OM in the News: If China is Too Expensive, Should We Locate in Vietnam ?

With China’s minimum wage at $170 a month, and rising steadily, the decision where to locate a manufacturing plant is not as clear as it was a decade ago. We discuss this issue in Chapter 8, Location Strategies, and see that low labor cost is a major factor in country selection.  The latest Businessweek (June 23-30, 2011) reports that Vietnam, until recently the low-cost alternative to China (with a minimum wage of $85 a month), was a very attractive choice. But with 20% inflation, stoked by fuel and electricity costs, multinationals are beginning to turn away in search of yet cheaper outsourcing sites. The problem is labor strikes–336 in the 1st four months of 2011–due to Vietnamese workers who say they can’t afford the higher cost of living.

Multinationals do not have to look far away–and they are turning in increasing numbers to Laos and Cambodia, the new Vietnams of cheap manufacturing. Last month, Japan’s Minebea  broke ground for a new 5,000 worker motor production plant in  Phnom Penh. “Labor is the key focus for us in choosing Cambodia”, says the company spokesman. And Srithai Superware, a Thai tableware maker, just suspended plans for an expansion of its Vietnam plant because of  economic instability. “Production costs have gone up after two salary increase this year”, says the GM.

The strikes have dented Vietnam’s 25-year-old policy of offering foreign firms a stable and low-cost workforce . “The nation is at a crossroads”, says the World Bank’s director for the country. “Vietnam can’t assume that foreign direct investment will continue. Money can go elsewhere”.

Discussion questions:

1. If manufacturers decide China is too expensive and Vietnam is in danger of following suit, how can they predict where to outsource to?

2. What other  critical factors influence the country location decision?