Vietnam supply chain diversification: why firms are looking here

Vietnam supply chain diversification is on many boardroom agendas because US tariffs have made goods made in China more costly to sell in the United States. Firms do not need to leave China to respond. A smart first step is to add a second source and test it with a small order.

What changed for China-based supply chains

The United States opened a Section 301 case on China's technology transfer and intellectual property practices. In June 2018 it announced a 25 percent duty on Chinese goods. The first $34 billion of products were covered from 6 July 2018.

The tariffs then grew. In September 2018 the US added a 10 percent duty on $200 billion of Chinese goods, with a planned rise to 25 percent. That rise was put off after the G20 meeting in December 2018. It took effect on 10 May 2019.

A further list followed in August 2019 for the remaining Chinese imports, and a 15 percent duty began on 1 September 2019 on some of them. A planned round of duties for 15 December 2019 was not put in place. In January 2020 the two countries signed a first-phase deal, and the US said it would cut the 15 percent duty to 7.5 percent. That deal starts on 14 February 2020.

The result is plain. Rates have moved many times in under two years, and talks could change them again. A buyer who plans a single-country supply chain is exposed to that risk.

Sources: Office of the US Trade Representative (ustr.gov), Section 301 tariff action pages on China, covering the $34 billion, $200 billion and later lists.

Why Vietnam is on the shortlist

Firms look at Vietnam for several reasons. It sits next to southern China, so parts can move by land and short sea routes. It has many factory zones aimed at exporters. It also sells under its own country of origin, not China's.

That last point matters most for tariffs. The Section 301 duties apply to products of Chinese origin. A product that is truly made in Vietnam is not covered by them. But "made in Vietnam" has a legal meaning, and it takes more than a label or a final packing step.

Treat the move as a business decision first. Tariffs may ease or return. A Vietnam site should still make sense on cost, quality and delivery time if the tariff gap shrinks.

What to check before you add Vietnam

Start with a short, written list. Each item below should have a clear answer before you sign a contract.

• Origin: Where is the product made, and what part of its value is added in Vietnam? Ask a customs adviser how your target market will judge origin.
• Inputs: Which parts and materials still come from China? Many Vietnam factories import them, and that affects cost and lead time.
• Capacity: Can the plant handle your volume at your quality level? Ask for samples and a visit.
• Logistics: Compare port access, transit time and trucking from the plant to the port.
• People: Check hiring needs, skills and turnover in the province you choose.
• Paperwork: Confirm licences, land terms and local tax rules with a qualified adviser.

Use the same test for each item. If the answer is "we assume," it is not ready.

Sources: Office of the US Trade Representative (ustr.gov), Section 301 tariff action pages, which apply the additional duties to products of China.

Start small and keep China as a base

Most firms do not move a whole line at once. They run a pilot. They pick one product, place a trial order with a Vietnam supplier, and compare cost, quality and delay against the current source.

A pilot also gives you real numbers for your own tariff cost. Ask your freight forwarder or customs broker for the duty on your product code from each country. Then you can see how much of the gap is tariff and how much is something else.

Keep your existing suppliers while you learn. A second source is a form of insurance. It lets you shift orders if rules, rates or shipping costs change.

Risks to plan for

Vietnam is not a copy of China. Supplier depth is thinner for some parts. Ports and roads are busy. A wave of new buyers may push up wages and rents in popular zones.

Contracts need care too. Put quality standards, delivery dates and the rules for changing orders in writing, in a form both sides understand. Use a local adviser to review it. Check intellectual property terms with particular care, since your designs will be on the supplier's floor.

Last, expect the trade rules to keep shifting. Build a plan that still works if duties fall, or if they rise.

This article is general information, not legal, tax or investment advice.

A simple way to decide

Work through three questions. Does a second source cut your risk? Does the Vietnam price still work after freight, inputs and duty? Can you test it with a small order before you commit?

If the answer to all three is yes, begin the pilot. If not, fix the gap first or look at another country.

Sources: Office of the US Trade Representative (ustr.gov), Section 301 tariff action pages on China, 2018 to January 2020.