a way to solve the problem. As for using "tactical" to deliver a message every day, it is very difficult and passive for us. Customers will lose trust, wonder if partners still want to do business with them, but every day, new troubles arise.

As a "bridge" between domestic suppliers and European customers, Vietnam Outsourcing faces East-West cultural differences every day. Must be very skilful, harmony between the two sides to work smoothly.

In your opinion, after the pandemic, will there be these changes in the supply chain of metal components?

Even during the pandemic, the demand for goods is very high, even in some industries setting new records. This trend will continue for some time after COVID-19 is contained. Experts cannot predict when the price of materials and logistics will stabilize again, but the world supply chain is gradually adjusting, and customers gradually accept the new price.

This is also a great opportunity for Vietnamese enterprises to conquer new European and American customers, gradually improve their competitiveness and go deeper into the world supply chain.

These developments are very encouraging because while other industries such as tourism and aviation are struggling, the manufacturing industry is developing well, facing many opportunities.

In the future, in which direction will the Vietnamese OEM industry develop?

For manufacturing enterprises, there are two development directions: one is horizontal development, expanding customer files, serving a variety of sub-sectors; the second is vertical growth, such as from just producing components at the bottom of the supply chain, to semi-finished products, and finished products. The highest step is to provide the solution.

Actually, growing horizontally or vertically is also fine. Often businesses will combine these two directions.

Horizontal development, depending on the size and level of your factory, the harder it is to make goods, the larger the quantity, the more money you will earn.

As for vertical development, of course, the deeper you go into technology – which means that the higher the ladder of the supply chain, the better the profit.

Most Vietnamese enterprises are still going horizontally. I hope more and more manufacturers can grow vertically. But this is a difficult problem, not just wanting, just having a lot of money to invest will do it. It depends on many factors, many of which must be followed by whether the business has a predestined relationship with that industry, or whether or not it has met a good partner.

How to grow vertically, sir?

There are 2 methods.

The first is through mergers and acquisitions (M&A). For example, a few years ago, a company specializing in oil and gas drilling wanted to close its factory in Singapore due to high costs, switching to buying components from Vietnam or China.

They made a very attractive offer: the factory that met the requirements would be liquidated the machine line and trained until it could be done. That is a very good opportunity, enterprises that are determined to participate will go very deep in the supply chain of the oil and gas industry. They will inherit the experience and technology that foreign enterprises take hundreds of years to accumulate.

The second is the natural path. In this direction, businesses have no choice but to invest deeply in technology and constantly expand their understanding of the industry they are participating in. In-depth knowledge and seasoned in the market will provide the opportunity to make more difficult products, reaching many big customers.

In addition, it is necessary to invest in customer relationships, so that they can entrust themselves with larger orders, higher up the supply chain ladder, or introduce new partners.

This organic method, as I said, is more difficult, and sometimes depends on fate, but I believe it can be done.

Speaking of which, look to China. Not long ago, they, like Vietnam now, are experts in outsourcing to foreign countries. Over the years, they accumulate experience, knowledge, build customer relationships, and then go deeper into production. By now, they have made a lot of things themselves and are at a very high level in many manufacturing industries.

That is the path that the Vietnamese OEM industry must follow to develop, there is no other way. Of course, this will be a long journey.



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