In the last decade, Vietnam has undergone a substantial change in its economic structure, transitioning from agriculture to the industry and services sector. Supporting industries have become a significant factor in Vietnam’s industrialization process, focusing on supplying raw materials, spare parts, and components to manufacturing industries.
Current Supply and Opportunities
According to the Japan External Trade Organization (JETRO), Vietnam’s localization rate for materials, components, and spare parts is only 34%, compared to Thailand’s 57% and China’s 68%. Despite these numbers, Vietnam’s supporting industries offer numerous opportunities for global buyers.
Around 1,400 Vietnamese companies, mostly small and medium-sized enterprises (SMEs), are engaged in the supporting industries. However, only 20% of these companies meet the criteria for global supply chain engagement, and 36% can participate in export-oriented production. Vietnam’s supporting industries currently cater to 25-30% of the overall industrial sector demand.
Trade Deficit and Growth Potential
- Despite a trade deficit of US$500 million in the first nine months of 2017, Vietnam’s garment and textile industry is expected to achieve a growth rate of 41% by 2020. However, domestic fabric production only meets 15-16% of the demand, which results in significant cotton imports each year.
- In the electronics sector, the imported value accounts for 77% of the total value generated. Domestic production primarily focuses on plastic-rubber components and spare parts. While foreign and joint venture enterprises dominate the market with high-quality products, Vietnamese companies mostly engage in simple, low value-added processes.
Economic Transition to Manufacturing
Vietnam’s economic transition to manufacturing is supported by an abundant labor force, low labor costs, and increasing manufacturing competitiveness. By 2025, Vietnam’s population is forecasted to reach 100 million, with 60% being of working age. Compared to neighboring countries, Vietnam has a low labor cost of around US$2,354 per year, with manufacturing wages averaging US$240 per month.
Government Efforts and Incentives
The Vietnamese government has implemented various measures to promote and support domestic and foreign investments in the supporting industries. Decision 68/2017/QĐ-TTg, issued in early 2017, aims to develop the supporting industries over the 2016-2025 period. Under this program, the output should satisfy 45% and 65% of the input demand of domestic manufacturing by 2020 and 2025, respectively.
- Incentives offered by the government include land rental fee exemptions, corporate income tax reductions, import duty exemptions, and favorable financing options for R&D, investment credit, and environmental protection.
Conclusion
Although the capability of Vietnam’s supporting industries is currently assessed as low, government support and incentives offer opportunities for growth and increased participation in the global value chain. As a result, Vietnam’s sourcing and supporting industries provide valuable opportunities for global buyers interested in procuring Vietnamese products.
Vietnam Sourcing