The export sector will continue to drive Vietnamese economic growth as long as local businesses keep abreast of market swings. Faced with formidable challenges in the current downturns, it is more important than ever to look back.
Opportunities are here to stay
A recent poll conducted by the Vietnam Chamber of Commerce and Industry (VCCI) revealed that 68% of enterprises reported a reduction in orders, 23% seemed unclear about their business prospects and just 9% saw an increase in sales. Despite the dismal outlook, it is believed that foreign trade will become the engine of Vietnam’s economy in 2023.
The optimism is in part justified given the role of exports in the nation’s rapid growth during the last 10 years. Although the economy may be less promising in the coming time, the export sector is expected to keep its decade-long upbeat trajectory.
In response to a global economic slump, foreign direct investment (FDI) corporations in Vietnam may join hands with domestic enterprises to weather the storm. The businesses have huge financial resources, extensive experience in operations and strong competitiveness in key export categories. Currently, foreign-invested firms make up 72% of the total export revenues, according to a report by the Party Central Committee’s Economic Commission in June 2022.
In 2021, over 30% of export revenues came from industrial products, namely phones and spare parts, computers and electronics. South Korean conglomerate Samsung, for example, earned US$65.5 billion from its Vietnamese subsidiaries’ exports, accounting for 19.4% of the country’s total earnings. The electronics market demand remained stable despite being hit hard by Covid-19 waves. Regardless of the current uncertainties, the resilience of the industry’s giant such as Samsung is even expected to thrive.
Since early October, signs of a decline in sales have arisen in the textile, garment and leather sectors, which ranked fifth among the top exporting products of Vietnam. Obstacles are likely to persist as falling customer demand cannot be solved overnight, particularly in light of soaring inflation in the U.S. and the European Union members, some of the country’s largest trade partners.
However, experts are putting their faith in the Chinese economic rebound. Since the beginning of December, China’s authorities have been easing pandemic restrictions nationwide. The International Monetary Fund and other major financial institutions forecast the country’s growth rate to reach 4.6% next year. In 2023, major Asian economies, including China, India and Saudi Arabia, are predicted to shape global growth, according to the Organization for Economic Co-operation and Development.
China is the second-largest market for Vietnam’s textile and garment products and the third-biggest exporting partner for the country’s leather footwear industry. If China brings an end to its zero-Covid-19 policy beginning from 2023, a rise in consumption demand will considerably stimulate export opportunities for local manufacturers.
Other Vietnamese businesses will also benefit from the momentum generated by the Chinese economic revival. In a similar vein, domestic firms have intended to make a big push into the Saudi Arabian and Indian markets next year.
Who benefits from FTAs?
However, achieving export growth targets does not necessarily imply the advancement of the Vietnamese businesses’ operation or the economy’s strength. Conversely, local enterprises, particularly those that are small or medium in size and limited in capacity, may find themselves in a bind due to the immense pressures in the global market. The risks of losing their modest exports portion may be just the tip of the iceberg.
According to the Ministry of Industry and Trade, some US$69.1 billion of export revenues were generated from tax breaks under the free trade agreements (FTAs) between Vietnam and other countries. In particular, the footwear (95.9%), plastics (69%), rubber (67.4%) and textile and garment (59.9%) sectors made the most of their FTA incentives.
Still, the majority of the benefits did not belong to the local businesses. Once again, a whopping 70% of the market share was held by FDI firms.
The rules of origin, which are required to determine the national source of a product under the FTAs, have posed significant challenges for export operations in Vietnam. As for the leather footwear industry, roughly 80% of the materials for manufacturing are now imported, making it ineligible for tax cut advantages.
Garment manufacturing seems to be on the same boat. Some 60% of local factories provide the Cut, Make and Trim service, which refers to the simple processing phases paid by the apparel buyers. As the local makers are not in charge of fabric sourcing, it is difficult for them to qualify for incentives offered by the FTAs. Meanwhile, roughly 30% of domestic manufacturers follow the Free On Board service, an active export modality involving both materials purchase and product completion processes.
Unfortunately, challenges remain given the limited capability of the local textile dyeing sector. Vietnamese manufacturers primarily produce cotton, and only a few enterprises are capable of making polyester filament, even though it is a more popular fabric for consumer demands, according to a study by the Ministry of Industry and Trade mouthpiece Tap chi Cong Thuong in October 2020.
FTAs also offer benefits to foreign firms interested in Vietnam’s market, entailing stiff competition for local businesses. In this sense, domestic companies may lose their advantage twice as market difficulties double at home and abroad.
In June 2021, Nguyen Quang Thai and Bui Trinh published a study titled, “Analysis of Inter-Country Trade Flows Based on Input-Output Model Between Vietnam, EU, China, and the United States”, on Research in World Economy. The economists found that Vietnam’s final products would help raise the country’s output by 75.4% and increase China’s output by 22.8%. While Vietnam’s final product adds 72.2% to the national added value, it also spreads 24.8% to that of China. Put differently, the authors write local consumers will raise China’s added value by 24.8% when using Vietnam’s final products.
That being said, Vietnam’s exports have generated benefits for countries that export materials for domestic manufacturing. Therefore, it is necessary for local businesses to fully take charge of their own production line to bolster the national economy and retain as many profits as possible.
Turning exports into a miracle
For years, hundreds of billions in revenues and tens of billions in trade surplus have testified to Vietnam’s phenomenal export performance. But the domestic manufacturing sector must now address how to properly equip Vietnamese businesses for market competition.
Strengthening supporting industries for key export-oriented sectors, including textile, garment and footwear, maybe at the pinnacle of the effort. Vietnam’s textile and garment products comprised 5.2% of the global market, while it was 10% for the leather footwear industry. The assignment makes sense, given that the two industries brought in US$60 billion in revenue in 2021. In addition, the activities would help deal with obstacles in public investment disbursement schemes. As outlined in the national development plan, it is high time for Vietnam to prioritize the aspects that might enhance the country’s production instead of focusing on less urgent tasks.
Understanding competitive edges, keeping ahead of market fluctuations and grasping supply chain characteristics seem to be essential for Vietnamese firms who run the risk of doing business abroad. To this end, the operations of local companies hinge on trade facilitation activities and the relevant authorities’ supporting role.
The models of the Korea Trade-Investment Promotion Agency (KOTRA) and the Japan International Cooperation Agency (JICA) might provide Vietnam with feasible options, according to analysts. With the enhanced assistance, small and medium-sized businesses can develop and compete in foreign niche markets. The strategy may pave the way for local specialties, handicraft products and eco-friendly items to create their own consumer base in the mid-range and high-end market sectors globally.
There is a long way to go from idea to reality. But if domestic businesses can ask the correct questions, they may get the appropriate responses.