The Stellar Rise of Vietnam

Vietnam’s is a story of remarkable economic success, closely mirroring that of China.

Just as its bigger brother to the north, Vietnam left decades of stagnation under planned economy with a boom. For both countries the magic formula seems to have been far-reaching market liberalization while retaining their respective communist parties in power. Vietnam missed both the first wave of the East Asian boom that had many of its neighbors dubbed Asian Tigers, as well as the stellar rise of China, and has been lagging behind ever since. Now, however, its time has finally come.

Ever since Vietnam´s accession to the WTO back in 2007, the economy has expanded by 6.7% annually, reaching a total GDP of 250 billion USD by 2018. At the same time, the previously large gap in purchasing power between Vietnam and other Southeast Asian countries has significantly narrowed. In 2007, the purchasing power adjusted GDP per capita (PPP) of Malaysia and Thailand were 5.2 and 3.3 times greater than in Vietnam respectively. By 2018, these numbers have decreased to 4.3 and 2.6.

Adding to this, Vietnam´s export increased by 21.1% in 2017 alone, and the country thus overtook both Malaysia and Indonesia. At 227 billion USD, the Vietnamese export is now the third largest in South East Asia, surpassed only by Singapore and Thailand.

Almost as a revenge for missing the first wave of the Asian Tigers, Vietnam was finally been given the coveted title. Owing to it´s remarkable economic performances over the last decade, the country was dubbed The Other Asian Tiger by the The Economist magazine.

Just as with previous feline economies in the region, growth has not been financed entirely domestically. Over 2017, Foreign Direct Investment (FDI) in Vietnam reached 14.1 billion dollars and constituted 6.3% of GDP. The majority of these investments went into the export-facing manufacturing industry. Amongst these, Electronics, industrial equipment, textiles and garments, as well as footwear were particularly popular amongst foreign investors. As of 2018, more than 70% of Vietnam´s exports were produced by factories that were backed by foreign capital.

Based on a study by ARC Consulting, there are three main factors that drive the increased investment in Vietnam: cost benefits, lowered market entry barriers and the increasing attractiveness of Vietnam as a consumer market

In terms of cost advantages, labour cost is the most obvious factor. According to SWS Research, the average monthly wage in Vietnam is only 250 US dollars – considerably lower than 420 in Thailand, 594 in Malaysia and 847 in China. Although labour costs have been increasing also in Vietnam recently, they are still well below those in comparable regions. It should also be noted that the fast pace of industrial development brings efficiency increases that more than offset any rising salary levels. Vietnam´s large workforce at 69.8% of the population as well as its large labour reserve that is stilled enrolled in agriculture will assure competitive labour costs even as the industrial base expands.

Secondly, the improving business environment and ease of entry has helped Vietnam attract foreign capital. Vietnam´s so called Doi Moi policy – the long term modernization of the country´s economy that was initiated in 1986 – has put large focus on modifying laws on foreign investments in order to minimize barriers of entry. This has included amongst other things the opening up of most economical sectors, and the removal of ownership caps. Foreign businesses in Vietnam are now also entitled to the same tax incentives as domestic enterprises. For example, enterprises in high-tech industries or with high capital investments, large turnover or many employees are allowed to remit corporate income tax during the first four years of profitability, and then pay only half of the due tax in the following nine years.

Perhaps even more importantly for foreign enterprises, Vietnam has worked consequently to eliminate trade barriers with as many foreign markets as possible. The country is one of the most eager signatories of Free Trade Agreements (FTAs) in the world, with 10 FTAs in full effect, 2 finalized but not yet in effect, and a further 5 already negotiated. As of now, exports from Vietnam to all of ASEAN, Japan, Korea and Canada are covered by such agreements, and the EU is expected to be added to that list by end of June this year. In turbulent times when others are building trade barriers, Vietnam has offered a safe haven for free global trade. This has proved to be a winning formula, and it seems like Vietnam will be the only clear winner of the Sino-American trade dispute.

Finally, Vietnam has become increasingly attractive as an emerging consumer market. The country´s population is not just large – ranking at 15^th place globally – but also sports the fastest growing middle class in South East Asia. According to HSBC, the Vietnamese middle class will count 33 million by 2020, and make up about 30% of the population.

With all these factors working on Vietnam´s behalf, the country is facing a bright future. The youngest of the Asian tigers is eager to catch up with its peers, and the country now constitutes one of the most attractive markets in the world – both for production and as an end-market. If the rise of the Vietnamese tiger has been impressive so far, we are likely to be astonished by it in the future.

Read more about our market entry and expansion consulting services.