Sourcing Metal Products in Vietnam
Metal Processing has seen a boon in interest of German companies looking to establish sourcing activities in Vietnam. This is largely due to rising prices and longer lead times of Chinese enterprises as well as general supply chain diversification trends. While 2020 has been somewhat lackluster, for us the past few years have seen a steady increase of inquiries for metal product sourcing. Last year it has been the 2nd most important industry for us overall and about 80% of our sourcing projects have been placed for metal products. Based on our experiences we would like to introduce the opportunities and challenges of sourcing metal products in Vietnam.
INTRODUCTION: METAL PROCESSING IN VIETNAM
For metal processing, steel plays an important role as an input material. Vietnam’s steel industry came to life in 1963, when the first blast furnace was put in operation in Thai Nguyen. However, the sector did not really take off for a long time because Vietnam lacked the financial resources to develop this capital-intensive industry. Since the 2000s steelmaking in Vietnam shows growth of 10% CAGR due to restructuring and international investments. Notably, Ha Tinh Steel for the first time developed hot-rolling facilities in 2017 making the country less dependent on imports. Overall, 93% of the Vietnamese steel-consumption goes into construction. Other consumers, such as electronics and machinery play a far less pronounced role than in Thailand and Indonesia. This also means that local steel production for the manufacturing sector is very limited. Most of the supply must be imported.
Downstream from steel production, metal processing includes a diverse range of steps treating steel and other metals. Basically, it consists of three processing types: Cutting, forming and joining. While most cutting and joining processes may be considered as “light industry”, many forming processes are “heavy industry” involving forges and massive machinery.
Forms of Metal Processing
Within our inquiries, cutting and forming are most relevant. For cutting, the majority of customers ask for CNC turning and sometimes stamping. For forming, inquiries go overwhelmingly into diverse kinds of casting. Joining overall is very rarely asked for.
Two-thirds of the suppliers we are regularly working with are located in northern Vietnam; primarily in Hanoi, Bac Ninh, Thai Nguyen and Haiphong. Meanwhile, most of the southern Vietnamese suppliers have set up shop in Ho Chi Minh City and the neighboring province of Dong Nai. Apart from this, the southern province of Ba Ria - Vung Tau is also developing into a metal processing center with the support of foreign investors.
Metal Processing Centers of Vietnam
There are a lot of international players in the game. Most are from Japan or Taiwan. They are either export-oriented or supply local customers, such as the country’s motorbike or electronics assemblers. Working with foreign suppliers in Vietnam has the advantage that they typically have larger capacity, better know-how and quality management as well as an overall better customer approach towards an international clientele. However, local enterprises are able to secure better pricing. Many of our clients are thus ready to invest into intensive supplier development and know-how transfer to save costs on the long run.
WHY COMPANIES ARE LOOKING INTO VIETNAM
Most of our customers are currently sourcing in China. Albeit, metal processing has been shifting southward recently. There are several factors at play up north:
The Chinese government led a crackdown on industrial pollution in recent years. While this brought “blue skies” over Beijing it also meant that many enterprises in heavy industries, e.g. steelmaking or casting, had to shut down. This led to a supply squeeze ending in higher prices and longer lead times for orders.
Mostly due to escalating labor costs in China (threefold over past ten years) as well as the above-mentioned upstream supply shortages.
Because of the ongoing supply shortage (as mentioned above) capacities of remaining manufacturers for steel, casting products etc. are fully utilized.
Many companies are in general trying to rely less on individual suppliers or sourcing markets. They try to diversify their procurement through so-called “China +1 Strategies”. More on this in our blog:
China +1 strategies of German companies in Vietnam: https://www.deinternationalvietnam.com/post/china-1-strategies-of-german-companies-in-vietnam
COVID-19 and supplier diversification: https://www.deinternationalvietnam.com/post/covid-19-will-german-companies-diversify-sourcing-and-invest-into-vietnam
Of course, 2020 is "different" because of the COVID-19 crisis. A continuation of above-mentioned trends may however be expected when the world economy is picking up again.
