Sourcing and outsourcing products to Vietnam can be lucrative due to its competitive labour costs and manufacturing capabilities. However, foreign customers should know potential pitfalls to ensure a successful partnership. Here are some typical pitfalls to watch out for:
1. Quality Control
Inconsistent product quality can be a common issue in Vietnam. Variations in quality may occur due to different production batches or a lack of strict quality control measures.
Establishing clear quality standards and conducting regular inspections to maintain consistency is crucial. FinnSEA Nordesk provides Quality Control services for our Supplier Search customers.
Quality is one of the core factors we analyze when auditing the factories before customer joint visits. The first approach is already done at the desk study phase, where we pose several criteria to supplier candidates and benchmark them, among other parameters, on the quality details.
2. Communication Barriers
Language and cultural differences can lead to miscommunications, misunderstandings, and production delays. Hiring local interpreters or using bilingual project managers can help bridge the communication gap.
With customers who have done the FinnSEA Nordesk Supplier Search, all along the process and during the manufacturing phase, FinnSEA Nordesk continuously follows up the communication between the Customer and the Supplier, which allows us to intervene if we see problems arising and to facilitate communication.
3. Intellectual Property (IP) Concerns
Protecting your intellectual property can be challenging in Vietnam. Some manufacturers may not have strong IP protection measures in place. Work with legal experts to safeguard your designs, patents, and trademarks.
Additionally, it is essential to sign NDAs to ensure the legal background of the cooperation. When FinnSEA Nordesk makes the supplier audits, the issue is also discussed with supplier candidates. The importance is to understand that our customers are looking for long-term partnerships more than traditional Customer-Supplier relationships. The objective is to be in a win-win situation.
4. Legal and Regulatory Challenges
Navigating Vietnam’s legal and regulatory landscape can be complex for foreign businesses. Understanding local laws, customs regulations, and taxation policies is essential to avoid compliance issues.
FinnSEA Nordesk is proposing to our Customers and Suppliers to use third-country independent arbitration centres like SIAC in Singapore and English as arbitration languages. This approach is typically evenly balanced for both parties.
5. Payment Risks
Payment disputes and delays can be a concern, especially when dealing with new suppliers. Establish clear payment terms and consider using letters of credit or secure payment methods to minimize financial risks.
In Vietnam industries, a typical way to start the cooperation is i.e. 30% pre-payment and the balance when goods are shipped.
Vietnamese suppliers are often low in capital, and the pre-payment serves for the raw materials purchases. All is negotiable, but a win-win situation is preferable for long-term partnerships.
6. Supply Chain Disruptions
Vietnam’s supply chain can be vulnerable to disruptions, such as natural disasters or political instability.
Develop contingency plans and diversify suppliers when possible to mitigate these risks. However, this risk has been proven relatively low compared to China or Myanmar. Worldwide pandemics can be a significant risk affecting all suppliers.
7. Labor Issues
While labour costs are relatively low in Vietnam, labour disputes, strikes, and turnover can impact production schedules. Suppliers usually build good relationships with their workforce and monitor labour conditions to maintain a stable workforce.
Developing countries are often seen as problematic due to child labour. This is still a problem in many countries, but Vietnam is a clear exception.
Over the years and hundreds of factory assessments FinnSEA Nordesk has done, we have only once suspected the age of a few production line workers. Children are highly regarded in Vietnam, and school is obligatory for all children under a certain age.
8. Capacity Limitations
Some Vietnamese manufacturers may lack the capacity to handle large or complex orders. Assess the capabilities and capacity of your chosen suppliers to ensure they can meet your production requirements. While doing Supplier Assessment for our Customer, FinnSEA Nordesk considers the expected yearly volumes.
The Supplier is benchmarked by total capacity, available capacity at the moment of assessment and for the next 12-18 months. All this, among other parameters, is reflected in the choice of final candidates to be visited with the Customer.
9. Infrastructure Challenges
Infrastructure in some areas of Vietnam may not be as developed as in others. Consider logistics and transportation challenges when selecting your manufacturing location. The Customer has two choices: regions near the deep sea ports (2-3 hrs away by truck) are prevalent and easy to access for the Customer QC teams and other staff.
Many suppliers are near Hochiminh City and its surroundings in the South and the Hanoi/Haiphong axis in the North. The disadvantage is that in those regions, cost level can be higher and workforce availability lower than if you go into still developing provinces/regions.
10. Currency Fluctuations
Vietnam’s Vietnamese Dong (VND) currency can be subject to fluctuations. Consider currency risks when dealing with payments and contracts, and consider currency hedging strategies if you accept the Donas basis for your order. However, all factories deal in USD, and you can pay in USD.
Vietnamese Dong value is tied to USD, and the Government and the State Bank Of Vietnam decide the level. Therefore, adjustments are typically made to ensure the competitiveness of Vietnamese labour costs.
11. Compliance and Ethical Concerns
Ensure that your suppliers adhere to ethical and environmental standards. Issues related to child labour, environmental impact, and worker safety can damage your brand’s reputation. You can read more in the additional article
Conducting thorough due diligence is crucial to mitigate these pitfalls, as building strong relationships with local partners and seeking guidance from experts familiar with the Vietnamese business environment. Additionally, having a clear and comprehensive contract with your suppliers can help address and prevent these potential issues.
FinnSEA Nordesk has provided complete, independent Supplier Search services for numerous customers in Vietnam over the last 15 years. B
Being a third-party consultant with consultative and operational services combined, we work for our customers, not for factories.