How Vietnam's Supply Chains Differ from its Peers and GVC Participation
With proactive participation in global value chains, Vietnam has steadily grown into a prominent manufacturer and exporter for electronics, ranking 12th in the world and third in ASEAN as an exporter for electronics in 2019.
Various factors contribute to Vietnam’s successful transformation from an agricultural country into an important location for electronic manufacturing in Southeast Asia – such as proximity to China, competitive costs, adequate workforce, low wages, and tax incentives to name a few. However, as Vietnam aims higher than being a low-cost option for electronic assembly, improvement in areas such as supporting industries, productivity, and technology is vital for the country to move up the value chain.
To learn about Vietnam’s integration into global value chains, our Business Intelligence Assistant Manager – Rebecca An conducted a webinar on how Vietnam’s supply chains differ from its peers. During this webinar, Rebecca gave us an overview of Vietnam’s electronics sector, Vietnam’s role in global value chains (GVCs) with a focus on the electronics sector, as well as its strengths and challenges.
We highlight some insights below:
Can you tell us a little bit about Vietnam’s electronics sector and its participation in global value chains?
The electronics industry can be grouped by Harmonized System (HS) codes in three groups. These include finished products that consist of 3Cs – computer, communication and consumer electronics, subassemblies and components which includes electronics components. In 2019, the total export value reached US$2.5 trillion in 2019.
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Vietnam had strong growth of around 20 percent for electronic finished products surpassing Thailand and just behind South Korea in export assemblies in 2019.
Vietnam joined global value chains (GVCs) in the late 2000s and is considered a global tier-2 supplier for 3C products. If we look at GVCs by countries, the top electronics export products in 2019 were China followed by Vietnam. The top import countries for electronics were China, the US, followed by Hong Kong.
For electronics, Vietnam’s top exports were to the US and China, followed by South Korea and Japan. Vietnam is dependent on imports with telephones being the largest export group. Samsung accounted for 90 percent of exports.
The 3Cs finished products group dominates the Vietnam electronic industry, with communications equipment and consumer electronics leading.
While 3Cs dominate Vietnam’s electronics, Vietnam’s role in the global electronics value chains is limited to be an integrator of components.
GVCs can be broken down further into three parts, upstream, midstream, and downstream activities. Vietnam is mainly integrated in the midstream part with lower value add. These include subassemblies, such as displays and special parts, and finished products such as consumer electronics, communications, and computers. Vietnam is also involved in upstream activities but predominantly in low-value add products such as plastic, glass, and packaging. The participation of Vietnamese companies remains low.
Further Vietnam heavily imports components and sub-assemblies, with electronic components accounting for 65 percent of imports in 2019.
What are some drivers for this?
Vietnam’s electronic industry and exports are driven by foreign investors. Exports increased by 90 percent between 2008 to 2019.
Vietnam’s foreign and local electronic companies can be grouped in four categories. The first categories include multinational corporations such as Samsung, LG, Panasonic, and Canon. The second group consists of contract manufacturers that supply to several MNCs such as Foxconn. The third group are entities that lead in software and hardware such as Intel. The final group are manufacturers that produce components that supply to global companies such as Samsung and LG. In the last group there are few local firms, but hundreds of foreign firms.
What are some challenges for Vietnam?
Vietnam still needs to do more to integrate into global GVCs and faces several challenges in logistics and infrastructure. There is a gap between raw materials and finished goods. The logistics industry is highly fragmented with more than 3000 logistic companies. These consist of small and medium enterprises providing low-value services. Goods in Vietnam have to go through many intermediaries from raw materials to delivery, increasing transaction costs. In addition, the connection between different modes of transport is weak as well.
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Vietnam also lacks the production scale and human infrastructure thus making moving up the value chain challenging. In comparison to other countries like Singapore, Malaysia, China, and India, Vietnam has one of the highest logistics costs and accounts for 25 percent of GDP.
Vietnam’s labor force is also another challenge. While it’s true that Vietnam has a young and strong labor force, the size of labor is much smaller at 57.8 million compared to China’s at 778 million and India’s at 500 million. Therefore, this hampers the mass mobilization of labor in the electronics sector. Skilled labor is also a challenge, making it harder for manufacturers to hire for complex processes. It can also be a challenge to find adequate labor that can meet the local market demand.
Vietnam’s localization rate at 36 percent is lower than China and India adding to a weak supporting industry with a low rate of procuring local components. The production of components is still underdeveloped. At present, Vietnam has limited capacity to manufacture high-tech components like semiconductors.
What are Vietnam’s strengths?
Vietnam has had increasing and steady economic growth of between 6 and 7 percent in the last decade. Its international trade and FDI inflows have been growing and Vietnam has been outpacing its regional peers in this respect. Vietnam is mostly open to investment across sectors. Despite the pandemic, Vietnam is one of the few countries to report positive GDP growth of 2.91 percent in 2020.
Secondly, Vietnam is a party to several free trade agreements (FTAs) which are push factors that can help it further integrate into GVCs. The ratification of the EU-Vietnam FTA and the upcoming UKVFTA and RCEP will help further its economy propelling its GDP growth.
Lastly, the government has launched several incentives to attract investment and encourage Vietnamese businesses to become a part of GVCs. For example, electronic components are entitled to an import tax of 0 percent, while are there additional incentives in income tax for hi-tech projects and investment in industrial zones. Additional incentives in the form of labor and technology policies are also provided by the government.
The government also supports R&D and the development of advanced IT systems as well as the manufacturing of ICT products. This will be a key theme as Vietnam gets more involved in IoT and 5G communications.