CHALLENGES IN VIETNAM
While there are surely a lot of opportunities of procuring metal products in Vietnam, we are also seeing considerable obstacles:
Local metal processors are still in the process of starting up their internationalization. This means that they are partly not used to work with foreigners. Hence, some do not have any (English) websites and do not necessarily answer unsolicited phone calls or e-mails from potential customers. Instead, they prefer to work through established networks. Some companies seem to be quite risk-averse and thus do not like to commit to large projects with new partners. If the personal supplier connection is not well developed, substantial follow-up might be needed to receive responses to queries, such as RFQs.
As mentioned above, many local suppliers are still focusing on the local market, which does not request products with an international grade of technical know-how and quality. While suppliers are typically eager to increase their skills, foreign customers should calculate considerable efforts for supplier development. Our customers are often planning with twelve to 18 months from first contact with a new partner to first serial delivery. Throughout this period, regular exchange and even site visits might be necessary.
As mentioned above, a key motivator to look into Vietnam as a sourcing location is to achieve lower costs. This expectation is fueled by the relatively low labor costs of the country when compared to China. However, it turns out that in some instances pricing is actually more expensive in Vietnam. This is true for local AND international metal processors. In fact, it may be possible that costs are twice as high as the target price. Calls from prospective customers for further negotiations are mostly feeble attempts to put pressure on their suppliers. These mostly react with a lack of understanding and might close their doors if the heat from the customer runs too high. It seems to be a simple truth that costs in Vietnam cannot be always lower than in China. This may have the following reasons:
Imported input materials: As pointed out above most of the “special steel” used in industrial applications has to be imported, e.g. from Japan or Taiwan. This creates two problems: Firstly, importation creates additional logistics costs. Secondly, Vietnamese companies have to content with foreign steel suppliers and thus they do not have the same smooth supplier networks that Chinese competitors enjoy locally.
Company scale: While many metal processors in Vietnam are rather small companies typically employing 50 to 200 people, their Chinese peers are often large, well established enterprises. Thus, Vietnamese suppliers cannot utilize the same economies of scale as their northern competitors leading to increased costs.
Productivity: The efficiency of Vietnams laborers is very low. For instance, as of 2018, it was only 56% of the Philippines’ or 45% of Indonesia’s benchmark. This weakness offsets a huge chunk of the savings from low labor costs in Vietnam.
Alleged subsidies for Chinese suppliers: Within the consultations with our customers we are actively pointing out that costs in Vietnam may be higher than with their existing Chinese suppliers. Most are not surprised. Some are pointing out that they suspect that their current suppliers are in fact receiving state subsidies. These allegations are in line with corresponding media reports. For example, Nikkei Asia states that support is “(…) ranging in form from direct cash handouts to tax breaks to interest-rate subsidies.” The Financial Times reported that state subsidies might have amounted to 63 billion USD in 2017 with an expert stating (…)“ that Chinese companies start the race for business far ahead of their competitors, (…)”. In fact, the EU as well as the USA are currently in negotiations with China on state subsidies towards private enterprises.
The above-mentioned points are a “working thesis”. Neither us nor the suppliers we are working with us are able to completely explain why prices in Vietnam are sometimes much higher than in China.
SO, IS SOURCING METAL PRODUCTS IN VIETNAM WORTH IT?
It surely is possible to save costs by sourcing in Vietnam. However, if companies approach Vietnam purely under the premise of saving costs they might be in for a nasty surprise. See above points.
Still, from a supplier diversification perspective it surely makes sense to take a look into the country. If a foreign company manages to find a partner, establishes a good connection and achieves a successful product launch it might be in for a treat. While supplier development and maintenance in Vietnam demand a lot of effort, this journey is often worth it. Many of customers report that they achieved creating a very close and trustful relationship with their suppliers. Thus, quality management and delivery reliability are typically not a problem. At the end, this is what buyers want: A hassle-free supplier relationship can mitigate the increased costs of multiple sourcing strategies.
LOOKING FOR A SUPPLIER?
As mentioned above, instead of engaging actively in international business development, many local suppliers prefer working through established networks. We are calling these connections the “Circle of Trust” explained here: https://www.deinternationalvietnam.com/post/accessing-vietnamese-partners-through-the-circle-of-trust
Our organization has played the role of a “trustee” as an access point into these circles numerous times. We have a great network and reputation that we are providing to our customers. By employing our services, a lot of companies have successfully found their way into the Circles of Trust of their partners of choice. More information: https://www.deinternationalvietnam.com/business-partner-search
Feel free contacting me/us to discuss details!