Economists are debating whether China will be able to lead the world economy out of the downturn. For individual companies that have already invested in China, the question is whether to stick around or go somewhere cheaper. Two Shanghai-based American consultants just gave Vietnam a close look.
Surprisingly, Vietnam is not as cheap as we think. Francis Bassolino, Shanghai-based partner of Alaris Consulting pointed out in an article that the productivity gap between Chinese and Vietnamese workers is so large that Vietnam's unit labor costs do not fall far below China's, despite the significant wage differential. In other words, don't just look at how much you pay; focus on how much you get for what you pay.Steve Ganster -- senior vice president, Asia, for Tompkins Associates -- found similar trends. According to a media report, Ganster analyzed the costs of sourcing in China and Vietnam and concluded that with the exception of value-added tax savings, there is no appreciable benefit to switch from China to Vietnam.Meantime, Vietnam's infrastructure is incomparable to China's. Bassolino made a very convincing comparison: Shanghai alone supports more than five times the shipping volume of all of Vietnam's seaports combined. Of course, Vietnam also lacks the tremendous domestic market potential China offers, a bigger prize that intrigues all foreign companies."At least another decade will pass before Southeast Asia can become a viable, large-scale alternative to China," Bassolino stated. Ganster echoed, saying "China is unparalleled in its economic scale and size for both exports and domestic demand. None of the countries we've looked at will be able to match China's will and ability to continue to make offshoring an attractive sourcing option."I don't want to promote a China-exclusive business attitude. Good margin justifies investment in any corner of the world. But it seems that China remains a top choice for foreign investors.Most importantly, I'd like to highlight a point both Bassolino and Ganster mentioned. There's plenty of room to improve margin in China. Bassolino put it this way: "Profit-optimizing strategies have not run dry -- far from it ... the majority of foreign manufacturers neglect to fully apply international best practices such as integrated planning systems, inventory optimization processes and lean techniques."SEARCH
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China's alternatives
COMMENTS (3)
Conan :
With regard to the "future" business attractiveness of Vietnam as compared to China.
The issues positive and negative in regard to China are now increasingly well known. The good and "challenging" experiences of that country have been greatly published and discussed. That said, Vietnam is potentially the next emerging (little) giant of off-shore production in my opinion.
The Vietnamese are a dynamic and energentic people, increasingly well educated and as the infrastructure improves will be hungry for the growth that manufacturing jobs can bring. The barrier for the time being will be the centralized communist government who like China's gov't will take steps to insure their influence and power in that future growth.
Like China's experience in the past...those companies that take the early steps will benefit the most in the coming shift of manufacturing toward Vietnam.
Nina Ying Sun 
:
:
Conan, thanks much for chiming in!
It's interesting that you mentioned the fact that both China and Vietnam have centralized communist governments. Usually we hear the "Communist China" term all the time, but not so much about the communist nature of Vietnam.
I don't think anyone can deny that the Chinese government, regardless of its ideology and flaws, has put the nation in the right track of economic growth and created the world's fastest-growing and third largest economy. So I wonder why you think the Vietnamese government is a barrier to growth and how is that "Like" China's government?
Posted by Nina Ying Sun |
January 19, 2009 12:18 PM
Bharath Srinivasan:
For Vietnam to get anywhere close to China in terms of manufacturing, lot of investment is required. In the current scenario, that is going to take a long time. Global aid agencies are busy bailing out countries with very little focus on development and private investment is highly unlikely.
From what I have heard, Vietnam labor is unionized and many exporters face the risk of stoppage of work. This is not entirely labor's fault as the Government cannot manage inflation (23% average in 2008). This would require frequent wage negotiations - last thing an exporter would want.
Until the World settles back into the old progessing ways which could take over 4 to 5 years, China will still retain the advantages in terms of inrastructure, productivity adjusted labor cost, worker discipline & investor friendly government not to mention the Domestic Market.