Vietnam embraced e-commerce really late compared to other Asian countries like Singapore and Malaysia. However, the country is now the fastest-growing e-commerce market in Southeast Asia, including the B2B e-commerce and omnichannel sector. In 2020, the country achieved a growth rate of 18% with a scale of $11.8 billion and is expected to reach $23.71 billion by 2025, says marketplace operator Alibaba.com
Vietnam also currently has one of the highest shares of non-organized retail channels among ASEAN countries and has recorded an increase in the number of B2B e-commerce businesses and platforms within the last year. One of the reasons for the country’s great boost in B2B eCommerce is a large number of local SMEs and foreign investors looking for reliable suppliers and business opportunities.
Vietnam’s highly improved B2B e-commerce offers a great opportunity for business owners who want to start or expand their business internationally. Also, business owners will find the e-commerce space less competitive and cost-effective in the long run.
Economy
Vietnam’s economy is growing on multiple fronts, and we expect it to continue for many years. The major drivers of the country’s economy include the relocation of businesses (to Vietnam) for investment and the significant surge in manufacturing activities.
In addition, the agriculture, forestry, and fishery industries increased in performance by 2.99%, contributing to about 4% of the country’s overall economic growth. The industry and construction sectors increased by 9.44%, while the manufacturing sector increased by 10.69%.
With the high performance of many commercial industries, Vietnam’s economy is predicted to grow much higher in 2023 and the coming years, says Alibaba.
International trade
Vietnam is currently almost as competitive as China regarding international trade and manufacturing business. Many companies have moved their operations from China to Vietnam mainly because China has become costly for many manufacturers.
Furthermore, Vietnam signed a free trade agreement bolstering international trade. Also, with the recent trade war between China and the US, many international entrepreneurs and traders are investing in Vietnam. It also helps that Vietnam is located in a strategic location, thus making the country more open for international trade and investment from other markets.
Major economic sectors
Vietnam is majorly known for being an excellent location for investors in the textile industry; the country has over 6000 textile manufacturing companies with over 2.5 million workers.
However, things have improved over the years, and other business areas are receiving as much attention. This includes high-technology manufacturing companies like Samsung and Nokia that made multi-million investments in the country. Samsung, for example, has made Vietnam one of its manufacturing bases and produces about a third of the company’s output from this region.
Other major export markets in Vietnam include:
- Coffee: At the moment, Vietnam is the second world’s largest coffee exporter, with Brazil being first.
- Pharmaceuticals: Another industry driving the Vietnamese economy, the market is expected to increase from US$7.7 billion in 2021 to US$16.1 billion in 2026. One of the factors driving this market growth is the increased need for accessible healthcare and the government’s goal of achieving health for all.
- E-commerce: Vietnam is fast becoming an area for e-commerce activities. This growing industry is associated with the blossoming economy, thus giving rise to a high consumer culture.
- Automotive: Another critical market in Vietnam currently is the auto market. The automotive market is projected to sell 1.7-1.85 million units by 2035.
Market size and GDP
According to Tran Van Son, the Minister and Chairman of the Government Office, “Vietnam’s GDP growth in 2023 will be among the highest in Southeast Asia as shown in many international organizations’ forecasts and assessments on the Vietnamese economic outlook. He is right!
Vietnam’s GDP growth has improved significantly post-pandemic, majorly due to the increase in its manufacturing activities to major export markets like the US, Europe, and China.
In the Q4 of 2021, Vietnam’s GDP grew by 5.2% and then by 6.4% in Q1 of 2022. Also, the country reopening in March 2022 made it possible to revive its tourism sector. GDP is forecasted to grow by 6.7% in 2023, according to the World Bank10.
The global impact of Vietnam’s economic recovery
Vietnam’s economic recovery also affects other countries, especially other Asia countries. For example, Vietnam is a major holder in exporting tech products, and they often need to source raw materials from other Asian countries, thus boosting their economy.
Also, Vietnam has helped with the development of prominent global companies. This includes Samsung, which has a manufacturing base in Vietnam, and Apple, which sources its manufacturing needs from the country.
It’s also interesting to note that, by moving business operations to Vietnam, these companies increase the income for the workforce in the country while increasing their profit margins (Vietnam has a very low labor cost compared to other countries).
Also, there has been a shift in the global supply chain between China and Vietnam. However, as a report says, the two countries are not exactly competing because their economies complement each other. For instance, Vietnam imports many raw materials from China, which has enhanced the relationship between the two countries.
