Market InsightsVietnam

Vietnam Contract Manufacturing: A Complete Guide

By 17 December, 2022June 30th, 2023No Comments

Worker in electronics factory

 

Vietnam has become one of the most sought-after manufacturing destinations in Asia, following the US-China Trade War, recent supply chain disruptions, and for companies to find manufacturing diversification opportunities.

The country is mainly known for its cost-competitiveness and increasing manufacturing capabilities. Yet, improvements are still needed considering infrastructure, efficiency, and transparency. Many have read about Samsung’s and Apple’s vast expansion plans in Vietnam, but how easy is it really to find local contract manufacturers?

In this article, we review where most contract manufacturers are located, what industries they operate in, and the benefits and disadvantages of working with local contract manufacturers.

Vietnam’s Contract Manufacturing Locations

Most contract manufacturers in Vietnam can be found in the North and the South, either in or surrounding the cities of Hanoi and Ho Chi Minh City. Let’s review what sets the cities and regions apart.

Northern Region

Foreign investors early targeted the Northern parts of Vietnam and it’s now considered a primary manufacturing location for electronics, tech products, telecommunication equipment, and heavy industry.

Hanoi and surrounding provinces all benefit from the proximity and shared land border with China, allowing for imports of raw materials and components. Yes, Vietnam still relies much on imports from China, something we will review later in this article.

Bac Giang, Thai Nguyen, Bac Ninh, and Hai Phong are some of the fastest-growing cities and provinces that foreign companies target when relocating the production of the above-mentioned products. Noteworthy, the Northern parts of Vietnam also have a comparatively developed road network, even stretching all the way to Shenzhen in Southern China.

Southern Region

The Southern part of Vietnam is the most economically active with Ho Chi Minh City being the country’s economic center. The city is surrounded by several other provinces and cities that are crucial for manufacturing, including Binh Duong, Long An, and Dong Nai.

Both Northern and Southern Vietnam are strong in textile and clothing manufacturing, but you will find more contract manufacturers of furniture in the South.

Central Region

In Central Vietnam, Da Nang City is a top choice for manufacturing, being the country’s fifth biggest city and a gateway to the Central Region, which is quickly industrializing. The city has changed dramatically in recent years, thanks to a more sustainable approach to urban development. This has allowed the city to sustain economic growth while also maintaining its status as the country’s “most liveable city”. This city is expected to be the most advantageous location in Central Vietnam for manufacturing, although it is still far less appealing than the two most well-known cities in Vietnam, Hanoi, and Ho Chi Minh City. This is owing to several difficulties for contract manufacturing in Da Nang, notably the lack of a major port.

Even if Da Nang relies much on its information technology and manufacturing sector, you’ll not find as many contract manufacturers here. With that said, the central parts of Vietnam should be of interest to companies that source outdoor furniture, with cities like Quy Nhon being major producers of the products.

Vietnam’s Contract Manufacturing Sectors

We have reviewed the different regions in Vietnam and where most contract manufacturers are located. Let’s continue and review in what industries you can find Vietnamese contract manufacturers.

Apparel and textile

Vietnam has long been a large exporter of garments and textiles, with a robust manufacturing base of over 6,000 textile businesses employing millions of people. The textile sector is Vietnam’s second largest in terms of export revenue.

The industry grew much in the late 1990s, and many multinational apparel companies now have a presence in Vietnam. Looking at the supply base, 70% of the factories are in or near Hanoi and Ho Chi Minh City, where the sector began to expand.

If you intend to manufacture or source textiles and apparel in Vietnam, you will almost certainly wind up in one of these areas. Vietnam manufactures a wide range of apparel products, making it a feasible market for several businesses. The most notable products include sportswear and gym clothes, footwear, bags, and backpacks.

Electronics

The country is also a major producer of electronics. Foreign direct investment capital in Vietnam is increasingly shifting to electronics manufacturing industries and electronic motherboard enterprises. The electronics industry accounts for a sizable portion of Vietnam’s manufacturing output and exports.

With multinationals such as Samsung, Foxconn, and Intel present, Vietnam has risen to the top of the electronics manufacturing world in terms of export value during the last decade. Consumer goods hold the lion’s share of electronics manufacturing in Vietnam with the most common products being mobile phones, computers, laptops, and related components.

Most electronic goods are produced in the North (Bac Ninh, Bac Giang, and Hai Phong provinces) as they may employ components from neighboring areas. Two-thirds of foreign electronic manufacturers are estimated to locate their factories in the North, with the remainder seeming to spread between the Central and Southern regions.

Notwithstanding, Vietnam is well-known for its strong capability in midstream activities. Meanwhile, upstream activities, involving the design and production of sub-components, and downstream activities, involving sales and distribution, are primarily done overseas. Local companies concentrate more on the assembly of finished products and sub-assemblies for export.

Benefits of Contract Manufacturing in Vietnam

Even if it’s still not easy to find contract manufacturers, the industry will grow in the coming years and with some notable benefits.

Cost-efficient and plentiful workforce

Vietnam has some of the lowest labor costs in Southeast Asia after Indonesia and Cambodia, which is further bolstered by the country’s young population. This is especially apparent in labor-intensive industries like textiles and apparel, footwear, and electronics. Labor costs in Vietnam are typically one-third to one-half of those in China.

