Vietnam Could Be the New China

When Patrick Kruse realized he'd have to manufacture offshore if he wanted to remain competitive, he started with China. That gave him the labor-cost savings he needed, but quality was sorely lacking. "We actually had to refuse some shipments, which really hurt our business," says the 45-year-old founder of Ruff Wear Inc., a Bend, Ore.-based maker of dog booties and other canine gear with $2 million in 2005 sales.

Another entrepreneur suggested Kruse check out Vietnam, and provided a referral to a factory owner there. When Kruse visited, he found a booming sewing industry catering to European buyers, which had developed during the years when Vietnam was on the outs with U.S. trade policy. Kruse noticed that many of the factories in Ho Chi Minh City specialized in backpacks, climbing gear and other products similar to the performance canine apparel and equipment Ruff Wear sold.

"The infrastructure was there," Kruse reports. "All we had to do was plug into it." Since signing on in 2003 with a factory in Ho Chi Minh City, his quality problems have disappeared. Now Kruse deals directly with Vietnamese manufacturers instead of the multiple middlemen he encountered in Hong Kong. And Vietnam's Communist government offers financing and tax incentives for constructing factories in designated economic zones. Kruse is paying a somewhat higher price than he did in China, but quality and convenience make the move worth the cost, he says.

Vietnam may be emerging as a smaller version of what China was a few years ago, according to offshoring and outsourcing experts. The country had the lowest wages for IT workers of seven nations -- including China, India, Malaysia, the Philippines, Singapore and Thailand -- that were surveyed in 2004 by NeoIT, a San Ramon, Calif., offshoring consultant.

Demand is catching up to supply in some of the countries that have taken the lead in offshoring, according to Ton Heijmen, senior advisor of outsourcing for The Conference Board in New York City. That leads to rising costs in places that previously based all their appeal on low costs. "India is getting more expensive, especially in IT-related outsourcing," says Heijmen. "And there is a shortage of certain IT skills there already."