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Supply Chain News: Companies Moving Sourcing Out of China, but Vietnam, other Countries not Ready for Prime Time


Vietnam is Practically Sold Out of Capacity, but Finding Component Sources is Major Challenges

Aug. 28, 2019
SCDigest Editorial Staff

To say that global supply chains are currently in flux is putting it mildly.

The tariff wars and other factors such as geopolitical and intellectual property risk are causing many companies to rethink their China sourcing strategies.

Supply Chain Digest Says...

Ever though wages in China are higher than in these and other low cost countries, the move away from China might actually lead to higher costs.

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But it can be very difficult to make a switch, whether that's back to the US or – it appears more likely – to another low cost country, probably also in Asia.

Tech companies are especially challenged, as their supply chains are tightly intertwined with Chinese component makers. In some cases, there are simply no alternative parts suppliers outside of China.

And the process of re-engineering supply chains to work outside China can be costly and complex – and risk a loss of sales during the transition, which could take years.

And even if all that can be managed there other problems, such as capacity and scalability in Asian alternatives to Chinese sourcing.

Vietnam, for example, has already benefitted enormously from work being moved there from China – but has absorbed about as much as it can handle as a result.

Spencer Fung, CEO of giant trading company Hong Kong-based LI & Fung, said recently that Vietnam for now is effectively sold out in terms of taking on new manufacturing work. And Vietnam is years behind China in terms of overall infrastructure, and supply chain maturity.

Case in point: Industrial pump manufacturer McLanahan Corp., as reported in the Wall Street Journal, which has shifted some production to Vietnam through a sourcing firm called Omnidex. However, out of more than 80 parts in one pump it makes, suppliers have only been able to begin producing 20 of the parts because all new molds must be created, a time consuming process.

"You can't just shift your business to Vietnam and expect to find what you're looking for," an Omnidex manager said.

Labor in Vietnam is also said to be extremely tight.

(See More Below)





China has been losing share of Asian exports to the US, down about 9 percentage points over the past six years. Vietnam has gained the most of any country from China's lost share, as shown in the chart below.

Source: AT Kearney


The simple fact is it will be years before this Southeast Asian nations and other aspiring manufacturing destinations are ready to replace China's current position as the so-called "factory to the world."

New supply bases take years to develop. Vietnam still has cheap labor, but its 100-million population is small compared with China's 1.3 billion. Roads and ports are struggling to keep up.

So if not Vietnam, where?

"The question everyone is asking is: 'Where should we go?' " Giang Le, a Singapore-based analyst for strategic consulting firm Control Risks, told the Journal. "The answer is not obvious."

India, the Philippines, Mexico and Egypt are all in the mix, but each has issues.

And ever though wages in China are higher than in these and other low cost countries, the move away from China might actually lead to higher costs.


China evolved such that suppliers and assemblers were in close proximity to each other. That kept cycle times low and created supply chain efficiencies.

Moving out of China will lead to more disconnected supply chain operations, which could lead to inefficiencies, increase cycle times, and expose companies to multiple tax and labor rules across countries.

Another challenge: In China, US companies can often deal with the final assembly or contract manufacturers alone, and let those firms find all the suppliers underneath that together meet a price point and quality requirements.

Not so in most other countries such as Vietnam, where US companies may have to put together the whole supply chain themselves.

So where does it go from here? Perhaps the US and China will in fact agree to a trade pact, allowing some companies to stick with a China strategy or given them more time to set up other sources. Then again, maybe the tariff war drags on.

Electronic supplies maker ECM recently looked to some move sourcing from China to Vietnam, but ultimately decided it would still have to source some of its components from China and ship them to Vietnam to marry with locally produced items.

"It's risky," an ECM manager said of the strategy. "It may not work, and the costs may be too high."

Do you think the move away from China will continue? Why or why not? To where? Let us know your thoughts at the Feedback section below.


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