Shifting your contract manufacturing from China to Vietnam? What you need to know

As global manufacturing trends are shifting away from China, Vietnam has risen as a viable option for contract manufacturing.

The ongoing trade tensions between the U.S. and China along with the rise in labor costs in the latter have driven Original Equipment Manufacturers (OEMs) to look for alternative markets to shift their production. Vietnam with its strategically advantageous geopolitical position has emerged as a leader in terms of economic growth amongst Southeast Asian nations. As a result, many companies that partner with contract manufacturers (CMs) have started exploring Vietnam as a viable option. Thanks to its closer proximity to China, lower labor costs, and government’s proactive steps in protecting Intellectual Property (IP) rights, the country happens to be an ideal location for companies that wish to diversify their supply chains.

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Understanding Contract Manufacturing in Vietnam

It is difficult for many companies, especially in the manufacturing industry, to produce everything under one roof. As a result, such work is outsourced to other companies who have expertise in the given field. Contract manufacturing is a business agreement between the contract manufacturer and any company that needs particular components, parts or productions to be prepared over a certain period of time. It offers a host of advantages from improved manufacturing time, easier market entry to significant cost reduction. 

Government Support for Contract Manufacturing in Vietnam

The Vietnamese government’s support for priority industries addresses three key areas:

  1. The provision of a production site: The government has allocated production sites quite promptly to support new, expansion, or intensive investment projects including ventures concerned with relocating production
  2. Trade promotion support: Fiscal support has been extended for creating and promoting enterprise brand names and refining international quality-management standards through industry associations.  Besides, the Ministry of Industry and Trade’s website encourages enterprises in prioritized industries to introduce their products as well as display them freely at trade fairs, national or local exhibitions.
  1. R&D activities: Financial support is also available for R&D-related activities as central budget allocations have been directed towards:
    1. Ventures in technology transfers including trial production
    2. Fortifying the capability of scientific and technological bodies such as R&D institutions
    3. Conducting research and adapting modern technology or equipment to improve productivity, quality, and lower production costs.

Simultaneously, funding from local-level budgets has been allocated for test/trial production (new products, materials, and auxiliary materials to replace imports) before technology or equipment is utilized in mass production. Moreover, financial aid has also been allocated to manufacturing projects focussing on environmental protection.

Why are Contract Manufacturers moving out of China?

Many U.S. companies have already started reshoring as well as diversifying their supply chains due to a compounded rise in Chinese USD wages, about 15 to 18% per year. The Chinese labor cost/unit of output is now approximately three times what it was in 2000. Furthermore, owing to the one-child policy, the workforce has declined to 3.5 million per year. There is a growing sense of dissatisfaction amongst the workers leading to frequent strikes thereby halting production until the demands are met. On the other hand, labor cost in Vietnam is around 2.73 U.S. dollars per hour whereas manufacturing labor costs in China were estimated to be 5.51 U.S. dollars per hour in the year 2018.

Costs of operations – lowest in Asia

Out of the nine countries in Asia, Vietnam has the second-lowest operating cost, and high logistics development potential, according to VNexpress. As per a report by Singapore-based business transformation consultancy TMX, the monthly minimum operating cost for a manufacturing company in Vietnam is $79,280, in comparison to the leader, Singapore, at $366,561 and second-placed Thailand at $142,344. The report further conveys that Vietnam, along with several other countries like Thailand and the Philippines, offers a large and comparatively economical pool of labor. As a result, costs of operations in Vietnam are the lowest in Asia with a moderately skilled workforce and cost-competitive at the same time.

Vietnam Trade Deals to be Aware of

As Vietnam continues to take bigger leaps toward economic liberalization and integration with the global economy, it has also invested in human as well as physical capital with great earnestness attracting a rising number of foreign investments. The country has further supplemented global liberalization with trade reforms by deregulating and removing unnecessary checks on doing business. Not only that, Vietnam has signed several key trade agreements with over 200 nations, both individually and as part of a greater economic organization. In 1995, Vietnam became a part of the ASEAN free trade area, and in 2007 it joined the WTO, and later signed a free trade agreement with the U.S. 

Some significant trade agreements are as follows:

  • EU-Vietnam Free Trade Agreement (EVFTA)
  • Vietnam & the Trans-Pacific Partnership (CPTPP) 
  • Trans-Pacific Trade Vietnam-UK Free Trade Agreement (UKVFTA)
  • The U.S.-Vietnam Bilateral Trade Agreement (BTA)
  • ASEAN – Regional Free trade agreement (AFTA)

Export Regulations

Since the liberal economic reforms undertaken by Vietnam in the 1990s, there have been innumerable opportunities created for international investment. With the changing times, the country has also become a member of many global trade alliances. In 2020 Vietnam’s exports witnessed a rise of 7%, approximately USD 282.66 billion. Each passing year as more investors head to the country, it is essential for them to familiarise themselves with its export procedures. 

Export duties are imposed mainly on natural resources in Vietnam and can range from 0 to 45% based on the free-on-board (FOB) price. The Trading Law of Vietnam prohibits the export of goods such as arms, antiquities, wood logs, etc. On the other hand, there are some products that require trading companies to get the government’s export permits:

  • According to international treaties signed by Vietnam, products that fall under export control 
  • Industrial explosives, explosive pre-substances, and chemicals
  • Products that fall under export quota as implemented by other countries

Original Source: An In-Depth Look into Import and Export Regulations in Vietnam

Apart from these regulations, before clearing customs trading companies should also maintain quarantine, food safety, quality standards, and regulations of their goods. 

Protecting your Intellectual Property

As e-commerce gains more traction, malpractices like piracy, cybersquatting and counterfeiting have become increasingly notorious and can be of potential threat to investors. Not different from other Asian countries, local counterfeit manufacturers are readily available in the market and have frequent trade exchanges with China. Consequently, Vietnam is leaving no stone unturned to counter such cybersecurity issues.

A foolproof Intellectual Property(IP) protection plan is the need of the hour for relocating businesses. IP protection in Vietnam falls under national jurisprudence so even if the company’s IP is already registered in its home country, it is not valid in Vietnam. To proceed with an enforcement action in the country, local registration is a must.

The table below provides a brief overview of the basic registration costs (excluding services and legal fees) and timelines:

TypeGovernment feesAverage time
PatentUSD 93 (approx.)36–48 months
TrademarkUSD 59 (approx.)15–18 months
Industrial designUSD 79 (approx.)12–15 months
CopyrightUSD 4 to USD 26 (approx.)15 days

Equally advisable is to run a pre-filing search to establish the availability of IP. One can search a national database at the IP Vietnam portal (http://iplib.noip.gov.vn/WebUI/WLogin.php) and access the WIPO IP Portal for international registrations designated in Vietnam.

Seeking advice from a local lawyer with expertise on the topic is highly recommended. Moreover, if an applicant doesn’t reside in Vietnam, appointing a local agent to file an application and work with the IP office of Vietnam is mandatory.

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FAQs

Simply put, it is when a company outsources the manufacturing of parts, and components that the original company cannot manufacture themselves.

Vojtech Zehnalek

Verified by:​

Vojtech Zehnalek, MSc.

Vojtech Zehnalek is the CEO of the Cekindo Vietnam office. He graduated in Economics and International Trade from the University of Economics in Prague, the Czech Republic, and he also earned a Business Degree at the Vlerick Business School in Belgium.