Vietnam’s Supply Chain: A Comprehensive Overview

January 2, 2023

Vietnam cargo port

Vietnam’s supply market gets increasingly more attention as companies seek to diversify manufacturing, and as its manufacturing capabilities increase. It has also introduced various free trade agreements, and the government has eased foreign ownership regulations in the past years.

Yet, many companies have little insights into the country’s supply chain capabilities and infrastructure, and how this will change in the coming years. We have therefore written this article and where we will review the following topics:

  • Vietnam’s economic zones
  • Vietnam’s supply chain infrastructure
  • Supply chain issues in Vietnam
  • Vietnam’s role in the global supply chain
  • Supply chain cooperation in South & Southeast Asia

Vietnam’s Economic Zones

Manufacturing is highly concentrated in key economic regions as these are more developed and have received the most investments in infrastructure, logistics, and facilities. Besides, the availability to labor and special financial incentives also play an important role. Let’s start and review the key economic zones of Northern, Central, and Southern Vietnam.

Northern Vietnam

The North Key Economic Zone covers the provinces of Hanoi and Bac Ninh, as well as Hung Yen, Vinh Phuc, Hai Duong, Hai Phong, and Quang Ninh. Most of the manufacturing activities in the North can be found in the Red River Delta, which consists of two municipalities (Hanoi and Hai Phong) and eight provinces, comprising the above-mentioned provinces except for Quang Ninh.

Vietnam’s Northern Key Economic Region is well-positioned as a hub for China-plus-one manufacturing activities – when existing manufacturing in China is complemented by one or more low-cost markets like Vietnam. Many companies have invested in Northern Vietnam to profit from the lower labor costs compared to China while remaining close to Chinese suppliers.

Furthermore, the North Key Economic Zone has well-developed transportation networks and prime industrial land on the back of extensive infrastructure development. Particularly, the region’s industrial parks and economic zones are well connected to the sea via Hai Phong port (in Hai Phong city), which is the country’s largest port in the North. Moreover, the Ha Noi-Hai Phong-Quang Ninh (adjacent to Hai Phong) development triangle geographically connects to other economic areas in the country and abroad.

Heavy manufacturing dominates the Northern Key Economic Region, which is partly a result of China-plus-one expansion programs. Investors in heavy industries such as automotive utilize the concentration of infrastructure and talent that works to their benefit. Worth highlighting is also that we find many electronics manufacturing clustered in the North, particularly in the Red River Delta region.

Investors in other sectors that are not labor-intensive or in heavy manufacturing such as IT may not select the North as the benefits of the infrastructure networks here may not be of significant value due to the nature of these sectors.

Southern Vietnam

The Southern Key Economic Zone includes the provinces of Ho Chi Minh City and neighboring provinces such as Ba Ria-Vung Tau, Binh Duong, Dong Nai, Binh Phuoc, Tay Ninh, and Long An. The locations of these cities and provinces, excluding Long An province, forms the Southeast region of Vietnam. This region has virtually always led the country in terms of exports, FDI, and GDP growth.

In comparison to the Northern Key Economic Zone, the Southern Key Economic Zone has a broader spectrum of manufacturing and services, with stronger economic diversification. As a result, enterprises in more specialized or niche industries may find that the South offers a more conducive environment for investments. This is especially true for small and medium-sized businesses (SMEs), and Ho Chi Minh City has recently been a magnet for startups and tech entrepreneurs.

Consumption is another key benefit of the Southern region. Investors seeking to establish a brand identity with Vietnamese customers may discover opportunities in the South, which is home to Ho Chi Minh City, the country’s largest city in terms of population and financial contribution. As a result, Ho Chi Minh City is a favored location for manufacturers of some specific industries such as pharmaceuticals and luxury goods. Furthermore, manufacturing in the South benefits from its proximity to Ho Chi Minh City, Tan Son Nhat International Airport, and various seaports, including Saigon Port and Cat Lai Port.

In stark contrast to the North, Vietnam’s Southern Key Economic Region innately lacks proximity to China. Therefore, it takes more time for investors who want to explore a China-plus-one expansion strategy to transfer components between factories in China and assembly facilities in the South of Vietnam. This suggests that investors with time-sensitive manufacturing chains would be best served by selecting locations in Northern Vietnam.

Central Vietnam

The Central Key Economic Zone is made up of five cities/provinces – Thua Thien Hue, Da Nang, Quang Nam, Quang Ngai, and Binh Dinh.

Textiles, building materials, and paper and forest products are the primary industries in this region. Besides, businesses like shipbuilding, logistics, and other high-tech industries are anticipated to grow significantly in the near future.

Investors in Central Vietnam’s industrial zones could benefit greatly from infrastructure and facilities designed to meet the needs of the country’s rapidly expanding sectors, such as textiles and electronics.  Da Nang, the economic hub of the Central region, delivers a consistent supply of skilled personnel to the Central Key Economic Zone and offers high-quality factories for rent in prominent locations. Besides, manufacturing in Da Nang also enjoys a higher level of urban planning and development than many other cities in Vietnam. This probably leads to the provision of cascading benefits for a diverse range of investors within the region.

