I talked with a client who was working in a Taiwanese factory established in Guangdong in the early 1990s. It had been set up recently — production was previously done in Taiwan.
Their facility was making products that require metal, rubber, plastic, and textile parts. At the very beginning, all these parts were coming in full containers from their old Taiwanese suppliers.
Over a few years, they convinced all their main component suppliers to set up production in South China, in order to cut lead times and costs. They went from 100% imported parts to near 100% locally sourced in 3 to 4 years.
When I look at Vietnam manufacturing these days, I see a number of Taiwan-owned facilities. They are quite well established.
There are several reasons why they came in the last 10-15 years:
- These business people have little loyalty to mainland China. They jumped from Taiwan to China, where they got racketed by the local officials. Another jump and they got to Vietnam.
- They can borrow money easily in Taiwan, for low interest rates.
- They look ahead and prepare for the next 20 years. They had already been playing this game for a while when Chinese companies started exporting directly in the 1980s.
Why are Taiwanese companies deciding on the future of Vietnam manufacturing?
Because they are setting up the supply chain there. They are not just doing final assembly.
No doubt, they started by purchasing all components and materials from China or Taiwan. And, over time they are setting up their whole supply chain locally. That makes a lot of sense.
I wrote an article about transferring production from China to Vietnam two weeks ago and got a number of comments. Here are a few conclusions I drew from this:
- Aside from a few specific product categories, it is still difficult to buy consumer goods or technical parts from Vietnam in the same conditions (price, quality, lead times, MOQs) as in China.
- If your production volumes are large (in the millions of USD per product line), it can be sufficient to negotiate a good deal with a manufacturer based there, or even justify setting up a new factory. That was the context of my article about production transfer.
- Don’t be fooled by the lower wages. Vietnam is the size of a Chinese province, and the labor pool is limited. Wages will go up fast. A Vietnam move is often a “spread my sourcing risks” move more than a “we can save 5% on costs” opportunity.
- Most components/materials still have to be purchased from mainland China. But I guess the supply chain in Ho Chi Minh City will be deeper in 5 years’ time. It might never be equivalent to the Shenzhen/Dongguan area, where nearly anything across many categories can be found, but it will be better.
- If you are a large player, you can work with Taiwan-owned factories, or emulate their approach. Having good suppliers close by is a recipe for great performance.
What have you seen?