Why Manufacturing is Driving Vietnam’s Growth

• As Vietnam transforms into a world manufacturing hub, it has emerged as an efficient relocation vacation spot also referred to as the China plus one technique.
• Main components driving business progress are the advantages from multilateral free commerce agreements and aggressive labor prices.
• Regardless of its improvement lately, the manufacturing sector in Vietnam may develop human assets and leverage its capabilities to boost competitiveness.

As international companies search to diversify, enhance resiliency and connectivity of their provide chains and reduce reliance on a single nation, Vietnam has turn into a high vacation spot for funding in manufacturing attributable to its strategic location and benefits in delivery, aggressive labor, and manufacturing prices.

In comparison with different Southeast Asian international locations, Vietnam stands out with worldwide airports seaports, and rail hyperlinks facilitating manufacturing move and transportation.

In 2020, the manufacturing and processing sector continued to take the lead within the nation’s international direct funding (FDI), making up 58.2 p.c of the entire. With its contribution, Vietnam’s economic system is forecast to regain momentum and attain GDP progress of 6 to six.5 p.c in 2022.

In 2020-2021, attributable to COVID-19, the manufacturing sector endured important provide chain disruptions. Short-term enterprise closures, transportation difficulties, and workers shortages all contributed to a discount in manufacturing output in Vietnam.

In the meantime, the pandemic hindered manufacturing industries attributable to a rise in enter costs, uncooked materials shortages, lack of delivery capability, and transportation points.

Nonetheless, following the easing of lockdown restrictions, enterprise exercise in Vietnam has been busy once more with client confidence progressively recovering.  

Based on a report by IHS Markit, Vietnam’s manufacturing buying managers’ index (PMI) elevated to 52.2 in November from 52.1 in October, attributed largely to greater new orders and authorities incentives. A rating of fifty or extra means an growth in manufacturing.

Manufacturing’s key drivers

The manufacturing business is pushed by a number of key components. Firstly, Vietnam is touted as a low-cost producer with aggressive labor prices. On common, Vietnam’s labor prices are half as a lot as China’s labor prices at US$2.99 (VND 68.000) per hour in comparison with US$6.50 (VND 148.000) per hour respectively. This contributes to Vietnam’s growing place as a cheaper different to its regional counterparts.

Secondly, Vietnam has a comparatively giant, well-educated labor drive, making it a lovely hub for manufacturing. As well as, the federal government has offered varied vocational training and coaching periods to equip the workforce.

With the present labor scarcity and lack of expert employees in particular industries comparable to IT, the federal government has put further methods and packages in place.

For instance, a number of incentives have been issued such because the latest approval of the vocational training and coaching technique 202-2030 and the issuance of Choice 17 on vocational coaching help. This highlights Vietnam’s dedication to bettering the effectivity of coaching and training for the labor market.

A plethora of free commerce agreements (FTAs), such because the EU-Vietnam Free Commerce Settlement (EVFTA), the UK-Vietnam Free Commerce Settlement (UKVFTA), and the Complete and Progressive Settlement for Trans-Pacific Partnership (CPTPP), additionally strengthens Vietnam’s competitiveness as a low-cost manufacturing export hub.

Such commerce agreements enable Vietnam to make the most of lowered tariffs, each inside the ASEAN Financial Neighborhood (AEC) and with the EU and US to draw exporting corporations to provide in Vietnam and export to companions exterior ASEAN.

Moreover, Vietnam has benefitted from the fallout of the US-China commerce conflict, as greater US tariffs on a variety of Chinese language exports have pushed producers to modify manufacturing away from China in direction of different manufacturing hubs comparable to Vietnam.

Vietnam specifically has grown to turn into a cheap and versatile vacation spot for manufacturing exterior of China, nevertheless, it nonetheless must develop to completely leverage its manufacturing capabilities.

Authorities incentives in manufacturing

The federal government just lately issued Decree No. 57/2021/ND-CP (Decree 57), supporting industries associated to provide of uncooked supplies, spare elements, and elements to manufacturing industries comparable to electronics and mechanical engineering industries, garment and textile, leather-based, and footwear industries, hi-tech industries, and the automotive business.

The tax financial savings from the appliance of the Decree will present monetary help to enterprises of their enterprise actions which have been impacted by the pandemic. It’ll additionally strengthen confidence within the authorities’s efforts to reform tax mechanisms and insurance policies, thus selling a extra favorable enterprise surroundings in Vietnam.

Based on Decision No.115/NQ-CP in 2020, the federal government set a goal that by 2025 Vietnamese corporations will be capable to manufacture merchandise in supporting industries which have a excessive stage of competitiveness, satisfying 45 p.c of the important wants of home manufacturing and consumption.

Additional Vietnam has issued a number of tax incentives and tax holidays for manufacturing tasks within the type of company revenue tax (CIT), for big funding tasks with capital of greater than VND 6 trillion (US$264 million) in addition to incentives in high-tech zones, sure industrial zones and tough socio-economic areas.

As well as, incentives are additionally supplied for the high-technology sector in addition to textiles and clothes, IT, cars meeting, and so forth.

Key industries driving manufacturing

Attire, garment, textile, and footwear

Vietnam’s textile and garment business has witnessed a powerful improvement and performs an more and more necessary function within the financial progress of the nation, making Vietnam the fourth-largest garment exporter on the planet market after China and the EU.

