Vietnam – where the global value chain reshaping is opportunity

1. Executive summary:

The article illustrates the short-term issue of the Global manufacturing disruption, as well as mentioned the long-term trend of the Global Value Chain (GVC). The long-term trend is measured by adopting the concept of agglomeration to global trade. This relies on the decision of different firms to “locate” activities off-shoring or re-shoring domestically. Although some stagnation has occurred in overall measures of GVC trade, it is important to note the considerable dynamism at the country and sector levels. Some developing countries have dramatically increased their share of GVC trade, most notably Viet Nam, which had a 14.3% annual growth in indirect exports during 2010–2019. In addition, electronics, textile & garment, and food processing are three main industries in which Vietnam received high competitive advantages and have increasingly participated in the upstream part of GVCs.

 

2. Global manufacturing disruption and Trend on the GVC reshaping

The disruption in manufacturing activities and the tendency of reconfiguring the GVC were the highlights of the global economy in 2020. Manufacturing has been halted in most countries since March 2020, when governments enacted measures to halt the spread of the virus. In comparison to 2019, worldwide manufacturing production declined by 4.1 percent in 2020. After a pandemic, high- and mid-high-tech businesses recover faster than low-tech industries. Furthermore, the epidemic has slowed and disrupted global supply operation, perhaps leading to a reconfiguration of GVC. The IMF’s “Supply Chain Disruption Index” measures current delivery times versus expected delivery at existing manufacturing output. The higher the value, the greater the disturbance.

From Jan to August 2021, the giant container ships got stuck in the wrong places, which was led to the rising of maritime shipping costs. In the first phase of the pandemic, as China shipped huge volumes of protective gear like masks and hospital gowns all over the world, containers were unloaded in places that generally do not send much product back to China — regions like West Africa and South Asia. In those places, empty containers piled up just as Chinese factories were producing a mighty surge of other goods destined for wealthy markets in North America and Europe.

Companies are expected to relocate production out of the People Republic of China (PRC); however, this will be difficult and time-consuming because PRC is a “dominant player” in the global supply chain for many items. Some significant corporations, on the other hand, are planning to relocate production to other nations in the region, including Vietnam. Nevertheless, this entails high switching costs, especially in sectors such as electronics or automotive manufacturing. Furthermore, the complex ecosystems that PRC has built around different GVCs are also difficult to transfer and replicate elsewhere. As a result, the China + 1 plan appears to be the most feasible and practical option. Any country or sub-regional economy that accepts this transition will benefit from increased employment and growth.

The belowed graph shows forward and backward agglomeration indices for all economies in ADB’s Multiregional Input–Output Database for 2000, 2010, and 2020.
Agglomeration Across Economies, 2000, 2010, 2020

 

Being ratios, agglomeration in either perspective is said to be high if the index is greater than 1; conversely, if it is less than 1. An economic sector may be profiled by whether it has high or low forward and backward agglomeration. A high backward agglomeration signals that domestic value-added embodied in final goods and services consumed domestically is high. Intuitively, this implies that domestic production for domestic consumption is higher than the world average. A high forward agglomeration indicates that domestic sectors absorb a significant portion of the value-added generated by an economic sector. This means that the value-added that goes to domestic production is higher than the world average. The classification presented in the agglomeration map combines these two effects to determine the form of domestic linkages taking place in an economic sector. Among major GVC players, the PRC registered modest declines in both agglomeration indices, while Singapore and Viet Nam boosted their forward agglomeration significantly.

From 2010 to 2020, many reshoring economies shifted to low agglomeration. Indonesia and the US were notable exceptions, as they shifted to high agglomeration. China left the low agglomeration category to become domestic value-added generating, indicating higher domestic content in domestic consumption of final goods. Singapore continued its forward agglomeration, while Viet Nam moved toward lower agglomeration on both perspectives.

These developments highlight the changing and complex nature of domestic linkages in different sectors. Economies moving toward the reshoring class provide support to slowbalization, as activities once located elsewhere become concentrated back to the domestic economy. The increases in forward agglomeration in some economies signal the ability of domestic sectors to absorb value-added from GVCs, which increases incentives to participate. These two forces indicate that strong domestic linkages do not necessarily imply a decline in overall trade.

The above graph measures of Global Value Chain Paritipation economies with both trade-based and production-based. The fastest growing traded-based countries, with the top fve all achieving yearly double-digit growth from 2000 to 2019, are developing Asian economies adjacent to the PRC: Cambodia, the Lao People’s Democratic Republic, Mongolia, Nepal, and Viet Nam. The largest by far is Viet Nam, whose indirect exports of over $160 billion in 2019 were 4.3 times larger than that of the Philippines, an economy of roughly the same size and level of development. Indeed, Viet Nam has long been a rising star in GVCs, having become a leading alternative to the PRC for labor-intensive manufacturing.

 

3. Competitive Advantage of Vietnam and in which industries?

Vietnam has achieved an impressive trade growth rate between 2010 and 2020, with continual increases in import and export turnover and a trade surplus that has been effectively maintained for the past 5 years. Vietnam was one of the few Asian countries with positive trade growth in 2020, despite the epidemic, and had the greatest recorded trade surplus of about 20 billion USD. Between 2010 and 2019, FDI into Vietnam grew at a pretty consistent rate. Although the Covid-19 epidemic had some effects on FDI inflows into Vietnam in 2020, these effects were not significant.

Over the period 2010 – 2019, Vietnam has a comparative advantage in 9/20 industry groups. However, in 2020, only 6 industry groups have comparative advantages, of which only 1 industry group has a high comparative advantage (Footwear and Headgear); 03 groups of industries with medium comparative advantages including Garments; Electronic Machinery and Equipment, and Leather and articles of Leather; and 02 groups of industries with low comparative advantage including Wood and articles of Wood, and Textile Materials.

 

Over the whole period, Vietnam’s comparative advantage has the following highlights. Firstly, the comparative advantage for most industry groups has decreased (7/9 industries have comparative advantage), even in the only industry group that Vietnam has a high comparative advantage in, which is Footwear and Headgear. Secondly, Vietnam is gradually losing its comparative advantage in agricultural products when Vietnam has no longer advantages in both animal and vegetable products in 2020. Thirdly, there is only one industry Vietnam has a high comparative advantage in, which is the electronics industry. However, the increase in comparative advantage in this industry is due to the presence and expansion of production, exportation, and investment of FDI enterprises in Vietnam. Fourthly, the industries that Vietnam does not have a comparative advantage in are those related to input materials such as plastic, rubber, mechanical machinery, metal, paper, or valuable products and technology such as transport, optical, musical, and medical equipment…

Despite successfully controlling the Covid-19 epidemic and continuing to thrive with a positive growth rate and remarkable export records in 2020-2021, Vietnam has failed to capitalize on these advantages to improve its position in the global market. Furthermore, the electronics industry is the only industry in Vietnam that has had an increase in RCA; however, this increase is primarily due to FDI firms in Vietnam. When comparing Vietnam’s RCA to that of ASEAN countries, it becomes clear that two sectors, footwear and headgear, and electronic machinery and equipment, are prospective industries that might continue to make advances in order to strengthen Vietnam’s position in the global market. Based on the foregoing findings, if Viet Nam is to achieve the set targets for 2025 and 2030, Viet Nam should focus on growing a number of manufacturing industries, including food processing, textile and garment, leather shoes, electronics, and cars. Furthermore, the mechanical sector has the potential to benefit the processing and manufacturing industries in terms of scale, growth, and efficiency, and should be developed further in the future.

 

Hebronstar Strategy Consultants
Vo San Anh / Senior Consultant