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Covid-19 A Catalyst for Vietnam Manufacturing


Covid-19 A Catalyst for Vietnam Manufacturing

With 97 million young tech savvy population, Vietnam compared with its peers remains still one of the most competitive on labour cost and land lease, construction cost. In its annual ranking of the most suitable locations for global manufacturing among 48 countries in Europe, the Americas and Asia Pacific, Cushman & Wakefield has assessed that Vietnam is the second most cost competitive manufacturing hub in the world. China remains the most attractive manufacturing hub globally from an operating conditions and cost competitiveness perspective.  The annual Global Manufacturing Risk Index (MRI) scores each country against 20 variables that make up the three final weighted rankings which cover conditions, cost and risk. The data underpinning the MRI comes from a variety of reliable sources, including the World Bank, UNCTAD and Oxford Economics. 

Vietnam’s global ranking is “Phở-nomenal” news, borrowing a phrase from HSBC Bank. What gradually started snowballing in 2018, continued throughout 2019. The US-China trade war was an impetus for the shift in production from China to Vietnam. The shift in production to Vietnam benefited all sub markets across Vietnam. In 2019, the North of Vietnam caught up with the south compared to the previous years in terms, accounting for half of the total new Foreign Direct Investment projects. In addition, Tier 2 regions that are well linked by infrastructure planning started to show up as highly competitive and fast-growing regions with good opportunities to reduce growing cost of land and labour especially when enjoying tax incentives granted to the  Economic Zones. 

Cost aside, Vietnam’s stable geopolitical situation and the wide-reaching market integration is another success factor. With 260 operational Industrial Parks, industrialists benefit from the ease of doing business, with a relatively swift and simple due diligence process. For the long-term sustainability of Vietnam’s manufacturing sector, keeping costs low cannot be the only strategy. Indeed, efforts are now being made to move the economy up the value chain to transition its manufacturing base towards Industry 4.0 through automation, robotics, 3D printing. Vietnam is also now experimenting more with contact-less technology in the wake of Covid-19. This will boost its potential as a Covid19 vaccine production base and stimulate the relatively undeveloped pharmaceutical industry. Should Vietnam succeed in embracing Industry 4.0, Vietnam’s overall position as a manufacturing hub will strengthen further, beyond its ability to keep land cost and wages low. 

Tremendous potential for Vietnam’s biomedical, food manufacturing sector 

 Vietnam stands to benefit even if China retains a clear infrastructure advantage to efficiently move goods via road, rail or sea transport. Vietnam businesses were already re-inventing, improving efficiency and diversifying supply chains. Industry & Logistics 4.0, Covid-19 and the resulting disruption in global supply chains has just accelerated the pace of innovation. For one, Vietnam took advantage of the global shortage of Personal Protective gear at the height of Covid-19 infections to fill the gap, cementing Vietnam’s position as the PPE supplier to the West. There is potential for Vietnam to develop its status as a key supplier of PPE in the coming years. Similar growth potential is being observed in the garment, textile, shoes and nonwoven plastic bags. 

One thing the pandemic demonstrated was the under-supply and short term need for more cold storage facilities across Southeast Asia. Food manufacturers saw demand for frozen food supplies spike at the height of lockdowns across Southeast Asian countries. In this regard, Vietnam’s tier 2 cities and remote regions possess tremendous potential to develop cold chain facilities to meet the increasing demand for frozen food. This will put Vietnam in a good position to lead the region as a food distribution hub. 

Fast-track Recovery with more FDI in 2H 2020

Vietnam recorded strong momentum in industrial activity at the end of 2019 as manufacturers continued to shift production from China to mitigate risks. Covid-19 halted the momentum with the closing of Vietnam’s borders to all countries. Still, the investment by foreigners in those few weeks before the lockdown made up a sizeable proportion of the 6 billion USD in foreign direct investments in the first half of 2020.  

On the eve of the 13th National Congress vote, the market expects the government to pivot to infrastructure development, land compensation, new legislation as well as decisions on when and how to open the borders of Vietnam around August /September 2020. This latter decision will set the stage for new potential foreign investors studying Vietnam’s market, ready to decide on the next course of action.

Since Vietnam posted economic growth in manufacturing in June and with the GDP growth of 1.8 per cent for the first 1H 2020 still expected to be fastest growing market in SEA. In hindsight the outbreak was managed extremely well, thanks to intensive testing, effective tracing, strong campaigns with a world-famous soundtrack and just a very proactive acting Government with swift decision making and deploying e-government tools to effectively communicate with the population. 

The country is back to normal for at least two months and on the road to recovery looking at the PMI bouncing back to 51.1 in June, up from 42.7 in May and above the 50 no-change mark for the first time in five months ever since the PMI hit a record low of 32.7 in April. Overall new orders increased, yet export business declined as export markets as still closed. Another good sign for manufacturing is that staffing declined at the weakest pace since February. 

2021 could be or should be the year Vietnam could advance its economy in an accelerated pace and gradually enter the league of some of the more advanced APAC economies. The central government’s role is key to step up infrastructure development, and public investment and reform law reducing the hurdles for real estate development. Segway to real estate development, this heralds a new generation of agile developers who need to provide value-added facilities manufacturers require. For one, in the wake of Covid-19, the demand for ready built factories and warehouses will grow as manufacturers look to enhance supply chain resilience and mitigate impacts of unexpected events with a preference for asset light solutions. Manufacturers will also be looking to the government to ensure the development of a robust local supply chain and high level of corporate governance in Vietnam. 

Although Vietnam government has limited capacity to deploy relief packages as seen in OECD countries, resolution 42 that targets six categories of individuals and businesses stimulus for SME and individuals contributing to the future bouncebackability as well. Besides curbing inflation Government is aware that it is crucial to speed up the infrastructure development and remove as many hurdles from stimulating real estate development. All eyes are on the Prime Minister’s decision in August around Vietnam’s 5,000 ha airport which is expected to be one of the largest airports in the world. ACV is scheduled to start working on phase 1 in May 2021 expected to open its gates by Q2 2026. 


The above article originally appeared in the Business Times on 27th July 2020. 


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