How can logistics and manufacturing in Southeast Asia drive Vietnam’s economic growth?

Companies around the world are seeking to diversify, increase supply chain resilience and connectivity, and reduce dependence on a single country. At present, Vietnam has become an ideal destination for manufacturing investment. Its strategic location, shipping gateway, competitive labor force and production costs, all of which attract foreign investment.

Compared with other Southeast Asian countries, Vietnam stands out for its relatively complete infrastructure such as international airports and seaports, convenient production processes and transportation railways.

In 2020, the manufacturing and processing industries continued to occupy the leading position in foreign direct investment in Vietnam, accounting for 58.2%. With the blessing of foreign capital, Vietnam’s economy is expected to regain its growth momentum and achieve GDP growth of 6% to 6.5% in 2022.

From 2020 to 2021, due to the impact of the new crown epidemic in 2019, the manufacturing supply chain suffered unexpected disruptions. For a time, business closures, traffic restrictions and staff shortages emerged, which together led to a decline in Vietnam’s manufacturing output.

At the same time, under the influence of factors such as rising raw material prices, shortage of raw materials, and insufficient transportation capacity, the manufacturing industry has also been affected. However, as lockdown restrictions are gradually lifted, Vietnam’s “business wheel” is turning again and consumer confidence is gradually picking up.

A report from IHS Markit showed that Vietnam’s manufacturing purchasing managers’ index (PMI) rose to 52.2 in November 2021 from 52.1 in October, largely due to an increase in new orders and government stimulus measures (a score above 50 means a manufacturing is in an expansion phase).

1 Key factors in manufacturing
Vietnam’s manufacturing industry is driven by three key factors.

First, Vietnam is touted as a low-cost manufacturer with competitive labor costs. Labor costs in Vietnam are on average only half of those in China, around $2.99 ​​(VND 68) per hour, compared to $6.50 (VND 148) in China. This makes Vietnam’s workforce increasingly valued as a more cost-effective option among other countries in the region.

Second, Vietnam has a relatively large, well-educated workforce, which makes it easier to become an attractive production hub. In addition, the government also provides various vocational education and training courses to cultivate the literacy of workers. Currently, the government has formulated new strategies and plans due to the shortage of manpower and the lack of skilled talents in specific industries such as IT. For example, several incentive measures have been promulgated, with the recent approval of the Vocational Education and Training Strategy 202-2030, and Decision No. 17 on Vocational Training Support, highlighting Vietnam’s commitment to improving the efficiency of training in the labor market.

The EU-Vietnam Free Trade Agreement (EVFTA), the UK-Vietnam Free Trade Agreement (UKVFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and many other Free Trade Agreements (FTAs) have also strengthened Vietnam’s role as a low-cost manufacturing Competitiveness of export centers.

These agreements allow Vietnam to take advantage of tariff relief within the ASEAN Economic Community (AEC), as well as with the European Union and the United States, to attract exporters to produce in Vietnam and export to partners outside ASEAN.

In addition, Vietnam has benefited from the aftermath of the Sino-US trade friction.

2 Government incentives for manufacturing
In 2021, the Vietnamese government issued Decision No. 57/ND-CP to provide raw materials and components to manufacturing industries such as electronics and mechanical engineering, apparel and textiles, leather and footwear industries, high-tech industries, and the automotive industry.

Tax savings from implementing the decree will provide financial support to businesses affected by the pandemic. It will also boost confidence in the government’s efforts to reform the tax regime, thereby creating a more dynamic business environment for Vietnam.

In 2020, according to Decision No. 115/NQ-CP issued by the government, it is expected that by 2025, Vietnamese enterprises will produce complementary products with competitive advantages for the market to meet 45% of the basic needs of domestic production and consumption.

In addition, Vietnam has implemented a number of tax incentives and tax incentives in the form of corporate income tax (CIT) for manufacturing projects, large-scale investment projects with capital exceeding VND 6 trillion (US$ 264 million), as well as high-tech zones, industrial zones and areas with socio-economic difficulties. Tax free policy.

In addition, the Vietnamese government also provides incentives for high-tech fields such as textiles and clothing, IT, and automobile assembly.

3 Manufacturing of key industries
• Apparel, Apparel, Textile and Footwear

Vietnam’s textile and garment industry is developing rapidly, and its status in the country’s economic growth is becoming increasingly prominent. As a result, Vietnam has also become the fourth largest clothing exporter in the world after China and the European Union.

