India and Vietnam: A Winning Combo For North America’s Sourcing Strategy

You might have heard Apple telling its suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam, as part of Apple’s efforts to diversify its assembly of products from China after increasing U.S.-China tensions, high US tariffs, and supply chain disruptions from the pandemic. The shift is happening right now. 

Apple will shift 10-15% of its iPhone manufacturing to India, along with smaller products such as Apple’s smart watches and AirPods, while Vietnam will handle the production of more sophisticated products such as the MacBooks.

Source: cnbc.com

This is a familiar story across North America, one that you might be intimately familiar with by now.

U.S.-China trade exploded in the two decades after China joined the World Trade Organization in 2001. This trade has benefited U.S. and Chinese consumers and companies, but Washington is increasingly concerned about the risks posed by Beijing’s policies and an increasingly combative stance with the US.

Till 2020, global supply chains were ubiquitously Sino-centric. Most, if not all, OECD nations imported substantially from China, which had become the global export hub.

Accordingly, China’s exports contracted at a quicker pace, in a mixed set of indicators that showed the world’s 2nd-largest economy facing persistent risks despite a recent improvement in domestic demand. Exports shrank 6.4% from a year earlier in October’23, faster than a 6.2% decline in September ‘23 and worse than a 3.3% fall expected in a Reuters poll.

Source: reuters.com

But the COVID related uncertainties even in 2023, protracted lockdowns in Chinese industrial cities, and a diplomatic row with The United States is finally taking its toll.

In this uncertain scenario, the world is having to look elsewhere to meet the ever growing consumption demands, in part driven by the high consumption trends as Gen-Z comes of age. This will be a trend in 2024, both in the USA and Globally.

When Boston Consulting Group (BCG) surveyed North American companies across multiple industrial sectors in 2023, more than 90% of respondents said that they had relocated production or some of their supply base to other countries over the previous five years. Of those, half reported that they had shifted more than 20% of their manufacturing and supply chain spending. More than 90% of surveyed executives indicated that they will make similar moves over the next five years. 

The redistribution of manufacturing is evident in trade data. While US goods imports from China declined by 10% from 2018 through 2022 in inflation-adjusted terms, they rose by 18% from Mexico, 44% from India, and 65% from the ten countries of the Association of Southeast Asian Nations (ASEAN), led primarily by Vietnam.

Source: BCG 2023 Report

In this evolving landscape of global manufacturing, the Chinese slowdown has opened up opportunities for other nations to emerge as prominent low-cost manufacturing hubs. India and Vietnam, with their unique advantages and growing capabilities, are poised to take centre stage in this transformative shift.

Source: BCG 2023 Report

For example, US imports of mechanical machinery from China shrank by 28% from 2018 through 2022, but increased by 21% from Mexico, 61% from ASEAN, and 70% from India.

Gearing Up For The Shift: What Do You Need To Consider?

When assessing new locations for diversifying a production footprint, companies need to gauge the country’s capacity to deliver. The source country should have a well-established and sufficiently large manufacturing and supply base that can reliably absorb anticipated production volumes, and its workers should have the skills that the company requires.

For instance, India is rapidly developing as a producer of engines and turbines, Morocco is rising fast as a destination for automotive assembly and components, and Vietnam is becoming a center for consumer electronics. First movers in such countries often gain the opportunity to establish capacity while labor, land, and other factors are abundant and very affordable.

But supply chains are rarely this simple, as you know from experience. A couple of positive indicators does not mean all is hunky-dory in a prospective source country.

For example, India has a huge domestic market and favorable government initiatives, but the large unorganized industrial base poses a challenge of uneven logistics and cultural mismatches. Vietnam, on the other hand, has a strong, stable business environment and skilled manpower, but has a small domestic market, hence its capacity to deliver very high volumes remains questionable.

So, what’s a business to do? Here’s an idea. You get someone to optimize your supply chain for you at a fraction of the cost and hassle of dealing with thousands of small suppliers spread across countries.

Just like alloys are often made because they have better properties than either of the constituent elements, there is a need for a synergised sourcing strategy that can take advantage of the strengths of different countries. Yes, you can have your cake and eat it too, if you use Zetwerk’s multi-country sourcing model.

