If Your Supplier Moves to Vietnam for Cheap Labor, Don’t Follow Them Blindly

Friday, April 18, 2008 20:55

There has been a lot of talk lately about China’s inability to maintain its role as the world’s factory floor. Costs across the board are higher according to some, and it is just too much for them to handle… they are now looking at Cambodia, Laos, and Vietnam.

CNN in fact just profiled one such factory owner.

Based in Dongguan, a bicycle helmet manufacturer who supplies Wal-Mart and others is feeling the pinch. the recent labor laws have increased his costs, and he is now considering moving half of the lines from his 17 factories around China to Cambodia, Laos, and Vietnam.

What I found most interesting about the report is that it showed the factory owner as a bit of a victim. That because of the new laws, inflation, and a couple of other things that “all came together” he was no longer able to make a profit from China anymore…

For me, this is simply another case of how this situation needs to be reframed, and what I found interesting about this report was that they were more concerned with the conditions of the owner than the workers that the law was supposed to protect.

Now, why is all this relevant?

Where this becomes relevant, and important, is that as these factories move to new regions simply to gain access to cheaper labor, those firms who follow them are implying that (1) firms are complicit in exploiting developing countries for corporate profit and (2) that even with all the promises and PR, companies are not really willing to invest in a community.

Now, I am anticipating a bit of a backlash on this, but hear me out.

For years, there have been stories of firms who have found the fountain of cheap labor in China. Some have done so paying the market rate, and some have done so by exploiting the market.

Regardless of the specific cases, there has been a lot of progress in China and where I am getting a bit hot under the collar is that these firms are only in business because they exploit the conditions found (labor and environment) in developing nations, and that their profit is simply coming from the margins that cutting corners provides.

It is not as if by moving to Vietnam firms are going to save large margins on raw materials. metals are metals, plastics are plastics…

So, a challenge of sorts. If your supplier sends you a forwarding address, do a double take. don’t follow them blindly (like some said you did to China).. and do your homework before making the move with them. This is not a game of hide and seek for the lowest costs. There are much larger things at play, and eventually consumers will catch on.

Oh – if this ethic argument doesn’t convince you, then perhaps you should consider the current regulatory hurdles, Vietnam’s own labor woes, and that there is a huge gap in logistics capabilities awaiting you… all increased costs that are not traditionally calculable through ABC costing accounting

Both comments and pings are currently closed.

9 Responses to “If Your Supplier Moves to Vietnam for Cheap Labor, Don’t Follow Them Blindly”

  1. Chris Wheeler says:

    April 21st, 2008 at 7:26 pm

    Mr. Brubaker, your argument seems to be that companies should not move operations to low wage countries just because their costs are going up in the country where they are currently producing.

    If manufacturers had followed that course, they would not have moved operations off-shore to China in the first place. Literally millions of jobs have been moved to China because of straightforward labor arbitrage; taking advantage of labor rates that are a small fraction of US rates. Now that process is being applied to China, only this time the low cost sites are Vietnam and Cambodia.

    I suspect that when livelihoods were lost and careers cut short by off-shoring, your advice to the individuals effected was “This process is inevitable. Adapt or die.” Now the shoe is on the other foot, and you claim it wouldn’t be ethical to pull investment out of China?

    Maybe you should start learning Vietnamese.

  2. Rich says:

    April 21st, 2008 at 8:01 pm

    Chris.

    to be honest, when I wrote this post, I expected a bit of push back and your points are well taken.. but there are a few things that I would clarify/ expand on in my defense

    1) People did not move to China solely to arbitrage labor costs. Moves were made to get closer to raw materials, moves were made because of 17% VAT rebates, moves were made because of free land and cheap loans, moves were made because firms believed that by moving to China they would be given access to the 1.5 billion people

    2) It is not that one shouldn’t follow suppliers moving to Vietnam, it is that they should not follow them blindly. the entire post is not to serve as a discouragement from following suppliers to Vietnam, it is asking that they look more closely at those who move vs. those who stay, and to make smart decisions.

