Opportunities to boost Vietnam’s global supply chain industry

Tiếng Việt

Opportunities to boost Vietnam’s global supply chain industry

With many businesses considering a shift from supply chains in China, Vietnam is in a unique position to strengthen its authority as a leading alternative manufacturing choice, according to an RMIT economics expert.

RMIT University School of Business & Management Program Manager Dr Burkhard Schrage discusses the potentials and recommendations for Vietnam in global supply chains.

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RMIT University’s School of Business & Management Program Manager Dr Burkhard Schrage

What were your thoughts on the potential opportunities for Vietnam's supply chain when the country was invited to join the unofficial Quadrilateral Security Dialogue (Quad) video conference on combating COVID-19 and reviving the economy post-pandemic?

Being part of the Quad+ dialogue was obviously a great opportunity for Vietnam’s economy, but the road ahead is not going to be easy nor fast. Vietnam is already a world champion in trade; it amounts to around 200% of its total GDP. To put that into context, trade represents 38% of China’s GDP and the world average is around 60%. Only a handful of rather small countries exceed Vietnam in trade intensity.

With trade levels already very high, Vietnam is facing a big challenge - increasing the value as part of the global supply chain, rather than increasing merely the trade volume. A relatively low GDP per capita but high trade intensity in the past has meant that there hasn’t been ‘much left on the table’ for Vietnam in the global supply chain.

Vietnam is now in a positive position to reimagine its role as a value-creating partner in the global supply chain, and consider things like training the semi-skilled labour force, supporting the formation production clusters, investing in infrastructure, and enforcing more stringent governance standards.

This event may also accelerate important economic reforms that can enable Vietnam to not only create more value in the global supply chain, but also to become more competitive in the global economy.

What would Quad need to see from Vietnam in order to select the country to join the group?

China is the dominant source of imports for all participants in the Quad group, accounting for 16-25% of all imports (it’s also worth noting that 30% of Vietnam imports originate from China). This creates an economic dependency for the US and the other group members, which in turn reduces their political and diplomatic clout.

Vietnam is a natural candidate to lessen this dependency on China. It is a populous country with an abundance of semi-skilled labour, established trade relationships and agreements, and an agile and flexible economy able to respond swiftly to the ever-increasing speed of product innovation.

The key features required by foreign investment are not dissimilar to China, which means a relocation to Vietnam can happen quickly. Perhaps even more important than the economic drivers for Vietnam is the alignment of all member states on trade policy objectives.

Addressing the trade imbalance with China has been on the agenda for a long time. The COVID-19 pandemic has highlighted the issues arising from concentrated supply chains and has infused urgency to act fast and build more resilience.

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Trade with China in 2019 as percentage of total trade. Source: UN Comtrade Database (2020).

What kind of Foreign Direct Investment (FDI) should Vietnam focus on to increase its competitiveness and participate in the global supply chain?

Foreign investors in Vietnam will typically look for a relatively low-cost semi-skilled labour force, which means that the FDI is likely to continue in the manufacturing sector. But in the quest to increase its value in global trade flows, Vietnam should focus on FDIs that provide important economic ‘spillover’ effects in selected industries, and capitalise on Vietnam’s existing competitive advantages. This can ultimately lead to competitive global industry clusters.

There are many established and budding industry clusters in Vietnam, from advanced farming technologies and automotive industry, to apparel and shoe production. Reviewing these clusters and understanding their current and future competitiveness should be the government’s focus.

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What should Vietnam do to position itself like China?

There are certainly some good reasons to think that Vietnam will attract more manufacturing companies away from China. Manufacturing labour costs are around $US3 per hour, less than half of China’s $US6.50 per hour. Vietnam also has a great number of free trade agreements, and generally good education levels.

Nevertheless, there are some limitations to overtaking China in manufacturing. One aspect is that China’s labour force is 14 times larger than Vietnam’s.

There are also cultural differences like family values and work ethics. For example, Vietnamese factory workers prefer to work at a factory near their family residence whereas Chinese workers will move thousands of kilometers away from their family for extended periods of time for work.

This workforce mobility explains the growth of the Pearl River Delta and the rise of manufacturing in and around cities like Shenzhen or Guangzhou. Foxconn’s factory in Shenzhen - the world’s largest - employs anywhere between 300,000 and 450,000 workers. It is hard to imagine this happening in Vietnam with a relatively immobile workforce.

What do you think about Vietnam’s opportunity to step up from a processing country?

FDIs are very long-term commitments. While Vietnam has pitched to foreign investors in the past, there is indeed a risk that labour-intensive manufacturing companies may search for locations that offer a more competitive cost structure.

However, with factory automation becoming increasingly compelling, labour costs are becoming smaller, and the location and availability of skilled labour is becoming a large part of the foreign investors’ decision making process. That is why a more valuable role in the global supply chain will be critical for Vietnam.

With less emphasis on low-cost labour, Vietnam holds the right card for long-term socio-economic growth.

Certainly, upskilling the labour force - a basic premise to capture more value created in the global supply chain - must go along with structural reforms. Those policy reforms need serious efforts from all parties involved, the authorities and the private sector, but also from the labour force.

Story: Thuy Le

Business and management

Media Release

07 July 2020