4 factors to take into account when transferring your production
- As many investors move or diversify their production, choosing another production base can be difficult, especially during a pandemic.
- Investors must therefore do in-depth due diligence and ensure that they are well prepared before relocating their production.
- Vietnam Briefing uses our Business Intelligence services to highlight important factors when choosing to outsource or diversify your manufacturing operations.
Vietnam is experiencing continuous and unprecedented growth compared to other low-cost countries. Foreign investors are increasingly choosing Vietnam as a China plus a destination to combat rising costs in China and other unpredictable scenarios, such as trade shocks.
This strategy has gained new value amid the U.S.-China trade war and, more recently, the COVID-19 outbreak, which has affected both Chinese manufacturers and their supplies in global markets. Such events are not entirely unforeseen but have global fallout. Of course, it makes sense for investors to diversify to better manage their risks.
In this context, foreign investors choose to complement Chinese operations with low-cost inputs from production facilities in alternative markets, such as Vietnam. In addition to its geographical proximity to China, Vietnam offers several advantages to manufacturers who plan to settle outside China.
To make an informed decision, Vietnam Briefing features our Business Intelligence (BI) service, which is an essential part of the decision-making process when considering and planning your move to countries such as Vietnam. While investors are strongly advised to use a professional service for such a decision, we highlight the key factors tailored by our BI services team to help them make an informed decision when planning a move. .
Choose the right location
Countries like Vietnam are not without their share of challenges. In the short term, manufacturers may find the change in production daunting as supply chains have to realign themselves. Companies often struggle to decide what to relocate, how they plan to enter the Vietnamese market, and where they will establish operations in the country.
Choosing a location can be particularly difficult as the factors affecting the choice of location change quickly. Everything from labor costs, logistics, customs practices and infrastructure in emerging markets such as Vietnam is constantly changing.
Location analysis and a strategic site selection plan can have a major impact on the success of a business, affecting production, operations and sales. Businesses need to take steps to ensure they have the right information before committing time and money.
For example, Vietnam enjoys a high degree of regional diversity, and the North, Center and South all have particular competitive advantages for different sectors and types of businesses. In the Ho Chi Minh City region, a potential investor will find a vibrant mall with a deep and diverse supply chain, while the center of the country can offer cost advantages unmatched by neither the North nor the South.
The northern provinces of Vietnam are well positioned as a destination for China + 1 manufacturing and oil and gas, and more recently for high-end manufacturing processes, such as automotive manufacturing.
There are several factors to consider when choosing a location. These include:
- Human resources (HR);
- Operating environment;
- Proximity to suppliers and the customer market;
- Legal and regulatory environment; and
- Operating environment.
These factors will allow the investor to better understand their options in new markets and to make informed decisions about where to invest.
In the current framework, as countries like Vietnam transform into a leading regional industrial hub, companies entering the market must take into account the availability of manpower and implement HR strategies. to find an appropriate workforce and to attract and retain the best talent.
Vietnam has more than 97 million inhabitants spread over 330,000 square kilometers. The country is still predominantly rural, with urban centers only inhabiting 35% of the population. Companies arriving in Vietnam for the first time often ignore regional variations in the labor market and invest in places that are ill-suited to their industry.
Investors who take the time to explore the provinces of Vietnam will find opportunities to manage costs while maintaining productivity. Executives will benefit from understanding the cost differential between different provinces in Vietnam, but the real beneficiaries of a regional approach will be HR departments and hiring managers. Human resources departments that understand what Vietnam has to offer will be in a much better position to recruit, onboard and, if necessary, train new workers.
Southern Vietnam’s labor pools are more diverse than their northern counterparts. Investing in services and a wider range of manufactured products provides access to more niche talent than in the north. Competition and demand for recruitment in the southern provinces is higher than in the northern and central provinces.
The regulatory environment encompasses several factors: political environment, policies, environmental laws, complexity of regulations, etc. Depending on the industry, this can range from administrative procedures, permits, fees, taxes and the time required to set up a factory.
While the gradual improvement in Vietnam’s regulatory environment has made it easier for businesses to operate, Vietnam is not without its challenges. Vietnam’s regulatory regimes and trade law, as well as the overlapping of responsibilities of some ministries, can lead to inconsistent government policies. There are also poor corporate disclosure standards and a lack of financial transparency, which can add to the challenges of due diligence and KYC.
The final consideration that businesses should consider is a competitive analysis comparing multiple countries or geographies. This involves cross-referencing and a comparative analysis of several factors such as:
- Political climate;
- Economic environment;
- Regulatory landscape;
- Cost analysis – this includes utilities, land rental, etc.
- Labor – includes wages, degrees and skill levels; and
- Taxes – Duties, corporate taxes, personal taxes, among others.
Such a thorough examination will allow the investor to make an informed decision when relocating his production to countries like Vietnam. It will also allow the investor to see the strengths and weaknesses of each referenced country. For example, some locations may be ideal production destinations for certain industries due to cost, labor, and regulation, while another location may be better for its political climate, stable government, and its attractive tax regimes.
However, it is important to note that every move or investment project requires a tailor-made approach. Although these are general guidelines, our BI services can advise foreign investors in the decision-making process when considering where and how an investment in Asia should be made.
Vietnam Briefing is produced by Dezan Shira & Associates. The company assists foreign investors across Asia from offices around the world, including Hanoi, Ho Chi Minh City, and Da Nang. Readers can write to [email protected] for further support on doing business in Vietnam.
We also have offices or have alliance partners to help foreign investors in Indonesia, India, Singapore, The Philippines, Malaysia, Thailand, Italy, Germany and the United States, in addition to practices in Bangladesh and Russia.