According to the Vietnam Textile and Apparel Association (VITAS), the total value of Vietnam’s textile and apparel exports in the first nine months of 2021 is estimated at US$29 billion, up 13.2 percent from the same period in 2020.

VITAS also forecasts that by 2022, as production gradually returns to normal, the industry is expected to achieve exports worth $39 billion to $42 billion.

Vietnam has become the second largest supplier of footwear and apparel to the United States, after China, and one of Asia’s key manufacturing hubs, producing products for large Western technology, apparel and sportswear brands. For example, Nike has 200 factories in Vietnam, Adidas has 76 factories in Vietnam, and Vietnam ranks second in the number of Adidas factories in the world.

Affected by the new crown pneumonia epidemic, the local government has paid more attention to the recovery pace of the industry. The Ministry of Industry and Trade (MoIT) plans to provide support and help factories resume production activities by taking advantage of orders from the European and US markets. In addition, Vietnam’s Ministry of Transport will promote the implementation of the 2030 sustainable development strategy for apparel, textiles and footwear.

Compared with many competitors, Vietnam’s textile and apparel industry has certain advantages in terms of product quality, craftsmanship, ability to meet strict labor requirements, and tariff preferences brought about by various free trade agreements. In general, the industry as a whole is expected to have a longer-term and more stable recovery, and there are still many opportunities for foreign investors to enter the market in the medium term.

• Electronic appliances

Despite the strong development of Vietnam’s electronics industry in recent years, Vietnam’s electronics industry still lags behind the global market due to the failure to achieve breakthroughs in the field of technology. However, the Vietnamese government hopes to change this by attracting high-tech industries to further develop and promote the industry.

From 2020 to 2021, the main focus of the policy is to attract multinational companies to settle in the country, especially large-scale investment projects in South Korea and Japan. In the first eight months of 2021, FDI projects in electronics manufacturing accounted for 95% of the industry’s total exports, with a total of 33 licensed electrical projects with a total registered capital of over US$1.7 billion.

Apple’s main supplier Foxconn has invested $1.5 billion in Vietnam in 2020 and an additional $700 million in 2021, employing 10,000 local workers.

However, Vietnam currently only performs simple parts assembly processing. In the production of spare parts or specialized equipment, Vietnam has not yet acquired key resources and mature labor.

4 Keys to Manufacturing
Manufacturing in Vietnam is concentrated in four key economic regions, including the North, Central, South and Mekong Delta regions. These regions attract manufacturing in different industries, each with its own characteristics in terms of labor resources, industrial structure and infrastructure.

Bac Kh consists of 7 cities and provinces, namely Hanoi, Hai Phong, Quang Ninh, Vinh Phuc, Bac Ninh, Hai Duong and Hong Am. FDI companies in Northern Kerr state account for more than 80 percent of the region’s total exports.

The region is known for high-tech industries such as heavy industry, oil and gas, and automobile manufacturing. The electronics manufacturing industry is mainly concentrated in the north, especially in the Red River Delta region.

Samsung, which has one of the largest production bases in Vietnam, mainly sells phones and tablets in North Korea. Samsung Electronics plans to move its main R&D base to the west of Hanoi in 2022, making Vietnam the largest R&D base in Southeast Asia.

The Central Park consists of Da Nang City, Thua Thien-Hue, Quang Nam, Quang Ngai and Binh Dinh and is attractive for marine economy and agriculture. Food, beverage and feed processing is more concentrated in this region than in the North and South. In fact, in recent years, Da Nang has become a center for seafood, food processing, IT and manufacturing.

At the same time, the manufacturing and service sectors of Kerr in southern Vietnam are wider than those in the north, and the region includes Binh Duong, Tay Ninh, Long An, Dong Nai, Bali-Yong Tau and Ho Chi Minh City. The garment and textile industries are concentrated in the south, and Ho Chi Minh City is one of the country’s largest garment manufacturers. Of the more than 6,000 factories nationwide, more than 70% are located near Hanoi and Ho Chi Minh City.

5 Challenges and opportunities
Despite weathering the pandemic, Vietnam is a growing manufacturing hub that has survived disruptions to global supply chains.

Vietnam still faces many challenges. Vietnam, for example, has a labor force of about 56 million and has almost 14 times as many workers as China. Local governments are also known to scrutinize documents for projects applying outdated and old technologies, increasing approval times. In addition, environmental laws can be relatively burdensome and land use restricted.

Investors should therefore carefully study the home market and recommend prioritizing due diligence and proactively seeking advice from professional firms before embarking on a project.

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