How to Approach Sourcing in Vietnam
This South-East Asian country currently is one of the hottest destinations for international buyers looking for new partners to diversify their supply chains or to reduce costs. Its companies are deemed to be reliable. Vietnam's economic policies are stable and sound. Perfect prerequisites for successful new business relationships it seems. There are however a couple of stumbling stones on the way to open new supply routes. More on this in the following blog article. It should be noted that this text mostly refers to local Vietnamese suppliers and not as much to internationally invested companies (e.g. from Japan or Korea) in-country.
The Influence of Market Maturity on Supplier Identification
Companies coming in from China or from Western countries might be used to suppliers being present on online channels. They assume that they have – findable – websites, are registered with business directories or might even be active on social networks. While some Vietnamese manufacturing enterprises are finding ways to engage with these “modern” means of marketing and communication, a lot of others might not do so. This often has to do with market maturity.
Many Vietnamese enterprises are starting their business locally. They manufacture for local customers. Here, personal relationships play a very important role. Why? Well, a saying in Vietnam goes like “In business, one side wins and the other side loses” (dunno if this is common but... I've heard it 😉) which is contrary to Western thoughts of “win-win” in a professional cooperation. In the local market there is a lot of mistrust. Hence, aforementioned personal relationships are extremely important to ensure a trustful relationship. Vietnamese tend to set up “Circles of Trust” which we explained 👉 here.
In the local market, this business approach works rather well. It ensures smooth processes and enables fast decision-making. However, when local companies turn to global markets, they face the challenge of having to deal with customers they do not (yet) know. They have to get used to designing their marketing strategies in more “transparent” ways by setting up websites, register on business registries, attending trade fairs and so on. Adjusting to this environment does not happen immediately. Hence, more established export industries over time mature and bring up great companies acting successfully in the global market. However, many industries in Vietnam only just recently actively approach or are being approached by international customers.
Following, you will find an overview of industries that might be deemed “mature” or “immature”. This is of course a generalized view that is debatable. Feel free commenting if you have a differing opinion.
Mature export industries:
Apparel and shoes 👕
Food processing 🧃
Metal processing 🔩
Electronics supply 📷
A foreign buyer will have to apply different strategies to finding suppliers based on the maturity of her target industry.
For mature branches it should be comparatively easy to identify and contact potential suppliers. Identification can be done through the following channels:
Companies in immature companies, as pointed out above, will however often only have a limited representation online. One client told us: “On the Vietnamese and English websites (of suppliers) you will find differing information” summing up a sometimes confusing situation. Another issue is that many of the suppliers in immature markets will not react to contact by “outsiders”; especially if they are from abroad. See: Circle of Trust. In these cases, support will be needed. We, AHK Vietnam, offer services to bridge the gap between foreign buyer and local supplier. More info 👉 here. In contrast to China, Vietnam is not an agent-heavy market. Most business is done directly. Nevertheless, there are some such partners which me might be able to introduce.
Vietnam is a global champion in exports. In recent years, it has developed into another “workbench for the world”. However – astonishingly – Vietnamese “local” enterprises only contribute 25% of the country's export turnover. In fact, 75% of the “Vietnamese” exports are done by foreign enterprises invested here. This implies that many local companies are in fact not yet as competitive on the world market.
This often is due to the above-mentioned difference in Vietnamese and international approaches to building business relations. But Vietnamese companies are also often not competitive in technical know-how. The good news here is that they are willing to acquire these skills. However, establishing a successful supplier partnership will take time. For technical products, our clients typically calculate with 12 to 18 months from first contact to first serial delivery.
First step in supplier development will be to establish a personal relationship between the buyer and the Vietnamese company. As one of our clients pointed out: “Personal contact will aid to understand the whole the relationship with the supplier better.” A successful cooperation will depend on regular – personal – meetings between the business partners. Within these visits, business will play a role. However, the Vietnamese will also want to set up a “private” relation by inviting her foreign guest home, go out to dine, drink and sing Karaoke. This is all part of the game of establishing trust.
Second step – especially for technical products – will sometimes be a know-how transfer that might have to be initiated to a certain degree. Sending technicians and engineers from abroad into the supplier's facilities to set up processes can be necessary. While these will be pleasant visits because the foreign guests will be treated well and most genuinely enjoy being in Vietnam, they also cost time and money.
The reward at the end of the supplier development process will likely be a long-lasting, stable relationship promising minimal issues and maximal trust between the business partners. This is what most successful buyers like about Vietnam. Again, a quote from one of our clients: “It takes a long time and is difficult to establish a regular business partnership with a Vietnamese supplier. However, when the relationship has been successfully established, then things run smoothly.” There could not be any more praise from a German buyer. 😅
And there you have it: Vietnamese suppliers can be a fantastic addition to supply chains of international companies if they are prepared to put in the necessary work in establishing and maintaining them. AHK Vietnam has a lot of experience in working with local suppliers. Feel free turning to us if you have any comments or questions.