VIETNAM - In the second of his two-part series on alternatives to the China market, Stuart Hoggard looks at Vietnam. While Indonesia’s domestic market is booming and packaging demand is on the rise, Vietnam is positioning itself as a regional hub to supply packaging, and product, throughout South East Asia.
Almost 60 years after the battle of Dien Bien Phu, and forty years after that last US helicopter took off from the US Embassy roof in Saigon, Vietnam has become the quiet foreign investment destination and, along with Thailand, becoming a lynch-pin in the multi-national Fast Moving Goods Manufacturer’s (FMCG) China Plus One policy.
The China plus One policy first emerged middle of the last decade, at the peak of China’s transition from a dirt-poor collective drab underdog to a thriving vibrant modern economy assertively taking its place on the world stage as foreign investment poured in to the workshop of the world at break-neck speed. At some point, someone, in FMCG board rooms in Europe and the US, said “Hang on a minute! What if….” What if indeed!
All of the Country Risk Assessments where re-evaluated turned up the possibility that their supply chains could be vulnerable to China as a new global super-power – Cross Strait and South China Sea conflict, changing attitude to foreign investment, intellectual property risk, escalating costs of doing business, rocketing property rents and salaries – and individually the FMCGs began evolving their own Plan B: a backup to their China strategies. This became known as China Plus One: Continue to invest in China, but make strategic investments in other low-cost Asian manufacturing capabilities.
In early 2014, Japanese flexible packaging company, DNP (Dai Nippon Printing Co Ltd) opened a 30,000 square metre factory near HCMC, in the My Phuoc Industrial Park 3 in Ben Cat District, Binh Duong province, to produce pouches for food, sachets for shampoo, stand-up pouches for softeners and washing detergent, laminate web for toothpaste and cosmetics tubes. This is part of the company’s strategy to expand production capacity to meet export demand in Southeast Asia as well as domestic Vietnamese demand.
In an interview with Packaging Business Insight Asia in Tokyo, Masahiro Yoshikawa of DNP’s Packaging operations Overseas Business Development Dept said, “The US$39 million (¥4 billion) plant is operated by DNP Vietnam Co Ltd – a joint venture between DNP (Japan) and DNP Indonesia (on an 80:20 equity split) and is an expansion of DNP’s booming Southeast Asian packaging business, which has operated from two plants in Indonesia for more than 40 years”.
Mr Yoshikawa explained that as South East Asian demand from the FMCGs increases, DNP found itself in a changing market.
“Several years ago, internal demand from Indonesia was slower than present growth rates. In recent years, the Indonesian economy has been expanding rapidly, and with that growth demand for quality packaging has increased. But at the same time DNP Indonesia’s major customers, brand owners such as Unilever are producing and exporting across Asia,” said Mr Yoshikawa.
“Since the packaging business is based on the needs of the local market, DNP Indonesia has been exporting a packaging to meet customer needs in neighbouring South East Asian countries. We have now reached the stage where we need to expand capacity further. Vietnam was the logical choice to cope with growth in domestic demand and to service customers in other regional markets.”
With a population of 92,5 million - the 14th largest population in the world - Vietnam has a lot going for it, if you can put the stereotype of a war-torn country back into the history book where it belongs.
VietNam has a very young growing population: The current workforce of about 43.3 million has an average age of between 25-54 years and is growing by more than one million people every year.
It is a highly educated work force (94% literacy).
The current generation of young employees aged between 18 – 30 is the first generation in the country’s post World War II history that has not experienced, and have no personal memories of, war. Unlike previous generations they are able to confidently embrace consumer lifestyles with almost no fear for the future.
Since I first began visiting the country in 1991, to write about VietNam’s open-door business and investment policies, the country’s economic health has been a roller-coaster ride, a series of rapid growth cycles lasting about three to four years, followed by sharp declines, though the overall general trend has been upward.
In 2006, GDP was US$52 billion. In 2012 it hit US$124 billion, a 138% increase in six years.