Asides from China, the rising manufacturing activities in Vietnam mean increased demand for raw materials from other countries, thus boosting their export economies.
Key drivers of Vietnam’s economic recovery include:
Low labor costs
One of the reasons Vietnam is becoming an export and business hub for many foreigners is due to the country’s low labor and manufacturing costs compared to other developing markets. Labor costs in Vietnam are about 50% of those in China at $2.99 per hour compared to $6.50 per hour.12
Foreign investments
As the Vietnam economy is improving and labor standards remain low, it has become a major choice of place for investment. Vietnam is a key player in the export of textiles, electronics, automotive parts, and footwear. Also, major companies like Nike, Apple, and Samsung have a manufacturing presence in the country.
This high foreign investment has fostered the country’s economic growth. Between 2020 and 2021, Vietnam recorded a 19% increase in exports.13
Free trade agreements
One of the primary drivers of Vietnam’s economy is the country’s recent free trade agreements. These agreements have made Vietnam more investor friendly, fostered the import and export of goods, and improved customs procedures.
Also, since the 2000s, the Vietnamese government has offered financial incentives to companies that set up their operations in the country.14 This incentive includes a low corporate income tax (CIT) of 20% and zero percent withholding tax on dividends.
Export-oriented manufacturing
Vietnam’s economic performance in 2022 was impressive, with the manufacturing and construction industries playing a significant role. For instance, the former grew by 6.4% due to the high demand for manufacturing products. Services sectors such as finance, telecommunications, and banking also witnessed laudable improvement and solid growth.15 At the moment, the manufacturing sector in Vietnam is the primary driver of its economic recovery.
Covid trade war
Vietnam has significantly benefited from the ongoing competition between the US and China. As China’s Covid-19 trade policy and rigid business policies are becoming permanent, companies are looking for ways to protect their business against disruptions that may occur in the future.
Many major companies like Apple and Samsung, which have a longstanding manufacturing presence in China, have reduced their operations in the country, and some moved their manufacturing operations to Vietnam instead.16
Also, many foreign firms (about 11,000) canceled their company registration in China.17 Instead, they took their businesses to Vietnam, where they could take advantage of the supportive business environment and low labor costs.
Vietnam’s economic outlook in 2023
Here are some things to expect from Vietnam’s economy and business environment as we get into 2023:
1. To become the fastest-growing economy in East Asia
Vietnam is fast becoming Asia’s economic leader as the region is rapidly recovering from the pandemic-induced slowdown. Also, according to the World Bank, the deceleration of China’s growth has dramatically benefited Vietnam.
In addition, Vietnam’s response to Covid-19 demonstrated its responsibility and earned admiration from many other countries. How the country handled the pandemic proved to other countries that the government is equipped to handle other things, like trade. Furthermore, Vietnam created policies that support production and manufacturing activities.
2. Building resilience through an export-based economy
Export in Vietnam is expected to grow by 15%, which is unsurprising considering the country is an export-based economy. During the Covid-19 pandemic, Vietnam maintained a positive GDP, especially compared to neighboring countries like Thailand, Cambodia, and the Philippines.
If the country could maintain such a positive GDP despite the pandemic, it is only reasonable to expect better from them in the coming years.
Up until recently, Vietnam was known for just textile exports. However, things have significantly changed as the country is now a manufacturing hub for automotive, technology, and electronics in Southeast Asia (SEA). Some of the most popular exports from Vietnam at the current time include mobile phones, computer parts, and electronics products.
3. An attractive destination for investment
Despite the pandemic setback in 2020, Vietnam was able to bounce back and become one of the fastest-growing ASEAN economies. This has made the country an attractive destination for foreign investment, supply chain, and manufacturing relocations. As of December 2021, Vietnam’s adjusted capital and share purchases by foreign investors reached $31.15 billion.18
Other things that make Vietnam an impressionable destination for Foreign Direct Investment (FDI) include the supportive business environment, solid infrastructure, and low labor cost. As of September 2022, Vietnam’s total registered foreign investment capital reached $18.75 billion.19 Also, as noted earlier, labor costs in Vietnam are relatively low, especially compared to other countries. The low-cost labor and manufacturing activities have made it an attractive destination for many investors.
