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Understanding Vietnam´s rise to economic transformation

by: Johnny Pan, SPI

Why should I read this document?

This document gives an overview of the economy and business environment in Vietnam, describes the leading industries and what challenges are facing, and how is the country making to economic transformation in the past decade. 

This document is targeted for the following audience: 

  • European SMEs and start-ups who provide innovative methods or ideas in key areas targeted by Vietnam’s economic initiatives. 

  • European SMEs and start-ups with technologically advanced features who would like to enter the Vietnamese market 

 

Overview

 

Economic Overview

Vietnam is an open economy with trading flow of USD 340 billion. It attracted total registered foreign direct investment (FDI) of USD 300 billion in 2016. Vietnam aims to help drive the global economic integration agenda. The GDP per capita reached to USD 2,733 in 2019. With a population of over 95 million and Southeast Asia’s fastest-growing middle class, Vietnam now represents an important market for foreign goods.

 

In 2020, amid regional export reductions and evaporating tourist inflows, the Vietnamese economy appears to be the most resilient in the ASEAN region. Turning to 2021, growth is expected to increase. Volatile external demand and pandemic-related restrictions continue to be downside risks. 

The government has recently implemented the 4th Industrial Revolution that aims at transforming socio-economic activities, delivering opportunities as well as challenges. According to the Boston Consulting Group (BCG), the economy will be able to earn significant benefits after making use of the 4th Industrial Revolution. It is expected that the country’s GDP may rise by USD 28.5 - 62.1 billion by 2030, depending on the level of technology put into use by businesses, or equivalent to an increase of between 7-16% of the GDP.

 

Business environment 

Vietnam was ranked in 69th position in the World Bank Doing Business 2019. This country has also experienced a significant improvement in the Global Competitive Index in 2019. Vietnam has its highest ranks in terms of its market size and adoption of information and communications technology (ICT) - measured by the number of internet users and subscription to mobile-cellular telephones, mobile broadband, fixed internet, and fibre internet.

 

In terms of human resources, with a population of nearly 100 million people and over 60% under 35, Vietnam is well-positioned to supply a young, abundant and quality workforce at a competitive cost. In addition, high skilled workers can demand a better package and companies are seeing higher turnover rates. Nonetheless, the government will need to tackle this by establishing more vocational schools and technical centres to train high-skilled workers.

 

The regulatory environment has been revised to incorporate more favourable regulations for businesses to invest and operate in Vietnam. Many new laws on investment, and the new Law on Enterprises, were passed in 2014, and decrees and circulars have been put in place to provide guidelines for better market access.

 

On Level 2 you can find information about the current business trends in Vietnam and leading industries, while Level 3 will tell you more about the best practice of doing business in Vietnam. 

This page will provide information on the leading industries, and further discuss linkages with the growing sectors in Vietnam.  

 

Leading sectors 

Vietnam’s information technology sector is experiencing high growth, driven by low costs and high-quality labour. As Vietnam has shifted from low-tech manufacturing to a service-oriented economy, the country’s information technology market has grown increasingly. This has been encouraged by the growth of Vietnam as a regional market for domestic enterprises and global technology vendors. 86% of total IT revenues in 2017 were generated from hardware. With this scope, there are five IT-related industries that are considered to be the driving force of Vietnam’s economy: 

 

  • Fintech

The fintech industry is expected to reach US$7.8 billion. According to EY, there are currently around 77 Fintech firms in Vietnam. The Fintech start-ups received a total investment of US$129 million, accounting for 63 % of all start-up funding value, according to Topica Founder Institute.

The fintech sector has a very high growth potential in Vietnam and will continue to attract funding, especially from venture capital funds. In addition, M&A activity is also expected to increase as consolidation occurs and firms try to expand, introduce new technologies, and increase service offerings.

For example, digital payment is getting more popular in Vietnam, and is set to be a 90% cashless economy by reducing cash transactions and increasing electronic payments. 