Furthermore, Vietnam’s labor force is large, as the proportion of the Vietnamese population of working age is almost consistently greater than 50%. Many of these workers reside in urban areas and have high literacy rates.

Free trade agreements

Vietnam has various Trade Agreements (FTAs) with different countries, including the EU (EVFTA) and the UK (UK-Vietnam Free Trade Agreement), with the EU ultimately removing 99.2% of all tariffs after 7 years from the entry into force.

Manufacturers gain financial and service benefits ranging from hassle-free customs, expanded export markets, and supply chains to being price competitive with competitors operating in FTA countries. The trade agreement network in Vietnam is among the most advantageous any manufacturer will find at this point in the value chain.

The reformed customs process and several seaports in Vietnam make shipping quick and easy. Sourcing from Vietnam can be made easier with the right bespoke manufacturing partner, who will walk your company through each step and ensure that all paperwork is in place.

Government incentives

For more than two decades, the Vietnamese government had a strong focus on economic growth and development. Thanks to policy changes and the easing of foreign investment restrictions, the country has become more favorable to establish production in recent years.

Disadvantages of Contract Manufacturing in Vietnam

Let’s continue and review some of the disadvantages of working with contract manufacturers in Vietnam.

Less skilled workforce

Although the Vietnamese workforce is abundant at a reasonable cost, it is not as skilled compared to China’s on average, for example. This is particularly the case in advanced manufacturing. In comparison to other Asian countries such as Malaysia, Vietnam’s advanced and high-tech manufacturing skills remain a weakness.

Higher minimum order quantities

Minimum order quantities (MOQs) are typically higher in Vietnam although this varies based on industries and specific products. If your company requires a smaller test run for a new product, manufacturers might struggle to move to lower production runs.

This is because Vietnam is a supply market where low prices and high volumes are prevailing business strategies. Taking clothing manufacturing in Vietnam as an example, most factories will be likely to decline your order if you want to make less than 1,000 items at a reasonable price in Vietnam. The basic reason is that they will incur financial losses.

Our advice is that any factory that accepts low-quantity orders should be approached with caution, especially when considering product quality.

Lack of price competition

Generally, price competition in Vietnam manufacturing can be difficult and frustrating, and there is little opportunity to haggle for the most affordable prices. The first reason is that Vietnam is home to fewer factories than countries like China. This means businesses will be constrained by fewer options, which may imply a lack of price competition.

The second reason is that a substantial number of foreign suppliers have extensive knowledge, depreciated equipment and machinery, and modern production networks with low-cost, high output. At the same time, many domestic firms have inefficient production methods and poor administration, resulting in a low level of price competition.

Considerations before choosing Vietnam for Contract Manufacturing

Even if Vietnam rises in the importance of becoming a manufacturing hub in Asia, it’s comparatively underdeveloped and there are certain shortcomings you should beware of.

Protecting intellectual property (IP)

Due to a lack of technical understanding and human resources to identify all cases of infringement, intellectual property enforcement in Vietnam still suffers from many shortcomings.

Overall, however, Vietnam provides robust intellectual property protection, allowing clients and manufacturers to avoid time-consuming and sometimes devastating IP issues. Furthermore, as a member of the WTO, Vietnam is required to adhere to this organization’s intellectual property regulations, which protect industrial property and other rights.

Patents for industrial designs, for example, are renewed for up to two consecutive five-year periods. Furthermore, Vietnam safeguards semiconductor integrated circuit designs until one of the following conditions is fulfilled:

  • The end of 10 years from the filing date
  • The end of 10 years from the date the designs were first commercially exploited anywhere in the world by the person having the right to registration or his licensee
  • The end of 15 years from the date of creation of the layout designs

Relying heavily on imports from China

Vietnam continues to import a substantial number of raw materials from China. Furthermore, Vietnam is heavily reliant on imports of intermediate goods from China, such as semi-processed products and capital goods, resulting in substantial trade deficits with this country. This reliance also results in other manufacturing-related concerns including longer production lead times and higher logistics costs.

Rather than focusing on raw materials or intermediate products, Vietnam appears to be more appropriate for processing and finalizing commodities before exporting finished goods.

Summary

In Asia, Vietnam is one of the most prominent manufacturing hubs and one of the largest recipients of foreign investment. Vietnam’s contract manufacturing sector has hugely benefited from its proximity to China, especially since many enterprises seek to relocate entirely or partially out of China.

Most contract manufacturers in Vietnam are located in major cities such as Ha Noi, Ho Chi Minh, and Da Nang, or adjacent provinces/cities such as Hai Phong, Dong Nai, Binh Duong, and Vung Tau.

Clothing and textile firms have always been drawn to Vietnam. Furthermore, electronics has emerged as a key industry for contract manufacturing in Vietnam. This can be seen by the shift of several global corporations like Foxconn, Intel, and Samsung into this country.

Contract manufacturing in Vietnam comes with many benefits, including its large labor pool at a low cost, and a wide array of free trade agreements. This is in addition to the stable and supportive Vietnamese authorities.

However, when it comes to manufacturing with advanced technologies, a large portion of Vietnam’s workforce still lacks many required high-level skills. Other drawbacks include high minimum order quantities and a lack of price competition.

In advance of contract manufacturing in Vietnam, some factors should be put into consideration. Two critical ones are the protection of intellectual property and the heavy imports of raw materials and intermediate goods from China to Vietnam.


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