Vietnam’s Supply-chain Opportunities Spurred by Foreign Investment

The economy of Vietnam is increasingly being driven by an influx of foreign direct investment (FDI), primarily focussed on the country’s manufacturing sector.

When it comes to wooing potential investors, Vietnam has number of favourable attributes, including a stable economic environment, a youthful labour force and relatively low production costs.

As a result, FDI in Vietnam is not just geared towards the production of labour-intensive goods, but also more sophisticated products like IT equipment and other electronic items. However, such production is largely processing activities by nature.

As Vietnam still lacks supporting industries, expansion in processing production has elicited vast demand for a variety of production inputs and materials.

Such foreign-invested factories however largely source production inputs via their procurement offices. Typically, these are either located in the investor’s home country or in one of the region’s key sourcing hubs, such as Hong Kong and some other ASEAN countries.

Any upstream supplier intending to tap into this demand for industrial inputs, then, should look beyond the factories of Vietnam and target clients elsewhere in Asia. In addition, apart from consideration of following their customers to invest directly in Vietnam, upstream suppliers could also make use of Hong Kong’s convenient platform to deliver supports to their downstream counterparts in Vietnam with cost-effective materials and logistics services.

Industrial Production Fuelled by FDI Inflows

Vietnam’s economy has been expanding steadily over recent years, with an average GDP growth in excess of 5% per annum. The industry and construction sector currently accounts for around 35% of the country’s GDP, up from 32% in 2010. At present, the service industry accounts for 39% of the national economy. In part, this is due to the Vietnam government’s adoption of several liberalisation measures following the country’s accession to the World Trade Organisation (WTO) in 2007. This move has contributed to the opening up of the Vietnamese economy, creating a business environment more conducive to attracting FDI inflows.

In particular, industrial production has benefited from foreign investment inflows, with manufacturing industries proving the major investment targets. At one time, Vietnam was primarily regarded as an attractive territory for those companies producing labour-intensive items, such as clothing and footwear. Thanks to recent investments by a number of multinationals engaged in more sophisticated production processes, Vietnam is now among the Asian economies producing IT and other products of higher technology.

As a result, the added value nature of its manufacturing base, as well as that of its other industrial activities, such as power generation and construction, has been rising steadily. This, in turn, has spurred demand for related supporting and business services, including the transportation of passengers and cargo shipments, the provision of hotels and catering and a wide range of other commercial services. This has helped to make contemporary Vietnam a lucrative market for providers and investors of such services.

Foreign Investment Focus Shifts to More Sophisticated Production

Currently, the foreign-invested sector accounts for more than 18% of Vietnam’s GDP, up from 15% in 2010. FDI inflow into Vietnam, in terms of registered capital, currently stands at more than US$20 billion a year. This is a significant increase from the early 2000s, when FDI totalled just a few billion. An important contributory factor here is the availability of a youthful labour force, making the country attractive to those manufacturers seeking a low labour cost[1] production site.

To date, though, the supporting industries in Vietnam remain underdeveloped. In addition, the country lacks skilled labour and technicians, while the production of a wide array of products relies heavily on imported materials. Nevertheless, a number of multinationals are considering expanding their production capacity within Vietnam, intending to establish a comprehensive production network across Asia in order to reduce the risk of over-reliance on a few production sites, most notably China. Vietnam has also recently concluded a number of trade deals with several of its overseas partners, a development that has greatly enhanced overseas market access for made-in-Vietnam products.[2]

As a result, foreign investment in Vietnam has become increasingly robust over recent years. As previously noted, the manufacturing sector attracts the majority of FDI inflow, accounting for about 58% of the country’s FDI total since 1988[3]. Coming a distant second is the real estate sector, which accounted for 18% of cumulative FDI inflows as of the end of 2015.

