Vietnam is on its path of becoming a global manufacturing powerhouse. In this final chapter of our two-part article series, our local MD examines the fundamentals that enable the emergence of Vietnam as an alternative production base to China.
Vietnam has come a long way since the end of the war. The last decade saw the country’s gross domestic product (GDP) grow 300% from US$57.63bn in 2005 to US$180.8bn in 2014, thanks largely tothe political and economic reform initiatives named “Doi Moi” undertaken by the Vietnamese government in the late 1980s. The transformation aimed to liberalise the local economy and embrace the free market.
An improved business environment and commerce friendly-policy attracted foreign direct investments (FDI) into Vietnam for the first time in the 1990s. Massive FDI flowing into the country helped to speed-up job creation and led to a constant 7.5% GDP growth for the following 20 years. It brought Vietnam from one of the poorest countries in the world (57% poverty rate) to a lower middle income country with only 5% of its population living below the poverty line.
Although the reformations managed to lift Vietnamese income by more than 20 times, labour costs in the country remained low in comparison to China. Wages in China have been rising steadily for the past decades. Today, Vietnam’s average daily wage for a factory worker is only US$6.70, or one third of China’s US$27.50. The gap is widening and China is not as cheap as it used to be. In order to defend profit margins, multinational corporations are looking elsewhere to relocate their manufacturing operation, creating a spillover of investment into neighbouring ASEAN countries.
Vietnam, located less than 12 hours’ drive away from China’s major manufacturing center, the Pearl River Delta, seems to be the best bet. In fact, it takes a shorter route crossing borders from Vietnam’s northern industrial zone of Haiphong to Shenzhen (the largest manufacturing base in the China) than to its largest city, Ho Chi Minh City. Besides that, Vietnam is also strategic situated right in the heart of Southeast Asia, home to 620 million people (9% of the world population) and the third-largest workforce in the world (behind China and India).
As China faces an aging population and shrinking workforce, Vietnam has only started to benefit from its ripening demographic dividend. Vietnam is the third most populated nation in Southeast Asia with the highest proportion of population falling within working ages: 40% of Vietnam’s 90 million people are between 15 and 49 years old.
With 1.5 million people joining the labour force every year, Vietnam is hungry for jobs. The country’s demographic dividend helps to create a secured pool of young and low-cost labour force favorable for long term investment and economic development.
Even Chinese companies invest in Vietnam to leverage low labour costs. The first five months of 2014 saw China as the seventh largest foreign investor in Vietnam, with investment rising 300% year-on-year. Last November, China’s Texhong Textile Group invested a recording breaking US$212.7mil to build an industrial park with a chain of manufacturing facilities.
While surging domestic wages is driving Chinese textile manufacturers to Vietnam, the real catalyst is the tax benefits of the major free trade agreements (FTAs) in negotiation.
Vietnam is in the midst of finalising the EU-Vietnam FTA and the Trans-Pacific Partnership (TPP), both expected to conclude in 2015. Once these FTAs are signed, the tax rate on apparel and textile manufactured in Vietnam will be reduced from the current 17.5% (US) and 9.6% (EU) to zero percent. It will give a game-changing competitive edge to Vietnamese textile products in two of the biggest markets in the world.
Among the two FTAs, Vietnam is set to benefit the most from the TPP as China (the world’s largest textile producer) is excluded from the deal. Chinese investors are doubling up their investment in Vietnam to gain tariff-free entry into major economies like the United States, Japan, Canada and South Korea.
Besides being an emerging global manufacturing powerhouse, Vietnam is also a blooming consumer market with the fastest middle class expansion in Southeast Asia. The Boston Consulting Group predicted the country’s middle class population to increase from 12 million to 33 million by 2020. Vietnam’s economy outlook remains bright in the foreseeable future. However, continuous reforms to improve the business environment will determine how far it can go from here.
Read the first part of our article series
Find out more about doing business in Vietnam