Blogs

Vietnam - Future factory of the World


  • Vietnam’s manufacturing space
  • Factors contributing to growth in manufacturing
  • Vietnam is benefiting the most from the US-China trade war

 

Vietnam, a small South-East Asian country located on the Indochinese peninsula, has been attracting leading manufacturing companies in recent years. During the last couple of years, the country has turned into a manufacturing hub and is steadily rising the ladder to become a leading exporters of garments, textiles and electronics. There are many factors contributing to the country’s increasing manufacturing presence in the world, ranging from cheap labor to a vast & robust supply chain.

In the current blog, we have analyzed and highlighted some of the preeminent reasons that are making Vietnam a favorite destination for manufacturing setup and attracting huge foreign investment. Some of the major factors are listed below.

Growing economy and manufacturing activities

Vietnam has recorded 7.1% of GDP growth in 2018 and is expected to grow by 6.5% in 2019-2020. The growth is majorly attributable to a significant increase in manufacturing output in the country. After the global recession in 2008-2009, this South-East Asian country has witnessed a healthy increase in its manufacturing activity. As a % of GDP, share from manufacturing has been gaining continuous strength, especially during the last five years, wherein manufacturing share in total GDP has increased from 13% to 16%.

Furthermore, as the country is known for its textiles, electronics and related products, the export of these major items is also growing in line with the expansion of manufacturing activity. From 2014 to 2018, export of textiles, electronics and related products has shown CAGR of ~19.1%. For the year 2019, growth was ~9.3% for the first 8 months compared with the year 2018 for these items.

Strategic geographic location

Amongst multiple elements supporting Vietnam as the next factory of the world, its geographic and demographic aspects are key contributors. The country has a long coastline of approximately 3,200 kms with more than 100 ports and has the desired road and railway network. Moreover, increasing infrastructure spending by the government is supporting the manufacturing wave in the country. Vietnam is getting benefit of knowledge transfer from manufacturing giant China in terms of technology and manufacturing expertise due to its geographic location bordered by China. Companies in Vietnam can easily outsource raw material & equipment from China and can easily export through its number of ports. Distance between country’s capital Hanoi city to Shenzhen (Silicon Valley of China) is only 865 kms, which further empowers the supply chain of the country.

Lower Wage rate along with Young population

Vietnam is a young country and more than 59% of the country’s population is labor force as of the year ending 2018. Between 2000-2018, the country’s population has grown from ~80 mn to ~95 mn and the labor force as a % of population has increased from ~52% to ~59% during the same period. With this abundance of young labor force, Vietnam is leading all the way to fulfill world’s demand for different products. The country’s minimum wage rate is almost half of the other countries in the region. Since, the worker’s salary is a good portion of the direct cost of any manufacturing company and impacts the cost per unit of good produced, cheap labor further strengthens the country’s competitiveness.

Government support

Another major factor is government support through policies for creating enormous opportunities in the country. Supportive policy and regulatory framework have aided Vietnam to gain competence as compared to other nations with its ease of doing business ranking upgraded to 69th position in the world. Tax exemptions, special economic zones, building new infrastructure are some of the offerings from the Vietnam government which contributed to upgrading the country’s ranking by more than 22 ranks during the past five years. Moreover, Vietnam has also signed  number of bilateral and multilateral international agreements including free trade agreements. To attract foreign investors, the country is focusing on robust infrastructure backed by increased government spending on infra projects along with increasing involvement of the private players in the economy. These factors have attracted foreign direct investment (FDI) and investment has grown at CAGR of ~8.6% from the year 2010 to 2018.

Low MOQ (Minimum Order Quantity)

Startup culture and e-commerce are booming around the world and the required quantity for products is limited for these companies. Vietnam is a country that is accepting orders in smaller quantities as well. As per Chinaimportal, while a Chinese supplier might require a MOQ of 500 to 1,000 pcs, factories in Vietnam can accept just half of MOQ at 250 to 300 pcs. This option of low MOQ is giving an edge to the manufacturing industry in Vietnam as compared with other countries.

Recent benefit from the US-China trade war

The US-China trade war, which has intensified during the last one and the half year, is forcing many companies to start looking at alternative sites for their manufacturing operations. The South-East Asia region gained major trade diversion due to its strategic location near China. Vietnam has come out as the biggest winner from the  on-going US-China trade issues and gained orders from trade diversion on tariffed goods equal to 7.9% of GDP in the year through the first quarter of 2019. Vietnam and US have bilateral trade agreement and trade has increased from USD 451 mn in 1995 to USD 58.85 bn in 2018. Trade between both countries has already reached USD 50 bn during the first eight months of 2019. Major companies including Nike, Adidas, Samsung, Foxconn are few names that are shifting their factories and research centers to Vietnam.

Nevertheless, alongside all the optimism, most emerging economies have their own internal challenges and obstacles related to bureaucracy, lack of transparency, corruption, shortage of skilled labor; and Vietnam does not hold an exception to the same. Further, Vietnamese suppliers are not easily available on online space and still rely on trade shows to be found by overseas customers. As per the report from US Embassy, piracy rate for software is above 70% and IP (intellectual property) abuse remains a problem in Vietnam which may increase concern for the companies to invest. Positively for the economy, it is persistently ameliorating its investment and business policies while also tightening the regulations to have a corruption free environment. According to the World Bank’s 2018 Logistics Performance Index, though Vietnam (39th) ranked well behind China (26th), it is investing heavily to improve its logistics capabilities (64th rank in 2016), to support the increasing requirements of timely and efficient completion of orders. While Vietnam’s infrastructure is still unmatched to China’s, the government has prioritized infrastructure development to facilitate economic growth and fulfill the rising demand. With easier access than China, lower MOQ and cheap labor, Vietnam’s production base is expanding rapidly and developing a robust cross-border supply chain. Overall growth is expected to continue in the country. The government though would have to continue working positively to fight the challenges, as they may weigh on the long-term growth if not handled soundly.

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