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Today we’ll look at Vietnam’s incredible growth in manufacturing, as well as the problems the sector faces.

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Vietnam’s economy is booming.

It ranks as the 33rd largest economy in the world. That might not sound like much, but in the last three decades, annual GDP growth dipped below 5% only three times, with two of those occurrences happening during the pandemic. The country’s economy has been expanding at twice the pace compared to the global economy.

And manufacturing has become a key driver of growth.

Manufacturing contributes 24.8% to the country’s $409 billion GDP, up from 21% in 2015. That’s the highest mark in the region behind only Thailand. The sector comprises 59% of stock FDI, the highest in the region, and generates 95.1% of total export volume, up from 81.8% in 2011.

Just to underscore how impressive Vietnam’s growth has been, in 1995 there was no industry in which Vietnam held a 0.5% share in total export value. In 2021, there were six such industries.

Although Vietnam’s manufacturing is fairly diversified, two industries are responsible for half of the total export value — apparel and electronics:

Vietnam follows a succession of nations that have leveraged their created or inherited advantages to build an export-focused economy. First, producing labor-intensive goods, and then moving up the value chain, establishing capital-intensive and technology-intensive industries. That was the case with China before Vietnam, with South Korea before that, and with Japan before that.

Now, what are those advantages that make Vietnam so compelling to invest in?

1. Labor force advantages. Vietnam’s labor advantages are multifaceted. The most basic part of that advantage is cost. In China, Vietnam’s main competitor for FDI, labor costs in manufacturing are twice as high. There’s also a cultural component. Vietnamese are among the most hardworking nations on the planet: they work well over 2,000 hours a year, and 70% of the country say that work is ‘very important’ to them, compared to 58% globally. Finally, Vietnam has the highest labor participation rate with 96% of men and 88% of women between ages 20 and 64 working.

2. Strategic location Vietnam boasts a 3,000 km coastline and shares a border with China, facilitating the manufacturing transition while keeping a significant portion of the supply chain intact. The country hosts three of the 35 largest container ports globally. Saigon, its primary port, has witnessed a staggering 272% increase in traffic over the past two decades, while Vũng Tàu has expanded by 147% since 2017. With 18 of the 20 fastest-growing trade corridors in Asia, Vietnam plays a pivotal role in driving this growth and reaping its benefits.

3. Policy changes. While numerous policy changes have contributed to fostering increased investments in Vietnam's economy, we can identify three pivotal ones: the market opening policy of Doi Moi1 launched in 1986, the lifting of US sanctions in 1994, and Vietnam's accession to the WTO in 2007. These policy shifts have had a profound impact, as evidenced by the subsequent decade witnessing a 30-60 percentage point growth in trade as a percentage of GDP following their implementation.

4. Geopolitical advantages. Similar to China, Vietnam operates as a communist state, yet it is considered a safer environment for businesses seeking to penetrate the American market. Furthermore, unlike Indonesia and the Philippines, Vietnam has not encountered significant issues with terrorist activities. Consequently, this has led both suppliers and producers to relocate a portion of their manufacturing operations to Vietnam, with notable companies such as Foxconn, Dell, HP, Google, and Microsoft, among others, making the move.

Vietnam is poised to remain an exceedingly appealing investment destination in the years ahead. With a projected economic growth rate of 7-8% for the foreseeable future and a skilled yet cost-effective workforce, Vietnam's allure remains strong. Moreover, sentiment toward Vietnam is overwhelmingly positive; in a 2021 survey of Japanese companies already operating in the country, 97% expressed their desire to expand their operations in Vietnam over the medium to long term.

However, Vietnam's focus extends beyond mere economic growth to the quality thereof. The government aims to elevate manufacturing's contribution to GDP to 30% by 2030, with 45% of that comprising high-tech products. As part of its digital transformation agenda, Vietnam aspires for the digital economy to contribute 30% of GDP, to establish a digital government by 2025, and to achieve net-zero emissions by 2050.

While these goals are undoubtedly ambitious, they are not without their challenges.

