Vietnam remains key beneficiary of supply chain shifts: DBS

VIETNAM continues to benefit from global manufacturing supply chain shifts despite short-term cyclical growth headwinds, DBS Group Research reported on Monday (Apr 24).

As geopolitical tensions between the US and China see companies speed up on their diversification strategy, DBS expects Vietnam to remain a key beneficiary for re-location or co-location of production.

Other favourable factors like extensive free trade agreements, its proximity to China, cost competitive skilled labour and growing electronics ecosystem also build Vietnam’s image as a “foreign manufacturing investment darling”, said DBS economist Chua Han Teng.

Vietnam’s new manufacturing foreign direct investment (FDI) inflows for the first three months of 2023 rose to the highest level since the start of the Covid-19 pandemic.

This comes after overall newly registered FDI weakened in 2022, although manufacturing was sturdy, implying a pick-up in its contribution and importance, Chua noted.

Notably, total new foreign investments from mainland China and Hong Kong rose to some US$800 million in the first quarter of 2023, 10 per cent above the three-year pre-pandemic average.

This makes China and Hong Kong Vietnam’s second biggest investor, behind Singapore – the country’s leading investor.

Chua also expects trade linkages between Vietnam and China to grow further, with Vietnam playing a larger role as an alternative manufacturing base to China.

Furthermore, Vietnam’s gross domestic product (GDP) per capita has risen in terms of purchasing power parity since 2010, riding on the back of the country’s FDI and export-oriented model.

SEE ALSO

US-China tensions amplify global trade shifts, shipping CEO says

Taiwan's Apple supplier Quanta plans Vietnam factory

China’s auto parts makers join Apple in offshore factory push

Apple suppliers accelerate buildup outside China, analysts say

More

“Continued good economic results from this approach look likely over the coming years,” Chua said.

Nonetheless, he cautions that Vietnam’s growing expertise in tech manufacturing and exports, integration into global electronics supply chains and its high trade openness leave it vulnerable to the global tech cycle’s volatility.

Vietnam’s manufacturing activity shrank by 0.4 per cent year on year in Q1 as electronics exports fell due to weaker global demand. Post-pandemic demand had normalised, coupled with tighter monetary policy shifts from advanced economies.

Although it expects growth to recover in the second half of 2023, DBS believes it might be tough for Vietnam to hit its 6.5 per cent growth target for the full year. In light of this, it has lowered its 2023 real GDP growth forecast for the country to 5.5 per cent from six per cent. (*see amendment note)

“Vietnam’s growth volatility and short-term headwinds amid a tougher global external backdrop reflect its successful integration into global value chains and emergence as a key electronics player over the years,” Chua added.

*Amendment note: DBS’ previous real GDP growth forecast for Vietnam has been amended to six per cent instead of 6.5 per cent as initially reported.