When we travelled to Vietnam in late December, the first novel coronavirus cases hadn’t even been reported in China. Now, with the virus battering Chinese manufacturing, our impressions from that visit seem especially timely as investors seek to assess the shift of global supply chains to Vietnamese factories.

Global companies have been testing Vietnam’s capabilities for several years—even before the added impetus from the US-China trade wars. That’s because China’s rise as the world’s factory has created labor shortages and pushed up costs. Labor costs in Vietnam, with its younger workforce and ample supply, are about 40% lower than in China. Vietnam also offers tax benefits and a six-day workweek, which can enhance productivity. Many popular clothing and sportswear brands, including Nike and Adidas, already have a large manufacturing presence in Vietnam.

Today, most global brand outsourcing to Vietnam is done by Asian manufacturers in two industries. Textiles and footwear accounted for 18% of Vietnam’s total exports in 2018, while electronics and electrical equipment accounted for 40%. So we wanted to get a closer look at the latest outsourcing trends in these two industries to better understand the dynamics of local and global supply chains. We took a four-hour flight from Shanghai to Hanoi, followed by a two-hour hop to Ho Chi Minh City two days later. By visiting manufacturing plants and speaking with managers and employees, we aimed to find out what it takes for companies to relocate capacity to Vietnam.

Cultural Sensitivity Is Crucial

Getting a relocation right requires sensitivity to cultural issues. At all the companies we visited, locals told us that Vietnamese employees prefer to work at factories close to home and live with their families, unlike in China, where workers often live in on-site dormitories and return home only during holidays.

Companies have also learned important lessons about modern slavery. Stella International Holdings, a leading global footwear and leather goods maker is a good example. We traveled about 100 kilometers from Hanoi to Thai Binh province to visit a Stella factory that employs more than 7,000 people. With 14 assembly lines and 52 stitching lines, it churns out about 7 million pairs of sneakers a year for Nike and other brands. Managers there seemed very attuned to global scrutiny of working conditions. “The key to managing local workers is to take care of them,” said one. Frequent visits to employees’ homes help enhance the company’s bond with employees, he added.

From Textiles to Technology

Beyond cultural issues, technology companies face additional challenges. Can Vietnamese firms meet global quality standards for sophisticated high-tech products at efficient operational levels? Luxshare Precision Industry, a leading Chinese electronics company that manufactures components for Apple, is one of the Chinese tech pioneers in Vietnam. It already has one plant on line in the country and is in the process of setting up three more. Ultimately, the company plans to have at least 60,000 workers in Vietnam—more than a third of its Chinese workforce—as Apple seeks to diversify its supply chain away from China.