Vietnam’s unique supply chain advantage in ecommerce

During my last few trips back to Vietnam, the optimism of people there has been phenomenal. Finally Vietnam is not only a box to tick when big ecommerce and ride-hailing companies claimed to have pan-Southeast Asia presence; instead, real companies are being built, goods are shipped, and people are buying.

Interestingly, since a while ago the ecommerce bigwigs among Momentum Works’s friends circle have all been very bullish (and optimistic of course) about Vietnam. Their rationale is simple: Vietnam is not only a market, but also well positioned for a good supply chain.

A recap on the Vietnam ecommerce market

For those who have not read our report on Vietnam’s ecommerce market, here is a quick recap.

Vietnam is a promising market. The population is estimated at 96 million as of July 2017 (among the top 15 in the world). Besides, with a median age of 30.5 years old, the Vietnamese are young and optimistic.

Although the GDP per capita is relatively low, the average annual growth over GDP for the past decade has been above 6%, and this growth momentum is expected to continue over the next few years.

Given those conditions, ecommerce has plenty of potential for growth. However, a combination of low quality infrastructure, underdeveloped payment system, and lack of trust between buyers and sellers has been hampering the growth.

Now with a new Lazada CEO in place, Shopee moving their office to the same building as Lazada, and all the other latest movements in the space, the growth should pick up over the next years.

Convenient supply chain

So why did we bring up the supply chain issue? Or rather, why are ecommerce bigwigs so optimistic about the supply chain?

Well, a number of factors should be considered here.

First, from a culture, political system and work ethics point of view, Vietnam is the closest country in Southeast Asia compared to Southern China, the world’s manufacturing powerhouse. Vietnam produces anything from packaged food to electronics, in short, if you’re an ecommerce platform that wants to sell everything, in most cases Vietnam can be the place to source your goods.

Chart 1: Map of established industrial parks in Vietnam (Source: https://duongchinhlaw.wordpress.com/)

In addition, as many of you would know, if you are producing consumer goods, the most difficult part to manage is actually your supply chain: would you be able to order components and raw materials just in time, with the right quality, good turnaround time and effective information feedback?  

A simple thing such as a ballpoint pen has a lot of components. The plastic casing, the coil, the ink, the ink container, the metal pen tip. If one manufactures pens, it would be wise to be located near supplier, not only because the transport cost would be low, but also because of flexibility: it would be easier to make changes to the order volume simply because it does not take as much time to transport components from the supplier to the manufacturer. And you can respond to your customer demand in a much more agile manner.

In that case, Vietnam has a unique advantage of geography: for factories in Northern Vietnam, it takes only two days for goods to be shipped from their suppliers in China’s Pearl River Delta – over land. In comparison, if an Indonesian or Malaysian factory will have to wait for more than a week for the sea shipment.

This is the reason why, when the labour cost started increasing in China, the logical step is for companies to move production to Vietnam, not farther afield.

The Vietnamese government also gives many incentives, including low land rental fee and tax breaks, in order to attract the companies.

Chart 2: Foreign investment into Vietnam in 2017, top 10 biggest investors (source: The Foreign Investment Agency [1])

Chart 3: Foreign investment in Vietnam in 2017, industry breakdown (Source: The Foreign Investment Agency [1])

Chart 4: Vietnam’s exports in 2017, industry breakdown (Source: the General Statistics Office [2])

As a manufacturing hub is also a gateway to other countries in Southeast Asia. Thanks to the ASEAN Free Trade Area, goods from Vietnam enjoy tariff of 0% when imported into other SEA countries.

They know

This is why, in March, Amazon signed an agreement with the Vietnam E-commerce Association (VECOM) to use Vietnam as a sourcing hub, in its words, “help Vietnamese small and medium enterprises export their goods through Amazon.” 

Alibaba recently replaced the CEO of Lazada Vietnam first, with someone from its core team, showing the emphasis on this market.

In November 2017, Tiki.vn, 5th biggest ecommerce site in Vietnam in monthly visit, was reported to have received an investment capital worth VND1 trillion ($44 million) from JD.com to expand its operations.

We believe more exciting stories will follow over the course of the year.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.