China+1 Strategy: Why Vietnam Is Becoming the Preferred Manufacturing Destination for German Companies

The Strategic Shift Is No Longer Speculative

For German manufacturers who established production operations in China over the past two decades, the strategic calculus has fundamentally changed. Supply chain disruptions during 2020–2022, rising production costs in coastal China, escalating geopolitical uncertainty, and growing ESG scrutiny of China-origin supply chains have collectively accelerated a transition that was already underway.

Vietnam has emerged as the leading China+1 destination for German and European manufacturers in Southeast Asia — not as a temporary hedge, but as a long-term industrial platform.

Why Vietnam — and Why Now

Trade Agreement Advantage

Vietnam has signed and is implementing a broad network of free trade agreements that no other Southeast Asian economy currently matches at the same depth:

• EU-Vietnam Free Trade Agreement (EVFTA) — preferential access to the EU market for Vietnam-manufactured goods.
• Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
• ASEAN Free Trade Agreements — covering ASEAN’s 650 million consumer market.
• ASEAN-Australia-New Zealand FTA, ASEAN-China FTA, ASEAN-Korea FTA, and others.

For German manufacturers producing in Vietnam, this means products exported from Vietnamese factories can access the EU market with significantly reduced tariffs — a structural advantage that Chinese-manufactured goods do not enjoy under current EU trade policy.

Manufacturing Cost Structure

Vietnam currently offers a manufacturing cost structure that is competitive with lower-tier Chinese provinces for most industrial categories. Key factors include:

• Labor costs significantly below comparable positions in Guangdong, Jiangsu, or Zhejiang provinces.
• Industrial land lease rates competitive with second-tier Chinese industrial zones.
• Corporate income tax incentives for manufacturing projects in industrial parks, including preferential rates of 10% for qualifying high-tech manufacturing (standard rate: 20%).
• Customs and VAT exemptions for export-oriented manufacturing enterprises (EPE status).

Supply Chain Development

Vietnam’s supplier ecosystem has matured substantially. Electronics, apparel, footwear, and certain mechanical components now have well-established local supply chains. While heavy industrial inputs typically require import, logistics infrastructure connecting Vietnam to regional supply hubs has improved significantly through expanded port capacity and road networks.

Political Stability and Regulatory Predictability

Vietnam’s political environment offers a level of predictability that has become increasingly valuable to German manufacturers focused on multi-year capital deployment. The government’s consistent commitment to attracting foreign direct investment — evidenced by ongoing industrial zone development, infrastructure investment, and regulatory reforms — provides a stable framework for long-term manufacturing planning.

What German Manufacturers Are Actually Moving to Vietnam

Across the industries where ECOVIS Vietnam Law advises international clients, the most active categories of German manufacturing relocation include:

• Electronics and electrical components manufacturing.
• Automotive supply chain (Tier 1 and Tier 2 suppliers).
• Mechanical engineering and precision manufacturing.
• Specialty industrial products.
• Renewable energy components.
• Medical device manufacturing.

Legal and Regulatory Considerations for the China+1 Transition

Investment Structure Decision

German companies transitioning production from China to Vietnam face a fundamental structural decision: establish a new wholly foreign-owned enterprise (WFOE equivalent: a 100% foreign-owned LLC) in Vietnam, or pursue a joint venture structure where local manufacturing relationships have strategic value.

The choice is not purely financial. It involves considerations of IP protection strategy, governance control requirements, transfer pricing implications across the group, and the regulatory complexity of the specific manufacturing sector.

Parallel Operations Management

Many German manufacturers do not close Chinese operations when establishing Vietnamese production. They run parallel operations for an extended period — managing intercompany supply agreements, transfer pricing documentation, and regulatory compliance across two jurisdictions simultaneously.

This parallel phase requires careful legal architecture to manage related-party transactions, IP licensing arrangements, and group financial reporting obligations.

Supply Chain Compliance Transfer

German companies subject to the Supply Chain Due Diligence Act (LkSG / Lieferkettensorgfaltspflichtengesetz) must extend their supplier due diligence framework to Vietnamese operations and supplier networks. This is not optional — it applies regardless of where production occurs.

Common Misconceptions About Vietnam as a China+1 Destination

Vietnam Is Not Simply “Cheaper China”

Vietnam offers a structurally different operating environment. Regulatory frameworks, labor law structures, tax systems, customs procedures, and business culture differ materially from China. Companies that approach Vietnam as an operational copy of their China model consistently encounter avoidable problems.

Industrial Zone Quality Varies Significantly

Not all industrial zones in Vietnam offer equivalent infrastructure quality, regulatory support, or environmental compliance standards. For German manufacturers with stringent operational and ESG requirements, industrial zone selection is a strategic decision — not simply a real estate transaction.

Licensing Timelines Require Realistic Planning

Investment and operational licensing in Vietnam follows a defined regulatory sequence that cannot be compressed beyond certain limits. German project teams accustomed to the speed and predictability of German regulatory processes sometimes underestimate Vietnamese licensing timelines. Realistic project planning requires accounting for regulatory sequencing from the outset.

The Strategic Opportunity for German Manufacturers

Vietnam’s combination of trade agreement advantages, manufacturing cost competitiveness, political stability, and growing industrial infrastructure creates a genuine strategic opportunity for German manufacturers seeking supply chain resilience.

The companies that will capture the largest share of this opportunity are those that enter Vietnam with a structured legal and operational approach — rather than treating it as a logistics exercise that can be improvised during execution.

This material is for general informational purposes only and does not constitute legal, tax or professional advice. Investors should seek specific advice based on their business sector, ownership structure and investment location in Vietnam.

About the Author: Attorney Vu Manh Quynh is the Managing Partner of ECOVIS Vietnam Law, advising international investors on Foreign Direct Investment (FDI), manufacturing expansion, and corporate governance in Vietnam. He leads the German Desk at ECOVIS Vietnam Law, advising German and European companies on market entry, factory setup, and cross-border investment structuring. Contact: vietnam@ecovislaw.vn