The global recession hurt Vietnam's export-oriented economic sector, with GDP in 2009-12 growing less than the 7% per annum average achieved during the previous decade. In 2012 however, exports rebounded increasing by more than 12% year-on-year.
With a GDP per capita of just US$3,500, VietNam is still regarded as a ‘poor’ ASEAN country: behind Indonesia, Thailand, Malaysia and the Philippines, but ahead of Laos, Cambodia and Myanmar.
Economy was the biggest concern among consumers in Vietnam, where consumer confidence remained “fairly stagnant” in Q4 of 2012 compared to the previous quarter, according to Nielsen.
The second and third biggest concerns for Vietnamese consumers were increasing utility bills like electricity and gas, and job security, according to the Nielsen Global Survey of Consumer Confidence and Spending Intentions.
Yet despite these concerns consumer spending in Vietnam increased to US$77.88 billion (1,630,143 VND billion) in 2011 up from US$62.95 billion (1,317,588 VND Billion) in 2010 - as employment levels increase, more money goes into the consumer pocket, and that changes lifestyles and consumer aspirations.
Retail sales increased 11.7% in the first quarter from the same period a year earlier, slowing from a 21.8% pace in the same period in 2011 earlier, according to the Vietnam Statistics Office (27 March 2013). The struggling economy and labour market cut into purchasing power, the agency said in a summary
The Vietnamese consumer goods sector posted the highest growth rate in Asia, according to a report released in January 2014 by Nielsen: It grew by 23%, while the figures of India and China are 18.8% and 13%, respectively.
Milk sales is a great indicator of changing consumer trends because, as a dietary supplement for young children, it is the first item on the shopping list when a family begins to have surplus income: In 2012, Vietnam's largest dairy producer Vinamilk reported a sales growth of 23% year on year, while NutiFood, another local milk producer, saw its sales grow by 30%.
VietNam has transformed its supply chain from being a 100% state-driven ‘distribution system’ in the 1980’s where products were distributed to the public via government owned stores in return for vouchers, to a small-scale capitalist ‘mom-&-pop’ stores in the period 1990-2000.
It is now a very mixed retail sector reflecting the growing wealth gap between rich and poor: HCMC has more up-market, expensive branded goods shops (Pierre Cardin, Armani, Burberry, Tiffany etc) than it has supermarkets. HCMC has three Ferarri and Porche dealerships even though imported cars are subject to 300% import duty.
|Table: Wage Comparison|
Where there is a market for branded luxury goods there is also a market for fine dining, and up-market food & beverage outlets; HCMC (Ho Chi Minh City, formerly Saigon) now hosts a wide range of food and beverage outlets representing many cuisines from around the world: Japanese, Korean, French, German and even Brazilian. A far cry from my first 1991 visit when the only foreign restaurant was the German Pub on Dong Khoi Street, formally Rue Catinat made famous by Grahame Green in The Quiet American.
Home grown coffee company Trung Nguyen, has more than 10,000 franchised cafés across the country, with branches in Singapore and Malaysia, serving Vietnamese coffee from 19th century plantations originally started by French colonists. It is a major competitor to Starbucks inside VietNam and has announced that it is to open outlets in the US.
The driver of growth is the expanding workforce, it is true that VietNam factory worker costs are lower than China and considerably less than its neighbours: 2.5 times lower than Thailand and 2.36 times lower than Malaysia.
That makes it an attractive production centre for FMCGs such as Unilever, P&G, J&J and food manufacturers like Nissin, Nestle and Ajinomoto.
VietNam has a minimum wage regulation which varies by location. In the key urban centres (Tier 1 Cities) it currently stands at US$125 per worker per month, but it is unlikely that a foreign employer will attract good staff by paying minimum wage. In the Ho Chi Minh area the average factory worker’s expected wage is in the region of 21% above minimum wage.
In addition the employer pays a variety of additional benefits, social security, worker insurance etc.
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