Previously, many foreign investors pursued speculative real estate investment in Vietnam. In 2008, immediately after Vietnam’s accession to the WTO, FDI inflows in this sector skyrocketed to more than US$71 billion, up from just US$7 billion in 2005. In that same year, real estate accounted for about 37% of the total FDI inflow. This percentage share fell to the current level of less than 10%, following the burst of the property bubble in 2011/2012. For the most part, the industrial sectors have remained the primary targets for foreign investors.

On the whole, FDI inflows over the last few years have been healthy, with significant investment coming from the major Asian manufacturing territories, including South Korea, Japan, Singapore and Taiwan. Hong Kong and Chinese mainland investors also feature high on this list, accounting for 6.7% and 7.7% respectively of total inflows during 2016. In particular, new investments have started to bankroll the production of more sophisticated products, including certain electrical and electronic parts for manufacturing of higher technology products in the country.

Even for the manufacturing of clothing items and other labour-intensive products, there are a number of manufacturers from the Chinese mainland, Taiwan, Hong Kong, etc., with manufacturing facilities in Vietnam. Some of them are not only engaging in the processing production of finished goods, but also production of certain upstream supplies and production inputs in the country, e.g. textiles, yarns and plastic items, etc.

In view of this expansion in manufacturing activities, certain foreign investors have also chosen to invest in the development of Vietnam’s industrial parks. These investors include companies from the ASEAN bloc (particularly from Thailand and Singapore), the Chinese mainland and Western Europe.

Selected Major FDI Projects

Licensed in 2016

• Korea: LG Display in Hai Phong – production and processing of plastic OLED display for mobile devices
• Korea: LG Innotek Hai Phong factory – production of camera modules
• Thailand: Amata Long Thanh City – urban building services

Licensed in 2015

• Korea: Samsung Display Co., Ltd in Bac Ninh – production, assembly and processing of monitors
• Malaysia: Duyen Hai 2 Power Generation Complex in Tra Vinh province
• Thailand/United Kingdom/Vietnam: King City joint venture Co. Ltd in Ho Chi Minh city – real estate business
• Samoa: Cheng Loong Binh Duong Paper Co. Ltd in Binh Duong Industrial Park – production of industrial and household paper products
• Turkey: Hyosung Dong Nai in Dong Nai Industrial Zone – yarn production and processing

Source: General Statistics Office of Vietnam; Ministry of Planning and Investment of Vietnam

Predominance of Processing Production

Vietnam’s manufacturing activities are largely related to the processing production of exports. Prior to the recent influx of foreign investment, Vietnam’s industries were less developed, with many local industries lacking the resources to implement modern production processes.

A majority of the more recent investors have taken advantage of the country’s relatively inexpensive land and labour resources to undertake processing production using imported materials. In addition to clothing and footwear factories, this practice has extended to the manufacture of plastic items, household products and the production of tyres for bicycles and cars.

At present, Vietnam is regarded by many multinationals as the go-to destination for the assembly of relatively sophisticated products, such as mobile phones, printers, copying machines and household electrical appliances, with the majority of these products destined for export markets. A number of industrial giants – such as Samsung and LG from South Korea – have long been investing in Vietnam in order to assemble finished electronic products. More recently, they have also started to produce electronic parts and components within the country. The electronics company Fuji Xerox, for instance, has invested in the development of a Hai Phong factory for the assembly of various multifunctional printer models. This facility uses locally-manufactured components, as well as other inputs sourced from suppliers across Asia.

Certain upstream suppliers from China, Korea, Japan, Taiwan and other ASEAN countries have established production facilities in Vietnam. Their industrial outputs are largely intended to support the production of their downstream clients – other foreign investors in Vietnam engaging in the processing production of finished / semi-finished goods. Obviously, this development is largely down to one simple factor – a desire to follow their own downstream clients. Similarly, a number of foreign automotive assemblers, such as Nissan and Honda, have also established assembly operations in Vietnam, with the automobiles assembled from imported engines and key auto parts and mainly intended for domestic sale.

