Challenges in moving to Vietnam

Certain factors—which also apply to other developing economies in Southeast Asia—put Vietnam as a “China Alternative” in the short run into question. These potentially worrisome factors include the unskilled nature of its workers, lack of robust infrastructure and developed supply chain, and economic uncertainties. These elements create an uncertain investment climate and can make foreign companies’ operations in Vietnam less smooth than they may have hoped.

Unskilled labor
Vietnam faces challenges in productivity and quality, where China still has the comparative advantage. The quality of labor is important for a foreign country’s production in the country, since ease of management and possible retraining will affect production efficiency. Though wage increases have made Chinese workers less competitive, they still retain higher skills and productivity, which could sustain their labor demand.

The aforementioned Economist article that doubted whether Vietnam would really become the “next China” focused on the fact that the country is also not immune to challenges such as labor instability and labor quality.

Infrastructure and supply chain
Vietnam’s infrastructure can be a hindrance to investment, affecting the transport and smooth running of operations. Last year, Vietnamese Prime Minister Nguyen Tan Dung acknowledged the infrastructure challenges: “The Vietnamese government is well aware of difficulties in the investment climate, first of all infrastructure like roads, ports and energy.”

Though the Vietnamese government has pushed for infrastructure improvements, relatively speaking, China appears to have the upper hand in this area.

Gianfranco Lanci, the chief executive of computer company Acer, has noted that Vietnam remains behind China when it comes to operations and cited this as a major factor in his choosing not to shift production to Vietnam.

“There is no substitute for China’s supply chain. Other countries (such as Vietnam) are quite a way behind,” Lanci said.

Economic uncertainties
Since Vietnam is still in transition to accommodate more market forces, there are many development challenges such as confusing and nontransparent procedures (regulatory and financial) and slow issues of investment licenses. Some of the other economic issues include high inflation and its budget deficit that could add to further economic uncertainty.

So while some see rising costs across China as a sign that the country’s days as the “factory of the world” are numbered, it would be wrong to completely dismiss all the advantages that come from an experienced manufacturing market. It may no longer be the cheapest manufacturing destination in Asia, but China still offers solid infrastructure, strong supply networks and skilled labor all at a reasonable price.

Below is a terrific graphic from The Wall Street Journal looking at the key pros and cons of China and Vietnam as garment manufacturing destinations (with India thrown in for good measure).

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