Could you imagine a country, that was colonized by a European power, torn apart by a bloody war, became communist, and turned into one the fastest growing economies in the world?
That country is Vietnam, and in this article, we will look at the five opportunities and the five risks of doing business in this emerging economy.
Vietnam is a long, slim country located on the Eastern side of Southeast Asia.
The geographical difference has an impact also politically and economically, with the North being more conservative, and the South being more economically vibrant.
The capital is Hanoi, but the economic capital city is Ho Chi Minh City, the former Saigon, which is the center of Vietnam business.
BUSINESS OPPORTUNITIES
First opportunity: high-potential market
The first opportunity in Vietnam is the size of its market: we are talking of a market of 97 million people with one of the fastest growing middle classes in the world.
According to a Boston Consulting Group’ survey, the middle class in Vietnam is expected to reach 33 million people by 2020.
The best way to approach this market is through a Vietnam B2B marketplace where you can find local distributors.
Source: BCG
Second opportunity: high-growth economy
The second opportunity is the pace at which the economy is growing: Vietnam has experienced GDP growth averaging 7% a year for the past 30 years; it is the fastest growing economy in Southeast Asia, having outperformed in 2017, 2018 and is expected to be the fastest growing in Southeast Asia even in 2019.
Source: Oxford Economics
Third opportunity: flexible but stable currency
This takes us to the third opportunity, the currency. One US dollar buys 23,000 Vietnamese Dongs.
Even if this does not look great for a currency, it is the result of a sharp devaluation from 2009 until 2011, in the wake of the global financial crisis that hit Vietnam’s exports. However, from 2011 onwards, the currency has held well against the US dollar.
There has been just a slight depreciation of 10% in more than seven years, which in our opinion is good for a developing, export-oriented economy like Vietnam.
Source: xe.com
As long as the devaluation and internal inflation are kept under control, and Vietnam’s internal inflation is stable at around 3%, which is perfectly fine for such a fast growing economy, we do not see any problem in a slight depreciation, and we see this trend continuing in the future.
Source: Trading Economics and General Statistics Office of Vietnam
Fourth opportunity: low cost of labor
The fourth opportunity in Vietnam is the low cost of the labour force.
Salaries are around half what they are in China, and as a result there has been a trend of firms relocating from China to Vietnam, especially in the textile industry.
Apart from that, a fabric of small-medium enterprises is building up in Vietnam; this is very good to find a potential supplier where to outsource the production, and even in the long term to develop a solid internal market.
The most sought after businesses are Vietnam clothing manufacturers, due to the booming textile industry in this country.
Source: Trading Economics and General Statistics Office of Vietnam
Fifth opportunity: openness to trade
The fifth opportunity is, and this is astonishing for a communist country, the openness to trade of Vietnam.
Vietnam is part of the ASEAN, the association of the Southeast Asian countries, which became a single market in 2015; it has signed a free-trade agreement with the European Union, a bilateral free-trade agreement with the United States for the reduction of tariffs and duties, and it is now one of the new members of the successor of the TPP, the CPTPP.
Vietnam has also signed a free trade agreement with the Eurasian Economic Union (Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan).
As such, there are many companies that import and export in Vietnam, and you will find that trading with this country has become much easier than in the past.
BUSINESS RISKS
First risk: corruption
There are great opportunities in Vietnam, but also risks. The first one that we have identified is unfortunately the high level of corruption: Vietnam ranks 107 out of 180 countries according to Transparency International. Such level is in line with the rest of Southeast Asia, even if it is markedly more than Malaysia and of course Singapore, and of course this is not good for attracting investments.
Source: Transparency International
Second risk: poor infrastructure
The second risk is the poor level of infrastructure: most of Vietnam’s infrastructure was of colonial origin, built by the French, and it was torn apart by the war.
Vietnam’s recent strong growth has rebuilt some parts of it, but there are still issues in the energy and transport infrastructural network.
Just to give you an idea, it takes 32 hours by train from Hanoi to Ho Chi Minh City.
Third risk: shortage of labor
The third risk in Vietnam is the shortage of labor, which is somehow the downside of such a booming economy. The unemployment rate is 2%, very low, it might be difficult not only to attract workers but even to find any there, especially the skilled ones.
When the unemployment rate is so low and the economy is booming that much, even if inflation is kept under control, at some point Vietnam might experience strong wage inflation in the future.
Source: Trading Economics
Fourth risk: dependency on foreign multinationals
The fourth risk is the dependency on foreign direct investments.
We just wrote that a fabric of small-medium enterprises is growing up in Vietnam, but for the moment 70% of the exports are made by multinational companies relocated to Vietnam.
Therefore, we have yet to see a domestic organic backbone of the economy coming up, making the country independent from foreign direct investments. While these are always welcome, when they become so disproportionate, there might be a risk for the economy if things change suddenly (an external shock to global trade, for example).
Fifth risk: low-income country
The fifth risk has to do with the fact that Vietnam is still an emerging market, with a low GDP per capita; this stands at around 7,000 US dollars, which is below the average in Southeast Asia, and it is half the GDP per capita in Thailand.
Even with the tremenodus growth that has taken place in the last decades, Vietnam is still an emerging economy that has to grow more to become definitively attractive.
Source: CIA World Factbook
CONCLUSIONS
This was our general analysis of Vietnam, of course if you had the opportunity to do business in Vietnam and you saw more opportunities or you saw other risks that we have forgotten to mention, please write them in the comments below.
Overall, we think that Vietnam is an attractive market, especially considering the fast growth that the country is experiencing that will bring a considerable middle class in the future.
There are risks in the country, still given by corruption, the poor level of infrastructure and over-reliance on foreign companies.
Yet we think this is a country to be bullish on.
Other info about Vietnam in our Country Data page: Vietnam
Globartis Research
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