The Viet Nam Advantage:How Pricing and Other Benefits Lower Total Manufacturing Cost

Beginning in 1986, the Government of the Socialist Republic of Viet Nam moved from a centrally planned, agrarian economy to a more open free market system. Internal restructuring and decades of reforms have paid off in the form of remarkable economic growth, development and competitiveness. Since 2000, Viet Nam has had the highest economic growth rate in the world. It joined the WTO in 2007 — which helped normalize western trade relations and its current GDP is a robust seven percent.1

“All high-tech segments are growing — commercial aerospace, medical and industrial,” says Dung Tran, Managing Director and Vice President of Sparton’s facility in Viet Nam’s Binh Duong province. “Many companies are transferring their products over from China. Samsung’s second largest plant is in Viet Nam. Nike is moving more work from China. Even McDonalds and Starbucks are opening here.”

As the cost of doing business in China escalates, companies increasingly look south.

Southeast Asian countries have been making a determined and well-planned effort to

surpass China as the destination of choice for manufacturing. Viet Nam has emerged as

a leader among these nations for its exceptional cost competitiveness. Understanding

Viet Nam’s unique financial advantages can help companies who outsource manufacturing

achieve a lower total cost of ownership that fuels higher profits and growth.

Dung Tran Managing Director and

Vice President, Sparton Viet Nam

“ All high-tech segments are growing — commercial aerospace, medical and industrial …”

Viet Nam’s Path to Growth

2 THE VIET NAM ADVANTAGE: HOW PRICING AND OTHER BENEFITS LOWER TOTAL MANUFACTURING COST

60%

More so than other Southeast Asian countries, Viet Nam has a unique set of economic conditions that make it well positioned to reduce manufacturing costs. While current advantages like tariffs may change (see sidebar), several other attributes support long-term competitiveness.

LOWER LABOR COSTS

Viet Nam’s labor resources are significantly lower cost than other Asian nations and powered by a youthful population. Labor costs in Viet Nam are 50-60 percent lower than in China. Chinese workers are compensated at roughly $650/month USD, compared with $190/month USD in Viet Nam.2 Viet Nam’s wages for skilled manufacturing work are also lower than in the Philippines, Thailand and Malaysia.3

Additionally, Viet Nam’s labor force is large, with 60 percent of the population of working age. Many of these workers are urban, digitally connected citizens with high literacy rates (in the 90th percentile). This up and coming, youthful, and engaged workforce stands in stark contrast to China’s aging — and increasingly wealthy — population.

STABLE GOVERNMENT

Viet Nam’s government and local administrations have been committed to economic growth and development for more than a quarter century. They have eased restrictions on foreign investment and are opening the country’s borders. The government’s Ministry of Trade and other entities actively work to control labor rates and inflation, ensuring it will remain competitive for years to come.

“The Viet Nam government sets the labor rate every year, similar to the U.S. minimum wage, and they manage inflation,” says Tran. “Year over year, our inflation has seen much less of an increase than in China. Growth has been steady, not explosive. Manufacturers love that stability.”

Drivers Behind Viet Nam’s Cost Competitiveness

Lower than China

4%

Viet Nam Labor Costs

Labor market efficiency

(Southeast Asia: nearly 5%)4

Number of Ministry of Trade business reforms5

670

3 THE VIET NAM ADVANTAGE: HOW PRICING AND OTHER BENEFITS LOWER TOTAL MANUFACTURING COST

Zero Tariffs There is currently no tariff on products assembled and finished in Viet Nam and shipped to the United States. This is a significant financial opportunity and can certainly benefit manufacturers. However, keep in mind that the situation is likely short term — the bigger, longer-lasting financial value is in Viet Nam’s pricing, quality and ease of doing business.

FREE TRADE AGREEMENTS (FTAs)

Viet Nam currently has trade relations with more than 200 countries, including the European Union. These agreements give Viet Nam access to multiple economies and create opportunities for the country to connect further with global production networks. As a member of ASEAN, Viet Nam also benefits from regional trade agreements with China, Japan, Australia, New Zealand and India.

What does this mean for manufacturing? Financial and service benefits that range from hassle-free customs, new export markets and supply chains, to staying price competitive with rivals who operate in FTA countries. According to one source, the Viet Nam network of trade agreements is among the best any manufacturer will find at this point on the value chain.6

Ensuring Consistent High Quality With such low-cost labor, concerns about manufacturing skills, quality and reliability are not unreasonable. And it’s true that Viet Nam and its neighbors have not yet achieved the levels of higher education seen in China. However, Viet Nam is far from being a low-cost production hub, having spent several years moving into more complex, sophisticated technologies. Among all Southeast Asian nations, Viet Nam attracts a record level of foreign direct investment (FDI), with more than 70 percent in manufacturing. Key U.S. players such as Samsung and LG have poured in millions — pushing Viet Nam’s workforce into higher-tech skills while the government continues to prioritize education.

Viet Nam Innovation

Ranks 45 out of 127 countriesSource: World Intellectual

Property Organization

4 THE VIET NAM ADVANTAGE: HOW PRICING AND OTHER BENEFITS LOWER TOTAL MANUFACTURING COST

Aside from quality and service, Viet Nam offers strong IP protection. Intellectual property is a longtime concern for customers who have operated in China and the reason many choose to leave. Avoiding time-consuming and potentially disastrous IP issues can contribute to the lower total cost of ownership of manufacturing in Viet Nam.

