Vietnam’s logistics sector in need of upgrades to fully capitalize on growth

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Vietnam’s logistics sector in need of upgrades to fully capitalize on growth

Vietnam’s logistics industry has seen strong growth over the past few years amidst problems arising from lack of infrastructure and low talent source. According to the Vietnam Logistics Business Association, 80 percent of logistics enterprises reached or exceeded their annual targets in 2014 – 2015, and the sector is expected to record an average growth of 20 to 24 percent over the next 5-10 years.

While progress is significant, Vietnam’s logistics industry still lags behind its Southeast Asian peers. The country ranks 64th on the Work Bank’s Logistics Performance Index in 2016, much lower than Singapore (5th), Malaysia (32nd) and Thailand (45th).

Annual expenses in Vietnam’s logistics account for approximately 21-25 percent (USD 37-40 billion) of the country’s gross domestic product (GDP) per year, whereas only 10 percent is spent in developed countries and 18 percent in other developing nations.

Moreover, the lack of qualified workers has become a great setback to the sector’s growth, with 54.7 percent of companies saying that staff with management and language skills is difficult to find. Aside from these problems, infrastructure for logistics services in Vietnam is underdeveloped, said Tran Bao Ngoc, head of the Logistics Department under the Transport Ministry.

Vietnam’s railway transport, one of its major means of freight transportation, is underdeveloped with only having one percent in market share. In terms of standards, only 6.7 percent of Vietnam’s 2,653 kilometers of railways meets international standards. There is also a lack of connectivity between road, sea and railway transport due to the lack of dry ports and storage facilities, which play an important role in transiting and distributing commodities, Ngoc said.

In light of these current problems, there is potential for growth nonetheless. Vietnam’s logistics is expected to expand following major trade agreements coming into effect. In anticipation for the ratification of the Trans Pacific Partnership (TPP), key investments will likely be seen in transport and logistics services to accommodate the trade demand from the TPP.

Road infrastructure improvements are already underway and links are being created between manufacturing regions and product destinations. Moreover, due to constraints in state budget, the government has decided to encourage private sector participation for additional infrastructural funding, which requires $48 billion infrastructure budget from 2016 through 2020. This governmental move will create a more conducive investment environment, aimed at encouraging private and foreign investment in infrastructure projects.

“Vietnam is more of a liberalized market now that plenty of multinational companies are setting a foothold following the 2007 accession to the World Trade Organization trade agreement”, comments Michael Sieburg, Associate Partner at Solidiance Vietnam, an Asia-focused management consulting firm.

However, he also adds, citing Solidiance’s white paper titled “TPP: Boosting Vietnam’s Manufacturing Growth”, that in order for foreign players to gain access the Vietnamese logistics market, it is crucial to establish a collaboration with local partners in training and technology transfer to likewise maximise their operations through increased localization.

On the other hand, the government should form a national logistics committee to boost cooperation between different means of transportation so as to increase competitiveness in the market. Vietnam is aiming to climb to 4th on the Logistics Performance Index in Southeast Asia and 50th in the world by 2020.

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