Vietnam’s investment environment has come a long way since its accession to the WTO in 2007. Investors, once attracted by low value-add textile and footwear manufacturing, have steadily ramped up the volume and sophistication of their investments to take advantage of the country’s increasing capacity in higher value-add manufacturing and assembly. 

Electronics exports are perhaps the most emblematic representation of this shift. In 2007, electronics exports comprised just 6.75 per cent of the country’s total export volume, with textiles and footwear capturing a 23.22 per cent share. As at 2016, electronics exports had risen to a 36.21 per cent share with textiles and footwear falling to just 19.56 per cent. 

Even within the electronics sector, Vietnamese exports are starting a slow shift from basic assembly to more complex operations. Mobile phone exports, the product of imported components assembled in Vietnam, take up the lion’s share of exports within the sector, at 19.78 per cent of the total. In recent years, however, integrated circuits production has grown rapidly, rising from 0.74 per cent of total exports in 2011 to a 6.76 per cent share in 2016.

The Vietnamese Government has taken concrete steps to support the country’s shift up the value chain by entering into public-private partnerships to expedite critical infrastructure projects and actively engaging in free trade negotiations to support investors as they export finished products to foreign markets.

In the coming years, investors targeting investment in more complex and higher value-add industries will be well served by keeping close tabs on a number of developments likely to influence the viability of FDI into Vietnam.

Trade agreements

Vietnam’s trade agreements are perhaps its most distinctive feature when compared to other markets of its stature. The country’s participation in ASEAN connects it to China, South Korea, India, and the other members of the regional bloc, among others.

In addition to these connections, Vietnam has pursued a number of trade agreements unilaterally since joining the WTO, which set it apart from its competition. Vietnam’s pending implementation of a trade agreement with the European Union, tentatively scheduled for the end of 2018, is the most important agreement to watch in the coming year. European companies are likely to see significant advantages from the agreement, both in tariff reductions and the imposition of protections for intellectual property and against counterfeit goods. 

On the horizon, investors will also benefit from the recent conclusion of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed in March. Though moving forward without the US, the agreement is widely expected to open new export opportunities for companies selling goods throughout the Pacific and the Americas. Many anticipate that Vietnam, the least developed economy within the agreement, will be the greatest beneficiary from an export and foreign direct investment (FDI) perspective. 

Rise of Vietnam’s middle class

Vietnam’s consumer class is also worth watching in 2018. In recent years, as a direct result of foreign investment, wages have grown rapidly and catalyzed the birth and continued growth of a thriving consumer goods sector. Foreign companies are likely to find a number of opportunities in key consumer goods sectors such as food and beverages, travel and hospitality, healthcare and pharmaceuticals, and even luxury goods. 

Major sectors to attract FDI

Looking forward to 2018, there are a number of industries, locations, and market entry methods that Dezan Shira & Associates expects to provide opportunities for investment. 

Manufacturing

Investors looking for sector-specific opportunities are likely to find the greatest value in Vietnam’s movement up the value chain. Higher value-add manufacturing is perhaps the best example of this. Companies with existing operations in China have traditionally explored Vietnam as a low-cost alternative for basic assembly and production in an outsourcing model commonly referred to as “China +1”. 2018 will begin to open up opportunities for companies to bring a larger portion of their production chain to the Vietnamese market.

The shift from assembly to component production is already being observed in the electronics industry, as outlined by Vietnam’s increasing exports of integrated circuits. Dezan Shira & Associates expects many industries previously dominated by Chinese production to follow suit in 2018 and beyond as the Chinese market continues to grow more expensive and more focused on services. 

Similar to China, not all of Vietnam will present the opportunities that investors are looking for. Vietnam’s rising wages and labor force capabilities are expected to play an influential role in where manufacturing operations choose to establish different facilities within the country. The skills, supplies, and infrastructure needed to support high-end components manufacturing is likely to remain in traditional hubs such as Ho Chi Minh City’s surrounding provinces but increasing access to basic labor and infrastructure in provinces further afield is likely to shift assembly towards areas such as Bac Giang province in the north. 

Consumer goods and services

Beyond manufacturing and assembly, Vietnam’s emerging consumer class presents significant opportunities for those selling goods and services within the Vietnamese market. Since 2007, consumer spending power has risen from $52 billion to above $140 billion in 2017. This has and will continue to open up new opportunities for foreign companies.