Seeming to have a superior organizational structure than other areas of Vietnam, Da Nang is still confined by its population, making retail scalability here a nerve-racking challenge. In other words, there are unlikely to be any ripe opportunities in the Central Key Economic Zone for investors desiring to build a long-term brand identity here.

Vietnam’s Supply Chain Infrastructure

While other ASEAN nations spend an average of 2.3% of their GDP on infrastructure, Vietnam currently allocates around 6% of its GDP. This significant difference puts Vietnam as the leading country in respect of infrastructure investment in ASEAN. Positive as it may sound, a gap seems to remain between Vietnam’s current infrastructure and its ambition of being a fast-growing economy.

According to the Global Infrastructure Hub, Vietnam’s infrastructure requires an average of US$ 25-30 billion annually to secure economic growth. However, the national budget only has room for US$ 15-18 billion (7% of GDP).

As a result, the remaining US$ 10-15 billion must be raised from private investors. During 2022-2027, Vietnam’s infrastructure is expected to grow at an annual rate of around 4%.

Transportation infrastructure

Only 20% of the roads in Vietnam are paved with medium to low-quality materials, leading to cracks and bumpy surfaces. The country is therefore in a desperate need for road quality improvements, given that road transports is the backbone of the country’s logistics and transport industry.

In 2021, the government announced the Decision No. 1454/QD-TTg, which promotes the development of a new road system for 2021 – 2030, with a vision stretching to 2050. It intends to expand the current national roadways of 1,290 kilometers to as much as 5,000 kilometers by 2030. This includes the upgrading of road surfaces and expanding access to key ports, airports, and railway stations.

In addition to road systems, Vietnam also has 22 civil airports, 12 of which are international and 10 are domestic. In 2025, the Long Thanh International airport in Dong Nai, which would eventually replace Ho Chi Minh City’s Tan Son Nhat International Airport, is planned to be finished in the first phase. Looking ahead, the number of airports is planned to increase to 26 by 2030 and 30 by 2050 by the Vietnamese government.

Port infrastructure

There are 320 ports in Vietnam with a combined capacity of up to 470-500 million tons of cargo per year. This can be compared to the Port of Shanghai, which handled 542 million tons of goods in 2019, while the port of Singapore handled more than 600 million tons of goods that same year.

Specifically speaking of seaport infrastructure, Vietnam currently has 45 seaports – 2 international seaports; 12 regional seaports; 18 local seaports; and 13 oil & gas seaports. Vietnamese port infrastructure is the subject of large-scale investments by many companies globally. However, this infrastructure continues to face hurdles because its current capacity has not been able to match the surging demand for imports and exports. This signals the need for more investment.

Manufacturing infrastructure

When evaluating and searching the most favorable manufacturing locations, which are typically industrial parks, the technical infrastructure is often regarded as the most important. Transportation infrastructure, which consists of two fundamental aspects – the internal transportation system and the surrounding transportation system – is the most crucial element of technical infrastructure in industrial parks, being frequently examined by investors.

Apart from transportation infrastructure, the most relevant technical infrastructure elements in industrial parks are also electricity supply, water supply, and other aspects such as waste treatment systems. It’s crucial to confirm that a factory has all utilities available for companies being able to run operations.

Access to roads and seaports

Overall, the transportation infrastructure – the combination of the internal transportation system and the surrounding transportation system – is adequate and meets fundamental standards, with considerable variation among regions.

First, in terms of the internal transportation system, most industrial parks have a basic infrastructural design. This involves, for example, the deployment of a chessboard pattern or by combining four main road lanes and two side road lanes, which make internal transportation easier.

Looking at surrounding transportation systems, we also see differences between industrial parks located in the North, Central, and South. Northern industrial parks are remote from seaports but more than 91% are close to highways, with 11% being right adjacent to highways.

In contrast to the North, the Central’s industrial parks include only national roads and provincial roads, with the former accounting for more than 88%. In contrast to the North, the Central region is bordered by the sea, thus the industrial parks here are close to the seaport (57.75% of Central’s total industrial parks), which is suitable for export-import and trade goods.

Nearly 60% of industrial parks in the South are adjacent to national roadways, and around 50% are near a seaport, making the South superior in terms of logistics.

Electricity supply

More than 70% of Vietnam’s industrial parks get electricity from the national power grid, which has a capacity of 22/110 kV. With that said, many industrial parks have increasingly focused on renewable energy as supplements, or even alternatives to coal-fired power. Solar power, in particular, is used in approximately 8% of the industrial parks. Renewable energy plants are also being erected at a growing rate, and an increasing number of factories are installing rooftop photovoltaic panels.

Worth highlighting is also the increased interest in eco-industrial parks, which grows in popularity. This concept, which helps mitigate emissions effectively and efficiently, has been experimented with in around five industrial parks so far. Some investors in large industrial parks are progressively integrating the eco-industrial park mode.