Zetwerk provides you the flexibility of enjoying India’s scale and market depth for your high volume needs, while procuring other specialized equipment in low quantities from Vietnam. Then, we can manage your inventory in our own partner warehouses right here in the US, for your Just-in-Time delivery needs. As a bonus, we also have fabrication units in the US, that can add value to your materials and make it USMCA-compliant. What could be a better deal than that, huh?

This even makes your supply chain more resilient, and immune to domestic problems of any one country, like what happened with China during the pandemic.

Let’s have a look at both the countries, and their manufacturing landscape.

India as a Manufacturing Hub

India, with its vast and diverse economy, is well-positioned to step into the void left by China. The fact that India is the world’s fifth-largest economy alone gives it significant competitive advantages.

• With a large economy comes a great domestic market, wide range of consumers, and an abundant, low-cost workforce for foreign (as India’s unemployment rate is lower than Vietnam, skilled manpower in India will be available at a lower price).
• It has a broad manufacturing base that supplies everything from electric vehicles and heavy machinery to chemicals and appliances for its domestic market. In the aftermath of COVID-19, as mentioned in BBC, India’s GDP growth rate is around 8 percent, and its merchandise exports crossed US$400 billion, which makes the country a “better-performing major economies this year.” 

Moreover, India seems to be taking full advantage of its economic benefit by announcing the PM Gati Shakti – a $1.2 trillion project aiming at snatching factories from China.

Source: scmp.com

• The government’s initiatives like ‘Make in India’ have been instrumental in fostering a favorable environment for manufacturing growth. This focus on improving infrastructure, ease of doing business, and implementing pro-manufacturing policies has garnered attention from international investors.
• Furthermore, India’s strategic geographical location offers easy access to key markets, enhancing its appeal for global manufacturers looking to diversify their production bases. The country’s skilled workforce, especially in the technology and engineering sectors, contributes to its competitiveness in the global manufacturing arena.
• English is spoken widely, boosting the country’s appeal for overseas customers. Parents, teachers, businesses, and the government encourage learning English to increase economic prosperity and social status.

Vietnam’s Strengths in Manufacturing

Vietnam, often referred to as the new “Asian Tiger,” has experienced rapid economic growth in recent years. The nation has successfully attracted foreign direct investment (FDI) by offering a stable political environment, competitive labor costs, and a diligent workforce.

Statement from vietnam-briefing.com, as global businesses seek to diversify, increase the resiliency and connectivity of their supply chains, and decrease reliance on a single country, Vietnam has become a top destination for investment in manufacturing. This is due to its strategic location, advantages in shipping, competitive labor, and production costs. Compared to other Southeast Asian countries, Vietnam stands out with its international airports, seaports, and rail links that facilitate production flow and transportation.

The manufacturing in Vietnam is driven by several key factors.

• Firstly, Vietnam is known as a low-cost manufacturer with competitive labor costs. On average, Vietnam’s labor costs are half as much as China’s, at US$2.99 (VND 68,000) per hour compared to US$6.50 (VND 148,000) per hour, respectively. This contributes to Vietnam’s increasing position as a more cost-effective alternative to its regional counterparts, except India, where the wages are even lower due to their huge population.
• Secondly, Vietnam has a relatively large, well-educated labor force, making it an attractive hub for production. The government has also provided various vocational education and training sessions to equip the workforce. To address the current labor shortage and lack of skilled workers in specific industries such as IT, the government has implemented additional strategies and programs.
• In addition, the inflation rate in Vietnam is lower than in India, which can partly ensure the stability of raw material prices and other costs – a crucial factor in times of turmoil. Foreign businesses also prefer Vietnam to avoid currency risks with its low currency fluctuation rate.
• Vietnam also benefits from numerous free trade agreements (FTAs), including the EU-Vietnam Free Trade Agreement (EVFTA), the UK-Vietnam Free Trade Agreement (UKVFTA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
• They have implemented several tax incentives and tax holidays for manufacturing projects. These incentives include corporate income tax (CIT) reductions for large investment projects with capital of more than VND 6 trillion (US$264 million), as well as incentives in high-tech zones, certain industrial zones, and difficult socio-economic areas.

