Is Vietnam garment manufacturing cheaper than China?

Often apparel sourcing managers get their first costing from Vietnam and they are surprised. “I thought Vietnam was the next rising star! Minimum wage in Vietnam is $US 170/month. China’s minimum wage is $US 350 / month. How come the Vietnam price is 1.5x greater than my China price?” There are three reasons: supply and demand, experience and fabric cost.

My name is Chris. I am an American who has been living in Vietnam since 2008. I work for a sewing factory as the marketing manager and I guide start ups investigating Vietnam. More and more people are contacting me and they all say the same thing. China is not working for us anymore; we need to find new factories in Vietnam. They expect Vietnam’s famous high quality at a cheaper price than their China price. 

There is a low supply of Vietnamese factories with experience and capacity. There is a high demand for capacity – orders normally placed in China are looking for a new home. The problem is that Vietnam is small compared to China. In an article written by Dr. Sheng Lu he shows that, in 2017 China exported to the USA $US27 billion worth of garments whereas Vietnam only exported $US11.5.  China has 10 million people working in the garment production business.  Vietnam has 2.6 million. Vietnam is opening new factories every month, but will never be able to absorb all the orders running out of China due to the relative size of both countries.

New factories are popping up like mushrooms in Vietnam. They have great websites and will say yes to you without blinking an eye.  But do they have the experience and sourcing abilities to deliver quality on time?  Many of them don’t. Proceed with caution.

The supply and demand imbalance means that Vietnamese factories are not motivated to offer high quality at low prices. They offer high quality at high prices. Why should they go the extra mile to offer a price cheaper than China when they have enough customers willing to pay their China +1 price?

In the world, there is what I call the best-world-price (BWP) for every garment. The BWP is not just about price. The BWP takes into account customer service, payment terms, on-time delivery, quality control and factory certifications. I believe that China still offers the BWP because they are experienced, they have economies of scale and they produce everything in their own country. 

The challenge for apparel sourcing managers today is to stay in China and find innovative factories that do offer the BWP.  They still exist, they are just fewer. It is harder to get the BWP due to China’s transition from low labor cost manufacturing to high tech manufacturing. It is harder to get the BWP in China due to the Chinese government environmental crackdown.  It is harder to hire the best Chinese factories because they are producing more and more for domestic consumers – not for export.  It is harder to get the BWP in China because of rising labor cost in the legacy manufacturing cities like Guangzhou, Shaoxing and Huzhou.  But still, China has the BWP price.

The second reason the initial Vietnam price will be higher than a China price is that Chinese factories have more experience in production processes and costing accuracy. 

The Chinese have been mastering the art of garment production since the 1980s. Vietnam garment industry came of age when they joined the WTO in 2007. The Chinese have just been at it a longer and figured out all the tricks to maximize production efficiency. Efficiency comes down to how much time it takes to produce one garment with no mistakes. Whether you measure it by garments by line per day or standard apparel minutes. The Chinese are faster.

Vietnamese factories have lower productivity because many of them started off as state owned enterprises and operate very conservatively. The motivation, discipline and training to maximize productivity is not part of the legacy socialist management systems. The same is true for China but China is 30 years ahead of Vietnam in their evolution away from socialist management style.

Vietnam is learning and applying industrial engineering practices to improve production efficiency. They are using sewing templates. They are using folding boards. They are buying automated machines. They are using longer cutting tables. They are using standard allowed minutes to calculate costs. They are implementing software solutions like Intellocut and Intellobuy. Industry 4.0 is just around the corner. In due time, Vietnam factories will become as productive as Chinese factories and the Vietnam price will become competitive - in line with its wage advantage. 

Talking about costing accuracy, when quota restrictions still existed in Vietnam, past performance pricing was used to determine quota allocations and set pricing. Quota restrictions no longer apply but the mentality of gauging future pricing based on past performance pricing is common. It will take years for Vietnam to evolve into using more efficient pricing methods as it took China decades to reach where they are today.

Vietnamese factory owners look at their profit and loss statements to gauge the accuracy of their price. If they turn a profit for the month or year then their Vietnam price is right. In a price breakdown, you have fixed costs like fabric, trims and accessories which are easy to determine. The rest of the price components are more difficult to ascertain. Price components like electricity, water, upkeep, labor, government fees and capital investment are not easily broken down as line items in the bill of materials for each garment. Basically, factories are guessing what the non-fixed costs are per garment. They guess on the high side to protect themselves.

The final reason that the initial Vietnam price is higher than your China price is because of fabric. 86% of the garments produced in Vietnam are made from fabric produced in China, Taiwan or Korea. When Chinese buy fabric from Chinese partners, they get sweetheart deals compared to the price Vietnam buyers pay. The price difference gets even bigger when a Vietnam sewing factory buys small quantities through wholesalers. Then there is the added transportation from China to Vietnam. If imported fabric is not re-exported as a sewn garment within 275 days then 10% duty must be paid to the Vietnamese government. Finally, there is the hidden cost of handling defective fabric. If fabric from China is received and 20% defective, who pays for the cost of getting replacement fabric? Fabric sourcing is Vietnam’s Achilles’ heel.

Yes, there are many large fabric producers in Vietnam like Tiong Liong, Huge Bamboo, Hualon and Formosa who can produce quality fabric cheaply. But, they have long term contracts with the Nikes of the world that use the majority of their capacity. What little capacity is left to sell locally is sold at a China +1 price.

It is important to note that when I refer to Vietnamese factories, I am not including factories operated by Chinese, Taiwanese or Koreans. These foreign owned factories in Vietnam offer the BWP because they bring with them decades of industrial engineering experience. They can hit the Walmart price. They typically are fully vertical or have sweet heart deals with fabric suppliers in China. Good luck getting in. Their MOQs usually start with 5,000 pieces per style per color.

So, what can Vietnamese factories do to offer a price lower than the China price. They can source cheaper fabric, improve their efficiency and qualify for free trade agreements.

What can buyers do to get the BWP in Vietnam? Know your China price to have a reference point. Add a bill of materials to your professional tech packs to facilitate breaking down the price of every component. Pro-actively source fabric, trim and accessories on your own to, again, have reference prices. If you feel that the factory is not efficient, then ask why and encourage them use new technologies like automation, fabric cutting software or templates to improve their efficiency. 

If you have a good supplier in China then focus your energy on building that relationship and innovating together with them before investing time and money searching in a new country like Vietnam. It’s not realistic to just fly down to Vietnam, meet some new factories and place orders. Vietnam has its language and cultural barriers that take time to adjust to as in any foreign country. The first price won't be the best price.

There are opportunities in Vietnam and Vietnamese factories are improving every day. If you are dead set on sourcing production in Vietnam then I can introduce you to many factories and you can work with them directly to begin the courtship, start the discovery journey. One thing you can count on is good food, nice weather, friendly people and easy transportation. Learn more from my website: www.vietnaminsider.net or contact me at [email protected].

I will be in Los Angeles to meet buyers on the 9th or 10th of August. Would you like to meet in LA? Or, I will be at the Sourcing at Magic trade show in Las Vegas from August 11th to 15th representing Thai Son S.P sewing factory. They produce men’s, women’s and children’s clothing using circular knitted fabrics. www.thaisonspgarment.comhttps://a.co/eTWx5wdhttps://a.co/eTWx5wdjfsfjsdlfjsdfljdfdsfffr

Is your brand Eco? Do you need help sourcing Eco fabrics? Check out my latest book called books 'Where to buy Eco fabrics: for production in Vietnam.' It's available for pre-order on Amazon. Thanks! Hope to see you in Vietnam!