    3) I have no problem with firms who are looking to save cost, but continually moving once labor costs change is not only bad ethics…. it is a sign that there are much bigger problems. The ethics of exploiting labor aside, I am pretty comfortable in saying that suppliers who do exploit labor are much more likely to use lead paint, are much more likely to ship empty boxes, and are much more likely to keep execs awake at night. It isn’t just about ethics, it is about good business,

    4) As for advising clients, and readers, I think I have always maintained a fairly balanced perspective on China. I took off the blinders a long time ago in China, and have argued that a large number of firms who did move here were better off at home once they factored in all the costs. Thinking China is a great source of cheap labor is a common mistake, and there are firms who did little more analysis than that, and now their businesses are weaker today than if they had stayed at home. There has been a lot of hype surrounding China for a long time, and I have done a fair amount of writing on that.

    5) I don’t see any reason for myself to learn Vietnamese. There are more than enough opportunities for me and my clients in China still, and I am fully invested here. Those who want to continually chase cheap labor will do so, but those who are interested in doing good / profitable business in China know where I will be. Its not just ethics… my products don’t get returned.

    Appreciate your comments, and happy to hear back

    R

  3. Chris Devonshire-Ellis says:

    April 22nd, 2008 at 2:45 am

    Good thread Rich. However, I feel you are painting only one side of the equation. There are indeed many manufacturers who have not been in compliance (especially in South China and Dongguan) and who have taken advantage of the area’s previously notorious lax laws to create margins and profits at rates that a compliant business cannot match. Often these have been investors from Taiwan or Hong Kong. The registered capital requirements have increased, tax has risen, labor law has gotten tougher and so have environmental laws. These companies – and you are right to be critical – are moving to Vietnam (and elsewhere).

    However it does not represent the majority of companies that are moving to Vietnam. Others are relocating also because they had the foresight ten years ago to buy land in South China quite cheaply, with values having increased by ten times in the same period they are selling on their asset at a huge profit. Nothing wrong with liquidating your assets when such a return can be made.

    Also, Vietnam does offer significantly cheaper land than China does, it’s not purely an economic argument than can focus purely on labor. Vietnamese labor is cheaper, but it is also less skilled, and it will take time to add value to this. Thats not labor exploitation, thats just a fact. It has to be balanced however with QC problems coming from Hanoi instead of Guangzhou.

    Additionally, as the Asian consumer market has grown, manufacturers are finding more people can buy their products now and they are simply looking at capacity to service these new markets. Vietnam does have some manufacturing capacity and a conveniently placed coastline and borders elsewhere with S/E Asia. Time was, Vietnam was a major regional force in days gone by. It’s merely climbing up back to it’s natural position after years of suffering and war. So we shouldn’t be surprised to see it developing; and nor is there necessarily anything incidious about investing there – it’s just a process of getting back to normality – and that is going on all over Asia.

  4. James Wolf says:

    April 22nd, 2008 at 6:44 am

    Hi, my names is James Wolf and I live in Vietnam. I have been here doing design/development/production and consulting for the export industry for 13 years, and I find your blog here fascinating! Some of the paragraphs you wrote are so spot on and I couldn’t agree with you more. So much that they are practically my exact thoughts. Yes I feel the flood of people coming down here for cheap labor, and it doesn’t seem ethical that China wants to clean up their manufacturing, and pass the dirty work along to somewhere else. I understand China as a threat, or challenge, as well as India too,we are all trying to compete with each other respectively.

    Coincidence? millions of low income people. The populations of Cambodia and Laos combined, hardly even matches that of a city in Vietnam or China.

    Thats why I have focused on our particular strengths, a “what is it that we can do better than them” kind of thinking. And seeing how bad they have done environmentally in China, we now have some hindsight in Vietnam and will utilize CP4BP practices as we develop. I am an expert in Sustainable Design, and consult on CP4BP ( Cleaner Production For Better Products ) where we teach manufactures to do what’s best for the Environment and People, while helping them to target for a foreign consumer who gives a ____ about what happens when they buy stuff, (and what happens to it when they throw it out) !

    Anyway, thanks for starting this blog, and Best regards.
    James

  5. James Wolf says:

    April 22nd, 2008 at 6:50 am

    P.S. I already speak Vietnamese
    P.S.S No offence meant about Cambodia and Laos, both are lovley countries with even lovlier people, I wish they will enjoy economical development for their people in a clean and socially and environmentally aware way. We should not let the greed of big corporations push the poorest people down just because they need to buy at the lowest price.

