Vietnam is entering its 'golden period'

Ho Chi Minh City

VIETNAM'S economic growth momentum will continue in 2020 on the back of strong macroeconomic forecast, a growing middle class, rapid adoption of cutting edge technologies, and a surging manufacturing industry.

Consumption, a key driver of Vietnam's economic growth, will continue to play a major role in the years to come, fuelled by healthy growth in incomes of the rapidly expanding and urbanising middle class.

This, said McKinsey & Company Vietnam's managing partner Marco Breu, offers plenty of opportunities for consumer goods companies, retailers and banks.

"Over the next five to 10 years, Vietnam will be in the golden period," Mr Breu told The Business Times. "The middle class in Vietnam will grow from 20 per cent of the population to 50 per cent, and this will be the time when it's very interesting for consumer goods companies, retailers, banks to be in Vietnam."

He added: "Consumption is the main economic engine for Vietnam, it's about 68 to 70 per cent of the GDP, so many companies and businesses are looking into new consumption patterns, product innovation, and so on."

Real gross domestic product (GDP) growth peaked at 7.1 per cent in 2018 but is projected to decelerate slightly in 2019 and 2020, remaining nevertheless robust at around 6.8 and 6.9 per cent, according to data from the Asian Development Bank.

Shifting trade flows

With trade tensions between the US and China still ongoing, Vietnam will remain a favoured destination for shifts in trade flows and supply chains, said analysts.

For over a year, the world's two largest economies have been locked in a trade battle which has seen both sides impose tariffs on hundreds of billions of dollars worth of goods.

Vietnam has so far taken advantage of emerging opportunities created by the friction and will likely continue to do so, said Claudio Karjalainen, co-founder and head of regional operations for FinnSEA in Vietnam.

"The Trump-China trade war has been the tipping point for companies to look at an alternative product base outside of China," Mr Karjalainen told BT. "With it, many companies have discovered that Vietnam has a lot of advantages for shifting manufacturing, including a skilled workforce, and reasonable salaries."

FinnSEA helps foreign businesses from various industries to outsource and offshore to Vietnam, and claims more than a hundred assignments for American, Finnish, and Australian clients, among others.

"Vietnam is reinforcing its position as a manufacturing hub in Asia," Mr Karjalainen said, adding however that growing demand from foreign companies is posing challenges on capacity availability.

"With increased demand comes also a risk of lower quality as factories might accept orders to only subcontract them to smaller factories with lower quality production," he said.

Nevertheless, in 2020 and beyond, he expects the country to continue to attract foreign companies looking to outsource or offshore some of their processes or services to take advantage of the country's lower costs and large, educated talent pool.

Mr Breu, meanwhile, noted that while the US-China trade war has certainly put the spotlight on the country, Vietnam has been a prime location for offshoring and outsourcing for some time already, and will maintain this position regardless of conflicts between the US and China.

Over the years, Vietnam has positioned itself to become an interesting alternative for diversification from manufacturing that was based solely in China, he said.

"This is a strategy Vietnam has adopted, and which has played out very well. If you look at foreign direct investment (FDI) levels, you see the success. It's something that I believe is quite thought through and has happened over the years and will continue whether there is tension or not in trade between the US and China."

Startup playground

In the technology and startup space, Justin Nguyen, partner at Monk's Hill Ventures, predicts "the rise of technification" where technology and innovative business models transform every industry, from education and finance, to healthcare and retail.

"It happened in China with Alibaba transforming the retail sector and Cainiao (an Alibaba affiliate) transforming logistics 10-15 years ago and we're now seeing the onset of technification in South-east Asia," Mr Nguyen said.

"We have had an on-the-ground presence in Vietnam early on as we see that there are massive opportunities to apply technology to transform industries almost everywhere you look. We are regularly seeing entrepreneurs solving problems from fintech, to property technology (proptech) to even autonomous vehicles."

In 2020 and beyond, Mr Nguyen expects the startup ecosystem in Vietnam to continue to grow and mature, and a key driver of that will be the country's large, educated talent base, and its returning diaspora.

