Long overshadowed by its giant neighbor, China, Vietnam is becoming a manufacturing hot spot in its own right. In fact, this small Southeast Asian country is one of the fastest growing locations for manufacturing in the world. According to Vietnam's General Statistics Office, foreign direct investment in that sector rose 13.3 percent from 2008 to 2009 and 19.7 percent from 2009 to 2010.
With labor and production costs rising in China and companies wanting to spread their supply chain risk rather than depend on a single manufacturing source, Vietnam has successfully positioned itself as a nearby, lower-cost alternative. Any business that shifts production to Vietnam, however, should be prepared for some challenges in such areas as transportation infrastructure and relationships with local companies and government agencies.
As the owner of SCM Vietnam, a supply chain and logistics consulting company, and chief editor of the magazine Vietnam Supply Chain Insight, Kurt Binh understands those challenges. In a recent interview with Editor James Cooke, the enterprising and energetic Binh offered his insights and advice on what foreign companies should do to succeed in his country.
Have you seen increased interest by foreign companies in opening manufacturing operations in Vietnam in the past year?
Yes, Vietnam is another "rising dragon" in Asia; it is really a most attractive country for foreign direct investment. Since Vietnam increasingly is an integral part of the ASEAN (Association of Southeast Asian Nations) market rather than a single market, manufacturing companies investing in Vietnam should really consider themselves to be taking part in the ASEAN market.
Moving manufacturing operations to Vietnam is one of the smart strategies that many foreign companies adopted to minimize a high-risk dependence on China. [Some of the] big players we see in Vietnam include Intel, Samsung, Coca-Cola, Canon, Formosa, Pepsi, Nestlé, Procter & Gamble, Unilever, and Honda.
The most interesting and booming sectors in Vietnam are real estate, retail and distribution, high-tech, heavy industry, and processing.
If a foreign company wanted to begin manufacturing in Vietnam, should it contract with a local company or form its own operation? What are the pros and cons of each approach?
There is no optimal solution that works in each case. We see many international retailers sourcing products in Vietnam. Wal-Mart, Kmart, Nike, and Gap already have Vietnam-based sourcing representatives. But we also have seen many foreign high-tech companies establish their own production facilities in Vietnam. The best advice, then, is: If you want to set up labor-intensive manufacturing, you should partner with local companies, but for capital and technology-intensive businesses, it's better to set up your own operations in Vietnam.
Name: Kurt Binh
Title: Owner and vice director
Organization: SCM Vietnam, a supply chain and logistics consulting company
What are some of the supply chain challenges companies will encounter when establishing a manufacturing operation in Vietnam?
There are many challenges for foreign companies that want to set up a production operation in Vietnam. The first and most important thing is to understand how to think globally and act locally in Vietnam. Vietnam's culture is somewhat different from Western countries; I have seen many companies face culture shocks when they set up manufacturing in Vietnam. My advice is to try to utilize local experts to help during implementation.
The second important challenge is labor skill and expertise. If you want to build high-tech products and operate sophisticated facilities, then you can face a shortage of well-skilled workers. Intel is an example of [a company that encountered this problem]. When it started a chip factory in Vietnam, Intel tried to overcome the challenges by partnering with a Vietnamese technical university to develop well-trained and skilled workers. Anyway, Vietnam's population is very young and has the capability to learn fast, so a company can quickly fill up any "hole."
The third challenge is the legal and regulatory environment. Although Vietnam joined the World Trade Organization in 2007, the legal environment is still in development. This means that a company can face a sudden change in laws and regulations, especially in the import-export area.
The fourth challenge is logistics infrastructure. Over the years, Vietnam has spent a large amount of ODA (Official Development Assistance) in upgrading its logistics infrastructure, but the infrastructure still does not meet the needs of economic growth and foreign investment.
Vietnam is still many years behind China's infrastructure level. Power blackouts, traffic jams, and port congestion are common bottlenecks that have recently been seen in Vietnam. But Vietnam is still an attractive country for investment because of its high number of young workers, advanced telecommunications, increasing transparency in law and economic policy (thanks especially to electronic sharing of government information), and well-educated students.
Are there third-party logistics companies (3PLs) that can assist foreign companies with distribution in Vietnam?
Vietnam is increasingly deregulating its transport and logistics industry. Ten years ago, there were few foreign logistics and shipping companies with official operations in Vietnam. But now a number of them have set up a long-term business in Vietnam in the form of either a joint venture or 100-percent foreign-owned business.
There are a lot of foreign 3PLs that have invested in Vietnam. You can see the presence of 25 of the world's biggest 3PLs, including such companies as DHL, Kuehne + Nagel, Damco, APL Logistics, FedEx, DB Schenker, and Agility. These companies have strong positions in Vietnam, especially in container shipping, freight forwarding, warehousing, and distribution as well as express services.
Recently I observed that many international 3PLs have invested many millions of U.S. dollars in first-class and multipurpose warehouses and distribution centers in parallel with an expansion of their local presence.
But besides that, you also see the significant rise of local 3PLs with strong ambitions, such as Sai Gon New Port, ICD Song Than, ICD Long Binh, Sotrans, and ITL-Kepple. They have strong investments in service capability, facilities, and management. Some of them have deployed complicated information technology solutions, such as warehouse management systems and transportation management systems, which can provide better visibility and decision support for customers.
What is the best transportation option—truck, rail, or barge—for moving products from the factory to a port for export?
It depends on the location of your manufacturing sites, but most moves are done by trucking. This is due to the limited convenience of barge and rail services. The rail mode only provides transportation between the North and South, while barge transportation only serves the Mekong Delta.
In Vietnam we have strong economic clusters located in the South in such places as Ho Chi Minh City, Dong Nai, and Binh Duong, and in such Northern places as Ha Noi, Hai Phong, Bac Ninh, and Hai Duong. Those clusters account for the majority of foreign investment.
Does the government set transportation rates?
In Vietnam, the transportation rates are controlled by the market and not by the government. So shippers can easily deal with providers to get the best rate to meet their logistics requirements. Besides that, we also have the Vietnam Shipper Council [a government agency], which can help shippers to deal with a transport provider on rate stabilization.
Are there state agencies that assist foreign companies that want to initiate production in Vietnam?
There are three sources of information and help whenever you want to set up production in Vietnam. The first and official source is FIA (Foreign Investment Agency). This organization belongs to the Ministry of Planning and Investment. You can find more information on their official website, www.fia.mpi.gov.vn. Under the FIA, we have many local agencies that can help foreign companies that want to invest in their locations.
The second source—a very important one for foreign companies—is Amcham, or the American Chamber of Commerce, and Eurocham, the European Chamber of Commerce. The organizations in Vietnam are very dynamic and widely connected with foreign and local companies. So they can help foreign companies with up-to-date and useful information on Vietnam's investment climate.
The third source is private, local investment consulting firms. These companies have close relationships with government agencies and have in-depth expertise in investment setup and implementation.