With a 97-million-strong young and 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 contactless
technology in the wake of Covid-19. This will boost its potential as a
Covid-19 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 & a Logistics 4.0, Covid-19 and the
resulting disruption in global supply chains have 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 non-woven 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 Recuperation with More FDI In 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 lock-down made up a sizable proportion of the US$6
billion 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 herald 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 bounce back ability 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.
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