Here's how Vietnam is acing the manufacturing game

Until 2019, China had a manufacturing monopoly in the world.

3 years in, another Asian giant is completely destroying its monopoly

And to everyone's surprise, it's not India!

Here's how Vietnam is acing the manufacturing game:

$372 Bn: The approx. export revenue clocked by Vietnam in 2022! It recorded a trade surplus of nearly $11 Bn last year as opposed to India's trade deficit of $218.94 Bn.

How did a country with nearly <10% of our population, & 1/10th GDP of ours, manage to strike trade surplus?

Not just exports, its GDP grew at around 8% in 2022 as opposed to India's 6.9%!And now, this actually placed Vietnam to be one of the fastest growing Asian economy. So, how did such a small country make us feel its presence in the worst economic times?

Especially since not a half-decade ago, it had tense relations with China and the US? The govt of Vietnam understood that their road to riches would rely heavily on them being the exporters of key commodities, and giving out incentives to attract foreign businesses.

So, they brought out Doi Moi.Doi

what now? Doi Moi was a policy reform introduced by Vietnam in 1986 to promote

- liberalization of the Domestic Market,

- encouragement of Foreign Direct Investment & the Private Sector, and

- reduction in subsidies to State-Owned Enterprises.

Doi Moi policy reforms along with renewed Industrial Policies over the years, made it the 6th largest exporter to the US while India was on the 10th place. Now let’s take a deeper dive on all the developments made by Vietnam in last few decades since its introduction:

1️⃣China-plus-one strategy:This strategy has been adopted by many multinational co.s to reduce their risks by investing & diversifying their businesses in countries other than China.Their was an overconcentration of business interests in China due to its

- cheap labour market, and

- lower cost of raw materials.

This increased the co.s risk profile and made supply chain more rigid as well as vulnerable.

2️⃣Free trade agreements:

Vietnam has been active in signing bilateral trade agreements with countries throughout the world.Additionally, due to its membership in the ASEAN, Vietnam has become a party to several Free Trade Agreements (FTAs).The FTA's help in 2 ways.

a) They can have more diversified sourcing partners and cheaper imports of intermediate goods from partner countries.This boosts the competitiveness of Vietnam’s exports.

b) They can partner with foreign firms that can transfer the knowledge & tech needed to raise production.

3️⃣Cheap labour market:On an average, Vietnam’s labor costs are half as much as China’s.The labor cost is typically characterized by minimum wage: the floor wage set up to protect the laborers in disadvantageous conditions.

This wage is set by the govt and as cheap labor remains a major competitive edge to pull in investment— the value set is very competitive.

5️⃣️Geographical location:Vietnam is located at the center of Southeast Asia. It has a long coastline and is close to many international shipping routes. Moreover, it shares borders with China.

It's proximity to the South China Sea, and the fact that

— one of it's 2 major cities is located near the coast, has made the transportation very seamless. And mind you, globally, transportation cost is almost 10% of total production costs. So it really makes a big difference if your source/destination is easily accessible.

Infrastructure development:Vietnam currently spends 6% of its GDP on infrastructure, which is greater than the average percentage spent by ASEAN countries.Now, almost 90% of that spending comes from the public budget, which has burdened the national debt and fiscal policy.

To overcome this, the govt passed a new law on Public-Private Partnership (PPP) with the aim to increase the private investment to at-least 20% of the total infrastructure spend. There have been some inefficiencies in planning and execution of large-scale projects and to make this process more streamlined and structured, it is trying to attract more foreign investment in the construction industry. It is doing so by offering incentives like reduced value-added tax for businesses.

Now, it already has a location advantage but if there are well-built international airports, seaports, and rail links, facilitating production flow and transportation, it would propel exports like anything.

Coming back to India, we recorded a much bigger number in exports and GDP, agreed.

But the point to be taken away from this is that in-spite of being so small and starting its journey so late, Vietnam has already made its mark in the world. It is emerging as the new manufacturing hub for Southeast Asia, and this leads many to view India & Vietnam as rivals.

But, in fact, they complement each other. India's young and diverse demography, its foreign relations, and Vietnam's prime strategic location, can be seen in going hand-to-hand.

India has drafted major national manufacturing policies under Make in India initiative.

Yet, there has not been any significant changes in the exports manufacturing sector. It needs to promote free trade, quality labour, and a more amicable business environment. Additionally, as India is becoming more and more powerful to counter China in Asia, other Asian nations, including Vietnam, are keen in partnering and building strategic relationships with India.India should leverage this and build a powerful network of allies, which will ultimately help explode it’s exports.

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