Strategies for Sourcing Industrial Suppliers in Vietnam

Since the US-China Trade War began in January 2018, Vietnam has quickly established itself as a favorable alternative to China. As such, identifying local manufacturers that are qualified to make target components or products is one of the primary objectives of investors coming to Vietnam. Here, we will help investors understand Vietnam’s industrial setting and how to approach the supplier network in the country.

Vietnam’s manufacturing industry is driven by several key sectors: textile and garment, electronics, and mechanical engineering. The textile and garment sector has seen the country rise to become the third-largest manufacturing hub globally, trailing only China and India. This industry comprises around 7,000 companies that collectively employ 2.7 million people. While large firms exist, the setting is dominated by small and medium-sized enterprises (SMEs) that are largely concentrated in the Red River Delta and the Southeastern region. Vietnamese textile and garment companies mainly focus on the garment processing stage, which accounts for 85 percent of activity, utilizing the CMT (cut-make-trim) method as their primary manufacturing approach.

The electronic cluster is characterized as non-resource and export-oriented. Consisting of approximately 2,500 companies, this sector employs about 800,000 people. Supply chains in this cluster are structured around many tier-2 companies supplying components and parts to foreign companies. Significant investment has come from South Korea and Japan, featuring companies such as Samsung and Nokia. We have seen large investments concentrated in the Saigon Hi-Tech Park, with additional company presence in the Red River Delta region.

Vietnam’s mechanical industry possesses strengths concentrated in three sub-sectors: motorcycles and motorcycle spare parts, household mechanics and tools, and auto and auto parts. Across the whole country, there are more than 24,000 metal processing and engineering companies. Geographically, the Red River Delta region, including Hanoi and Hai Phong, caters to original equipment manufacturer (OEM) suppliers. In the central region, Quang Nam province has witnessed an increase in auto parts production, while in the south, mechanical clusters are concentrated in Dong Nai and Binh Duong provinces.

Despite the strong development of the supporting industries in recent years, Vietnam is yet to acquire the necessary resources, meaning a large amount of raw materials is still imported. This reliance is evident in the textile sector; Vietnam needs fiber imports as the domestic supply can only meet 1 percent of demand. In contrast, the total output of yarn is 2 million tons per year, which surpasses domestic demand, with two-thirds of this output exported to other countries. However, due to Vietnam’s inefficiency in weaving and dyeing, under-developed technology, and sub-standard designs, 65-70 percent of textiles needed to supply the industry in Vietnam must be imported from China, Taiwan, and other markets.

Similarly, despite strong developments in recent years, Vietnamese plastic manufacturers still have to import a large portion of raw materials. The plastic industry imports about 4 million tons of plastic materials to serve domestic production. These imported materials include plastic resins, plastic powder, and additives, with main imports consisting of PE, PP, PET, PVC, PS, ABS, and others. Vietnam primarily sources these plastic materials from Saudi Arabia, South Korea, Taiwan, Thailand, and China.

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Vietnam’s steel industry is also dependent on imported inputs and suffers from unbalanced development between construction steel and mechanical steel. Production outputs are mainly limited to construction steel, steel coil, and steel pipes. Due to the fragmentation of the industry, poor investment in technology, and inadequate production facilities, steel manufacturers—even large corporations like Vietnam Steel Corporation, Hoa Phat Corporation, or Formosa Corporation—only focus on these basic products. The domestic steel industry is currently unable to produce steel for mechanical engineering as those products have stricter technical requirements. Therefore, mechanical engineering companies must import a significant amount of steel from China, Japan, and South Korea as input for production.

Furthermore, while bauxite serves as the main source of aluminum, the country faces extraction challenges. Vietnam possesses the third-largest national bauxite reserves with 2.1 billion tons, yet the country still counters a number of difficulties in bauxite extraction and aluminum smelting regarding geographical features, infrastructure, and technology. Hence, materials for aluminum casting in Vietnam are mainly imported from other countries.

Supporting industrial companies can be divided into two main groups: domestic companies and FDI companies. Domestic companies account for a relatively small portion (16 percent) compared to FDI companies that dominate the market. FDI companies account for a very large portion of manufacturers in Vietnam and tend to be larger suppliers with a larger production scale, better infrastructure, and advanced technology. They have a larger online presence and are easily searchable, and most are proficient in English, typically originating from Japan, South Korea, and Taiwan. However, such large companies have little interest in working with small buyers.

On the other hand, while Vietnamese companies account for a smaller portion, they seem favorable to foreign buyers due to their reasonable prices compared to larger FDI companies. These companies are, however, not easy to find because of a small online footprint and poor English proficiency in communicating. Many Vietnamese companies are small and medium-sized enterprises with medium production scale and capacity, lacking advanced technology. Their products are able to meet foreign buyers’ standards, but they either cannot or are not willing to invest in audit programs such as the Walmart audit programs. Nevertheless, Vietnamese companies are willing to accept smaller orders, are flexible, and demonstrate a willingness to learn and adapt to new technology. Consequently, Vietnamese companies are therefore best characterized as inexperienced rather than lacking funds or knowledge.

Investors can approach supplier networks through local chambers of commerce and industry, which are active in large cities in Vietnam. Foreign investors can also attend various trade fairs and workshops, which are typically held every month in key economic cities, attracting significant Vietnamese manufacturing companies that have enough production capacity and are looking for new clients. Investors can also attempt to source Vietnamese businesses directly using sites such as Alibaba.com or general online searches. However, Vietnam-based sourcing companies or consulting companies would be able to provide more value in Vietnam compared to more developed manufacturing countries like China.

Local sourcing companies use their local network and experts to match the investor with a qualified supplier. Investors should do their due diligence in finding reliable sourcing companies, distinguishing them from traders, which have different roles. Sourcing companies provide all the required information about manufacturers, including the company’s profile, production capacity, key contact person, sample cost, MOQ requirements, certifications, and so on, while traders do not. Further, sourcing companies can support you with a factory tour, supplier background check, or even testing and logistics via a third party. Some companies will offer these services as an all-inclusive package, while others charge based on project milestones or individual services.