Vietnam or China?

Vietnam or China? Or Both?

August 2019

I just spent a couple days in Vietnam refreshing my professional connections and taking a look at how things have developed since the last time I was there.

First let me say I don’t mean the “versus” as literally as it sounds.

For most companies it doesn’t make sense to choose one over the other. If you’re looking for an Asia-Pacific manufacturing site, you may need to be in both.

China has a clear advantage with a solid established supply chain base. Vietnam offers lower costs, and less political drama with the US. Especially now with the trade war – it can make sense to have an alternative manufacturing base to mitigate the effect of the Tariffs. But China is still the center of manufacturing in Asia and the trade war doesn’t change that.

So let’s look at how the two countries compare in regards to a foreign entity establishing a business there. I’m going to focus on areas that are of particular concern to foreign held corporations.

Incorporation Process:

China: while the government is simplifying requirements to incorporate in China the regional authority still has to improve your incorporation documents. And they’re often less flexible than the national government wants them to be. While the national government has eliminated the requirement for registered capital – the local authorities will still want you to make a minimum registered capital commitment.

Foreigners still set up a separate form of corporate entity, commonly known as WFOE. This means transferring ownership from a local to foreign owners or vice versa is more complicated. There are also different set of compliance regulations. Shutting down a company is more time consuming than it would be in the U.S.

One of the aspects of incorporation in China that many foreigners are not familiar with is the positions you will be required to have filled before the incorporation date. When you register your company in China its required to designate at least three positions; The Legal Representative, the General Manager, and the Supervisor. These positions can all be held by foreigners or by Chinese. Note that the Legal Representative has the most unchecked authority and will have personal liability for the misdeeds of the business.

Vietnam: Vietnam doesn’t have a separate set of foreign company types. Similar to the U.S. you would choose between different kinds of entities, similar to a C Corp or an LLC. Both foreigners and locals can establish these types of companies. Similar to China, they do require a commitment of registered capital for the corporation to be approved. Shutting down a company is as complex as it is in China – no clear benefit on that point.

Similar to China companies are required to designate the Legal Representative as well as a Chief Accountant. In Vietnam both positions are typically held by a Vietnamese citizen. Why? Their requirements, especially for the Chief Accountant are such that very very few foreigners could meet them, as they include local licensing / practice and residency. In China any of the three mandated positions can be held by someone outside of the country, including a non-resident and non-Chinese citizen.

Foreign Capital / Money Across Borders:

China: it’s still not easy, and the simplicity of moving money between China and other countries ebbs and flows depending on what’s happening on the world stage. For corporate profit distribution, you’re required to hold back some monies to cover future liabilities primarily to employees. After that money is funded, you can apply to repatriate profit distributions. Over the last few years some of my clients have been able to bring back millions of dollars without a problem. But then just as quickly, their application is delayed or denied. Other types of financial transactions are more frequently denied, specifically the Chinese entity paying foreign entities for intangible services – those have always been difficult, and remain so.

To move money out of China over benchmark levels, you have to have both the approval of the bank and SAFE. Choosing which bank to set up your company’s accounts with when you incorporate is critical. Certain banks are more problematic when it comes to paying intangible invoices or repatriating dividends. SAFE operates based on central government priorities. So if they want to hold back foreign reserves, then they make it harder to pay money out. As difficult as it is for corporations, it’s much more difficult for individuals.

Vietnam: Vietnam is very similar to China, to the extent that it’s not easy to repatriate profit dividends. It’s also not easy to pay for intangible services to companies outside of the country. They don’t have an official agency like China does in SAFE. The banks have to make approval of the payment along with tax authorities…and they can hold things up. I was told that it’s gotten easier by some of my contacts. Others said it’s not any easier.

Vietnam is very focused on transfer pricing, as a way to control how foreign entities in their country are shifting profit. China has strengthened their transfer pricing rules. But Vietnam pays particular attention to transfer pricing. Both countries have VAT.

