Vietnam: Expanding Beyond China For Sourcing Needs

For decades, China has been the cornerstone of global manufacturing. Its vast supplier networks, skilled workforce, and unparalleled infrastructure made it the obvious choice for companies seeking cost-effective production. Businesses have long relied on China sourcing services to streamline procurement and production. But as global dynamics shift, so do sourcing strategies. Rising labor costs, tariffs, and geopolitical tensions have pushed many companies to consider other options—and Vietnam has emerged as a leading contender.

Why Companies Are Looking Beyond China

While China remains central to global supply chains, its dominance is no longer taken for granted. Businesses have grown wary of depending too heavily on a single country for production. Events such as COVID-19 disruptions, shifting trade policies, tariffs, and increased scrutiny of supply chain resilience have all underscored the importance of diversification.

Many companies that once relied exclusively on China sourcing services are now reassessing their strategies to reduce risks and improve flexibility. This has given rise to the “China+1” strategy—a risk mitigation approach in which businesses maintain some operations in China while expanding into other countries. Vietnam, with its growing capabilities and strategic location, is often the “+1” in that equation.

Vietnam’s Growing Role in Global Manufacturing

Vietnam has positioned itself as a viable alternative for businesses looking to diversify. Several key factors contribute to its increasing attractiveness:

1. Competitive Labor Costs – Vietnam’s workforce remains significantly less expensive than other manufacturing countries, making it particularly attractive for labor-intensive production.
2. Favorable Trade Agreements – Vietnam has positioned itself well globally through major trade pacts like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), which offer reduced tariffs and better market access for exporters.
3. Upgraded Infrastructure – Continued investments in transportation networks, ports, and industrial parks have boosted Vietnam’s logistics capacity and made it easier to move goods efficiently.
4. Business-Friendly Government Initiatives – The Vietnamese government actively promotes foreign direct investment through tax incentives, simplified regulations, and support for priority industries.
5. Close Geographic Proximity to China – Vietnam’s location makes it easier for companies to maintain supply chain ties with China while building out complementary production in the region.
6. Established Manufacturing Base – Vietnam has built strong capabilities in sectors such as textiles, electronics, footwear, and machinery, providing a wide supplier base for varied sourcing needs.
7. Ongoing Partnerships with Chinese Suppliers – Many Chinese manufacturers have already set up shop in Vietnam. For companies that value continuity, working with familiar Chinese suppliers in a new location is a practical path. In fact, an estimated 40% of factories in Northern Vietnam are owned by Chinese firms. In 2023 alone, Chinese investment in Vietnam topped $8 billion—more than any other country—with a strong focus on electric vehicles and renewable energy.

Challenges of Sourcing from Vietnam

While Vietnam presents many advantages, businesses must also navigate certain challenges:

1. Limited Supplier Base – Vietnam’s industrial ecosystem is still developing. In many product categories, especially those requiring advanced technology or highly specialized components, supplier options are limited compared to China’s vast and mature supply network. Many companies that previously relied on China sourcing services now face difficulties finding equivalent suppliers in Vietnam.
2. Higher Initial Production Costs – On a factory price basis, Vietnam is often more expensive than China for many products. However, due to high tariffs on Chinese goods, Vietnam may still offer a lower landed cost—but only after factoring in duties, taxes, and transportation.
3. Perceived Stability vs. Reality – Vietnam is often seen as a politically stable country, but there are growing signs of internal volatility. Leadership shakeups and opaque governance structures raise questions about long-term predictability for foreign investors.
4. Opaque Political System – Like China, Vietnam is governed by a one-party system. The Communist Party of Vietnam (CPV) tightly controls national leadership, suppresses political opposition, and operates with limited transparency. This lack of democratic process increases the risk of sudden policy shifts or leadership changes.
5. Ongoing Anti-Corruption Campaigns – Vietnam’s recent high-profile political resignations and dismissals stem from an aggressive anti-corruption initiative known as the “Blazing Furnace.” While intended to clean up the system, it has created uncertainty and disrupted institutional continuity.
6. Labor and Human Rights Concerns – Businesses entering Vietnam must factor in potential scrutiny over labor practices. The country faces criticism for restricting free speech, limiting civil liberties, and failing to ensure consistent protections around wages, working conditions, and collective bargaining rights.
7. Geopolitical Tensions – Vietnam’s maritime disputes in the South China Sea—particularly with China—could escalate and affect key shipping routes. Furthermore, shifts in U.S. trade policy, including possible future tariffs or new regulations, could create new vulnerabilities for companies relying heavily on Vietnam.
8. Economic Dependence on Exports – Vietnam’s economy is heavily tied to global export markets, with relatively little diversification. This leaves the country—and companies that source from it—exposed to demand shocks or trade disruptions in key industries such as apparel, electronics, and furniture.

 

A Smarter Approach: China+1 Strategy

For many businesses, shifting some sourcing to Vietnam can be a smart move—especially when it aligns with broader goals for cost control, product quality, and supply chain resilience. However, success depends on careful planning. Many companies accustomed to China sourcing services must adapt their approach to navigate Vietnam’s different regulatory environment, supplier networks, and logistics challenges. These key strategies can help companies tap into Vietnam’s potential while minimizing exposure:

1. Vet Suppliers Carefully – Before making any commitments, conduct detailed due diligence to confirm that suppliers meet your quality, compliance, and tariff-related requirements. Proper checks can help avoid customs delays or legal complications down the line.
2. Track the Geopolitical Landscape – Stay informed about the U.S.–Vietnam trade relations, tariffs, and regulations. The political and regulatory environment can shift, and a proactive understanding of those changes is critical to long-term planning.
3. Avoid Overconcentration – While diversifying away from China makes sense, replacing that dependence with a single new country carries similar risks. Expanding your supplier base across multiple regions can offer stronger risk mitigation.
4. Prioritize Ethics and Compliance – Align your sourcing strategy with ESG benchmarks and globally accepted standards for labor, environmental protection, and ethical business practices. Conducting supplier audits and setting clear compliance goals are important steps toward responsible sourcing.
5. Invest in Local Relationships – Establishing trust with local suppliers, government contacts, and trade associations can make a big difference when it comes to navigating local policies, regulations, and unexpected hurdles. 

Vietnam offers real opportunities for companies seeking to reduce exposure to China—but those gains come with new risks. A thoughtful, diversified approach rooted in compliance, awareness, and strong local ties will ensure your Vietnam strategy supports long-term success.