Experiencing the impacts of rapid urbanization, industrialization and modernization, traditional villages of many Asian cities face the risk of encroachment or function changes. Besides providing jobs for people in their region, traditional craft villages also bring work opportunities for migrants, materials providers, salespeople, and other ancillary service providers. In the rapid process of urban sprawl, many traditional craft villages in peri-urban areas that capture heritage values are gradually shrinking and in danger of disappearing. Therefore, an urgent concern is how to protect traditional villages and traditional residential areas threatened by urbanization. Ho Chi Minh City is a large metropolis engaged in economic, financial, trading, modern industrial, and service activities. There are still many handicraft activities in Ho Chi Minh City, especially traditional occupations, with more than 60 handicrafts distributed over 19 trade villages. Many traditional villages have been encroached and demolished to make place for new developments as a result of speedy urbanization. This paper reports a qualitative study using a mixed method, which includes literature review and comparison, mapping and observation. Based on analyzing the current situation of traditional craft villages and identifying the advantages and disadvantages of two craft village models, this paper proposes a new development model for craft villages in the urban fringes of Ho Chi Minh City.