Supply Chain: Vietnam comes to terms with new outsourcing trends

Editor’s Note: This if the third installment of a three-part article written by Mi Nguyen, Seafreight Pricing Specialist - North America region for Kuehne + Nagel.

While ocean logistics in Vietnam has been improving significantly, companies that import large volumes using air freight face more challenges.

Michael Tomasulo, Kuehne + Nagel’s Senior Director of Transpacific Airfreight advised that depending on the market fluctuation, but during off peak seasons, air freight rates from China are often 20 percent more competitive than from Vietnam. However, during peak seasons, freight cost difference between the two countries is minimal.

China does offer much larger lift capacity. A global logistics manager at a U.S large sport and winter wear retailer said importers are concerned about heavy backlogs during peak seasons for shipments from Vietnam.

As the Vietnamese government only allows carriers and shippers to consolidate air cargo in the government’s facilities, which have very limited space, heavy backlogs occur every peak season. Serious delays caused by these backlogs keep importers up at night. In many cases where shipments are not extremely urgent, importers may consider a sea-air strategy where freight is shipped out of Vietnam as ocean freight, to a less congested hub –Singapore or Seoul for example – then by air freight to final destinations in the U.S. This combination service adds options, normally costs significantly less than during peak seasons, and helps avoid backlogs as ocean freight is not restricted to be loaded at government’s facilities, and allows faster transit time than pure ocean shipping.

Before making a decision on moving manufacturing to Vietnam, an importer should be aware of some key economic issues the country currently has and whether these issues can have a negative impact on the company’s supply chain. In February this year, Vietnam’s inflation hit a two-year high record of 12.31 percent. In the same month, electricity prices rose by 15 percent, and retail prices of oil products increased by as much as 24 percent compared to the previous year. The population is struggling with a soaring cost of living. The government said fighting inflation is its top priority but struggles to find effective solutions. Inflation pressures are raising the cost of production and there’s been an increasing number of labor strikes to raise wages.

Inspite of the inflationary pressure, many U.S. importers have not seen so much of increase in production bills from Vietnam. The reason is the country has a trade deficit, which causes its currency, the dong, to lose about 20 percent of its value since mid 2008 against U.S dollars. Inflation is another factor that drives people to sell the currency due to speculation of the weakening currency.

As Vietnam attracts more contract manufacturing orders from the West, there are constantly new developments in the country to meet this increasing demand. The Vietnamese government recently announced increasing transportation infrastructure projects such as new highways to connect northern Vietnam to southern China, which will enable Vietnamese factories to become part of China’s supply chains. Manufacturers in Vietnam can then take advantage of lower labor costs and move shipments via China to the U.S while having more transportation options from China. In addition, a number of the world’s largest retailers have already thought beyond Vietnam, relocating large portions of their manufacturing to Cambodia for a deeper cut in labor costs while moving shipments out of Vietnam’s seaports and airports.

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