Manufacturing in Vietnam: A Key Driver of Economic Growth

Vietnam’s manufacturing landscape has been growing remarkably in recent years. Due to this growth, caused by the location of southeast Asia, its young and dynamic workforce, and the increase of foreign investment, Vietnam became a key player in the global supply chain. While big brands such as Samsung, Nike, and Adidas are already manufactured in Vietnam, Vietnam has become an attractive manufacturing destination for even more companies. The manufacturing sector is key to the Vietnamese economy because it contributes to GDP and provides millions of jobs. Approximately 14 million people are employed in manufacturing. These numbers represent about 25% of the total workforce, which is driving the overall economic development

In this blog post, we will explore the latest trends and developments in Vietnam’s manufacturing industry. We will talk about key sectors and challenges, and speak about the advantages manufacturing in Vietnam brings your business.

Key Industries for Manufacturing in Vietnam

Vietnam’s manufacturing sector is dominated by several key industries, which all play a crucial role in Vietnam’s economic growth and global trade positioning. Key industries are also experiencing significant growth, with electronics growing at an annual rate of 12% and textiles maintaining a growth rate of around 5-6%. Additionally, foreign direct investment in manufacturing was around $20 billion in 2022, with a substantial portion directed toward key industries like electronics and textiles.

Vietnam’s key industries include the following:

• Textiles and Apparel: 10% of total exports

• Electronics: 30% of total exports

• Furniture: 7-8% of total exports

• Automotive: 3-4% of total exports

• Food and Beverage: 15% of total exports

• Pharmaceuticals: 1-2% of total exports

Current and Future Trends

Vietnam had a great manufacturing output in 2023 and continues to grow. This growth has contributed to the GDP and was a key helper for Vietnam’s economy. Vietnam’s production growth is consistent with an increase from 149 billion in 2019 to 191 billion in 2023, making the manufacturing output for 2023 191 billion. This is an increase of 4.36% from 2019, and the manufacturing sector contributes around 16% to Vietnam’s GDP. Through consistent growth, the manufacturing sector is projected to grow 8–10% annually due to foreign investment. In addition, investments in education will address labor shortages, and new trade agreements will open markets and improve logistics. While new emerging industries like electric vehicles offer new manufacturing and growth opportunities, Industry 4.0 technology and sustainability efforts will boost productivity and enhance industrial processes. The shift to high-tech industries and the integration of digital tools are crucial as manufacturers increasingly adopt advanced technologies like IoT, AI, and robotics. Furthermore, the focus on sustainable practices is driving eco-friendly initiatives, while the diversification of supply chains enhances Vietnam’s appeal as an alternative to China for global firms.

Advantages Of Manufacturing In Vietnam

The good reputation of manufacturing in Vietnam doesn’t come from nowhere. Manufacturing in Vietnam brings many benefits and advantages for manufacturers. Here are some examples of what these could look like.

1. Cost-Effective Labor: Compared to other manufacturing hubs, Vietnam offers a young, skilled, and low-cost workforce, ultimately reducing overall costs

2. Strategic Location: Located in Southeast Asia, Vietnam provides easy access to major markets such as China, Japan, and ASEAN countries, facilitating trade and logistics.

3. Growing Economy: Vietnam’s manufacturing industry benefits from rising domestic demand and investment prospects due to the country’s rapidly growing economy.

4. Government Support: The Vietnamese government actively promotes foreign direct investment (FDI) through incentives, tax breaks, and streamlined regulations to attract manufacturers.

5. Diverse Industry Base: Vietnam has a broad range of manufacturing industries, including textiles, electronics, automotive, and furniture, allowing companies to diversify their operations.

6. Infrastructure Development: Ongoing improvements in infrastructure, such as transportation networks and industrial parks, enhance logistical efficiency for manufacturers.

7. Trade Agreements: Vietnam has signed multiple free trade agreements (FTAs), including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), providing favorable terms for exports.

8. Stable Political Environment: A stable political climate contributes to a favorable business environment, encouraging long-term investments from both local and foreign companies.

9. Emphasis on Sustainability: Increasing focus on sustainable practices and green manufacturing helps companies meet global standards and consumer preferences for eco-friendly products.

10. Growing R&D Capabilities: Investments in research and development are on the rise, enabling local manufacturers to innovate and improve product quality.

Challenges Of Manufacturing in Vietnam

Manufacturing in Vietnam brings many benefits, but let’s not overlook a few challenges you should be aware of. These could be:

1. Infrastructure Limitations: Despite advancements, Vietnam’s roads, ports, and logistics networks remain inadequate, which may jeopardize effective operations and transportation.
2. Labor Shortages: The industrial sector’s explosive growth has resulted in a strong demand for competent workers, which has caused shortages in some places and raised wages, which may affect production costs.
3. Regulatory Environment: Foreign businesses may find navigating intricate rules and bureaucratic processes difficult, which could cause delays in project approvals and compliance.

