Vietnam has improved its growth rate from 2.8% in 1986 to 7.1% in 2019. Its policy, ‘doi moi’ (to make a change) was introduced in 1986. This policy aimed to open its economy and encourage free trade. There was a dramatic increase in foreign investment into Vietnam. As per a 2019 World Bank report, Vietnam attracted more than 10,000 foreign companies who focused on the export-oriented and labour-intensive manufacturing sector. Foreign Direct Investment (FDI) in Vietnam surged to 9% in 2018.
Large multinational companies, namely, Intel, Samsung, Adidas and Nike have set up manufacturing bases in Vietnam. Samsung has invested $17.3 billion during the past decade to build eight new factories and a research and development centre in Vietnam. In 2010, Vietnam became the primary supplier of Nike - accounting for 37%
of their total production, while China produced around 34%. The country has also become a significant exporter of textile items after Singapore.
Vietnam has benefited from the US-China trade war. With the new tariffs that were levied in 2018 by the US President Donald Trump, few American companies found China to be cost-prohibitive. After the tension intensified, along with many European and American companies, many Japanese and Korean companies too invested in Vietnam for their product manufacturing. This helped them to avoid trade with China and toe the American line.
According to the World Bank’s ‘Ease of Doing Business’ ranking, Vietnam has moved to the 68th position in 2017, climbing up from its 104th position in 2007. In that period, the Vietnam government could leverage the IT boom by ensuring elaborate domestic infrastructure reforms. The boom in the IT industry also led to a massive industrial development in Vietnam and the country could successfully position itself as a global manufacturing hub.
The country also launched the Vietnam Association for Supporting Industries (VASI) in May, 2017 that targeted to improve the capacity of domestic industrial components suppliers. The association is the result of the EU-Vietnam Multilateral Trade Project that was funded by the European Union. Vietnam has also signed around 13 Free Trade Agreements (FTAs) recently and few others are in the pipeline. They are also considering launching new Special Economic Zones (SEZs) which will help to attract new foreign investment.
According to the World Economic Forum’s ‘Global Competitiveness Report’, Vietnam stood at the 55th position in 2017. The Ministry of Industry and Trade, Government of Vietnam has presented their first ‘Industry White Paper’ in 2019 that focuses on manufacturing and sub-sector competitiveness within the country. Vietnam also enjoys the comparative advantage over many other manufacturing hubs due to its cheaper labour rates. The wage rate in China has increased by around 60% in the last decade and this has led to many global companies to set up manufacturing units in Vietnam.
A large number of Chinese companies have shifted their production units to Vietnam to reduce production cost and in the trade war backdrop, some others are manufacturing in Vietnam to avoid the Chinese label.
Need to focus
The population of Vietnam is around 96 million and about 70% of its total population is between 15 and 64 years. This presents the country with a unique demographic dividend as an overwhelming majority of its population is in the working age. However, one major constraint in Vietnam is its lower education and skill levels. According to the World Economic Forum’s Human Capital Index, Vietnam has ranked 120th out of 130 countries in terms of ‘know how’ (knowledge or skill of workers) and this is one area that the country will need to focus upon. There is also a need to develop the country’s logistics infrastructure for promotion of its manufacturing sector. Vietnam’s industrial sector still imports most of its manufacturing inputs from China.