Vietnam's growth can be sustained over next 3-5 years: HSBC

VIETNAM'S current growth momentum "can be sustained and even accelerate" over the next three to five years, despite constraints such as land and labour shortages, according to a Nov 15 HSBC report on the country.

Quite apart from trade frictions between the United States and China, Vietnam's role in Asian manufacturing supply chains has been growing for years and is set to expand further, said the report. Samsung is one notable player, now making some 60 per cent of its smartphones in Vietnam.

According a Japan External Trade Organization survey, manufacturing costs in Vietnam are about 73.1 per cent of what they would be in Japan.

"This was among the lowest manufacturing costs in Asia, though still above that of the Philippines, Cambodia, Sri Lanka, and Bangladesh - but these markets usually manufacture less sophisticated products and don't have the same kind of manufacturing capabilities that Vietnam possesses," said the report.

While Vietnam has long been attractive to manufacturers looking to move production out of China, "it is simply not possible to replicate the scale, expertise and ecosystem available in China", noted the report.

"A local supply chain and logistics expert told us that Vietnam would need to boost its capacity by 70 per cent to absorb 5 per cent of the output of Chinese factories. This is a daunting task."

One issue is land shortage, with local experts saying Vietnam may run out of land for development in the next three to four years if the current pace of demand from foreign manufacturers is sustained.

Labour shortages have also begun to bite, and demographic trends already point to an ageing population. By 2030, Vietnam's working age population as a share of total population is expected to be lower than that of Malaysia and Indonesia.

More investment is also needed in infrastructure, not least electricity. "From our discussions, local experts believe that electricity production will probably be sufficient for two to three years," said the report. Logistics costs are also increasing, with high port congestion.

According to the report, Vietnam may need to invest around US$646 billion during 2019 to 2040 to meet its infrastructure requirements, with electricity accounting for 38 per cent of total infrastructure spending.