India + Vietnam: A Winning Combo

When comparing India and Vietnam, it is easy to conclude that each country has its pros and cons. If India is a large economy with market and workforce advantages, Vietnam is fast emerging as a stable manufacturing hub. Why not kill two birds with one stone?

Indeed, the two countries themselves see the current situation through the lens of collaboration, where India and Vietnam can complement each other through bilateral cooperation policies.

For instance, mentioned in en.vietnamplus.vn, Mr. Sanjaya Baru, former Secretary General of the Confederation of Indian Chambers of Commerce and Industry, regards Vietnam as a potential partner in India’s new supply chain process. Through the connection with Vietnam, India hopes to increase exports of Indian goods to Southeast and East Asia through a joint venture.

When looking at the diplomatic journey of the past two decades, the bilateral trade relationship between India and Vietnam has grown steadily from US$200 million in 2000 to US$12.3 billion in the financial year 2019-2020.

Data source: indiaglobalbusiness.com

The increased cooperation reflects how the two countries regard their diplomatic affair: a mutually beneficial relationship.

In the wake of China’s slowing manufacturing growth, India and Vietnam are emerging as dynamic players in the global manufacturing landscape. With their respective strengths in labor force, strategic location, and conducive business environments, these nations are well-positioned to attract investments and become the new low-cost manufacturing hubs. As they navigate the challenges and capitalize on opportunities, India and Vietnam act as new sources for international manufacturing.

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How does Zetwerk help you?

Zetwerk offers a unique solution to virtually all the challenges and risks that come with multi-country sourcing. The following points briefly explain why global OEMs are preferring a partnership with Zetwerk today:

1. Vast supplier network: Zetwerk boasts of an exhaustive supplier network across India and Vietnam, and covering virtually every industry. Today, we can confidently claim to serve companies in any industry and any country looking to source parts and components globally. Along with the supplier network in India & Vietnam, we are also well supplemented with our presence across Mexico and China, thus eliminating any risks that may arise due to region-specific issues.
   
2. Reduced risk with supply chain assurance: The vast supplier network across multiple countries allows Zetwerk to offer supply chain assurance to companies it works with, thus eliminating the uncertainty that often looms with global sourcing. Once Zetwerk is contracted for supply, the complete responsibility of delivering them in the agreed timeline rests with us.
   
3. Expert team to assist with right sourcing: It can often be daunting to select the right components and parts, and then choose the right supplier specifically for it. This is where our expert team comes into the picture. With an in-depth understanding of manufacturing processes and experience spanning over decades, we take the load of selection of parts and suppliers off our customers. This helps save significant time and resources for them, making the entire process smooth and cost-effective.
   
4. Partnership model: Our model is simple. Once customers choose to work with us, we take the entire load of supply chain management off their shoulders. We become their partners where we are the single point of contact between their manufacturing needs and supplies. No more dealing with multiple suppliers, no more extended meetings and cost-benefit analyses, no more scouting of new suppliers in different countries – Zetwerk takes care of all of that. Our customers focus on creating and selling the product.
   
5. Reduced costs: Firstly, the vast network of Zetwerk allows us to choose the most optimal supplier for any parts. Having a variety of options ensures that we always go with the cheapest option that ensures the quality required.
   
   Apart from the direct reduction in costs through optimal sourcing, Zetwerk’s supply chain expertise ensures that our customers don’t spend unnecessary time on supply chain planning and management. This earns them hundreds of man-hours of productive time, which results in an even bigger cost reduction than the direct sourcing of materials.
   
6. Reduced lead times: A major drawback of global sourcing is long lead times that add to uncertainty and costs for manufacturers. With warehouses across key locations in the US and Mexico, Zetwerk can stock important parts and deliver them in under a week to any part of America. Moreover, we can set up a warehouse close to prominent clients for even better efficiency.
   
7. Deep knowledge of South Asian manufacturing: Indian suppliers can be tricky to navigate without the right geographical and cultural context. Many of them have the right capabilities but not the business nous to work with an international client. Even though the manufacturing landscape is big, for international companies dealing with the suppliers directly, the effective market becomes smaller. Zetwerk, being an Indian company and with professionals having decades of experience in this manufacturing ecosystem, knows exactly how to tap into the nook and corner of this landscape and unlock opportunities no one else can.
   

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If you are looking for a global sourcing partner, look no further.