Vietnam is lately getting traction as an alternative sourcing destination to China. Many companies that formerly exclusively sourced in the Middle Kingdom are now expanding their sourcing network within so-called "China +1" strategies. Within this article we try to sort out what is possible to source and what is not.
Although Vietnam has a lot to offer, its export portfolio has its limitations as it is based on its comparative advantages. As a developing economy, these advantages are first and foremost its natural environment as well as its abundant, able and reasonable work force. Since opening up in the mid-1980s, the country has made huge socio-economic progress. Vietnam closely follows the “Flying Geese Pattern”. It predicts that emerging markets first develop non-durable goods, then durable goods, and finally capital goods sectors during their industrial evolution. Thus, Vietnam has systematically built up its export portfolio.
Creating a BCG Matrix for Vietnam's Export Industries
We created a BCG matrix to better understand which products are relevant for our customers and where these products are currently located in the product life-cycle of Vietnam´s economic development. Goal was to include these research results into our daily consulting work. We tried to assess the status of products exported by local companies as some industries - especially electronics - are dominated by foreign investors which are often only partly relevant within our sourcing projects. Of course, in a country where 73% of exports are generated by foreign companies the definition of "local industries" may however be a bit difficult.
First step was to analyze which products are being inquired by our customers and thus should be "relevant" export segments. Below, you will find a treemap with the results of our research. As you can see metal products are by far the most important sourcing segment within our database. They are followed by textile and consumer goods. Car parts, food and electronics also play a role in our sourcing projects.
Treemap: Inquiries for Sourcing by Industrial Segment @ DEinternational (2018/19)
Next, we narrowed down the definition of the above mentioned segments. For example, most of the car parts inquiries are actually for metal products and many consumer goods are in fact inquiries for furniture. Result is a BCG matrix for a selection of Vietnam´s (more or less) local export industries. In this matrix, the Y-axis measures export growth per annum and the X-axis depicts the current export world rank. We also added arrows to show where the industries are heading in their future development. Overall, Vietnam has a well balanced portfolio with some industries which are already world-leaders (furniture, apparel, agricultural produce) and some runner-ups (metal products, electronics supply, processed food). Crucially however, the country is missing capital goods industries as explained below.
BCG matrix: Vietnam's Export Product Portfolio (focus: local companies)
The BCG matrix can be a basis for policy making. For example, one could argue that capital supply for asset-intensive industries such as metal processing (which is a "Question Mark") should be improved. On the other hand it can be helpful for buyers to understand how mature and competitive certain product segments are. For instance, apparel and furniture as "Stars" can be comparatively easily obtained in Vietnam. However, suppliers for electronics products as "Question Marks" often need more attention to enable an effective know-how transfer and to ensure product quality.
Following, we added short explanations to each industry sorted by development stages (non-durable, durable, capital goods).
Agriculture has been the first industry profiting from economic liberalization pushes in the 1980s. Vietnam profits massively from its natural bounty. Nowadays, it is the 12th biggest exporter worldwide for agricultural products. However, the country often exports unprocessed (e.g. coffee) or pre-processed goods (e.g. shrimps). Its industry so far fails to develop an established localized food processing industry.
Using its ample and able HR supply, the country also developed a strong apparel sector. Vietnam now is the 4th biggest exporter worldwide. On the downside, Vietnam still has to import a lot of textile pre-products which limits its competitiveness. Also, the sector has not yet developed a strong standing aside from apparel, e.g. in technical textiles.
Although agriculture and apparel are still showing brisk export growth, their outlook is dimming as salaries are rising and agricultural potential is fully utilized. The economy will therefore probably move more firmly into durable goods.
Vietnam's woodworking industry is the first fully internationally competitive sector in this field. Currently the country ranks as 7th biggest furniture exporter and aims to become no. 2 until the mid 2020s.
An emerging industry is metal processing. Because of constraints with labor costs and environmental regulations in China, a lot of production capacity is currently shifted to Vietnam. The country has a lot to offer in terms of casting, turning, stamping etc. However, local companies also face a lot of constraints regarding raw material supply, customer orientation and technical know-how.
Vietnam´s supplying electronics industry is still rather weak. Although it ranks no. 12 in overall worldwide exports, 95% of these are done by foreign OEMs such as Samsung. Albeit, as these are strengthening their localization rates local suppliers are bound to emerge during the coming years.
Durable goods are currently the most promising product segment for the development of Vietnam's economy. Here, the country can fully utilize its young and eager workforce and lay the basis for the formation of capital goods industries.
To become a truly industrialized nation, Vietnam has to move into the production of capital goods. Fore example, THACO trucks/buses and Vinfast are already active in capital goods manufacturing . Furthermore, the country sports a large array of foreign manufacturers producing capital goods in Vietnam.
However, local Vietnamese companies so far have not developed a broad base of internationally competitive capital goods manufacturers. There are several challenges these enterprises have to fix before they can conquer global capital goods markets the same way they are currently taking over many non-durable/durable goods markets (we might touch upon these in another feature).
Admittedly, Vietnam's economy is still in an early development stage. And first seeds of an emerging capital goods industry can already be seen (e.g. picture above of a local metal processing company producing sorting machinery). Albeit, it will be years until Vietnam will be known for its capital goods producers.
International Competitiveness Over Time
So, when will above-mentioned products peak in their competitiveness? When is the best time to approach Vietnam to source specific goods?
Below, you will find a graphic depicting international competitiveness for the segments above in rough terms of "highest" and "lowest" on the Y-axis. The X-axis shows a timeline starting in the official starting year of the "Doi Moi" market reforms 1986 and ending 50 years later. All the segments grow in competitiveness over time, peak and then show some form of stagnation or decline. This approximates the product life-cycle as laid out by Vernon.
International Competitiveness of Selected Vietnamese Export Goods
As can be seen agricultural produce and apparel have been the first segments to gain international competitiveness and are currently peaking. In the future, agricultural produce will most likely retain a high degree of competitiveness due to the natural bounty of Vietnam's soil and environment. Albeit, the country's apparel industry might sharply decline in the coming years due to rising labor costs on which it relies heavily. The furniture industry will peak in the early 2020s and then should also slowly lose competitiveness because of increasing wages. Regarding production factors, it does rely more on assets (machinery), so the decline should be slower than with labor-intensive apparel. Metal products are on a sharp rise currently and should max out competitiveness in the coming decade. (Local) Processed food and electronics supply are late-comers. They might become world-market leaders in the latter half of the 2020s. However, for this to happen capital supply for these asset-reliant industries has to be improved. Of course, this overview is just an approximation and does not factor in external influences such as supply shocks in other markets (as is currently the case with metal processing in China).
If a specific segment has not yet reached full international competitiveness this does not mean that foreign companies cannot establish successful sourcing operations in them. It will just take more efforts to develop suppliers. For example, some of our sourcing customers in metal processing calculate 12 to 18 months from first contact to first serial delivery. Within this time they will establish a firm relationship to their supplier, transfer know-how and ensure QC processes. They hope to profit from their "first-mover" status due to cost reductions and supplier risk diversification.
Overall, Vietnam is not yet an easy sourcing market. Supplier development takes time and efforts. Albeit, once a supplier is firmly established the pay-off can be big. Our customers report that Vietnamese partners are eager to learn, reliable and are able to deliver high quality.
Are you looking for suppliers in Vietnam? Check out our business partner matching services: https://www.deinternationalvietnam.com/business-partner-search