Labor – Employee Cost:

China: China has a very robust employee regulatory system making it difficult to terminate staff. The average employer portion of benefits is at about 45% which significantly increases the company’s cost of Labor. The average cost of a shop floor worker in China in a middle-market area is about $1,000 – 1,500 U.S. dollars a month. Including benefits. If you want someone that speaks English – that is another 50-100% higher than the wages for someone who does not. Higher level staff with English language skills in major cities can cost near the same as they do in the U.S.

Vietnam: Vietnam has less employee regulation than China, and its less stringently applied. But there’s more employee driven agitation. It’s common to hear of employees “striking”, or refusing work. The average cost of a shop floor worker in a middle-market area is about $500 with benefits. This is because wages are lower, as well as employee benefits. Employee benefits cost the employer about 22%. Vietnam has a clear advantage from cost of Labor standpoint. it has additional difficulties from a worker and Labor Management standpoint. And there are fewer skilled and trained workers then in China. English language skills are also in demand, and mean you pay higher wages for those with that skill.


China: the majority of banks in China are still government owned. They give out asset-based loans, typically not operating capitol loans. That’s created an environment of what’s called Shadow Lending. A large lending market where non-bank lending occurs in an increasingly regulated environment. Its estimated to be $5-7 trillion USD in lending. Rather than squash it (because it provides liquidity the banks don’t want to) a few years ago the government started to create more regulations. The Chinese government does not allow corporate to corporate direct lending. There are many companies who get around that by investing in the target company as a way to infuse capital.

Vietnam: similar to China, Vietnam has primarily government banks. They also provide only asset based lending. In Vietnam the non-bank Lending is commonly called “black market” lending. It’s not at all regulated and its very risky.

What I heard is that many Vietnamese companies looking for additional funding are looking for investors. One of the challenges for them to attract foreign capital is that many of the privately-held Vietnamese companies need to formalize their accounting and financial reporting to be able to meet investor expectations.

Government / Business Environment:

China: while both countries are communist top-down managed governments, they differ. The Chinese government is very well structured and tightly controlled. There is some variation and latitude in decision-making across regions in China but overall it’s a relatively uniform coordinated government system. There is very little bribery or corruption (comparatively). When the central government wants to move the country or the economy in a particular direction, it happens.

Vietnam: the Vietnamese government is much more fragmented and less tightly organized. There’s a lot of disagreement and differences between levels of government within one region, as well as between different regions in the country. This means that business here is much more opaque. It also breeds more corruption and graft. But for companies that like to take advantage of the gray zone to leverage opportunities outside of appropriate channels…..then they will like Vietnam’s lack of coordination and consistency.


China: China is famous and rightfully so for the rapidity and focus that they apply to building infrastructure. New highways, new train lines, new airports. They’ve also made dramatic improvements to the reliability of the energy system. There are some infrastructure issues, especially in more remote regions, but for the most part the infrastructure in China is extremely well-developed.

Vietnam: Vietnam is still very much a developing country. There are regular electrical outages. The road and train system is not well established. This is in part because they have lagged China on the economic development curve. And also because the Vietnamese government doesn’t have the coordinated capability of delivering big projects the way China does.

Overall – certainly the costs are lower in Vietnam. If you have a heavy labor content and repetitive product manufacturing then Vietnam becomes more attractive. From a political risk standpoint it diversifies risk to have at least a small operation in Vietnam. Many companies already do this with plants in both China and Mexico – then they move manufacturing back and forth as needed. The current concerns in Vietnam are the more agitated labor force, weaker infrastructure, more bribery and graft, and a less developed supply chain.

As with any site selection – you need to look at a variety of factors to decide whether being near a city or near a port is more important, what type of labor you need, where your supplier base is located, etc. The trade war doesn’t change those fundamental factors.

Other tariff mitigation options….On a recent China trip I was traveling with a client – we had set up meetings in various parts of Shandong province to look at manufacturing sites, specifically in Export Processing Zones. They are looking at setting up a JV with their Chinese supplier. Having looked at the other regional options (including Vietnam) they decided that China still provided the best all around choice to manage their supply chain, continue with a trusted supplier, and by focusing on Foreign Export Zones we can mitigate the customs taxes / tariffs.