 

  • Artificial Intelligence

The artificial intelligence sector (AI) industry in Vietnam has become a key sector with strong growth potential. For instance, AI application can be used to healthcare industry, helping the improvement of health care service quality. This is increasingly relevant for prevention, control and treatment, particularly with COVID-19.

In addition, the government is aiming to set a target by 2025 of at least 20% of all businesses applying an Industry 4.0 technology. In priority industries, the figure is expected to reach at least 30%.

 

  • E-commerce

E-commerce is another strong sector that has become a prime market for foreign investment, driven by the young population, growing smartphone usage, and rising internet penetration. 

Vietnam has approximately 50 million smartphone users and has consistently ranked within the top 20 countries with the highest number of internet users. 

Online retail is fast becoming the new trend of shopping, particularly among the country’s youth. In 2018, the e-commerce market has reached US$6.2 billion and is expected to hit US$10 billion. 

 

  • Software outsourcing

Vietnam has emerged as a cheaper outsourcing destination compared to some other markets, such as China and India. According to the Vietnam Software and IT Services Association, the software industry reached revenues of US$8.8 billion in 2018. Due to the low labour cost, outsourcing to Vietnam makes a lot of sense for companies looking to make the most cost-effective development. Vietnam ranks 20th among the top nations recognized as an excellent outsourcing destination.

Vietnam is also increasing the number of talented IT developers. A focus on higher education is one of the main reasons Vietnamese tech workers rank among the best software developers in the world.

 

  • Education technology 

Vietnam’s education technology (Edtech) is growing and shows the capacity to bridge the gap between traditional education environments and learning needs inspired by the private sector. There is an emergence of new learning models and the development of science and technology.

As a recent example, Vietnamese start-up Everest Education secured a USD 4 million investment by a Hong Kong-based equity firm. The company provides tech-enabled personal learning through a network of centres and partner schools.

This page will showcase the relationship between the EU and Vietnam, and the business climate in Vietnam.

 

EU- Vietnam relations

The relationship between Vietnam and the European Union (EU) has been developed since formal ties were first established in 1990. The EU is the fifth-largest foreign investor in Vietnam. EU firms had invested a cumulative total of almost US$24 billion in Vietnam by the end of 2018. European investors are present in many sectors and industries. The top-three sectors for European investment are manufacturing; production and transmission of electricity; and real estate - with the total amount of investment USD 8.2 billion, USD 5 billion and USD 2.6 billion respectively.

Given the status of the signing of the EU-Vietnam Free Trade Agreement (FTA), the country is steadily becoming more open to international trade and investment. The key sectors include garments, footwear, textiles, agricultural products, machinery, and automobiles.

 

Business climate 

Whilst at lower levels because of the COVID-19, pandemic, the EuroCham’s Business Climate Index (BCI) is over 50, and overall there is a more optimistic sentiment among business leaders with a belief that the economy is more likely to stabilize and improve indicates a stronger sense of hope for the economy in the future.

European companies also continue to remain optimistic about Vietnam’s business environment as well as the EU-Vietnam Free Trade Agreement (EVFTA). 

Indeed, European firms operating in Vietnam have historically been positive about the business environment in Vietnam, envisioning strong growth on multiple fronts with particular interest to investors who has been the main driver for the growth of Vietnam’s domestic consumer market.


 

Sources

PWC. (2017). Spotlight on Vietnam: the leading emerging market. https://www.pwc.com/vn/en/publications/2017/spotlight-on-vietnam.pdf 

https://www.focus-economics.com/countries/vietnam 

The Fourth Industrial Revolution: A Vietnamese Discourse, December 2017

https://www.vietnam-briefing.com/news/vietnams-improving-competitiveness-2019-global-competitive-index.html/

https://nms.com.vn/en/vietnam-software-outsourcing/ 

Whitebook 2020, EuroCham 

https://www.vietnam-briefing.com/news/positive-outlook-for-european-businesses-in-vietnam.html/

Last updated: 10.12.2020 - 12:18