We interviewed four Sourcing Companies that specialize in finding Vietnamese suppliers for international clients. We solicited their expert opinions on topics ranging from: Vietnam vs China, how sourcing agents are compensated, how to avoid IP theft, and other tips and tricks to help would-be importers find suppliers in Vietnam and protect their interests.
Specifically, we asked about:
The answers to the above questions have been consolidated from the responses of four Vietnamese Sourcing Companies. For more information about their services, please visit their respective websites:
- Seditex Co Ltd. – https://seditexvn.com
- Source of Asia – https://www.sourceofasia.com/
- Vietnam B2B Direct – https://vietnamb2bdirect.com/
- OneLink Holdings Inc. – https://onelinkholdings.com/
NOTE: The responses have been de-personalized from any particular respondent, and no single idea/answer is uniquely attributable to any one of the responding companies. None of the respondents bare any responsibility for the accuracy of the consolidated answers. No attribution or blame shall be placed upon the responding companies. Anyone wishing to cite this article should attribute the content to the article’s author, and/or “a group of interviewee sourcing companies”.
1) Vietnam vs China – Efficiency of Export Process
How do Vietnam and China compare in terms of time and efficiency of the export and shipping process?
According to our respondents, Vietnam and China are quite comparable in overall efficiency of the export and shipping process, with Vietnam coming out a little more expensive. However, one’s experience and cost will vary by factors like the industry, the raw materials used, shipping destination, and whether there are intermediary hand-offs (like in Hong Kong or Singapore).
About China, the respondents highlighted:
- China has a mature infrastructure and many large ports, making it very efficient for large volumes.
- China can provide better services and products in sectors requiring sophisticated heavy manufacturing machinery (although Vietnam is becoming increasingly more sophisticated in fabrication).
- China can source a lot of materials domestically, which provides a cost advantage for certain producers, whereas Vietnam may have steep import tariffs outside of Export Zones.
About Vietnam, the respondents highlighted:
- Vietnam outperforms China in industries that require a lot of manual workmanship, such as handicrafts, furniture, and textiles.
- Vietnam is often more flexible and accommodating, particularly for small and fast shipments.
- Vietnam has made significant efforts recently to streamline its export and customs procedures, such as reducing bureaucratic red-tape.
- Vietnam is has been investing heavily in logistics infrastructure, with several new deep-water ports and expressways constructed recently (although these are still less developed than in China).
- Overall, Vietnam provides a better trade-off in terms of efficiency and quality of work.
2) Major Challenges Faced by Sourcing Agents
When a sourcing company searches for a Vietnamese Supplier for a Client, what risks are they most worried about and/or keep them most preoccupied?
Sourcing companies handle a wide variety of challenges and ever-changing business conditions. What challenges keep them most on their toes?
At a high-level, sourcing companies view their overarching challenge as “business matching” — aligning the needs and constraints of the Buyer with the capabilities and capacities of suppliers/manufacturers. The respondents identified the following key areas as being some of the most challenging for finding adequate suppliers:
- adequate quality control,
- acceptable lead-time,
- compliance with regulations,
- overall business stability and long-term reliability, and
- hidden costs.
One respondent noted that Vietnamese factories were currently strained with abundant demand. Some are not responding to new inquiries. Some Vietnamese factories are getting increasingly standoffish, hardened by the glut of inquiries that don’t convert to sales.
Another respondent warned of communication challenges in Vietnam: many suppliers are not proficient in English or other trade languages. This can lead to misunderstandings and mistakes that can have serious consequences for businesses.
3) Compensation for Sourcing Companies
How are sourcing companies compensated for finding a supplier and brokering an agreement?
There are a variety of ways that sourcing companies receive compensation for their services; half of the respondents offer multiple methods/hybrid schemes that can be tailored to each Client’s project.
In order of most-commonly mentioned schemes, the respondents listed the following:
- commission-based, paid by Buyer, based on a percentage of order value;
- fixed fee per project;
- monthly retainer to perform multiple services;
- success fees; and
- hybrid solutions
The respondents were also adamant about the need for the Buyer, and not the Supplier, to compensate the sourcing company. Otherwise, there is a conflict of interest for inspections, quality controls, and due diligence.
Many sourcing companies offer other value-add services (e.g. logistics) and bundled services, thereby accruing value for their Clients and themselves by leveraging their local relationships and larger buying power.
4) Key Provisions in Negotiating with Suppliers/Manufacturers
When negotiating an Agreement with a Vietnamese manufacturer/supplier, what are some key clauses and provisions to watch out for and minimize risks to the Buyer?
Sourcing companies typically provide their clients with a template Manufacturing Supply Agreement. Such templates will have industry-standard provisions that more-or-less the protect interests of the Buyer, such as: remedies for failure of the supplier to deliver on time, quality obligations, intellectual property protection (e.g. buyer’s designs, trademarks), whether the manufacturer can work with the buyer’s competitors, etc.