"Unlike its regional peers losing their best talent to Western markets, Vietnam is experiencing a reverse brain drain, where the best and brightest go abroad for school and work experience, but come back after a few years," Mr Nguyen said. "And when they come back, they come equipped with experience and a strong sense of what it takes to build great companies solving big problems."

A healthy pipeline of deals and funding is set to occur in 2020, and more regional startups are expected to enter the Vietnamese market, a trend that began to accelerate in 2019, Mr Nguyen said.

He cited the examples of Finaxar and Glints, two of Monk's Hill Ventures' portfolio companies originally from Singapore, which entered the Vietnamese market in 2019.

Finaxar is an artificial intelligence (AI)-powered small and medium-sized enterprise financing company, while Glints is an AI-powered recruitment platform.

Rising Internet and mobile penetration is giving plenty of opportunities for startups and tech companies alike but one area in particular which Mr Breu pointed out is the banking sector and the rise of fintech. "Vietnam still has a fairly low banking penetration," he said. "There are opportunities in terms of financial inclusion and the banking sector growth. It's especially interesting now with fintech and digital banking coming to Vietnam."

In 2019, Vietnamese fintech firms secured US$410 million, or 36 per cent of fintech funding in Asean, as at Sept 30, according to a report by UOB, PwC and the Singapore Fintech Association (SFA).

This is a sharp increase from 2018, when Vietnam only accounted for 0.4 per cent of Asean fintech funding.

The momentum is set to continue as Vietnam works on finishing up the legal framework for a regulatory sandbox, a special regime that would allow fintech companies and firms to live test new products and business models in a controlled environment under regulators' supervision.

"Vietnam has a great startup sector which would benefit a lot from these kinds of new regulations," Mr Breu said.

Key challenges

Being one of the fastest growing economies in South-east Asia also comes with its plethora of drawbacks and problems.

Urbanisation, industrialisation, as well as strong economic and population growth have not been friendly to the environment and have caused considerable waste management and pollution challenges.

Over the past decade, final energy consumption tripled, growing faster than output, and demand for water continues to increase while water productivity still remains low, according to the World Bank.

Waste generation in Vietnam is expected to double in less than 15 years' time, and linked to this is the issue of marine plastics and water pollution which have already impacted productivity of key sectors and human health.

Air pollution is also a major concern with large cities including Hanoi and Ho Chi Minh City hitting their worst-ever levels in September.

A series of initiatives announced recently showed that the government is committed to reducing environmental footprints.

There are plans such as the Green Initiatives for Hanoi, which focus on air quality management, waste management, energy, urban planning and green living with sustainable consumption, as well as a broader national action scheme unveiled in December that aims to reduce 75 per cent of plastic debris in the ocean over the next decade.

For Mr Breu, a shift to cleaner energy sources and the management of increased pollution levels will be among Vietnam's top challenges in the years to come.

"People are becoming unhappy with how these pollution levels are rising year after year. If you were to look at China and Beijing in particular, it took them 20 years to bring it under control and it took them enormous amounts of investment to actually clean this up," he said.

"Vietnam will have to face this challenge in the next years and I think this becomes more and more exacerbated as we speak."

Another key challenge for Vietnam will be to increase labour productivity, Mr Breu said.

"The average productivity level is below regional peers in terms of labour productivity and it needs to increase roughly 40 to 50 per cent in order to sustain the economic growth of the next few years. Vietnam still has to up that game," he said, adding that in this area, AI and automation could play a major role.

"There are lots of opportunities (in AI and automation), and that's because labour productivity is one of Vietnam's main challenges," Mr Breu said. "Vietnam can be at the forefront in the next couple of years around automation and productivity."

Over the next few years, Vietnam will also need to figure out how to sustain, and more importantly diversify FDI, which has so far come from manufacturing and real estate, and will need to accelerate the restructuring of state-owned enterprises to improve business efficiency and productivity, he said.