Besides the easy-to-recognize macroeconomic factors, there are many other reasons to explain why manufacturing costs in Viet Nam (and also other developing countries) are not as cheap as China’s.

Most American/European companies, when they first come to Viet Nam, find this difficult to understand. After all, the average labor cost in Viet Nam is half that in China; but, the quotations they get from Viet Nam manufacturers are often 1.5 – 2 times higher than China’s equivalent. This, in turn, caught them off-guard.

Most recently, an American company send us an inquiry about a Hydraulic Torque Wrench – Said Mr. Daniel Pham, Director of VNoutsourcing.com (VNO), the Vietnam local office of Chinaoutsourcing.com. In Viet Nam, no company specializes in this product, which means we will need to find factories with suitable machines, and facilities and set up a new production line for it. The initial combined quotation is almost twice as expensive as that of China. It will take some time for VNO to set up and optimize to meet the targeted pricing of such customers.

It was also the wave of supply chain shifts driven by the US-China trade war that caused the supply and demand imbalance in Vietnam. Many Vietnamese manufacturers mistakenly believe that this opportunity will last forever and do not feel interested in providing good quality products at a lower cost than what they normally do. They do not think that for manufacturing industries with high technical barriers and complex management processes, being able to take part in the international customer’s supply chain, in the long run, will bring much greater benefits compared to the short-term benefit of a couple of high-price orders.

Another subjective reason for the surprisingly high price of Viet Nam support industry manufacturers is the mindset of doing business based on relationships. This is rather difficult to get scientific statistics to illustrate this statement, but most are based on taking away from face-to-face meetings – Said Mr. Daniel Pham, Director of VNoutsourcing.com: “In my database, there are about 2000 manufacturers in Viet Nam, which I visited about 300 of them. Manufacturers that are originated as a state-owned enterprise (SOE) usually have their “traditional” orders. This makes the commercial orders not vital to their business. They don’t have enough pressure to provide the best quality product at competitive pricing. The studying of technical drawings, generating quotation, making sample, don’t get enough attention and focus as they should.”

It sounds hard to believe, but this kind of mindset is also common in many private enterprises that have traditional orders with large FDIs. Such manufacturers often have good existing business results and strong production capacity. Over many years of optimizing the production process for their traditional product, with timely information from the advantage of a “good relationship”, the profit on each of their orders is much more attractive than the new inquiries that they need to compete with China. They are not overly keen on the new opportunities from the current wave of supply chain shifts. From a business point of view, for manufacturers that are successful and have a stable source of orders, doing so is not necessarily wrong. It is entirely up to them to decide where they will allocate their resources and time. However, many smaller private factories, when trying to develop their businesses, often try to mimic the bigger and more successful companies using the same mindset. Although the market for the FDIs in the country is very large and is a great playground for domestic factories to develop their capabilities; however, if they think it is the only available market, such companies will not be ready to take advantage of the opportunities brought by this wave of supply chain shifts.

On the other hand, it does not mean that just by changing the sales mindset, Viet Nam factories can immediately provide more competitive product pricing than China. Chinese businesses have much more accurate pricing experience than most Vietnamese manufacturing enterprises. The main formula for manufacturing pricing in Vietnam is: (direct cost) + (indirect cost) + (expected profit) = Price.

While the direct variable costs on finished products such as materials, labor, and machine hours … can be estimated quite accurately and easily (although it can be further optimized). It is difficult to dissect indirect costs (factories, energy, indirect labor, sales costs, customer care, defect rate, shipping, etc.) and accurately distributed individual products. Many Vietnamese businesses determine whether their pricing is correct based on the quarter/annual profit and loss balance sheet (P&L).
And to be safe, they calculated with a large safety margin. The market-driven pricing method – based on competitors’ prices and prices that customers are willing to pay is less often applied. Therefore, many Viet Nam local manufacturing companies are not able to assess their competitiveness in the global supply chain.

How do overcome the differences?

So how could Viet Nam Manufacturers overcome these stumbling blocks and get ready for more opportunities given by the global supply chain shift? We think the fastest way is to open up and learn from Western customers. Difficult technical requirements and quality control of customers are the problems, which if solved will improve the competitiveness of domestic factories greatly – said Mr. Chris Mooney. Besides, as previously mentioned, there are many similarities between Viet Nam and China – Vietnamese factories can learn from their neighbor about the most efficient way to organize production, and gradually apply automation and advanced management method to optimize their production. Particularly, they can learn about the competitiveness of China’s price quotes to better position themselves in the global supply chains.

The actual job of moving production to Viet Nam is hard and time-consuming, said Mr. Daniel Pham. We VNO are fortunate to collaborate with factory owners who have a clear awareness, willing and ambitious to take advantage of this transition wave. For example, we are working on a first article submission of several precision machined copper products with a factory in Dong Anh province. Right from the beginning, the factory director bought all necessary materials and measuring equipment according to the product requirement. Together we found some materials and tools that are not available in Vietnam, so VNO transferred such items from our China office to the factory to speed up the sample-making process.

Our chief engineers and experts from China also came to the site, collaborating with the factory to help develop the process. Yet, it still took us 7 months to develop and undergo 3 sample submissions to get the samples approved.

For this product line alone, we are ordering about $3 million annually from China. We are targeting to move $500k worth of product to Viet Nam in the first year. Our first and foremost priority is to ensure all technical and quality requirements are met and maintained.