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

Vietnam has recently risen in global export rankings, and now competes with traditional export leaders. The country’s competitive labour costs and growing capabilities have made it a key sourcing hub for procurement managers who are looking to diversify their supply chain. In this article, Axis Group International offers insights on how and why you can source from this dynamic market.

Vietnam Supply Market

Key Highlights

  1. Vietnam has grown its exports from USD 14.8bn in 2000, to USD 336bn in 2021. This represents an impressive CAGR of 17% for this new, dynamic market.
  1. Vietnam has risen to become the world’s 21st 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?)
World of Global Procurement Opportunities
  1. Many companies are already investigating how they can effectively source more from this market in a bid to take advantage of lower costs, and to diversify existing supply portfolios.
  2. Vietnam sourcing requires a good analytical base and a rigorous process in order to identify, evaluate, and select potential suppliers. Knowledge of the economy, business systems, policies, industrial clusters, language, and culture are key enablers to help navigate the journey to a shortlist of suppliers for a specific category.
  3. Next, good supplier engagement is then needed to test true export readiness and filter the short list to a final choice of a supplier. This process may require patience and local, on-the-ground support to ensure complete commercial and technical alignment.
  4. Supplier development can improve outcomes over time – and in order to achieve a more significant scope of supply (at attractive cost points) without simultaneously increasing risk, it is important to have a medium- and long-term orientation that drives short-term decisions and activity. In short, it is advisable to invest in relationships and partnerships.

In 1995, Vietnam had a GDP of USD 20.74bn and was ranked the 60th largest economy in the world. In the two-and-a-half decades since then, the country has managed to climb to the 41st position globally, with a GDP of USD 366.2bn in 2021. This includes an increase of USD 23.3bn from 2020 to 2021 alone. While Vietnam is still below other Southeast Asian economies, such as Indonesia and Thailand, its growth of over 6% annually for several years has seen it become a very strong contender in the region. Current IMF estimates gives 2022 GDP figures of USD 408.95bn.

Vietnam Exports profile GDP - 13 September 2022

Early in the pandemic, sourcing specialists increasingly looked for ways to diversify their supply chains, after experiencing the dramatic impact of over-exposure to single-source markets during the first half of 2020. While most of the global export leaders experienced a decline in exports in 2020, with global export growth estimated at -7.4%, Vietnam managed to grow its exports by 6% to USD 281.4bn. Increasingly, manufacturing capabilities in key sectors and lower costs than other Asian markets have made Vietnam an attractive market from which to source.

A key hub for supplier diversification

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

Vietnam Exports profile image 2 - 13 September 2022

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, and these made up 46% of total exports in 2020. This indicates a shift to more value-added manufacturing.

  • Vietnam’s exports reached USD 281.4bn in 2020 and increased to USD in 2021.
  • Exports grew at a CAGR of 17% from 2001-2021, well above global growth of 6%.
  • Since 2012, Vietnam 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 26% for the period of 2001-2020 and comprised 46% of total exports in 2020.
  • Most of Vietnam’s exports still consist of low-end manufacturing, but the proportion of value-added products is on the rise. It is capitalising 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 2021, Vietnam’s exports increased by 19.4% year-on-year.
Vietnam Exports profile top 100 exports - 13 September 2022

Upshot: Strong domestic policies ensured that Vietnam experienced limited impact as a result of the pandemic, and subsequently became one of the few countries to see economic growth in 2020. In addition, Vietnam signed Free Trade Agreements (FTAs) with the EU, the UK, and 14 other countries by means of 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 the country’s manufacturing and technological capacity.
  • The trade war between the US and China, as well as rising manufacturing costs in the latter country, have also been to the benefit of 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, as well as 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 experienced a recession in 2020, Vietnam’s economy expanded by 4.6%, and it grew by a further 7% in 2021. As per IMF’s estimates, it is also expected to grow by 12% in 2022. While its export demand will depend on the health of the global economy as after-effects of the pandemic endure, it seems to have proven its resilience.

  • Take note of Vietnam as a supply market. It is now a highly competitive supply base with a fast developing and integrated supply chain infrastructure. This makes 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 most likely to be 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.
vietnam 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 in terms of sourcing requirements. Vietnam has seen increased foreign investment to meet the production needs of companies that are looking for low-cost alternatives to global and other Asian markets. Tapping into this sourcing market has numerous challenges, but it can be rewarding.

Vietnam Exports profile ranking - 13 September 2022

The essential components 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 plays a vital role in the longevity of that relationship.

effective supply management

Source: Axis Group International

A strong analytical base is crucial

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

  • Economy: Knowing where Vietnam is positioned in the global supply market, and how stable this market is in terms of long-term sourcing.
  • Business systems: Understanding how Vietnam’s suppliers operate, for example in respect of payment terms, expected delivery times, and engagement protocols.
  • Policies: The existing policies that can either aid or hinder your ability to source from this market. The numerous trade agreements existing with other markets and how trade barriers that exist prior to sourcing from this market can affect your decisions.
  • 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 the China+1 strategy for diversification.
  • Language & Culture: Essential to any supplier engagement in most ASEAN markets, is understanding the fundamental cultural nuances of how to interact with your Vietnamese counterparts, and how these interactions are crucial in 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 you need to test the export readiness of your potential suppliers. Only then can you shortlist the eligible targets and decide which ones are 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. Attempting to expedite the process of starting to procure from a supplier could increase your exposure to risk and could have cost implications in the long run. Proper supplier identification, evaluation, and pre-qualification – before compiling a shortlist of suppliers – require 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 the successful identification of your chosen supplier/s. From the RFQ, RFP and RFT processes, to site visits, supplier audits, commercial & technical evaluations, 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 your risk, it is important that you have 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.

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