Larger customers may have more leverage to negotiate better terms, while others may have to accept the standard language or cede terms that are less favourable to their interests.
Nonetheless, all buyers should familiarize themselves with some key clauses:
- Quality compliance – this should outline rigorous inspection rights, including both inline and final inspections. There should be exhibits with clear product specifications.
- Delivery & lead-time – faster is better; there should be penalties for late delivery and/or failure to meet agreed-upon specifications.
- Intellectual property & confidentiality – this should include protections for Buyer’s trademarks, patents, and copyrighted materials, including remedies for any potential infringements. There should also be an agreement for confidentiality and non-disclosure of sensitive information shared with the Supplier.
- Termination and cancellation – Buyers should negotiate for the ability to terminate or cancel the agreement (ideally “for convenience”), especially in case of poor performance by the Supplier and/or changes in market conditions.
- Warranties and indemnification – to protect himself against any defects or problems with the goods, the Buyer should negotiate for warranties from the Supplier and indemnification against any loss or damages caused by the products themselves or failure of the Supplier to meet their obligations);
- Price & payment terms – Buyers should negotiate for competitive pricing and favorable payment terms, such as a discount for early payment or the ability to pay by credit card or wire transfer.
- Dispute resolution – buyers should include clauses that outline how disputes will be resolved, such as through arbitration or mediation. Include the jurisdiction and governing law (i.e., “this contract is governed by the laws of __”).
About the final point, one respondent warned that the civil justice system in Vietnam is somewhat weaker and more arbitrary compared to other developed countries — therefore it’s best to avoid litigation and pursue independent arbitration. In particular, they recommended using the Singapore International Arbitration Center. For example, one would include a provision:
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration administered by the Singapore International Arbitration Centre (“SIAC”) in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC Rules”) for the time being in force, which rules are deemed to be incorporated by reference in this clause. The seat of the arbitration shall be [Singapore]. The Tribunal shall consist of [NUMBER] arbitrator(s). The language of the arbitration shall be [ENGLISH]”
5) Does the Sourcing Agent Work for the Buyer or the Manufacturer/Supplier?
How can a Buyer ensure that their Sourcing Agent is working on their behalf, and not working on behalf of the supplier/manufacturer?
Wherever there is an asymmetric transaction between Buyers and Sellers mediated through an Agent, there is a potential for a conflict of interest. This is especially worrisome for foreign Buyers looking to get a foothold in Asia, where there is a residual business culture of bribes, familial connections, and “informal fees”.
However, with a little due diligence and proper terms of compensation, Buyers can help ensure that their interests and the Agent’s interests are more closely aligned. The respondents made the following recommendations:
- Conduct cursory checks on personal ties between the Agency and Supplier/Manufacturer;
- Check the Agent’s references, credentials, and years of experience operating in Vietnam;
- Make sure the Agent fully understands the needs of the Buyer;
- Make sure that the commission-schedule is transparent and clearly defined, including the scope of work, performance expectations, timelines, and deliverables;
- Know whether the Agent’s business model is as a “trading office” vs “buying office” — in the former, the Buyer pays for the goods plus commission, with the intermediary acting as the exporter. Even if the premium is officially stated, there isn’t much transparency about the underlying transactions. In the latter, the Agent handles the Buyer’s sourcing operations, but the Buyer purchases the products directly from factories, with more transparency about names, contacts, prices, etc.
- Ask for regular project updates, including specific communication channels (e.g. not by text/Zalo), and get regulars reports on costs and fees involved in the sourcing process;
- Consider working with multiple Agents to compare and contrast their performance and offerings (see the “exclusivity” clause in any Agent/Representative Agreement).
Finally, arm yourself with a little knowledge about the Vietnamese business culture. This can help you understand the pressures & incentives that an Agent may be facing.
6) Payments, Title-transfer, and Risk-of-Loss Provisions
What is the industry standard for the terms of title-transfer and risk-of-loss provisions?
According to respondents, the most common situation is FOB (Free on Board), whereby the title-transfer occurs as soon as products are loaded onto the ship. This essentially means that Buyers assume all risk of loss thereafter. Up until that point, risks are born by the Supplier. See also EXW (Ex Works), CIF (Cost, Insurance, and Freight), and DDP (Delivered Duty Paid), or other ICC Incoterms here.
As an additional service, many sourcing companies also conduct inspections of goods once they are loaded onto containers. This helps minimize risks to the Buyer once they assume full risk-of-loss.
For payment terms, a common schedule is for the Buyer to pay 30% in advance, and 70% upon receipt of shipping documents. Many clients also ask for credit terms, such that the Buyer pays the second 70% after 30 or 60 days.
7) IP Theft by Manufacturers
What recourse do Buyers have for theft of intellectual property in Vietnam?
