Vietnam’s supply market potential and top tips for effective sourcing

Vietnam has risen in global export rankings to compete with traditional export leaders. Competitive labour costs and growing capabilities in the country have made it a key sourcing hub for procurement managers looking to diversify their supply chain. Axis Group International offers insights on how and why to source from this dynamic market

Key Highlights

1. Vietnam has grown its exports from USD 14.8bn in 2000, to USD 281.5bn in 2020, an impressive CAGR of 15.9% for this new dynamic market
2. Vietnam has risen to become the world’s 22nd largest exporter, and competes with other dynamic markets and traditional export leaders as it edges higher in the rankings. (More on this: A World of Global Procurement Opportunities – but Where to Look?)
3. Many companies are already investigating how to effectively source more from this market in a bid to tap lower costs and diversify existing supply portfolios
4. Vietnam sourcing requires a good analytical base and a rigorous process to identify, evaluate and select potential suppliers. Knowledge of the economy, business system, policies, industrial clusters, language and culture are key enablers to navigate the journey to a shortlist of suppliers for a specific category
5. Next, good supplier engagement is then needed to test true export readiness and filter the shortlist to a final choice of supplier; this may require patience and local on-the-ground support to ensure complete commercial and technical alignment
6. Supplier development can improve outcomes over time – and in order to achieve a more significant scope of supply (at attractive cost points) without increasing risk it is important to have a medium- and long-term orientation that drives short term decisions and activity. In short, invest in relationships and partnerships

In 1995 Vietnam had a GDP of USD 20.74bn and was ranked the 62^nd largest economy in the world. In the 2 and a half decades since, Vietnam has risen to the 38^th position globally with a GDP of 340.82bn. This was an increase of USD 11.28bn from 2019 to 2020. While Vietnam is still below other South East Asian economies such as Indonesia and Thailand, its growth of over 6% annually for several years has seen it become a contender in the region. Current IMF estimates has 2021 GDP figures at USD 354.87bn.

Early in the pandemic, sourcing specialists increasingly looked for ways to diversify their supply chain, with over- exposure to single source markets dramatically impacting supply in the first half of 2020. Whilst most of the global export leaders experienced a decline in exports in 2020, with global growth estimated at -9.2%, Vietnam grew its exports by 6.5% to USD 281.5bn. Increasingly manufacturing capabilities in key sectors and lower costs than other Asian markets has made Vietnam an attractive market to source from.

A key hub for supplier diversification

Vietnam’s strong export performance in 2020, amid a global decline, makes it one of the most competitive supply bases globally. Increased development in high value-added goods manufacturing, with a growth in capital and consumer goods being exported, make this a key market to monitor for global sourcing managers. Vietnam’s growth in key sectors such as machinery & electronics make it an attractive sourcing hub to diversify one’s supply portfolio.

Trends: Most of Vietnam’s top export partners are its neighbours in Asia, although the US continues to be its top export destination. Exports in machinery & electronics dominate, making up 42% of total exports in 2019 and indicating a shift to more value-added manufacturing.

• Vietnam’s exports reached USD 265bn in 2019 and increased to USD 281.5bn in 2020
• Exports grew at a CAGR of 17% from 2001-2019, well above global growth of 6%
• Since 2012, it has achieved a trade surplus, except in 2015 when local businesses imported heavily to fulfil orders
• Exports in machinery & electronics grew at a CAGR of 28% for the period of 2001-2019, and comprised 42% of total exports in 2019
• Most of Vietnam’s exports are still low-end manufacturing, but value-added products are on the rise as it capitalises on China’s pivot towards high-tech manufacturing and rising input costs
• Capital and consumer goods make up the majority of its exports, with the exports of mobile phones, textiles and furniture accounting for the largest share of all exported goods
• Despite the industrial slowdown experienced globally in 2020, Vietnam’s exports to increased by 6.8% year-on-year

Upshot: Strong domestic policies ensured Vietnam experienced limited impact from the pandemic and became one of the few countries to see growth in 2020. In addition, Vietnam signed Free Trade Agreements (FTAs) with the EU, the UK and 14 more countries through the Regional Comprehensive Economic Partnership (RCEP) in 2020.