Water supply

More than one-third of Vietnam’s industrial parks have access to a water supply system with a capacity of 10,000 – 20,000 cubic meters per day. Similarly, more than one-third of the industrial parks install wastewater treatment systems that have a capacity of less than 5,000 cubic meters per day. However, industrial parks located near major economic centers usually require substantial water waste treatment capacity, as these generally attract more manufacturing, necessitating more treatment of wastewater.

For instance, roughly 45% of the South’s industrial parks that are located within a radius of 30 km from Ho Chi Minh City are equipped with a wastewater treatment system with a daily capacity ranging from 5,000 to 10,000 cubic meters.

Unfortunately, most industrial parks have paid scant attention to solid waste treatment. This is evident because more than 90% of Vietnam’s industrial parks lack their own solid waste treatment plants. More specifically, only about 20% of the North’s industrial parks within a 30-kilometer radius have their own solid waste treatment facilities. In general, local service providers will be outsourced to handle most of the garbage treatment.

Supply Chain Issues in Vietnam

Like most Asian countries, Vietnam is still highly dependent imports of raw materials from China. Consequently, Vietnam’s supply chain has been hampered by raw material shortages due to China’s long-lasting geopolitical tensions and previously strict zero-covid strategy.

The country also relies heavily on Chinese imports of intermediate commodities such as semi-processed goods and capital goods, resulting in large trade deficits with its neighbor. In consequence, this leads to longer production lead times and increased logistics costs. Although Vietnam is primarily strong in midstream supply chain activities, it has yet to be a top-of-mind destination for upstream activities, including the design and production of sub-components, as well as downstream activities involving sales and distribution.

The uneven manufacturing capabilities across different stages reinforce Vietnam’s fear of remaining an “assembly platform”, and it has a long battle to climb up the global value chain.

For Vietnam to move up the global value chain, it must focus more on educating its workforce. This will enable foreign companies to relocate more upstream manufacturing activities such as the production of sub-components in Vietnam, making the country less reliant on imports of such components from China.

This will also result in an important shift and allow Vietnam to take full advantage of free trade agreements, like the EU-Vietnam free-trade agreement, for products being considered “made-in-Vietnam”.

Vietnam’s Role in the Global Supply Chain

Amid the growing manufacturing exodus out of China, Vietnam is one of the largest beneficiaries on the back of many positive characteristics. First, Vietnam has strategic proximity to China – the “factory of the world”. Second, Vietnam’s labor force is abundant at a competitive cost that ranges from one-third to one-half of that in China and lower than most other countries in Southeast Asia. This has resulted in much manufacturing moving from China to Vietnam.

Importantly, Vietnam also enjoys a slew of favorable bilateral and regional free trade agreements (FTAs) including the EU-Vietnam FTA, the UK-Vietnam FTA, the Regional Comprehensive Economic Partnership (RCEP), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Last, the Vietnamese government and authorities actively support the manufacturing sector through a plethora of incentives from tax reductions or exemptions to related paperwork and process streamlines.

These perks have provided a big fillip to Vietnam’s position as a promising manufacturing hub and a sourcing market, especially in Asia.

Supply Chain Cooperation in South & Southeast Asia

Countries in the South and Southeast Asian regions can benefit from the many fruitful trade agreements in the regions, including:

  • ASEAN-Australia-New Zealand Free Trade Area
  • ASEAN-China Free Trade Area
  • ASEAN-India Free Trade Area
  • ASEAN-Japan Comprehensive Economic Partnership
  • Regional Comprehensive Economic Partnership

Looking at supply chains in South & Southeast Asia, there’s still much room for increased collaboration between the countries, which could reduce their undue reliance on China for the import of raw materials and sub-components.

For example, Vietnam could switch to importing more raw materials from other Asian countries that have high availability of certain raw materials, like Indonesia and India. Besides, the countries can also enhance the legal corridor by providing special trade incentives to one another, enhancing and promoting the supply chains linking the countries.

These proactive efforts being put in a coherent manner could mitigate supply chain vulnerabilities in South & Southeast countries by gradually cutting China out of the picture, which helps build greater supply chain resilience and strengthen economic self-reliance.

Summary

Most of Vietnam’s manufacturing is concentrated in key economic zones, thanks to the comparatively developed infrastructure, availability to labor, financial incentives, and governmental support.

Although Vietnam’s infrastructure still has room and need for further development, the advantages are notable. This is particularly true as the Vietnamese government has actively invested in the country’s infrastructure more than many other Asian countries in recent years. This leads to considerable expected growth in Vietnam’s infrastructure sector for years to come, which bodes well for the country’s logistics and supply chain.

Possessing various strengths, Vietnam stands to benefit from its emergence as an important hub in the global supply chain. This is especially true considering foreigners efforts in decoupling from China. However, there are still critical supply chain issues that must be resolved long-term, related to both infrastructure, efficiency, and production capabilities. One resolution to help address these issues is establishing cross-border supply chain cooperation, especially with South & Southeast Asian countries.


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