4 Expected Trends in Vietnam’s Manufacturing from TPP

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4 Expected Trends in Vietnam’s Manufacturing from TPP

Vietnam is expected to become a major beneficiary from the TPP (Trans-Pacific Partnership), a regional trade agreement among 12 countries across the globe. Given that TPP accounts for ~40% of global GDP and ~11% of the world’s population, global trade and global supply chains will be impacted and shift towards member states through tariff reductions and expanded market access.

Vietnam is set to be benefited by the trade agreement due to a deepening supply chain and export-driven growth. Solidiance, an Asia-focused management consulting firm, looks ahead to spot the trends in relation to Vietnam’s manufacturing growth.

  1. Higher manufacturing output and expanded market access

At present, Vietnam’s largest trade partner is with China. Once TPP is ratified, Vietnam will witness higher trade volumes with the U.S. and Japan. Expanded market access to these countries would mean that TPP is able to increase Vietnam’s appeal to manufacturing investors and drive further investments. TPP will also accelerate Vietnam’s exports to member countries and is expected to increase the country’s total export by an additional USD 68 billion by 2025.

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Driven by the strong growth rate of manufacturing sectors in textile & apparel, computers, electronics, and electrical equipment, Vietnam is poised to become a major manufacturing hub in Asia.

Current tariff rates for textile, garments, and apparel exports from Vietnam to the U.S. (7.9% on average for textiles and 11.4% for clothing) will be gradually reduced to zero once TPP goes into effect. This will further attract investments into the textile sector in Vietnam and means that the purchase of machinery and equipment from other countries will be at a lower price.

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In anticipation for TPP, large electronics manufacturers have already expanded their production base in Vietnam, creating potential market opportunities for local parts and components suppliers while others have set up specialized industrial zones for garment & textile material production, yarn factories, packaging facilities, and more.

Manufacturing facilities will then try to scale-up to take advantage of economies of scale. The scale of both domestic and foreign enterprises following TPP’s implementation will drive the development of upstream suppliers as well as manufacturers in supporting industries.

  1. Vietnam’s competitive manufacturing landscape are making factories relocate

Due to the fact that wage inflation in China’s coastal cities is averaging around 12% a year, more manufacturing players are considering to relocate their factories. The state of manufacturing in Vietnam— with its competitive landscape, low labor costs, low-tech, low-added value manufacturing— will act as a magnet for Foreign Direct Investment into the country, where foreign investors which have existing China operations are now actively inquiring about the payoffs of moving to Vietnam.

Urbanisation will also be a major driver of demand for Vietnamese industry. The national urban population is set to grow from 29-50% by the year 2040, supplying many of the growing labor needs of Vietnam’s manufacturing.

Growth in Vietnam’s manufacturing sector due will lead to an increase in production scale and industrial deepening as well, leading to higher productivity. Increased financing, skills transfer, and capacity buildings are crucial factors driving manufacturing enterprises to scale up. This trend is likely to accelerate with the implementation of the TPP following through.

  1. Shifts to low cost economies in manufacturing

Manufacturing shift to lower cost economies will continue as Vietnam is increasingly recognized of having a low cost competitive factory to the world. The country has received more than USD 200 billion of investment over the last 25 years (in 2008, FDI reached a staggering USD 71 billion alone), into more than 14,000 projects including Canon, Samsung smart phones and Intel’s USD 1 billion chip plant.

As a percentage of GDP, Vietnam has been attracting more than five times the Foreign Direct Investment seen in China or India over the last 5 years. Expect huge investment in the next decade in next-generation manufacturing across a wide range of industries. Many of these exports will be components to supply Chinese factories, but also, to the U.S. and Japan.

  1. Manufacturing output will give rise to the development in supporting infrastructure (port, logistics, construction)

As manufacturing output increases overtime, there is a greater need for transporting, supplying, and warehousing at international standards, thereby leading to the development of logistics services and investments in warehouses, especially at large ports.

Road infrastructure improvements are already underway and links are being created between manufacturing regions and product destinations. However, due to constraints on the state budget, the government has taken measures to turn to the private sector for infrastructural funding. The estimated USD 48 billion infrastructure budget requirement set from 2016 through to 2020 has been identified to support and sustain the country’s economic growth, which has been among the highest in Asia in the recent years. This governmental move will create a more conducive investment environment, aimed at encouraging private and foreign investment in infrastructure projects.

In addition, Vietnam’s 2007 accession to the World Trade Organization (WTO) have led many global logistics companies to strengthen their presence in the country as the sector shifts towards a more liberal market. The expansion of multinational companies in Vietnam to create a more competitive market is driving growing demand for supply-chain management facilities, particularly in relation to handling more complex sourcing issues, production requirements, and servicing sales networks to accommodate the rising flow of goods in and out of the country. 

Source: “Trans-Pacific Partnership: A Boost for Vietnam’s Manufacturing Growth” white paper

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