The foreign-invested sector continues to play a pivotal role in foreign trade but boosting added value remains an issue.
After reaching a decade-long high last year, Vietnam’s handsome GDP growth is expected to continue to increase this year. Last year’s result was attributed to increases in domestic consumption and exports, both of which came in well above targets.
Strong export growth and a better-than-expected trade surplus were notable bright spots of the country’s trade picture, especially given that the global economy was and is rife with difficulties. The foreign-invested sector continued to play a pivotal role in trade, though growth did in fact ease.
Vietnam posted record high trade turnover of $480.2 billion in 2018, more than $52 billion higher than in 2017 and representing 196 per cent of GDP. Export value reached $243.5 billion, up 13.2 per cent and exceeding the target, while import value was up 11.1 per cent, to $236.7 billion. 2018 was the third year in succession the country posted a trade surplus, according to the General Department of Vietnam Customs, with 2018’s $6.8 billion joining 2016’s $1.8 billion and 2017’s $2.1 billion.
The foreign-invested sector contributed 70.4 per cent of Vietnam’s exports and 59.8 per cent of its imports. The sector’s growth in exports and imports of 12.4 per cent and 10.8 per cent, respectively, were much lower than the 22.9 per cent and 26.6 per cent recorded in 2017 and even lower than that of domestic enterprises, which came in at 15.4 per cent and 16.4 per cent, according to the Vietnam Trade 2018 Report released in February by SSI Retail Research.
The Ministry of Industry and Trade (MoIT) reported that the export structure continued to show positive changes. Raw material exports declined while the export of industrial and processed products rose. This is in line with the roadmap for promoting foreign trade in the 2011-2020 period and direction towards 2030, which aims at increasing the presence of Vietnamese goods in global production and supply chains.
Eight export items grew strongly in trade value against 2017, including textiles, up $4.37 billion, telephones and components $3.81 billion, machinery, equipment tools and spare parts $3.64 billion, computers, electronics and spare parts $3.43 billion, footwear $1.56 billion, cameras, camcorders and components $1.44 billion, different types of steel $1.4 billion, and wood and wooden products $1.21 billion. Increases in the eight key items were attributed to growth in goods value in the foreign-invested sector.
In particular, foreign-invested exports of telephones and components were worth $48.8 billion out of the $49.1 billion total, computers, electronics and spare parts $27.9 billion out of $29.3 billion, cameras, camcorders and components $5 billion out of $5.2 billion, machinery, equipment tools and spare parts $14.7 billion out of $16.5 billion, and transportation means and spare parts $7 billion out of $7.9 billion.
Foreign-invested enterprises (FIEs) in the textiles sector have played a key role in its growth over the last few years. Exports grew impressively in the 2015-2018 period, from 12.1 per cent to 16.7 per cent. In 2018 alone, FIEs accounted for $18.3 billion of the total export value of $36 billion.
They focused on major investments in yarn and sewing while the sector lacks investment in fabric production, which is a focus of Vietnam’s textile and garment development strategy, according to Mr. Nguyen Van Tuan, Chairman of the Vietnam Cotton Association. Industrial parks need to attract FDI into the dyeing segment as this creates fabric. But only one South Korean company has done so recently, investing $200 million in a textile-dyeing factory in the south.
Footwear ranks fourth among Vietnam’s key exports, with growth in recent years largely dependent on FIEs. Export value in 2018 was $16.2 billion, up 10.6 per cent against 2017, with FIEs accounting for 79 per cent, or $12.8 billion, while the localization rate was 60 per cent.
Figures also reveal the major contributions made by large foreign corporations such as Samsung, Canon, Foxconn, Toyota Motor Vietnam (TMV), Honda, Ford, and Intel. Samsung Vietnam exported more than $60 billion worth of goods in 2018, up 12 per cent compared to 2017 and accounting for 25 per cent of Vietnam’s total export turnover.
It recorded a localization rate of 59 per cent, with 35 Vietnamese companies being Level 1 suppliers, which is expected to grow to 50 by next year. “In addition to its economic contributions, Samsung always strives to accompany the government to develop the country’s support industry,” a representative from Samsung told VET.
TMV, meanwhile, recorded nearly $71 million in export value with a high localization rate from over 400 components provided by 33 suppliers. It has established a specialized department to support its suppliers, especially local concerns, and reform their management capabilities.
In general, FDI has contributed significantly to the promotion and expansion of export markets and the restructuring of export goods, and put the country into global production networks and value chains. Vietnam needs to improve added value in exports, with local support enterprises connecting with the FDI sector to move into global value chains, according to local economic analysts.
Prospects and barriers
The implementation of FTAs and major agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) this year is expected to give a boost to many industries in Vietnam.
In textiles and garments, for example, Canada will remove 100 per cent of tariffs in the fourth year of implementation, while 42.9 per cent were abolished as soon as the agreement took effect. Japan removed 99 per cent as soon as the agreement took effect.
In footwear, Canada agreed to abolish 67 per cent of tariffs as soon as the agreement took effect, 12 per cent in the seventh year, and the remainder in the 12th year. Japan will remove 80 per cent in the tenth year. With FIEs contributing 79 per cent of total footwear export value, this represents a huge opportunity.
Regulations also apply zero per cent VAT to export goods and services and tax refunds or incentives and corporate tax exemptions and reductions for businesses with a high ratio of export value in their sales.
This has helped enterprises cut production costs and enjoy more favorable conditions to compete in price on the international market, according to the Ministry of Finance (MoF).
In addition to the impact of the CPTPP, many industries are also waiting for changes stemming from US - China trade tensions. According to Dr. Nguyen Duc Thanh, Director of the Vietnam Institute for Economic and Policy Research (VEPR), the US continued to be the country’s largest export market in 2018, with $47.5 billion, an increase of 14.2 per cent against 2017.
US - China tensions can present great opportunities for Vietnam’s economy,” Dr. Thanh believes. “In the short term, Vietnamese goods exported to the US may find some advantages compared to equivalents from China.”
In the time to come, the foreign-invested sector needs to make a greater contribution to Vietnam’s export growth, particularly in terms of technology transfer and advanced technology application.
Eighty per cent of FIEs said that the application of technology is the same as around the world, while 14 per cent applied outdated technology and only 6 per cent had high technology, according to the Ministry of Planning and Investment (MPI).
This is due to technology being brought into Vietnam based on the investor’s benefit and not demand for technological innovation in Vietnam, according to local economists. Thus, Vietnam has not yet achieved its goal of improving technology levels and technology transfer from FIEs.
Mr. Do Thang Hai, Deputy Minister of Industry and Trade, told local media that domestic firms haven’t considerably improved their direct exports, especially those in manufacturing, and even indirect exports through the supply of input products to FIEs remains a major challenge for them.
“Underdeveloped support industries make companies that produce finished products heavily dependent on imported inputs,” he added. “Foreign investors will hesitate to invest in manufacturing and production in an economy with underdeveloped support industries.Conversely, this makes investment in support industries highly attractive.”
MPI has been completing a scheme to orient institutions and policies towards improving the quality and effectiveness in FDI attraction and use by 2030, for submission to the government.
Vietnam needs to focus on attracting foreign investors with capital, high technology, and modern administration methods that can expand export markets and participate more deeply in production networks and global value chains to promote economic restructuring associated with innovation of the growth model in the context of Industry 4.0, according to Deputy Minister of Planning and Investment Vu Dai Thang.
VN Economic Times