Vietnam has a history of “copy culture“, where a little success is almost assuredly copied by another desperate competitor. What should a Buyer do if they suspect their Supplier is using their intellectual property without their permission, such as re-using a Client’s custom designs with another party, or the factory workers selling excess products on the side? (see problem description here)
The respondents felt that while the chances of this were low, they said there is little recourse after-the-fact for IP theft in Vietnam. While some may try to pursue legal action, in reality, it is difficult to pursue because the costs are high and the chances of success have been historically low (until recently).
However, the respondents also thought that the government was increasingly taking IP protection more seriously. It has been a priority issue raised by the EU during the latest EU-Vietnam free trade agreement.
The respondents recommended being proactive about IP issues through a well-thought-out Supply/Manufacturing Agreement, in both English and Vietnamese, with clear provisions for IP protection and Confidentiality. One respondent recommended that Buyers register their trademarks with the government IP Office. They also note that having leverage from the start can help ameliorate these issues.
8) Authenticity of Documents and Certificates
Are certificates and documents easily faked in Vietnam?
Certificates and legal documents can be easily faked in Vietnam. Even authentic documents can be superficially “purchased” from regulators with little underlying authority. This has been known to happen in domestic spheres like driver’s licenses and notarization services.
How much of a problem are forged documents along the Vietnam supply chain, such as business licenses, shipping documents, testing/auditing reports, and/or factory certifications?
The respondents claimed that such issues are not significant in the Vietnamese supply chain (aside from an uptick of faked certificates for nitrile gloves and face-masks during the height of Covid-19). Nonetheless, the respondents gave the following tips and insights to help ameliorate the risk of forgeries and fakes:
- In addition to relying on sourcing companies’ due diligence, Buyers should also do simple checks on factories before placing purchase orders, such as asking for copies of business licenses, factory certifications, and banking details.
- Certificates of Inspection should be issued by a third-party inspection company and sent directly to the Buyer, with a copy sent to the factory. Consider randomly contacting the laboratory which issued a report.
- Consider using a third-party document verification service to confirm the authenticity of documents.
- Conduct random on-site inspections and product testing.
- For the most security, use only CE-certified laboratories.
- Shipping documents are the least likely to be forged.
While it may not be entirely practical to reduce the risk of forgeries to 0%, a little awareness and attention to detail can alleviate many of the risks.
9) Bribes, Gifts, and Informal Fees in Vietnamese Supply Chains
How much of a problem are “informal fees” (e.g. bribes, gifts) to the cost of doing business with a Vietnamese supplier?
Some people like to excuse gifts and entertainment expenses as part of the “Asian way of doing business”, as in, a system of relationship-building and reciprocal benefits to cement trust and loyalty between business partners. Others, citing the letter of the law, see such “informal fees” as black-and-white illegal. These business methods can be very frustrating for foreigners who aren’t familiar with Vietnamese business culture.
But do such practices and informal fees matter to Buyers working through sourcing companies?
One respondent answered that foreign Buyers should not be exposed to, or involved with, anything to do with informal fees. They admitted that it is not uncommon for factories to pay some sort of unofficial “service fee”, but considered these unaccountable fees to be minuscule.
On the accounting side, factories may post dubious items such as “facilitation” costs — this is an indication that something is not 100% kosher, but it should be the factory’s responsibility to deal with the issue, and not the Buyer.
Another respondent emphasized the need for foreign Buyers to use local on-the-ground agents who are familiar with the local customs and laws, and how such customs differ from Western expectations. From their experience, they warned about foreigners facing a steep learning curve upon entering the Vietnam market — clients can save a lot of time, money, and energy by not going it alone.
Another respondent mentioned that more and more large companies are implementing anti-corruption policies and procedures, which include audits, employee training, and transparency about transactions. Buyers should inquire whether their large supplier/manufacturer has such procedures and policies in place.
10) Problems at the Port
Compared to other SE Asian countries, how much of a problem is it for products to be stolen and/or seized during the shipping process on the Vietnamese side (e.g. by customs agents or rogue port staff or others)?
The respondents answered that the risks of theft and seizure of goods at Vietnamese ports were either relatively low, or that they had not witnessed any issues, or that the risks were comparable to other ports around the world. One respondent noted that they had clients who had switched from China to Vietnam due to such problems at Chinese ports.
The majority of respondents also noted that it is for these types of issues that a having local sourcing team is so important, to help resolve any possible issues that may arise, and to do loading control checks.
More Information on Sourcing From Vietnam
We’d like to give special thanks to respondents at Seditex, Source of Asia, Vietnam B2B Direct, and OneLink Holdings for giving us their time and answering our questions. Please reach out to these companies for more information about their services.
The responding sourcing companies also provided us extra booklets & guides to learn more information about the sourcing process and Vietnam more generally:
- Source of Asia’s “Doing Business in Vietnam” (2022), including country profile as an export nation, key manufacturing zones, and the regulatory environment including tax, compliance, and business formation, and more. 20 pp [PDF]
- Vietnam B2B Direct’s “Sourcing Manufacturers in Vietnam. Tips for Your Product Success”, including key terms and considerations for prospective importers. 6 pp [PDF]