I had a call recently with the team at a well known home appliance brand, discussing opportunities here in Vietnam. These folks have deep experience in China, but given the current environment are interested in exploring other options as well. From my perspective, the short conversation didn’t go very well. Reflecting on this, I believe the issue was that we had not defined the core reason why this company was interested in leaving China.

Conversations around moving away from Chinese manufacturing center on three issues:

1. Tax and Cost. Companies that are in the crosshairs of the trade war are interested in reducing their tariff bill when importing into the United States. Along with this there is an interest in further reducing cost by taking advantage of lower labor costs in countries other than China.

2. Robustness. Companies want to make sure that their products and underlying supply chains will be resilient to future shocks – geopolitical conflicts, natural disasters, market turbulence, etc.

3. Proximity. Companies see advantage to having final assembly done closer to themselves and their end customers. This can be from savings and simplifications in logistics, allowing the assembler to also have more involvement in customer support and refurbishment, lead time reduction and cash flow improvement, and considerations as simple as time zones and travel times.

For most companies improvements in all three areas would be desirable. But I believe it is worth considering which is the priority for a given company. In doing so, we can decide which is the correct strategy to pursue in discussions of leaving China.

Strategy #1: Business as Usual/Party Like it’s 2014. Trade transformation in a third country, with continued heavy reliance on China and existing supply chains. Discussions here will be around substantial transformation, content percentages from a given country, compliant labeling and documentation, and generally making sure that a company feels confident to import their goods as the product of a country other than China. This strategy aligns with a focus on tax and cost reduction.

Strategy #2: China-Free. Not only moving final assembly out of China, but looking into the supply chain to make sure reliance on China is eliminated or strongly reduced. Choice of assembly country should likely rely on these supply chain considerations, rather than the lowest cost of labor. This strategy aligns with a focus on robustness, and perhaps also proximity.

Strategy #3: Ready to Jump. Moving final assembly out of China, likely moving more generic manufacturing services out of China as well (metalwork, plastic components, etc), and having a clear-eyed view of for which components the company is still reliant on China. Developing a sense for what it would take to become China-free or source all components in-region, if required. This strategy aligns with a focus on proximity and robustness.

For a US-based and focused company, Vietnam can be a great solution for Strategy #1. With a land border with China, developed ports and trade infrastructure, many existing manufacturing companies, and only a one-hour time zone difference with China, Vietnam is set up to be the smoothest possible transition in terms of moving final assembly. In my mind the goal in these sorts of projects is for the reduced labor cost in Vietnam to offset the increased logistics cost of moving components here to have no net increase in ex-works cost of goods for the customer, all while enjoying a substantial tariff savings on import to the US.

But if the goal is to completely or greatly reduce reliance on China, then Vietnam likely isn’t the best place. Like it or not, Vietnam is and will continue to be in China’s sphere of influence. My view is a major conflict between the US and China would likely have repercussions for production in Vietnam as well. Proximity to China, as well as a free trade agreement through ASEAN, will reduce the chance that suppliers of intermediate components naturally develop here. And Vietnam is even further from the US than China, whether it is a discussion of shipping goods there or of managers and engineers traveling here.

So if I could redo that previous conversation, I would start by asking the team to define what their priorities were in transitioning away from China. That likely would have been the start to a more productive discussion.