In recent years, the manufacturing sector in Vietnam has received attention from foreign investors for its remarkable growth potential. Alongside with strategic location, stable political system, strong FDI inflows, and commitment to sustainable development, Vietnam is regarded as a prospective global manufacturing hub.
This article gives a closer look into the outlook of the manufacturing environment in Vietnam in the upcoming years. Opportunities and challenges are provided for foreign investors to consider as a comprehensive evaluation.
1/ Key growth drivers of 2022
Domestic consumption, merchandise exports, and especially in the manufacturing sector.
2022 saw positive growth across different sectors. Here are some of the most prominent key growth drivers that contribute to the success of Vietnam’s economic development. Vietnam’s GDP experienced an 8% growth, reaching a high record amid the 10-year period (2011-2022), indicating a strong recovery. The Vietnam government plays a major role in stabilizing the macro-economy and putting inflation under control.
More specifically, the merchandise exports of Vietnam saw a similar upward pattern in 2022. It is estimated that Vietnam’s export increased by 13.4% over the same period last year, in correlation with the rise of foreign-invested sectors.
These domestic indications resulted directly in the growth of the FDI. The manufacturing sector is the key driver among the invested projects, contributing up to 60.6% of the country’s total capital. In 2022, the industry grew by 9%, according to the Ministry of Trade. The significant increase in the number of newly-registered foreign direct investment projects and their capital contributions shows a strong attraction and confidence of Vietnam in foreign enterprises to expand investment.
The manufacturing destinations vary across 54 provinces and cities of Vietnam. Specifically, Bac Giang Province in North Vietnam has gained attention from investors as a destination to operate manufacturing factories. There have been 2 established projected from Chinses and Singaporean investors, with a total worth of $761 million.
These key growth drivers in 2022 present a positive outlook for Vietnam’s manufacturing sector. The country strives to attract more foreign investors in the upcoming years through stable economic growth and business incentives.
2. Vietnam’s manufacturing outlook
Some highlights and outlook for 2023
Being the backbone of Vietnam’s economy, the industry is expected to rise at a 6.6% rate in 2023. According to the Foreign Investment Agency under the Ministry of Planning and Investment, the manufacturing sector of Vietnam continues to be the lead investment highlight for FDI. With the constant effort from the authorities to improve the business investment environment, create trust with investors and effectively exploit the advantages of free trade agreements.
Vietnam earns the investment capital movement from major countries since the Chinese apply the COVID-19 restrictions. Among the 107 countries, Singapore, China, and Hong Kong will remain the top investors in projects and value.
Despite the positive forecast, challenges remain a hinder to the manufacturing sector development. The January data signaled a marked decline of 16.3% when comparing the same period last year to $1.35 billion.
Key challenges in 2023
The sector faces challenging business conditions in the opening month of 2023. The indications for imports and exports continued to decline. The product and new orders were lowered, aside from low customer demand and increasing cost of raw materials contribute as key factors that the industry must face. As such, the demand conditions for Vietnamese manufacturing firms remained challenging at the start of 2023, which leads to a reduction in output and stock purchases.
Reactions/supports by the Vietnam government and long-term prospects.
Supporting the manufacturing industry is prioritized by the Vietnam government. In order to gain capital investment from FDI resources, the authorities made action by introducing preferential financial policies and improving institutions. The implemented policies include the five main points that focus on protecting investors’ rights, enhancing law transparency, improving the infrastructure, and incentives to attract foreign-invested projects.
Domestically, Vietnam is planning on more appropriate and effective policies to attract the shifting foreign investment capital. Certain factors, including accelerating administrative reforms, improving the investment environment, and ensuring policy stability would make foreign investors feel secure when they pour capital into domestic projects.
Highlights on FDIs
Vietnam is heading for a sustainable development strategy as a modern approach on a national scale. As such, top priority projects are new and green technologies that implement modern corporate governance, apply for technology transfer, and integrate with global logistics technology. Vietnam is expanding its investment portfolio to the US and EU countries.
3/ The expansion opportunities for international investors
Now that we know Vietnam’s manufacturing outlook for 2023 looks bright, it is no doubt that international investors are taking notice of the country’s potential and flocking to its shores.
Let’s dive deeper into the specific expansion opportunities that this country holds for foreign investors!
As mentioned, Foreign Direct Investment (FDI) is a major factor that provides businesses with access to Vietnam’s growing market.
Vietnam has experienced significant growth in FDI in recent years. FDI in Vietnam reached an all-time high of 22.4 billion USD in December 2022. This growth in FDI can be attributed to Vietnam’s stable political environment, low labor costs, strategic location, and growing middle class, which make it an attractive destination for businesses seeking to diversify their supply chains and access new markets.
Vietnam’s government has also made efforts to attract investors and improve the business environment, such as reducing bureaucracy, streamlining the registration process, and offering tax incentives.
The “China +1 strategy” has also contributed to the surge in FDI in Vietnam. As Chinese labor costs continue to rise, many companies are looking for alternatives to maintain their competitiveness. Thus, Vietnam has emerged as a top choice due to its lower labor costs and proximity to China, making it easier to shift supply chains.
Furthermore, Vietnam’s free trade agreements namely the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) play a crucial role. The EVFTA, signed in 2019, eliminates almost all tariffs on goods traded between the EU and Vietnam over the next 10 years. The CPTPP eliminates tariffs between Vietnam and other CPTPP members, such as Canada, Australia, and Japan.
All these factors make Vietnam an increasingly popular destination for international investors looking to take advantage of its benefits and expand their businesses. As Vietnam’s economy continues to grow, it’s expected that more and more investors will turn to this country for new growth opportunities.
4/ Final thoughts
Vietnam’s manufacturing sector has undergone considerable expansion in recent times and is expected to continue this trend in 2023. The country’s strategic location, low labor costs, and free trade agreements make it an attractive destination for foreign investors looking to diversify their supply chains and tap into a growing consumer market. However, challenges remain, such as limited infrastructure and the need to further develop skilled labor.
If you’re a foreign investor considering establishing a new manufacturing entity in Vietnam, SOA’s Sourcing and Supply Chain service can help you navigate the process. Our comprehensive 360-degree service includes landscape analysis, feasibility studies, and factory setup, taking into account legal, structural, financial, geographic, and strategic factors to help (re)localize your production in Vietnam. With Source of Asia, you can tap into Vietnam’s potential and unlock new growth opportunities for your business.
Find out more about our Sourcing & Supply Chain services for your business in Southeast Asia.
