Many factories want to leave China to Vietnam, but this is an almost impossible goal

Tram Ho

With tensions in US-China trade relations continuing to escalate, this should be a time for Vietnam to shine. But it will obviously be many years before this Southeast Asian nation can replace China as the world’s factory.

Specialized supply chain, which makes China a “giant” in manufacturing industry, has not developed in Vietnam. Meanwhile, factories with available safety certificates and state-of-the-art machinery are too rare, WSJ estimates.

Vietnam, with a population less than one-tenth the size of China, is also facing the problem of manpower shortage as many global manufacturers begin to flock to avoid U.S.-imposed tariff barriers. onto imported goods from China.

“China started 15 years ago – whatever you want, someone else is doing it,” said Wing Xu, managing director of Omnidex Group, a pump manufacturing company for industrial equipment manufacturer McLanahan Corp. , to speak.

Workers at the Kim Tinh Casting factory in Binh Duong.

Omnidex actually transferred a part of its production line to Vietnam. But of the more than 80 parts needed for a pump in mining operations, the plant has just started manufacturing with 20 parts here because the mold has to be rebuilt from scratch.

“You can’t move to work in Vietnam and hopefully find everything you need,” she added.

Many businesses are preparing for a “battle” between the two largest economies in the world. Some companies plan to leave China. But companies that depend on scattered production and supply models in the mainland look for ways to diversify their production sites.

Specifically, some companies are moving part of their production lines to Southeast Asian countries while continuing to produce goods for China and non-US markets in a billion-dollar country, in a strategic they call it “China + 1”.

Companies with large orders are hoping they can influence partners to push operations out of China.

Data as of June 30, 2019. Source: United States Census Bureau

As a result, a global manufacturing picture is about to change, WSJ quoted a senior staff member. Companies leaving China are dividing investment between developing countries and partly returning to the US with a high capitalization platform.

The creation of a new industrial empire will not take place after a short time. Vietnam has cheap labor, but the population of 100 million is still very small compared to 1.3 billion in China. Meanwhile, road and port infrastructure is overloaded. India has human resources but skills cannot meet it, and regulations on management are still limited.

“The question everyone is asking is: ‘Where should we go?’” Said Giang Le, an analyst for Control Risks, a consultancy.

Camera manufacturer GoPro Inc is moving most of its production chain to the US market to Guadalajara, Mexico, while maintaining manufacturing in China for other markets. Universal Electronics Inc., based in Arizona and producing smart home technology, also has a new partner in the Philippines and expanded operations in Monterrey, Mexico.

Techtronic Industries Co. Ltd, a Hong Kong-listed company that produces Hoover vacuum cleaners, will open a factory in Vietnam and add capital to its Mississippi plant. However, its factory in China will operate for at least another 10 years.

Over the past 20 years, China’s manufacturing model has grown thanks to nearby suppliers, making the manufacturing process faster, cheaper and more efficient. Currently, when operating highly fragmented, companies face increased costs and delivery time, besides tax issues and labor management.

Kim Tinh Casting Factory.

Companies are also focusing on understanding the overlapping regulations that control what percentage of production value in Vietnam will be considered “Made in Vietnam” goods, said Willy C. Shih, a senior analyst. Harvard Business University, shared. “The era of decent business environment is over,” he added.

Source: United States Census Bureau, WSJ

The shift is the opportunity that Vietnam is waiting for. The labor-intensive industry like sneaker and apparel moved back here many years before labor costs in China increased. Korea Electronic Technology Group Samsung Electronic Co. also invest billions of dollars, while Vietnam also hopes to expand the electronics and technology to increase the value of the supply chain.

Industrial zones in Vietnam are flooded with orders. BW Industrial Development, the company that the Warburg Pincus Fund backed, started building a rental factory last year and was “out of stock” until December. Marketing director Michael Chan said many customers even expected wants to accelerate meeting and close contracts in just a week.

Hanel PT, a Vietnamese company that specializes in manufacturing electronic devices for motion sensors and fire alarms, revealed it was negotiating one of its biggest deals. The 20-year-old company, which still relies on many Japanese customers to grow but said it is also receiving the first signals from the US company.

A factory of BW Industrial Development JSC was hired by a Japanese wood company to start production in September.