4. Home to a favorable supply chain environment
Since 2019, Vietnam has been transitioning into a manufacturing hub, thus attracting many new manufacturing investments from different countries. Businesses with manufacturing bases in China and other South Asia countries are relocating to Vietnam, thus driving the FDI. Its transformation to a global manufacturing hub and strategic business relocation destination has made it the go-to destination for many businesses.
Trends show that the number of orders moving to Vietnam from China has increased dramatically, primarily due to the somewhat complex business conditions and policy in China at the moment. For example, many companies with factories in China have noted that it has become more expensive to operate a business in the region. As such, they look forward to relocating to a more supportive supply chain environment, like Vietnam.
Apple moved 11 of its manufacturing plants in its global supply chain to Vietnam, while companies like Foxconn and Pegatron expanded their manufacturing facilities. Also, Samsung is building a Research and Development cent worth $220 million in Vietnam.20
Vietnam has also invested greatly in building a reliable manufacturing ecosystem over the years. This includes signing trade agreements with other countries, supporting manufacturers, and improving the country’s infrastructures (road, power, and transportation). Furthermore, the Vietnamese government implemented several policies to support the rising foreign investment activities in the country. This, coupled with other factors, has made Vietnam an obvious winner in the supply chain relocation war.
5. E-commerce on the rise
Vietnam’s e-commerce is rapidly expanding, making it conducive for entrepreneurs to tap into new business opportunities. According to a stat, more than 70% of the country’s population is expected to use e-commerce transactions by 2025.21 For this reason, it has been receiving attention from many foreign investors.
6. Favorable regulatory environment
Vietnam offers a very conducive legal environment, especially in the ASEAN region. After the pandemic, the country adopted a fiscal and monetary policy to support economic recovery of Vietnam. This policy aimed to provide interest rate support, reduce VAT, support housing for skilled workers and improve the country’s transport infrastructure.22
Key challenges for Vietnam’s future economic growth
Although Vietnam is experiencing a boost in economic development, it risks facing some challenges in sustaining its economic growth. Most of these challenges are external and include the following:
1. Inflation
One of the biggest risks Vietnam may face is inflation, mainly due to the booming economic activities in the country. According to the IMF, the high costs of transportation and agriculture products like fertilizers and animal feed could raise prices for a wide range of goods and services, thus increasing inflation pressure on the economy. Also, the fluctuation in oil prices and rising raw materials costs may contribute to the inflation pressure.
Meanwhile, it’s important to note that inflation is rising globally due to energy prices and the Ukraine-Russia war, but somehow, Vietnam is keeping it under control. Currently, Vietnam’s inflation level is way lower than OECD countries.
2. Global economic slowdown
While Vietnam is getting a boost in the economy, it’s the opposite for other countries, including the major advanced economies like China. This may be a challenge for Vietnam’s economy as it means lower demands from major trade partners like China, Europe, and the US.
3. War
The Russian-Ukraine conflict has impeded trade in many ways, which may also affect Vietnam’s economic recovery. This crisis has resulted in restricted access to raw materials, supply chain disruptions, tight monetary policy, and a global economic slowdown.
4. Exchange rates and Interest rates
Many advanced economies, including the United States, have rising interest rates which is a measure to curb inflation. However, this increase in the value of USD has affected the exchange rate in Vietnam, and the country had to sell off many foreign exchange reserves. Also, this rising interest rate will affect business expansion plans, slow economic growth, and lead to tighter financial conditions.
5. Labor shortage
Another challenge Vietnam may face in its future growth is its population size. Vietnam has a relatively low workforce, especially when compared to countries like China. Thus, the country may need help meeting up with demands. Also, while the country is improving in infrastructure development, they are still nowhere near major world economies.
6. Weak external demand
Vietnam’s GDP growth may slow down due to weak external demands from major trading partners like the US and Europe. Also, the risk of recession in Europe and rising international interest rates can reduce external requests. These countries have experienced slow economic growth, which can negatively affect Vietnam’s economy.
In short, Vietnam has recorded incredible economic growth over the past years, and it’s projected to improve in the coming years. This makes the country an attractive destination for foreign investment and trade. Also, with the unending tension between US and China trade, the improved business policies in Vietnam, and the increase in manufacturing activities, it’s safe to expect the country’s economy to improve positively in 2023 and future years.
Meanwhile, a few hurdles may affect Vietnam’s economic recovery, including the war in Ukraine, the recession in Europe, and the rising exchange rates. However, the country can maintain this booming economic growth if policymakers remain vigilant.
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