Vietnam production credentials up on strong PMI, rising FDI

Vietnam’s manufacturing sector started 2015 with a strong rate of expansion, further bolstering the country’s position as a major industrial player in the Asia-Pacific region.

The purchasing managers’ index, or PMI, compiled by HSBC, was at 51.5 in January, indicating that the economy is generally expanding. It has been above the 50 level, which denotes growth, for the past 17 months. In December 2014, the PMI was at 52.7. As a forward-looking indicator of activity levels, this will likely support robust production figures for the coming months.

The survey, which was answered by executives of about 400 manufacturing companies in Vietnam, found that employment in January soared at the fastest rate since December 2013. The sharp increase in job creation is attributed to steady client demand. Businesses were also able to reduce their backlogs for the first time in three months. Plummeting oil prices have allowed suppliers to offer competitive quotes, helping them secure new orders.

These results are encouraging for Vietnam as it continues to solidify its standing as one of the world’s most important sourcing centers. Over the past few years, global businesses have been viewing the country as a viable alternative hub to China, which has been beset by rising labor costs and intermittent manpower shortages.

Moderate wages attracting investors

More buyers are expected to shift their purchasing activities to Vietnam given its moderate minimum monthly wages, which are between $101 and $146. Although salaries have been surging steadily yearly as the government implements measures to minimize the discrepancy in remuneration, the rates are still lower compared with China where monthly pay is between $135 and $294.

Vietnam’s low labor cost is a key factor attracting foreign companies to do business in the country. This is supported by data released by the Foreign Investment Agency which show that total foreign direct investment in Vietnam surged 67 percent to $664 in January 2015 compared with the same month a year ago. The manufacturing industry, in particular, pulled in 18 projects amounting more than $600 million, or 91 percent of total FDI last month.

These investors came from 15 countries and territories, adding to the number of foreign companies that have already established presence in Vietnam such as Canon, Samsung, Nokia, GE, Kyocera, ABB, Toyota, Fuji, Xerox and Bridgestone. Ho Chi Minh City is the most attractive destination among 13 cities and provinces that received FDI in January, drawing in 24 projects worth nearly $350 million. Other important hubs are the provinces of Binh Duong and Bac Ninh, and the city of Hai Phong.

FTA to open more doors

More FDI is expected to flow into Vietnam with the signing of free trade agreements with Russia, South Korea, Belarus and Kazakhstan. The FTA with the EU, in particular, is expected to offer more opportunities for local manufacturers. The country’s exports to the 28-nation bloc are seen rising at least 30 percent once the accord is signed. This is on top of the EU’s revised Generalized Scheme of Preferences, which was implemented January last year. Under the deal, most domestic-made products such as garments, textiles and footwear are eligible for reduced or zero tariffs.

According to Vietnam’s Chamber of Commerce and Industry, the country’s exports to the EU totaled roughly $27 billion in 2013, up 28 percent over the past two years. Bilateral trade, on the other hand, jumped 16 percent to $33.6 billion in 2013. Currently, the association has more than 1,400 investment projects in Vietnam spread in various fields, including services and construction.

Domestic manufacturers are also likely to gain from the expected signing of the Trans-Pacific Partnership or TPP later in 2015. The proposed regional FTA, which is currently negotiated by Vietnam and 11 other countries, including the US, Australia, Japan and Canada, aims to eliminate tariffs and nontariff barriers to goods, services and agriculture.

Analysts believe that Vietnam will benefit the most from the pact as it would allow the country to have greater share of the garments and footwear markets, specifically in the US and Japan. The Vietnam Textile and Apparel Association predicts exports to the US will accelerate 13 to 20 percent by 2017 once the TPP is passed. The garments industry posted $24.5 billion in exports last year, up 16 percent from 2013. Of the total turnover, the US and Japan accounted for about 13 percent and 9 percent, respectively.

Vietnam’s young and deep labor force is another factor that helps the country draw in more foreign investors. Government figures indicate that the country’s manpower grows by roughly 1.5 million annually. Another driving force is the government’s investor-friendly policies. Over the past years, the administration has taken steps to restructure business regulations, including offering financial incentives and tax breaks for businesses looking to set up operations in Vietnam. Moreover, the country appeals to foreign investors because of its growing consumer market and strategic geographical location.

This report is produced by the Hinrich Foundation, a development organization that aims to promote sustainable global trade by, among others, helping create jobs in emerging Asia. It also produces industry-specific sourcing reports through Online Developing Country Sourcing, which covers several countries including Vietnam.

This article and its contents are provided by the Hinrich Foundation, a partner of Global Sources in promoting trade across Asia. The products and the suppliers featured in this article are export assistance program beneficiaries of the Hinrich Foundation.