Seditex Co. Ltd, a company that connects foreign companies and factories in Vietnam, receives 20 requests per week since the US announced tariff barriers, up from 20 requests per month. Foreign companies want to produce a variety of items from backpacks, Bluetooth speakers to suitcase wheels and clothes hangers.

Frank Vossen, founder of the Ho Chi Minh City-based company, said companies already familiar with the Chinese market had a hard time adapting. “There is no available solution in Vietnam, it is a proven fact,” he stressed.

The personnel issue also began to be more difficult to solve. A local exporter of pipelines and faucets is taking on many orders for taxable items but employs only 30 of the 100 personnel it needs.

Japanese furniture manufacturer Muji said it was late in production since January due to a shortage of manpower.

Yotaro Kanamori, managing director of Generation Pass Co., Ltd. Ltd., says the company is hiring itself a factory instead of depending on outsourcing contracts. He shared that the company had difficulty explaining to Vietnamese suppliers that the underside of a table should also be as good as the top.

The process of shifting production to Vietnam has been going for a long time. Many companies like Nike Inc imported shoes from a Vietnamese factory since the mid-1990s.

As the minimum wage in China has increased, many orders of clothes, toys and shoes have moved to cheaper cost countries such as Bangladesh, Myanmar and Vietnam.

Japanese multinational company Canon Inc has started manufacturing printers in Northern Vietnam since 2012. But the supply chain for items such as cameras and printers is difficult to replicate.

Of the 175 network of Canon suppliers in Vietnam, only 20 are local companies, Dao Thi Thu Huyen, senior manager, shared. They mainly produce plastic components and packaging.

She added that almost all electronic components come from Japan, China and Taiwan.

Monidex Manufacturing Vietnam engineers oversee products at Kim Tinh Casting Factory.

The pace of companies moving to Vietnam has been increasing since last year as many leaders weighed the potential and made decisions.

Christopher Devereux founded a company called ChinaSavvy in the early 2000s to ship orders from the West for complicated parts to Chinese factories with something called “Chinese prices”.

At the end of 2018, due to the impact of tariffs, the company’s customers began to question: How long can you move out of China?

Mr. Devereux is investigating many factories in Vietnam, sometimes 6 factories a day, and changed the company name to “Omnidex” to better fit the reality.

Moving production to McLanahan Corp has many challenges. The pump is made up of about 80 parts and requires precise handling to limit leakage. Mr. Devereux experimented with water by producing many small components at factories near Ho Chi Minh City. Even if this is not easy, Vietnam market director Truong Khac Long, told WSJ.

Mr. Truong Khac Long, director of Omnidex Manufacturing Vietnam.

DuPont powder is also difficult to find because there is not much quality supply in Vietnam. Domestic companies often do not have quality control experts. Engineers from China must move a lot to Vietnam to ensure the quality and quantity of accuracy.

Many leaders decided that large parts production would not be able to move out of China. The pump will be manufactured in two countries and cannot completely avoid tariffs.

In early 2019, Peter Zhao, responsible for managing product imports for Wisconsin-based US electronics company ECM Industries, gave up hope that the trade war would end. He found agents in Southeast Asia on Google and contacted the Vietnamese intermediary company Seditex.

Zhao asked Seditex to find an experienced factory that produces current meters that are being manufactured in China. Seditex could not find a suitable solution. The most suitable company is Viettronics, which relocates its production of TVs and other equipment.

In the office, Viettronics’ R&D specialist studied the model of equipment that Mr. Zhao sent with the conclusion: The company can find a local supplier for plastic and cable covers and can assemble at the factory but with many other important parts, such as integrated circuit boards, they need to be imported.

That’s a big problem for Mr. Zhao because he has been accustomed to buying everything in China since manufacturing here 10 years ago.

An industrial park in Binh Duong.

Zhao was not concerned with design or component search issues, but only concerned about the final product and price. He only interacts with major suppliers without regard to the units below to maintain lean operations.

Switching to manufacturing in Vietnam, he said the company would have to develop transnational supply chains from the beginning, find factories in China for components that Vietnam could not produce, and learn about the quality of products. quality, price and compatibility. He did not have enough resources and budget for that goal.

Still, he is thinking of assembling equipment in Vietnam with the worry that if problems arise, factories in Vietnam and China will blame each other.

“It is risky. It may also be ineffective and incur very high costs, ”he commented.

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Source : TechTalk