  6. Rich says:

    April 22nd, 2008 at 7:16 am

    Chris,

    Everything you have said, I would agree with.

    However, the factories that are moving are not Dell’s chip suppliers, of GM’s catalytic converter suppliers, or Hitachi’s plasma screen suppliers. They are (what I have seen) largely textile, largely sports wear, largely plastic… i.e largely labor intensive.. and these industries are not typically ones known for their high standards of labor conditions (esp. in the HK/ Taiwanese managed).

    No doubt, there are the Intel’s who are going to expand into these markets, but again, I am only saying that firms need to be careful when their supplier moves to Vietnam lock stock and barrel.

    As for vietnam’s other strengths. there are obviously going to be excellent markets as this country develops, but anyone who has spent time in Vietnam knows that it will not take long before the costs of Vietnam will rise, that the ports will max out (already there), and people will start looking further inland.

    R

  7. Rich says:

    April 22nd, 2008 at 7:22 am

    James,

    Part of nature is that sh*t rolls downhill right? and pulling Chris into this, I would say that every developing country needs to deal with their fair amount of sh*t as they develop.

    Development is a great thing when balanced, and this is something that I see China struggling with (environment vs. GDP). At some point, firms who are exploitative will run out of markets, and I can only hope that consumers will start wising up on these issues.

    R

  8. Chris Devonshire-Ellis says:

    April 23rd, 2008 at 3:15 am

    Theres always a bit of shit that occurs when countries go through an “industrial” or “development” revolution. Things get messy, polluted, people exploit. Then the same country decides to clean up it’s act when it notices all the crap going on and things improve. That’s what is now starting to happen in China.

  9. Phuong Duong says:

    May 28th, 2008 at 9:59 pm

    A hello from Vietnam,

    On googling some info, I found this entry and below is some thoughts of me on this issue:

    I do think this is a natural tendency. Many of those suppliers who plans to move their factories to Vietnam are really the big ones, they must have carried out careful researches and analysis before deciding to leave China for Vietnam, Laos and Cambodia. The concern that they are blind or follow the others blindly is unwarranted.
    I agree with you both about the shortage in quality of Vietnamese labor. However, Rich’s point of view is more persuasive. It sounds a bit unilateral in Chris’s opinion on labor exploiting. Once the employers think of training their employees, that should not be labor exploitation. It is not difficult to understand this, you cannot compare the wage of an expert with that of an normal worker, or more simple, wage of a worker in the U.S with that of a worker in Vietnam, not only because of difference in living standards, but also the skill of the labor. Certainly, the labor owner will have to pay higher for their workers – but this mostly goes with the higher profit that is brought about by the better skills of the workers – and it is now happening in China, and will appear in Vietnam in the future. The moving suppliers are not blind to see this. Moreover, Vietnam nowadays is consider open, safe and attractive environment to foreign investors. Our logistic systems are being improved as well.
    Regarding the ethic in business, I do not know what Chris is trying to express when borrowing this term. His love for Chinese workers? Or his love for the every workers?
    As a Vietnamese, I am glad to see and welcome a good opportunity for my people, however, I do hope the moving enterprises in China will find the best ways to rearrange the lives for their workers – who are about to lose their jobs. However, I like the statement of Chirac, those who are skilled can never unemployed.
    On the other hands, not every Chinese feel insecure and worried about this matter. I work for a freight forwarding company, and on a project introduction mail from one of our important partners in China, he wrote very excitedly “A great new opportunity of logistics has come!”. Better go a mile on another’s shoes before jumping into some conclusion.
    For Rich, everyone has the right to say whatever they want to, and should not let your old age comes sooner! 
    Anyone intends and wish to learn Vietnamese, feel free to contact me! My blog – of course – is not as professional as Chris’s, but you can leave me a message from there too. Here is the link to it http://www.360.yahoo.com/mar_mgu
    By the way, if any of you know any info on moving enterprises, I do appreciate if you would let me know…
    Good luck for everyone!