Vietnam: Asia’s Newest Economic Powerhouse?

Foreign investors’ attraction to Vietnam has been rising throughout 2020. The region has transformed into an attractive location for foreign companies to source products from, as well as relocate their factories to, with companies such as Apple, Hanwha, Foxconn and Nintendo being some of the biggest names to do so. Attractive government policies and the consequences of geo-politics, among other factors, have aided Vietnam’s growth transition from a protectionist past, with its GDP seeing consistent growth in the last 10 years, peaking at 7% in 2018 and 2019.  However, a range of issues still remain that may limit the region’s future growth.

Vietnamese exports have helped propel the nation’s economy forward. The value of exports has been growing for the last 15 years – between 2013 and 2018, the total value of Vietnamese exports nearly doubled, from 145 to 275 billion USD. The largest Vietnamese exports are electrical machinery and equipment as well as clothing and footwear. Electrical machinery, such as computers and mobile phones, make up around 35% of total exports, whilst clothing and footwear comprise around 20%. Vietnam’s main export partners include the United States (19% of total exports), China (16%), Japan (8%) and South Korea (7%). The south-east Asian country’s integration in the global economy shows a complete switch from their heavily communist and protectionist past.

A key reason for the increased value of exports is due to the impact of the US-China trade war and the geo-political uncertainty associated with it. With imposed US tariffs on Chinese goods, such as textiles, American companies have looked elsewhere for their manufacturing needs. Vietnam boasts numerous key qualities for manufacturers. Low costs of utilities and labour, government incentives (such as preferential tax rates) and proximity to China (allowing manufacturers to sell and move equipment across the border quicker) all act in Vietnam’s favour. Moreover, Vietnam holds a shipping advantage, as the country has 2 international airports, several major ports, reliable energy sources and accessible internet and cellular networks. Although the US-China trade war has certainly increased manufacturing opportunities in the country, it is important to note Vietnam’s exports had been on the ascend for several years before the election of Donald Trump, albeit not at the same rate. The impact of the trade war has been seen since 2019, with Vietnamese exports to the US rising by around 35% in 2019 at the same time as Chinese exports to the US decreased by around 16%.

However, export trade primarily in manufacturing is contributing to a skill-gap in Vietnam. Less high skilled workers are being produced or trained due to the increased manufacturing demand for low skilled workers. This may deter foreign companies in high-skilled sectors such as IT and engineering from locating in Vietnam, which limits any moves up the value chain for Vietnamese commerce. At the root of the issue is the education system of Vietnam, which fails to produce sufficient highly qualified graduates. Only an estimated 28% of the 18-29 age group in Vietnam attend university, compared to 43% and 48% in Thailand and Malaysia respectively. As such, there have been reforms to the education system over the last few years, with initiatives such as the Secondary Education Sector Development Program aiming to establish ‘national standards to education’.

In addition, Vietnam largely relies on foreign suppliers for materials, with the largest source of imports being from China, and as such only adds 55% of a product’s value before export, warranting further economic improvement. Moreover, despite shipping advantages, only 20% of Vietnam’s national roads are paved, meaning transporting goods from factories to ports can often be unreliable. Lastly, demand for Vietnamese Manufacturing could also be threatened by the recent election of Joe Biden. His policy is yet to be seen with regards to China; if he looks to ease tensions with China, halt the trade war, and reduce Chinese tariffs, companies may revert to China for their manufacturing needs once again, usurping demand in Vietnam.

While Vietnam has seen impressive growth in the manufacturing industry fueled by an export boom, in order to maintain such levels of success in the long run the country must address its issues. Unless addressed, an under-skilled workforce may leave Vietnam unable to transition to higher-skilled markets in the future. However, if able to sustain the current surge in growth by solving endemic existing problems, Vietnam’s potential as an Asian economic powerhouse may be reached, and continue, for years to come.

 

By Hadi Ahmed

Sector Head: Jared Gibson

 

 

 

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