• Vietnam’s resilience and manufacturing strength have made it a reliable sourcing base for businesses that no longer want to overexpose themselves to a single source market, but want to expand their supplier base
• High foreign investment over the past few years has helped uplift its manufacturing and technological capacity
• The trade war between US and China as well as rising manufacturing costs in China have also benefitted Vietnam and its position in global trade
• With the signing of the RCEP and the EU-Vietnam FTA in 2020, Vietnam may further challenge India, a top exporter of textiles and chemicals, and China, a top exporter of electronics
• Additionally, Vietnam has FTAs with key markets such as Australia, Canada, Japan, New Zealand and China

Imperatives: While most countries underwent a recession in 2020, Vietnam’s economy expanded and is predicted to grow around 7% in 2021. While its export demand will depend on the health of the global economy as aftereffects of the pandemic endure, it has proven its resilience.

• Take note of Vietnam. It is now a highly competitive supply base with fast developing, integrated supply chain infrastructure, making it an increasingly indispensable node in global supply chains
• Incorporate Vietnam into supply base diversification considerations. Adopt a long-term view here – some challenges and imperfections are a short-term reality
• Understand Vietnam’s capacity to satisfy your procurement needs and seriously consider the role Vietnam could play in your inbound supply chain – how do incumbent source markets compare?
• Seek out capable, Asia-savvy partners to develop a Vietnam-inclusive procurement strategy

Sourcing from Vietnam challenging but rewarding

Sourcing from traditional export leaders such as the US or Japan, and even from previously low-cost markets such as China, has increasingly become more expensive for sourcing requirements. Vietnam has seen increased foreign investment to meet the production needs of companies who are looking for low-cost alternatives to global and other Asian markets. Tapping into this sourcing market has numerous challenges but can be rewarding.

Understanding what the essential components are of navigating in this market can be broken down into two key parts. First, a sound analytical base is required to understand how your company’s procurement requirements fit into the Vietnam sourcing landscape. Second, identifying and developing the right supplier is crucial to ensure the longevity of your relationship with your chosen supplier/s. Once selected, effective management of your supplier/s play a vital role in that longevity of that relationship.

Source: Axis Group International

Strong analytical base crucial

To enter a market such as Vietnam, one needs to be equipped with the correct information prior to considering if this opportunity is viable. This includes having knowledge on:

• Economy – Knowing where Vietnam is positioned in the global supply market and how stable this market is for long term sourcing
• Business system – Understanding how Vietnam suppliers operate, for example in payment terms, expected delivery times and engagement protocols
• Policies – What policies exist that either aid or hinder your ability to source from this market? Numerous trade agreements exist with other markets and understanding if trade barriers exist prior to sourcing from this market should be one of the first steps you take
• Industrial Clusters – Vietnam’s manufacturing clusters vary between the northern, southern and central regions of the country. The north’s proximity to China has led to this region being the largest manufacturing hub for machinery & electronics in the country, and a key part of China+1 strategy for diversification
• Language & Culture – Essential to any supplier engagement in most ASEAN markets, understanding the fundamental cultural nuances of how to interact with your Vietnamese counterparts are crucial to maintaining a functioning relationship with your supplier

Identifying the best fit supplier for your needs

Filtering through the vast supplier landscape of the Vietnamese market can be daunting, as one needs to test the export readiness of your potential suppliers. Only then can you shortlist the eligible targets to decide which is best suited to fit your specific procurement needs. This however requires two critical approaches in order to achieve a successful result:

1. Patience is truly a virtue in a market where the number of available options is numerous, hence attempting to expedite the process to start procuring from a supplier could increase your exposure to risk and cost implications in the long run. Proper supplier indentation, evaluation and pre-qualification before compiling a short list of suppliers requires a time investment that is essential before supplier engagement can occur
2. Having on-the-ground local support to ensure that commercial and technical alignment occurs is another essential component to successfully identify your chosen supplier/s. From the RFQ, RFP and RFT process, to site visits, supplier audits, commercial & technical evaluation and negotiation & contracting, having an on-the-ground entity to support this process increases the success rate and opportunity for effective sourcing from Vietnam

Supplier development to improve long-term outcomes

Once a sound analytical base has been established, and that base is used to then identify and select best-fit suppliers, developing those suppliers for long term partnerships should be the goal of every procurement manager. In order to achieve a significant scope of supply at attractive cost points and without increasing risk, it is important that one has a medium- and long-term orientation that will drive short-term decisions. Investing in your relationships and partnerships will guarantee the longevity and stability of your future engagements with this dynamic market.

For more on Axis Group International’s Global Procurement & Supply solutions email us at solve@axisgroup-international.com

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