Based on the Vietnam Textile and Attire Affiliation (VITAS), within the first 9 months of 2021, the entire export worth of Vietnam’s textiles and clothes was estimated at US$29 billion, up by 13.2 p.c over the identical interval of 2020.  

VITAS additionally predicts that in 2022, as manufacturing progressively returns to regular, the business ought to count on to attain an export worth starting from US$39 billion to US$42 billion.

Vietnam has grown to turn into the second-biggest provider of footwear and attire to the US after China. Additionally it is one among Asia’s key manufacturing hubs and produces items for among the greatest Western manufacturers in tech, clothes, and sportswear.

For instance, Nike has 200 manufacturing vegetation whereas Adidas has 76 factories in Vietnam, of which the latter constitutes Vietnam’s second rank within the international variety of factories for Adidas. Statistically, each Nike and Adidas produce extra of their core merchandise in Vietnam than in China.

After being hit by COVID-19, the federal government has paid extra consideration to fastening the restoration of this sector. To revive manufacturing, the Ministry of Business and Commerce (MoIT) plans to take away bottlenecks and supply help to assist factories resume operations and make the most of orders for European and US markets.

In the meantime, in response to the present commerce bottlenecks on the China-Vietnam border attributable to China’s preventive measures, the MoIT is suggesting corporations contemplate different transportation apart from street transportation comparable to rail networks.

For instance, they’ll take a look at maritime transportation and redirect commerce routes to different provinces to ease congestion. MoIT can even facilitate the implementation of a improvement technique for garment, textile and footwear by 2030, with a imaginative and prescient to 2035, and the constructing of a program on sustainable improvement of the sectors till 2030.

In comparison with many opponents, Vietnam’s textile and garment business has sure benefits when it comes to merchandise’ high quality, methods, the flexibility to satisfy strict necessities on labor, and tariff preferences attributable to varied FTAs. General, the sector expects an extended however steadier restoration with many alternatives for international traders within the medium time period.

Digital and electrical home equipment

Regardless of robust improvement lately, Vietnam’s electronics business nonetheless lags behind the worldwide market, by not having a breakthrough or achievement to compete within the expertise subject. Nonetheless, the federal government is eager to vary this by attracting hi-tech industries to additional develop and promote the business.

Inside 2020-2021, improvement was primarily mirrored within the attraction of huge investments from multinational firms, particularly these from South Korea and Japan. Within the first eight months of 2021, FDI tasks in electronics manufacturing accounted for 95 p.c of the entire export turnover of the business, with 33 electrical tasks licensed and complete registered capital of over US$1.7 billion.

Foxconn, a key provider for Apple, has to date invested in Vietnam US$1.5 billion in 2020 and raised its funding by US$700 million whereas recruiting 10,000 extra native employees in 2021.

Nonetheless, Vietnam presently solely assembles easy elements and does easy manufacturing processing. In relation to the manufacturing of elements or specialised units, Vietnam is but to amass the required assets and expert labor drive.

Key areas for manufacturing

Vietnam’s manufacturing is centralized in 4 key financial areas (KERs), together with the Northern, Central, Southern, and Mekong Delta areas. These areas appeal to totally different manufacturing sectors and are distinctive when it comes to labor swimming pools, industrial combine, and infrastructure.

The Northern KER consists of seven cities and provinces, specifically Hanoi, Hai Phong, Quang Ninh, Vinh Phuc, Bac Ninh, Hai Duong, and Hung Yen. The FDI corporations within the Northern KER account for greater than 80 p.c of the area’s complete exports.

The area is thought for heavy manufacturing, oil and fuel, and hi-tech industries comparable to car manufacturing. Electronics manufacturing is clustered within the north, particularly within the Pink River Delta space.

Samsung, with one of many largest manufacturing bases in Vietnam, focuses on distributing cell phones and tablets within the North. In 2022, Samsung is planning to relocate its main R&D operations to the west of Hanoi, making Vietnam its largest R&D middle in Southeast Asia.

The Central KER consists of Da Nang Metropolis, Thua Thien-Hue, Quang Nam, Quang Ngai, and Binh Dinh is enticing for the marine economic system and agriculture. Meals, beverage, and feed processing is extra centered on this area than within the North and South. The truth is, lately, Da Nang has emerged as a hub for seafood, meals processing, IT, and manufacturing.

In the meantime, Vietnam’s Southern KER has a wider vary of producing and companies than the North. The area consists of Binh Duong, Tay Ninh, Lengthy An, Dong Nai, Ba Ria – Vinh Tau, and Ho Chi Minh Metropolis. Clothes and textile industries are clustered within the South with Ho Chi Minh Metropolis being one of many nation’s largest garment producers. Out of 6,000 factories nationwide, over 70 p.c are positioned in or close to Hanoi and Ho Chi Minh Metropolis.

Challenges and Alternatives

Regardless of COVID-19, Vietnam remains to be thought to be a key and rising manufacturing hub, surviving the worldwide provide chain disruption.

Vietnam nonetheless faces quite a few challenges. For instance, concerning the dimensions of its labor drive of roughly 56 million folks, Vietnam has virtually 14 occasions much less the variety of employees in comparison with China.

Native authorities are additionally recognized to scrutinize paperwork leading to further time for approvals, notably for tasks which are outdated and use older expertise. Additional, authorized surroundings legal guidelines may be cumbersome, together with land use limitations.

Buyers ought to due to this fact examine the native market fastidiously and are suggested to do their due diligence and search recommendation from an expert agency earlier than endeavor a producing mission.