In late October, pan-Asia professional services firm Dezan Shira & Associates published the second edition of its Asia Manufacturing Index report. The report is designed to be a guide for foreign companies seeking the best locations for manufacturing in Asia, analysing 11 countries across a range of criteria.

While China retained top spot on the back of the strength of its economy, infrastructure and costs, and innovation, Vietnam secured second spot. Vietnam scored well across all the criteria and the report noted that economic growth from Q1 to Q3 exceeded expectations, fuelled by a significant uptick in manufacturing activity and exports.

Vietnam has emerged as a top destination for supply chain diversification, driven by its competitive labour costs and extensive network of free trade agreements. After navigating political turbulence over the past three years, Vietnam now appears to have a stable government – further strengthening its position.

Marco Foerster, Head of ASEAN Advisory at Dezan Shira & Associates and lead author of the report says the prospect of tariffs on Chinese-manufactured goods entering the US has encouraged companies to move away from the mindset of ‘manufacturing in China for the rest of the world’ to manufacturing in China for China but going elsewhere to supply the rest of the world.

“We are working with a US-owned automotive supplier that has been producing parts in China since the early 1990s and has now decided that it needs to look overseas to diversify its supply chain,” he says. “The company told us it would not want to leave if not for the fear of tariffs as the infrastructure is excellent, the factory is highly automated, the workforce is good and it is easy to get goods out of the country.”

According to Foerster, tens of thousands of manufacturers face the dilemma of where to go.

“Slower than expected automation in many sectors means labour demands are a real issue,” he says. Demographics are important when it comes to choosing manufacturing locations. For example, Indonesia will be the fourth largest consumer market in the world by 2030 and Vietnam is projected to be in the top ten by the end of the decade, ahead of the likes of the UK and Germany.

When the report compared reasons for expanding outside of China in 2018 compared to now, factors such as clients expanding their operations and sourcing requirements, environmental concerns and reduced tax incentives have been replaced by geopolitical factors and more intense local competition driving down margins.

On the question of how many sourcing/manufacturing hubs companies need, Foerster suggests a presence in Asean (for companies targeting ‘sensitive’ markets or those likely to impose tariffs as well as those looking for lower production costs and access to free trade agreements) and India (for access to the most attractive labour market in the region) is required in addition to China.

His analysis of the borders China shares with other countries concludes that its border with Vietnam is the most important given the political, physical and demographic obstacles presented by China’s other 13 shared boundaries.

“Existing supply chains can be connected via truck within 24 hours overland and there are apparently discussions in place to improve the road and rail network between China and Vietnam,” says Foerster.

“Vietnam has almost the perfect investment environment based on a combination of population. Labour costs may be slightly higher, but that is fine because there are free trade agreements, reasonable infrastructure and associated costs,” he adds.

The only area where Vietnam ranked poorly in the Asia Manufacturing Index 2025 was innovation. However, Foerster noted that rankings can change relatively quickly.