One of the ways our Outsourcing Navigator Council members use our data is to help the manufacturing operations team push back when told by senior management to do something the ops team knows will be catastrophic. Since our data are from real-time industry-specific case studies, and can be tailored to like-kind, scale equivalent analysis, this approach is usually quite compelling, and we have been part of some heroic rescues by the hard-working folks on the front lines for, especially, low to medium volume, complex electronics OEMs.
Recently, journalists and other industry tourists have published cheerful and well-meaning articles about Vietnam, expressing positive surprise at the high level of expertise available in the country. This caused us a quiet ‘uh-oh’ as we anticipated a new round of client complaints about C-Suite pressure to ‘drop everything and move manufacturing to Vietnam’ as labor costs in China escalate.
So let’s look at the facts. Vietnam is a small (size of New Mexico) populous (9th in the world) country that’s listed as ‘lower middle income’ on the World Bank rankings. It has a per capita income of US$1,100. It experienced a boom in FDI in the late 1990s and early 2000s, accelerating during that decade and after joining the WTO in 2007; investment by the electronics industry included Jabil, Foxconn, Sparton, and others who set up EMS facilities, mostly serviced in industrial parks around HoChiMinh City and Hanoi. Its supply chain ecosystem was enhanced when Avnet bought a local distributor in 2009.
However, CBA’s Outsourcing Navigator Council global capacity utilization table shows Vietnam losing favor in each of the last 4 quarters. Why?
One reason is infrastructure. All the things C-Suite executives take for granted that are necessary for the highly complex human activity known as manufacturing: reliable power, internal transportation system; telecommunications, water and sanitation. These support systems are better than they used to be in Vietnam, but add risk to manufacturing there.
The second reason is skilled labor. While there may be 89 million people in Vietnam, the urbanization rate is still only 30%, compared with 47% in China and 72% in Malaysia. Many Vietnamese young people want to be engineers, but you might find nearly as many skilled Vietnamese engineers if you send your work to the Jabil facility in Tempe, Arizona as their facility in HCM City. Sons and daughters of the intellectual cream of South Vietnamese ex-pats escaping the ‘Reeducation’ camps of the 70s and 80s are disproportionately represented in the undergraduate engineering programs across the U.S. These well-educated U.S. citizens return to Vietnam and spend money during Tet, but don’t typically want to return there to work. They’d much rather stay in the U.S. where they can speak their minds about the government of Vietnam without fearing reprisals.
The third reason is Ease of Doing Business. Vietnam is a Communist country, where corruption and inefficiency are a way of life, and the current global economic crisis is exacerbating the problems of a managed economy. The country dropped 8 points on the World Bank’s Ease of Doing Business Ranking, from 90th in 2011 to 98th in 2012, out of 183. Just to put that in perspective, China is ranked at 91, Zambia 84, Belarus is 69, Kazahkstan is 47, and Tunisia comes in at 46. The government is scrambling to initiate economic and fiscal reforms of banks and state owned enterprises (which represent 40% of GDP) as the country’s inflation rate soared to the highest in the region, averaging 18% in 2011.
So, aside from the fact that it’s a great country to visit with beautiful beaches, why would it make sense to move an electronics manufacturing program from any geography to Vietnam, when the risks are high and increasing?
Good question.
Tags: electronics manufacturing, EMS Insider, global outsourcing, Vietnam EMS
Thank you for your summary. Apparently the “C-suite” hasn’t learnt their lesson. Since more than 20 years we follow the migration to so-called LCC and for more than 20 years we see that “cost” are mixed with “price” (similarly as it is the case with “production” and “market”). And in most cases those guys taking a (potential wrong) decision will not remain in the company if the deal turns sour. The unfortunate American “quarter-to-quarter-thinking” doesn’t allow for real long term planning as the (greedy) shareholders are interested not so much in the existence of the company but rather in short-term profits. The advantage of German industry is that most of the production is done by medium-sized companies, preferably in family ownership, internally financed. The disastrous American idea about credit financed buy outs and throwing the burden to the “bought” company is destroying value rather than creating value. (I have to confess that I don’t understand the reasoning of the Republican policy but from the European point of view the economic policy is focussed on the benefit of a few and not on the benefit of many. Insofar some of my comments might be biased but it is the mind-set I was educated in).
And I miss some “common sense” in many of the decisions taken by companies. When Hicks, Muse, Furst & Tate started their buying spree in the pcb-industry under the “Viasystem” umbrella they destroyed many large companies in Europe (ISL/GB, Exacta/GB, Mommers/NL, Zincocelere/I) with combined revenues of about 500 million USD. And the idea of easy and fast money spilled over to other companies which buried another few hundred millions so that about 20 % of the European capacity was taken from the market.
Now coming to Vietnam: I have been based in Asia for 5 ½ years and although during my time there (1982 to 1988) I haven’t been to Vietnam, at least I got a picture of the region.
“common sense”: when the decision for China was taken it was # 1 because of low wages and # 2 of the potential big market. The draw backs were accepted: pollution, working conditions, violation of IP, legal insecurity etc were all accepted because “everything was soooo cheap”. The next destination was India, again with the excuse of the large market, but here bureaucracy, inefficiency and corruption fairly soon has shown the limits. Then we had the other countries of the BRIC group but instead of making a proper survey the lemmings closed their eyes (if XYZ-company is doing it, it MUST be good). As you rightly say in your 3 reasons: the disadvantages are easily overlooked.
The traditional (European) way of looking at sourcing is to be close to the end-markets (to save in logistics, to meet local or regional taste/requirement, to accelerate responsiveness etc). Why produce “cheap” in China and have a costly supply chain, susceptible to all kind of risks (currency, politics, climate and geological disasters).
And the main “good question” is: if there is no production anymore in USA or Europe, how do these “experts” expect the income created to buy all those nice cheap things?
I hope I haven’t tired you with my comments
Michael Gasch
Data4PCB