As a member of the WTO, Viet Nam must follow this organization’s IP requirements, which protect three rights: copyright and related rights, industrial property rights and rights in plant varieties. Companies that manufacture in Viet Nam through a U.S.-owned company gain an additional layer of protection from U.S. IP laws.

Protecting Intellectual Property (IP)

First Place in Hand SolderingLe Van Linh, a Sparton employee in the Viet Nam facility, won first place in the Viet Nam IPC Hand Soldering competition — a skill critical to quality manufacturing. The competition recognizes top skills in hand soldering complex printed board assemblies. A panel of independent judges evaluated each assembly based on workmanship, overall functionality, speed of completion and compliance with IPC standards.

Viet Nam’s reformed customs process and many seaports make shipping fast and seamless.

“With the right partner, ordering from Viet Nam can be a piece of cake — just like Amazon and

other online companies. Our team walks the customer through each step and makes sure all

documentation is in order. It will seem as if we’re down the street or the next state over.

It’s absolutely seamless.”

David RobinsonDirector

Business Development

“Just like Amazon”

5 THE VIET NAM ADVANTAGE: HOW PRICING AND OTHER BENEFITS LOWER TOTAL MANUFACTURING COST

Manufacturing in Southeast AsiaViet Nam outranks several other Southeast Asian countries for cost competitiveness and ease of doing business. However, a U.S.-owned facility can offer additional benefits. Before choosing a contract manufacturer based in Southeast Asia, look for the following:

English-speaking service and engineering staff

Measurement against international quality standards

Rigorous training and skills programs

Direct contact with project and engineering leads

Guaranteed response times

A framework for IP protection, including U.S. regulations

A clear process for overseas shipping and logistics

Customers gain the most quality/cost value when their manufacturing is handled in a U.S.-owned company with Viet Nam operations. In these cases, robust training programs, customer service expectations and well-established processes for meeting international quality standards can be easily integrated.

“We’ve found what works best is to leverage the training that we do in the U.S., including using IPC trainers,” says Dave Robinson, Sparton Director of Business Development. “So the skill sets in our Viet Nam facility are really the same. The quality is high, even compared with our domestic sites. We measure against international standards such as ISO 13485 and AS9100 and share that data with our customers.”

A U.S.-owned Viet Nam facility can also duplicate a U.S. service culture so customers experience the same responsiveness. Cost and quality, combined with customer service and U.S. regulations, lower the total cost of ownership by reducing costs from errors, delays, IP issues and reliability problems.

“Customers worry about responsiveness because it’s an ocean away,” says Tran. “In our Viet Nam facility, we adopt the same culture as our U.S. locations. We guarantee a response to an email within four hours. Our staff speaks English and customers work directly with our functional leads or engineers — that’s unusual for a Tier 2 and 3 contract manufacturer.”

Lower Total Costs with U.S.-owned Manufacturers

1 Asian Development Bank. https://www.adb.org/countries/viet-nam/economy. Accessed October 31, 2018.

2 Dezan Shira & Associates. The case for Viet Namese manufacturing. May 24, 2016. Viet Nam Briefing. https://www.VietNam-briefing.com/news/VietNamese-manufacturing.html/ Accessed October 25, 2018.

3 Pasion, Patty. Fast facts: minimum wage in ASEAN countries. November 13, 2017. Rappler.com. https://www.rappler.com/newsbreak/fast-facts/187932-minimum-wage-asean-countries Accessed October 24, 2018.

4, 5 Doing Business in Viet Nam. Viet Nam Chamber of Commerce and Industry and PwC (Viet Nam) Ltd. 2018.

6 Brown, Maxfield. China+1: the new face of manufacturing in Viet Nam. April 4, 2018. Viet Nam Briefing. https://www.VietNam-briefing.com/news/china1-new-face-manufacturing-VietNam.html/ Accessed October 25, 2018.

Source: World Bank Group

Ease of Doing Business IndexViet Nam 68 of 190 economies

30 60 90 120 150 180

W O R L D E C O N O M I E S

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SPARTON CORPORATION

425 N. Martingale Road, Suite 1000Schaumburg, Illinois 60173 800.772.7866www.Sparton.com

ConclusionWith labor hovering around 20 to 30 percent of production costs, it might be time to consider contract manufacturing in Southeast Asia. Viet Nam stands out in the region for offering substantial financial advantages without sacrificing quality or endangering intellectual property. A U.S.-owned facility, such as Sparton’s Viet Nam facility, offers advanced skills and a number of additional benefits that add up to a lower total cost of ownership — an excellent foundation for long-term profits and growth.

About Sparton Sparton Corporation (NYSE: SPA), now in its 119th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service and refurbishment. We use our experience and our Sparton Production System (SPS) to produce breakthrough products and address complex manufacturing challenges — faster and more cost effectively. We have experience in many industries, including medical and biotechnology, industrial and commercial, and military and aerospace. Headquartered in Schaumburg, Illinois, Sparton has 13 design and manufacturing facilities worldwide. For more information, visit www.Sparton.com.