As well as sourcing ancillary materials locally, certain assemblers have invested in the production of selected auto parts within Vietnam. A case in point here is Honda, which has set up a motorcycling parts manufacturing facility in the country.

However, at this stage, Vietnam still lacks the resources to locally produce most inputs, key parts and components. Those local producers engaged in upstream business are largely producing ancillary and general industrial items, such as plastics and packaging materials. Most local manufacturers engaged in the finished goods business, meanwhile, are undertaking processing production under contracting or sub-contracting arrangements with foreign companies. As such, Vietnam relies on the import of various industrial inputs in order to support its expanding manufacturing activities.

As a result of this, industrialists, especially foreign investors, are active in the export business, as well in the import of raw materials and other inputs. The foreign-invested sector, therefore, was responsible for the lion’s share of Vietnam’s trading activities during 2016, accounting for 72% of the country’s exports and 59% of its imports.

In line with this, the country’s exports are largely comprised of finished goods – most notably mobile phones and other finished electronic products, textile items (especially clothing) and footwear – completed under processing production arrangements. Other significant export sectors include the primary and agricultural items, such as wood and aquatic products, made by local Vietnamese businesses. At present, Vietnam’s key export destinations include the US, which accounted for the 22% of the country’s exports in 2016, followed by the EU, which accounted for 19%.

Among Vietnam’s leading imports are raw materials and industrial inputs, such as machinery and tools, parts, components and accessories for the manufacturing of electronic items, as well as a wide range of plastic, chemical, base metal items and fabrics for processing production. Not surprisingly, Vietnam’s leading suppliers include China, South Korea and ASEAN, all of which are globally-leading producers of a variety of production inputs. In 2016, they accounted for 29%, 18% and 14% of Vietnam’s total imports respectively.

Targeting the Required Industrial Demands

In the light of the increase in processing production in Vietnam, there is now strong demand for imported parts, components and other industrial inputs. Most of this demand, however, actually comes from foreign investors. Their production facilities in Vietnam, including their sub-contractors in the country, usually source the majority of imported items via the sourcing departments of their headquarters or else through the international procurement offices (IPOs) within their region.

The ultimate clients for imported materials, then, are actually the sourcing departments or the IPOs of foreign investors, rather than any factories physically located in Vietnam. As such, upstream suppliers intending to tap the vast input demand should approach the IPOs of foreign investors and foreign companies that have set up processing arrangements with local producers in Vietnam. Indeed, these IPOs are normally located in the home countries of the foreign investors in question or in certain popular sourcing hubs, most notably Hong Kong and some other ASEAN countries.

Upstream suppliers looking to establish a close supply relationship with their downstream counterparts may also consider following their clients and directly set up production facilities within Vietnam. By doing so, they will find themselves in a better position to support their clients’ production activities. They would also be able to enhance their clientele by supplying inputs to other, similar foreign investors Vietnam.

Direct investments such as these, however, entail long-term strategic business considerations. Companies that are not prepared to undertake such investments might be better advised to make use of convenient sourcing platforms, allowing them to provide material supports and other services to their downstream clients. While cost-effectiveness is one of the key factors for foreign investors, in-time support and short delivery lead-times are also important requirements when it comes to processing production. In the case of Hong Kong, it is a natural trading hub with material support from the Pearl River Delta, as well as efficient sea and air transportation links with all of the major manufacturing sites in the region. As a result, suppliers based in Hong Kong – or those using the city’s network –have a distinct advantage when it comes to supporting Vietnam’s manufacturing activities and tapping into the vast industrial demand that now characterises the country.

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[1] For more information about labour costs, please see: Vietnam’s Youthful Labour Force in Need of Production Services

[2] For more information, please see: Vietnam’s Emerging Merchandise and Services Trade Opportunities

[3] This is following the adoption of the so-called “Doi Moi” reform policy in 1986 and implementation of related regulations by the government to open up Vietnam’s economy to foreign investment.

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