Vietnam’s supply chain challenge

Vietnam has been one of the world’s most impressive growth stories over the last two decades.

Vietnam has been one of the world’s most impressive growth stories over the last two decades. Over the last 10 years in particular it has integrated into the global economy, becoming an attractive business location. Yet the economy faces internal weaknesses and challenges, reflected in low competitiveness in different aspects. Moreover, rapid and complex external changes are affecting Vietnam’s open economy in increasingly significant ways.

Key supply chain issues: The Vietnam Competitiveness Review provides a detailed assessment of the country’s strengths and weaknesses. Published recently by experts of the Asia Competitiveness Institute (Singapore) and the Central Institute for Economic Management (Vietnam), under the technical guidance of Prof Michael Porter of the Harvard Business School, it identifies the key structural and supply chain issues the country needs to address.

Since economic reforms began in the second half of the 1980s, Vietnam’s GDP per capita has grown at an annual rate of almost 6%, lifting millions out of poverty. The key driver, says the Review, has been improved labour productivity. However, despite the recent gains, Vietnam still remains behind many other countries in infrastructure development, supply chain maturity and national business policy framework.

Cluster development and industrial policy: Higher competitiveness requires specialisation in areas where the presence of related and supporting activities can support a level of productivity that an individual company could not achieve. The current approach is based on creating national champions from state-owned enterprises, providing cheap credit to individual companies, and creating dedicated infrastructure. There are limited growth strategies for private business sectors. Government efforts should enable companies in clusters to compete on a higher level, not shelter them from competition.

Road infrastructure: In recent years, the government has increased investment in the North-South highway system and vastly improved inner-city roads, especially for large cities such as Hanoi and Ho Chi Minh City. Investment in road infrastructure is high, at more than 10% of GDP, compared with 7-8% in Thailand and China. Without efficient multi-modal transport options, however, many businesses will remain locked into rising transport costs as oil prices escalate.

Seaports and coastal trade: Though there are international seaports (in HCM City, Danang, Haiphong) that can handle large ships, their services do not meet the expanding requirements of shippers, and port infrastructure development has not kept pace with export growth. For instance, service costs are too high; customs clearance takes too much time, usually 3-7 days but in some cases up to one month (in Singapore the figure is 10 minutes); an international container transshipment port is lacking; railways and roads are not connected to the seaport system, hindering efficient domestic coastal trade.

Air transport: Airports are also hitting passenger capacity barriers, especially international airports. Service quality is poor, and domestic flights are frequently delayed. The domestic aviation market is only 9-10 million passengers per year. There is significant opportunity to develop export and domestic transshipment channels with more effective air cargo utilisation.

Railways: Although Vietnam has 2,600 kilometres of railways, the infrastructure is outdated. The wholly state-controlled market is unable to meet growing demand. Even though the North-South railway (linking with Beijing) is being upgraded, the fact that there is no alternative or full dual-track system means that even slight congestion at one location can halt the whole line. There is a lack of rail lines to economic and industrial zones and ports, and to Laos and Cambodia. Existing poor-quality, narrow-gauge lines limit train speed; and too many crossings at roads in residential areas cause frequent accidents.

The review identifies specific policy recommendations and an implementation structure to build increasingly sophisticated competitive advantages. While much has been achieved, there is an acute awareness that Vietnam still has a long road ahead.

Tags: Vietnam supply chain