Thanh joined us this week in Vietnam! He is our first technical team member in the country. He’s already doing a great job diving in on projects and working with local suppliers. Having new energy in Vietnam has given me a chance to reflect on lessons learned working in the country in the last few years.

Here’s the secret… Vietnam is not always that much cheaper than China. Sometimes it’s more expensive.

Why? I’ll introduce what I call the Mercedes Theory of Entrepreneurship: Everyone in the world gets into business with the goal of owning a Mercedes. Ok, maybe not a Mercedes, could be a Lexus or a Volvo or a Land Cruiser. Even lightly used would be ok, as long as the interior still looks nice. Not a Maserati, just enough to have made it to the good life. And the good life doesn’t just require a car of course. Good food. A nice house. Physical, medical, and financial security. International trips and educations for your family. And eventually enough free time to enjoy it all. Put another way, doing significantly better than you would be in the 9 to 5 job to which you are qualified. I’d say this describes me as well as it describes the bosses we work with in China or in Vietnam or our entrepreneurial partners back in the US. It’s a global rule.

Chi and Her Ride

Before moving on, I think folks reading from the US should understand that this kind of lifestyle isn’t a rare occurrence. There are Mercedes everywhere. Thinking about it now, I’m sure I’ve ridden in a Mercedes or comparable vehicle on four continents and India. Harare, Zimbabwe is covered in used Mercedes. There are many more high-end cars on the road in Shenzhen than where I’m from in Pennsylvania.  And this idea can be expanded; there are people everywhere living comfortable, even opulent lifestyles by international standards. It may be the case that when you convert incomes into US dollars they aren’t earning more than a middle manager at Intel. But that income can mean more in a developing country than it does in Portland, Oregon.

But how much more? Certainly some of these expenses are location dependent. A house and dinner out are likely cheaper in Hanoi than in Shenzhen. But a hotel room in Paris or a semester at USC (should) cost the same no matter where you are coming from. It’s a fact that the same model Mercedes is more expensive in China than it would be in the US. And given a 200% tax on cars, it’s way more expensive in Vietnam.

Circling back to the original topic of this post – Vietnam’s seeming price advantages in labor might not be as important as we would think. We should remember, at least in the world of manufactured goods, the relevant comparison might not be Hanoi vs. Shenzhen, but Bac Ninh vs. Foshan. $250 vs. $450 per month as a base wage for a factory worker? While a large difference percentage-wise, it’s not a huge difference to overall cost when thinking on a pieces per minute basis in a smaller production run. In the other direction, we’ve found raw materials are often more expensive in Vietnam, often having been imported from elsewhere in Asia. We too have been finding ourselves needing to import material to get exactly what we want at a reasonable price.

Cool tailpipe, right? It’s plastic 🙂

But in the above discussion we have forgotten one key expense: the Mercedes, and everything that comes with it. And this is where China wins. The Chinese market is more robust than the Vietnamese market. China has a huge domestic market for goods plus plentiful export opportunities. The Chinese boss will have more customers to divide his Mercedes between. The Chinese market may also be more competitive, particularly in geographically concentrated industries – PCBA in Shenzhen, etc. Price is driven down by easy shopping between seemingly identical suppliers. A market with seemingly infinite, low profitability work is how we get where we are, with perceptions of low Chinese quality and long long hours for workers, all in order to hopefully satisfy the dreams for boss and investors.

The Vietnamese boss has more limited opportunities. The domestic market is smaller, and most small factories lack access to a platform like Alibaba in order to take orders from overseas. Not only this, but a free trade agreement along with easy geography and logistics mean that many common objects in Vietnam – say a wrench in a hardware store in Hanoi – were likely made in China. From my experience, it’s not uncommon to walk into a Vietnamese factory and see many machines idle. Staffs are often much smaller than you would see in a Chinese factory. There simply isn’t as much work to do. Back to the boss, she has no other choice then but to ask for more from each customer. For her Mercedes. And without the intense competitive pressures of a market like China’s, these prices can be sustained.

A lambo and a tank??

And therefore, Vietnam and markets like it aren’t necessarily cheaper than China for manufactured goods. A related topic for consideration is that there is likely a bigger gap between developing and developed countries in the target income of the boss and the income of the worker in an owner-operated small businesses, at least in percentage terms. A successful boss may be taking home 10 to 20 times the wages of her average worker in a developing country, where in the US context we might expect something like three to five times. In a macro sense, this can help us understand how many developing countries show high income inequality.

Right now this may not matter. During this trade war it may be worth having a product made in Vietnam at the same price or even a little more than it would be in China, enjoying significant savings on import into the US. But long term it is worth considering these kinds of market forces before blindly setting sights on a new country. For our part, we help our customers think through these sorts of dynamics with respect to their projects, finding the best location and partners for their production, in Vietnam, China, or elsewhere.

Googling the GDP per capita of a country may not give a good indication of expected price for that country’s manufactured goods. Maybe better to start with the price of a new Mercedes.