Vietnam’s Trade Agreements and Their Impact on Manufacturing

Trade agreements are particularly important in the manufacturing industry in Vietnam. These agreements have granted Vietnam access to international markets, which has led to a surge in foreign direct investment (FDI). Furthermore, it has enhanced export opportunities, which especially affected electronics, textiles, and automotive manufacturing. Vietnam is a hub for global supply chains, which draws international companies towards it. While the competitive labor costs and tariff reductions are more than beneficial, these benefits come with challenges, for example, the pressure to meet international quality standards and adapt to stricter labor and environmental regulations. However, Vietnam’s trade agreements are crucial for driving continued growth in the manufacturing sector. Below you’ll find a few trade agreements that are essential for Vietnam.

1. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

Vietnam is one of 11 member countries in the CPTPP. This partnership offers access to markets like Japan, Canada, and Australia and is boosting exports of key products like textiles, seafood, and agricultural goods. Besides the access to the market, the partnership also attracts foreign investment in manufacturing and services and is also part of the economic reforms, which include, for example, labor rights. For Vietnam, the CPTPP partnership brings a lot of benefits, such as export growth, foreign investments, economic modernization, and digital trade. Although these benefits are promising, Vietnam faces a few challenges within the partnership as well. These include competitive pressure, labor and environmental standards, and intellectual property.

2. The European Union-Vietnam Free Trade Agreement (EVFTA)

The EVFTA is a relatively new trade agreement. It has been effective since 2020 and is specifically designed to boost economic ties between Vietnam and the EU. Its goal is to reduce tariffs, improve market access, and promote sustainability. Key features include tariff reduction, which eliminates 99% of tariffs on goods traded between the EU and Vietnam. This makes it easier for European companies to export to Vietnam and for Vietnamese businesses to access the EU market. The EVFTA also includes provisions for goods and services trade, with many restrictions being lifted. This allows European companies greater access to the Vietnamese market. Besides that, the agreement strengthens intellectual property protection, which ensures better enforcement of trademarks, patents, and copyrights. It also includes provisions on labor rights, environmental protection, and sustainable development. There are a few more key features that EVFTA brings, such as a deal that provides protections for investors and the opening of public procurement markets between the EU and Vietnam.

While this partnership brings benefits such as access to the EU market, sustainable growth, and regulatory reforms, it challenges Vietnam with increased competition, higher compliance costs, and the adjustment to new regulations.

3. The Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement signed in 2020 between 15 Asia-Pacific countries: the 10 ASEAN nations plus China, Japan, South Korea, Australia, and New Zealand. It’s the world’s largest trade bloc, covering 30% of global GDP and 28% of global trade.

It includes tariff reductions, trade-in services, investment protection, e-commerce, and intellectual property. Through those key features, RCEP improves market access and economic integration.

The Role of Technology and Sustainability in Vietnam’s Manufacturing Sector

The role of technology and sustainability in Vietnam is driving the manufacturing sector through efficiency, innovation, and competition.

Role of Technology:

• Automation & Robotics: Improves efficiency and reduces costs, especially in electronics, textiles, and automotive.
• Industry 4.0: Technologies like AI, IoT, and big data optimize production processes and enable smart manufacturing.
• 3D Printing: Enables flexible design and cost-effective prototyping, especially in electronics and automotive.
• Digital Supply Chains: Technologies like blockchain and cloud computing enhance logistics and transparency.

Role of Sustainability:

• Green Manufacturing: Companies are adopting energy-efficient practices, renewable energy, and waste reduction to meet environmental standards.
• Circular Economy: emphasis on recycling, reusing materials, and reducing waste.
• Energy Efficiency: Investments in smart grids and energy-efficient equipment to cut consumption.
• Sustainable Supply Chains: Focus on ethically sourced materials and carbon footprint reduction.

Challenges & Opportunities:

• Challenges: High tech adoption costs, skill gaps, and environmental compliance barriers.
• Opportunities: Government support for green tech, global demand for sustainable products, and foreign investment in innovation.

Why Inventory Management Software is Important Here

Megaventory is becoming a necessary tool for manufacturers who want to streamline their processes. Additionally, Megaventory helps companies manage supply chains and optimize operations through its inventory management features. These include real-time tracking of inventory levels, order management, stock notifications, and reporting tools. Additionally, Megaventory offers features for managing multiple warehouses and tracking sales and purchase orders. These features boost efficiency amid market volatility and rapid expansion. As a result, Vietnamese firms can effectively address challenges like labor shortages and quality control. This technology ensures their competitiveness in a complex and opportunity-rich market. Furthermore, adopting advanced tools like Megaventory will be essential for achieving operational excellence and driving future growth as the nation embraces Industry 4.0 and sustainable practices.

In Summary

Manufacturing in Vietnam has grown due to its key benefits for manufacturers. This makes Vietnam an attractive destination for the future. However, to maintain this growth, it will need to address problems like infrastructure limitations and labor shortages. Systems like Megaventory will be crucial to helping manufacturers manage this complexity. In the end, when Vietnam becomes one of Southeast Asia’s leading industrial hubs, adopting innovation and making use of technology will be essential to creating new opportunities and ensuring sustained economic growth for years to come.