Can Vietnam Replace China as the Manufacturing and Sourcing Superpower?

Explore the complex rivalry between Vietnam and China in manufacturing and sourcing and examine the factors preventing Vietnam's rise to the top.
April 19, 2023

The question of whether Vietnam can replace China as a manufacturing and sourcing hub has grown more urgent in recent years. With lower labor costs and an emerging manufacturing sector, Vietnam seems poised to challenge China's dominance. However, it hasn't quite managed to do so. In this article, we explore the complexities of manufacturing in Vietnam vs. China and examine the factors that have shaped their rivalry.

China Vs. Vietnam in Manufacturing: Exploring the Historical Context

We must first delve into their economic histories to understand the current state of manufacturing and sourcing in China and Vietnam. How have these two nations evolved in manufacturing, and what factors have contributed to their successes and challenges?

China's manufacturing prowess is rooted in its economic liberalization policies that began in the late 1970s. A combination of foreign investment, technology transfers, and government support has propelled the country to become the "world's factory." On the other hand, following the Doi Moi economic reforms in the late 1980s, Vietnam began its journey toward industrialization and global integration. It has since attracted foreign investment and experienced rapid economic growth.

China's entry into the World Trade Organization in 2001 further solidified its position as a global manufacturing leader, while Vietnam's accession to the World Trade Organization in 2007 marked a significant milestone in its integration into the global economy. However, it has yet to reach the same level of industrial development as China.

According to the World Bank, as of 2021, China's GDP was approximately USD 17.7 trillion, while Vietnam's was around USD 366 billion. This vast difference highlights the disparity in the overall scale of their economies and manufacturing capabilities.

An aerial view of Shanghai's cityscape, representing China's thriving urban development and its dominance in manufacturing and sourcing.

Size Matters: China's Unmatched Industrial Scale

One of the primary reasons Vietnam has yet to be able to replace China as a manufacturing powerhouse is the sheer difference in scale and scope of their respective industries.

China's manufacturing sector is immense, with a total output valued at USD 4,865.83 billion in 2021, accounting for approximately 30% of global manufacturing output. It boasts various industries, from electronics and textiles to automobiles and heavy machinery. Furthermore, it has an extensive and well-developed supply chain network critical to its global manufacturing dominance.

While growing rapidly, Vietnam's manufacturing sector is still relatively limited in size and scope. Its manufacturing output for 2021 was USD 90.13 billion. Although Vietnam is making strides in developing its electronics manufacturing, it still lacks the comprehensive supply chain network that China has spent decades cultivating.

Skilled Workforce: The Human Factor in Manufacturing Success

The availability of skilled labor is another crucial factor when comparing China and Vietnam. It directly impacts a country's ability to produce high-quality, technologically advanced goods and technologies.

China's workforce is not only vast but also highly skilled. Decades of investment in education and workforce training have led to a large talent pool capable of producing sophisticated goods and advanced technologies. This skilled workforce has been a significant driving force behind China's manufacturing success.

Vietnam's labor force is growing, but it lacks the level of skill and expertise found in China. While it has a competitive edge in low-skilled, labor-intensive industries, it struggles to compete with China regarding advanced manufacturing and technology. The Vietnamese government and manufacturing sectors recognize this gap and have invested in education and training programs to close it. However, it will take time for these efforts to bear fruit.

An aerial view of Shanghai's cityscape, representing China's thriving urban development and its dominance in manufacturing and sourcing.

Relocation Costs: The Financial Hurdle of Moving from China to Vietnam

The substantial relocation cost is a significant barrier to shifting manufacturing operations from China to Vietnam. Companies must carefully weigh the financial implications of moving their operations before leaping.

Disentangling from China's Supply Chain Network

China's extensive and well-established supply chain network has become deeply ingrained in the operations of many companies. The cost of breaking away from this network and establishing new connections in Vietnam can be prohibitive. Companies must consider the expense of finding new suppliers, negotiating contracts, and adjusting their logistical arrangements to accommodate the move.

Investment in factories and Facilities

When relocating manufacturing facilities, companies must account for the significant capital investment required to set up new production sites in Vietnam. This may include the cost of acquiring land, constructing facilities, and installing necessary equipment and machinery. Companies may also need to invest in improving local infrastructure to ensure efficient transportation and logistics.

Training and Workforce Development

Companies must consider the cost of training and developing the workforce in Vietnam to meet their specific manufacturing needs. This may involve investing in education and skills training programs to ensure a smooth transition and maintain productivity. Additionally, companies may need to provide incentives to attract skilled workers or relocate existing employees from China to Vietnam.

Regulatory and Compliance Costs

Relocating manufacturing operations may involve navigating new regulatory and compliance requirements in Vietnam. Companies may incur additional costs to ensure compliance with local labor laws, environmental regulations, and tax policies. The process of obtaining permits and licenses can also be time-consuming and costly.

Potential Loss of Market Share and Customer Confidence

Finally, companies must weigh the potential risks of relocating their manufacturing base, such as losing market share and customer confidence. The transition period may result in temporary disruptions to production, which could impact product availability, quality, and lead times, leaving long-term consequences on a company's reputation and customer relationships, ultimately affecting its bottom line.

An image of Ho Chi Minh City in Vietnam, showcasing its rapid development and the nation's emerging potential as a contender in the manufacturing and sourcing sector.

Infrastructure and Logistics: The Backbone of Manufacturing

Another critical aspect of the China vs. Vietnam manufacturing and sourcing debate revolves around infrastructure and logistics. A country's ability to manufacture goods is only as strong as its capacity to transport them efficiently.

China's vast transportation infrastructure, including roads, railways, ports, and airports, is a testament to its commitment to connectivity. The country's efficient logistical capabilities enable it to transport goods easily globally, further solidifying its position as the world's manufacturing hub.

Vietnam's infrastructure has improved in recent years, but it still has a long way to go to match China's level of connectivity. Its port facilities and transportation network are not yet on par with its larger neighbor's, which can result in the slower and less efficient movement of goods.

Conclusion: Vietnam's Uphill Battle to Replace China as a Manufacturing and Sourcing Hub

The debate surrounding Vietnam vs. China manufacturing has revealed the intricacies of their rivalry. While Vietnam's lower labor costs and proactive government policies make it an attractive destination, it has yet to replace China as the go-to hub for manufacturing and sourcing. Factors such as infrastructure, skilled labor, and relocation costs contribute to China maintaining its stronghold.

As Vietnam continues to invest in its manufacturing sector, it may narrow the gap with China over time. However, the question of whether it can truly dethrone China remains unanswered. The evolving competition between these two Asian powerhouses will undoubtedly shape the future of global manufacturing and sourcing.

reach us out

Thank you!
Your submission has been received! We will contact you shortly!
Oops! Something went wrong while submitting the form.

Join our newsletter!

Fashion community: join our creative professionals network
Thank you!
Oops! Something went wrong