Introduction
As G&N introduces our new range of clothing, it is imperative that it chooses a location that fosters growth and positive impact. When examining potential options, G&N’s reputation remained the primary focus. After conducting analysis on South East Asia, our team determined that Vietnam aligned best with both our business goals and practices due to the clear regulation, low cost wages, and flourishing economy.
Political Context
Vietnam is one of the more politically stable countries in South East Asia. Ruled by the Communist Party of Vietnam (CPV), Vietnam is a “one-party state which provides strategic direction and decides all major policy issues” (The World Bank). Pushed by the drive for consensus and cohesion, disagreement is rare. Party leaders and the leaders of the government, are selected every 5 years at the National Party Congress. The next election will take place in 2021 for Vietnam’s legislative body. This longer term of five years allows for more stability within the government.
Economic Context
Vietnam’s development over the past 30 years is exceptional. Economic and political reforms under Đổi Mới, launched in 1986, stimulated quick economic growth and development and transformed Vietnam from one of the world’s poorest nations to a growing country. The country's main industries are textiles, the food industry, furniture, plastics and paper (Norea Trade). Specific to our endeavors, in 2016, the Vietnamese textile industry was the country’s leading export sector. The country ranks fifth worldwide in textile and apparel exports and has a labor force in that sector of more than 2 million people, of whom 1.3 million are working directly in the industry (International Trade Administration).
Economic Indicators
Vietnam performed well in 201 GDP growth was at 6.8 percent in 2017 – the fastest expansion in the past ten years (The World Bank). This push in growth is a product of three factors: (1) of a strong rebound of the agriculture sector, (2) rising global and domestic demand in manufactured goods, and (3) large foreign investment inflows.
In terms of FDI, the country has long been an attractive destination, particularly for other Asian countries. FDI inflows “average 8% of GDP annually, the highest among major emerging markets in ASEAN and proportionately larger than China” (“Overseas Business Risk). This growth in FDI – particularly in the textile and apparel industry – is believed to be a result of Vietnam joining the Trans-Pacific Partnership (TPP). When joining the TPP, the textile tax rate reduces to 0%, which also indicates a larger growth and more profit for Vietnam’s textile and apparel exports, another benefit of locating G&N in Vietnam (“Vietnam Is Becoming a Popular Textile Investment Destination”). Since US withdrawal from TPP, Vietnam has signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Growth and macroeconomic stability are expected to be sustained in the years to come. Growth is projected to “stabilize around 6.5 percent,” with some potential to surprise on the upside in the short run, especially if the global recovery continues. While “inflation is projected to remain moderate thanks to a benign global price environment,” strong wage growth may ultimately lift core inflation. External balances will likely benefit from strong exports and FDI inflows. (“The World Bank in Vietnam”)
A few other key facts about Vietnam’s economy are listed below:
• The unemployment rate is particularly low. It reached 2.3% in 2017 and it is expected to remain the same in 2018 and 2019 (“Vietnam Unemployment Rate”).
• As of 2016, Vietnam’s literacy rate reached 97.3% (DTI News). Literacy levels open the doors to more educational and employment opportunities and is a key to making the workforce efficient.
• Vietnam has the fastest growing middle class. With our target demographic of middle class consumers and 20% of our output expected to be sold locally, Vietnam is an ideal location.
Labor force
Currently, Vietnam’s labor force consists of 54.5 million people, with young workers accounting for the majority and 74% of the labor force actually under 50 years of age. This clearly shows that Vietnam has a large and abundant supply of young labor, which is something that is clearly advantageous for its on-going economic development. (HKTDC Research)
It should, however, be noted that the majority of these workers are unskilled (HKTDC Research). This lack of skilled labor has acted as a barrier to growth – however, the government enforces a clear educational mandate to remedy this. Around “98% of children attend primary schools with little favor to one gender over the other,” and as of 2010 the government had precise goals for vocational training in line with “socio-economic development" (Jennings). In the long run, combining the educational mandate with the young labor force will result in more skilled workers.
Manufacturing garments is typically a low-skilled job – so skill is not the top concern for G&N. However, skilled labor in managerial positions increases the efficiency and productivity of a factory. The World Economic Forum (WEF) Human Capital Index measures the “knowledge and skills embodied in individuals that enable them to create economic value” through education metrics (Knack). By this measurement, Vietnam’s human capital beats other Southeast Asian countries (World Economic Forum).
(Knack)
This large labor force is comprised of both males and females. Over the years, the gender gap in Vietnam has narrowed. Women’s labor force participation rate is within 10 percent of that of men, which is a smaller gap than that found in most other countries (“The World Bank in Vietnam”). In addition, there has been an upward trend in the share of women in wage work, mostly driven by increased employment opportunities for women in foreign-owned export-oriented factories. As G&N will be a foreign-owned export-oriented factory, our company has the chance to employ more women and contribute to the movement for gender equality.
Business Environment & Cost of Setup
Minimum wage
Compared to other ASEAN countries, Vietnam’s minimum wage is low. It is not the lowest among the options, in order to avoid accusations of manipulating the working population.
(Knack)
Workers’ rights
Vietnam has a strong structure in place for the rights of workers. According to the Department for International Trade, as of 2012, the government approved a revision of the Labor Code which included a number of important provisions including:
• Maternity leave extension to six months;
• Required minimum wage;
• Inhibiting employees from working more than 50 percent over their official working hours in a day;
Infrastructure
The Government of Vietnam has developed its 2011-2020 socio-economic development strategy (SEDS) which outlines the medium-term development strategy. It focuses on structural reform, social equity, sustainability, and macroeconomic stability. Many of these goals relate to infrastructure development. A few key goals outlined by United Nations ESCAP below:
• Greater transparency, stability and fairness to encourage business to invest in
infrastructure projects;
• Fairer and more transparent procurement, minimizing pre-assigned contractors and using land of high commercial value;
• Strengthened inspection and monitoring of investment projects;
• Improvement of the quality and effectiveness of public investments;
This improvement in infrastructure shows the potential that Vietnam has. With strengthened inspections and monitoring, G&N can ensure that the projects are done correctly and ethically to avoid reputation risk.
Not only will infrastructure improve for businesses, access to household infrastructure has improved dramatically. In 2016, “99 percent of the population used electricity as their main source of lighting, up from 14 percent in 1993”. In rural areas, in 2016, “77 percent of the population had access to sanitation facilities—compared to 36 percent in 1993. Rural access to clean water has also improved, up from 17 percent in 1993 to 70 percent in 2016. Access to these services in urban areas is above 95 percent”
(The World Bank). These improvements mean more dependability and a higher quality of life for workers.
Potential risks
Litigation
Some businesses have expressed dismay over how the Court operates. Like many other countries, there are issues with transparency and litigation is often expensive and lengthy. Many countries in Southeast Asia also experience this issue as well.
Corruption
Another key risk is exposure to corrupt actions. Corrupt practices are widespread across Vietnam including, bribes, facilitation payments, and expensive gifts. Corruption also remains an issue in the court system. To combat this, the government committed to eradicating corruption and have taken action, such as including adopting and improving anti-corruption laws, developing anti-corruption strategies, strengthening relevant institutions and ratifying the UN Convention against Corruption (UNCAC). (United Nations ESCAP)
Furthermore, there is a drive within the business community and society to promote clean business in Vietnam. In order to keep a pristine image, G&N can partner with Towards Transparency, an NGO, works with foreign companies to share best practice on business integrity with Vietnamese partners in the value chain so that they all operate in line with international standards.