The first issue is labour productivity, the counterpart to labor costs, with Vietnam ranking 124th out of 189 countries at just $10 per hour. This "unproductiveness" can be attributed partly to the types of industries Vietnam specializes in currently, as well as differences in labor costs. However, it's also evident that many developing nations lack the requisite technologies, processes, or skills to maximize productivity.

Only 11% of the country's labor force is highly skilled, resulting in a reliance on labor-intensive tasks even within technologically advanced industries. While Vietnam plays an important role in the semiconductor industry, its focus primarily revolves around the most labor-intensive aspect of the industry, namely packaging.

According to a 2021 report by the World Bank, only 6.9% of local firms utilize cloud computing technologies, and robots are employed by just 5.9% of firms.

Manual labour predominates in most industries.

For instance, in apparel manufacturing, manual design remains the most common method for 46% of firms, whereas Computer-aided design (CAD) is predominantly used by only 22% of firms. A similar trend is observed in sewing, with 62% relying mostly on manually operated machines, while only 20% primarily utilize semi-automatic sewing machines.

Likewise, in food manufacturing, the most prevalent method for testing suppliers is 'human sensory' (46%), which may not instill confidence. Similarly, in car manufacturing, the most widespread assembly method is 'machines fully controlled by operators' (60%).

The same study looked at why is technology adoption low. If we summarize and oversimplify a bit, we can boil it down to four reasons:

Another obstacle to Vietnam's manufacturing dominance is the absence of established local supply networks. For instance, Samsung, despite significant investments in the country, still heavily relies on South Korean and Chinese suppliers for its local factories.

Without the necessary suppliers it’s tough for companies to bring their production to Vietnam:

Finally, and this may be a more long-term issue, there's the problem of reshoring. In the US, for example, reshoring activity is on the rise both rhetorically and in practice. If the labor costs in Vietnam are rising (and they are), and the output increase lags behind, there’s more incentive for a company to reshore its production.

Moreover, geopolitical tensions and local rhetoric may create additional pressure to reshore. Consequently, firms with overseas production may expect higher returns from their offshore factories to offset political risks.

There’s still a lot to be done to modernize Vietnamese factories. As mentioned in a McKinsey study, local manufacturers need to invest in sensors, performance management software, scheduling systems, analytics systems, and supply chain planning.

While global solutions are available to Vietnamese factories, local alternatives are also emerging.

One established player in the industrial automation space is Axiomtek. The company offers both hardware and software products, including computer boards, system-on-modules, machine vision products, and various types of industrial computing systems. Their software offerings include process automation, maintenance solutions, and lighting and HVAC installation.

With the combination of hardware and software, clients are promised a smart factory where they can monitor activities on the factory floor, automate manual tasks, and manage utility and material expenses.

Similarly, though focusing more on software and comprehensive automation solutions, Intech offers a five-level system for industrial automation:

There are local providers of manufacturing execution systems (MES) software. This is software that is used to control the production process. One such provider is akaMES, which enables manufacturers to:

There are also specialized solutions available. On the analytics systems side, WinMain offers equipment maintenance software. With their software, manufacturers can track maintenance work history for assets and machinery and receive preventive maintenance alerts.

While these solutions may not heavily emphasize features like warehouse management (such as tracking remaining stock and suppliers) or employee management (including storing certifications and sending role-based notifications), they are still included in the software, albeit in a basic form.

Additionally, there are industry-specific solutions like Inflow, which positions itself as a supply chain and manufacturing platform tailored for fashion brands.

The overall value proposition is straightforward: no matter what you need to accomplish as a fashion brand, our platform has you covered:

Two things.

It’s interesting that this type of growth — sustained, multi-decade, non-resource based — is mostly prevalent in East and Southeast Asia. While Brazil, Turkey, and other countries are frequently grouped with Asian nations as growing, they significantly lag behind in their capacity to maintain growth and overhaul their economies.

Regarding Vietnam, there appears to be no real market leader in the industrial automation space. Most websites look like they were built a decade ago at best, with vague product descriptions and often non-existent specific details on how they work.

Either there's still a lot of opportunity to launch a product in this space, or everything is going to be gobbled up by foreign providers.