Investors involved in consumer goods, food and beverages, and hospitality are likely to be the most immediate beneficiaries of increased spending power. Investors in industries where brand recognition is important will find 2018 and the years ahead to be pivotal in attaining first mover advantage.

Dezan Shira & Associates projects that, in the run up to the European Union - Vietnam Free Trade Agreement’s implementation, European investors are likely to gain the most from establishing a presence in the Vietnamese market as suppliers of high quality consumer goods and luxury products. 

Investors looking for new opportunities in consumer goods and services are also likely to increase the popularity of joint venture and acquisition agreements within Vietnam. By partnering with an existing local brand, international players in the consumer goods market will be able to ensure that they gain an immediate foothold with Vietnamese consumers ahead of their competition.

Challenges for foreign investors

Vietnam’s ability to transition foreign investment from basic manufacturing towards higher value-added production and consumption-based sectors is largely predicated on providing investors with the resources and conditions needed to justify investment and succeed within the market.

Labor

Investors’ most immediate concern is that of labor availability and quality. Vietnam’s workforce, while highly skilled in basic production, continues to fall short when it comes to more complex skillsets and professional qualifications. The continued influx of investment has compounded this problem by further driving up labor costs for technical positions and destabilizing the labor market. 

Investors often find the most immediate impact of high demand and rising wages is lagging retention and high turnover rates. Unlike European or North American markets, which have a surplus of college educated workers, Vietnam’s labor pool of similar workers is small and in high demand. Workers often switch between jobs quickly and may demand increased compensation when new opportunities arise.

In the short term, high turnover and thin technical labor pools do pose an immediate concern for investors and should be mitigated with higher wages and more stringent human resources (HR) protocols. Fortunately, Vietnam’s Ministry of Labor is keenly aware of these issues and has been working to encourage investment into the sector through incentives and government funding.

Over the long term, Dezan Shira & Associates expects HR risks to dissipate as public and private education programs increase the number of skilled workers within the country. Vietnam’s younger generation is also aware of the wage premiums that come with education and is keen on attaining higher levels of education in the future. 

Policy instability and corruption

Aside from labor concerns, investors’ second most common area of concern revolves around policy instability and corruption. Vietnam’s struggles with these issues are fairly common for countries at its stage of development and have followed its efforts to converge its legal system with global best practice.

For investors, new policies coupled with a foreign legal system can create uncertainty and even issues with compliance in the event that new regulations are not fully understood. Vietnam’s efforts to encourage investment and modernize its regulatory infrastructure have resulted in many new laws and a constant stream of guidance on how these laws are applied. 

Often times, Vietnamese legislation goes into effect with simple mandates that particular agencies handle particular aspects of the legislation. These agencies can take weeks or months to clarify the specific methods by which legislation is to be applied. During this interim period is where businesses find the Vietnamese legal system to be the most confusing. 

Many businesses find regulatory uncertainty to be a risk area for corruption. Government officials often find themselves to be in a similar position to companies, with little legal guidance on how a new law will be applied. Small fees to expedite a process or work around an area of legislation with no existing guidance can be charged. 

Fortunately, Vietnam is keenly aware of these issues and is making great strides to tackle its regulatory process as well as corruption at all levels of government. Recent crackdowns have seen a number of executives from State-owned enterprises put on trial, sending a strong signal that corruption will no longer be tolerated. Investors also often find that Vietnamese legislation and other public data is much more accessible than other countries at a similar stage of development. Many processes to do with registration, compliance, and invoicing are becoming available online, aimed at reducing uncertainty and the opportunities for corruption.

Mr. Maxfield Brown is a Senior Business Intelligence Associate at Dezan Shira & Associates’ Ho Chi Minh City office, where he oversees the management of pre-market entry strategy projects for the entire ASEAN region. Dezan Shira & Associates is a leading pan-Asian foreign direct investment consultancy firm with over 25 years of experience in assisting investors with market research, business matching, M&A support, corporate set-up, legal, tax, and accounting, and HR and payroll services. In Vietnam, it is present in Hanoi and Ho Chi Minh City and has a team of high-level experts with knowledge of the local business and legal environments.

VN Economic Times