Message by MATRADE Trade Commissioner

in Ho Chi Minh City, Vietnam

Encik Faizal Izany Mastor, MATRADE Trade Commissioner at MATRADE’s office in Ho Chi Minh City, Vietnam

It gives me great pleasure to have this opportunity to feature an article in the MASSA newsletter on Vietnam’s market overview and business opportunities. Since my tenure in Ho Chi Minh City began in September 2014, there were many positive economic and business developments that have taken place in Vietnam.

Recently Vietnam and Malaysia, together with another 10 member-state, concluded and signed the Trans-Pacific Partnership Agreement (TPPA). In December 2015, the ASEAN Economic Community (AEC) was formally established and the negotiations of Vietnam and the European Union (EU) FTA were concluded. Prior to that, the Vietnam – Eurasian Economic Union FTA with the membership of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan was officially signed on 29 May 2015. The economic liberalisation and international integration efforts by Vietnam lead to vast business opportunities for Malaysian enterprises to explore.

The vibrant and lively Ho Chi Minh City is the commercial hub of Vietnam and home to almost 200 Malaysian businesses and investments in various sectors, such as property development, energy and water, hotel and hospitality, industrial processing and manufacturing, banking and financial services as well as oil & gas.

Vietnam is Malaysia’s fourth largest trading partner in ASEAN. Over the last ten years, bilateral trade recorded an impressive average annual growth rate of 17 per cent. Major products traded were electrical and electronics, chemicals, machinery and petroleum products. Trade has the potential to be further diversified into various sectors, such as construction and infrastructure, supporting industries, oil & gas, ICT and health and personal care, which are being featured in this article.

Malaysian enterprises, especially MASSA members, could leverage on MATRADE’s presence in Ho Chi Minh City and Hanoi, as well as our coverage area of Cambodia and Laos, to explore market opportunities and identify potential business partners. We will be more than happy to facilitate and add value to your business exploration and export promotion plans.

Thank you MASSA for the opportunity to feature an article here and I hope the readers would gain a better insight of Vietnam’s market and it’s potential.

Faizal Izany Mastor
Trade Commissioner
MATRADE Ho Chi Minh City

Part 1: Market Overview

Vietnam is a country with a developing planned and market economy. Commitment was made by the leaders in 1986 to pursue a policy of Doi Moi (economic renovation), resulting in an open economy to the world and allowing private enterprise to operate in the country.

In recent years, the government, and particularly a succession of prime ministers, has expressed strong support for the private sector. This strategy requires, in part, reform of the country’s State-owned enterprises (SOEs). By mid-2008, almost 3,800 SOEs had been equitised (part-privatised) and a further 950 are planned for equitisation by 2010. Currently, the equitisation initiatives are still on-going as an important step towards privatisation and efficiency.

In January 2007, Vietnam became a member of the World Trade Organisation (WTO), over a decade after it first applied for membership. This completes Vietnam’s efforts to become a full member of the world trading system. Prior to joining the WTO, Vietnam had begun a process of trade liberalisation, reducing its tariffs in accordance with its obligations as a member of the Association of South East Asian Nations (ASEAN).

View of Ho Chi Minh City’s East-West Corridor

In addition, under its bilateral free-trade agreement with the US, which came into effect in late 2001, tariffs are being reduced, intellectual property rights are being increasingly protected, quantitative restrictions are to be gradually ended, and WTO-inconsistent measures (such as local-content requirements) are being phased out.

Over that period, the economy has experienced rapid growth. In the 21st century, Vietnam is in a period of being integrated into the global economy. Vietnam has become a leading agricultural exporter and served as an attractive destination for foreign investment in South East Asia.

Vietnam will follow through its international integration initiatives through its participation in the ASEAN Economic Community (AEC), the Trans Pacific Partnership Agreement (TPPA) and several free trade agreements (FTAs) such as with South Korea, Eurasian Economic Union and the EU.

Recent Economic Development

Vietnam’s GDP growth in 2015 reached the highest level over the last five years at 6.68%. The agriculture, forestry and fishery sector rose 2.41%, lower than 2014’s growth rate of 3.44%. The industry and construction sector raised by 9.64%, higher than the previous year’s growth rate of 6.42%, of which the industry went up by 9.39% against the previous year  and manufacturing rose 10.60%. The construction sector grew by 10.82%, the highest increase rate since 2010, while services sector increased by 6.33%. The nominal GDP in 2015 reached USD 191 billion with the estimated GDP per capita in 2015 reaching to VND 45.7 million (USD 2109), an increase of USD 57, compared to 2014.

Alongside a brighter external demand picture, Vietnam will continue to benefit from the relocation of labour-intensive, low-cost, export-oriented manufacturing from China. Vietnam’s growing stature as a regional base for exports will support a further pick-up in investment activity in 2016. The latest GSO numbers show that there is already a lot of foreign direct investment (FDI) in the pipeline for the years to come. The 12-month rolling average of approved FDI projects hit an all-time high of 156 projects in September 2015. Meanwhile, a similar rolling measure for the total value of these licensed inflows rose to its highest in five years, to stand at US$1.6bn. Efforts from the Vietnam Government to push the delayed infrastructure projects to further enhance the attractiveness of Vietnam to foreign investors are on-going.

For the first 9 months of 2015, total newly registered and additional capital registered USD17.15 billion, increased 53.4% over the same period in 2014. In this period, the spike in foreign investment is due to the licensing of several big projects include: Duyen Hai 2 Power Plant Project at USD2.4 billion by a Malaysian investor in Tra Vinh Province and Samsung’s Screen Display Project of South Korea at USD3 billion in Bac Ninh Industrial Zone. Among the major highlights of investment projects in Vietnam are:

Long Thanh International Airport

State-owned Airports Corporation of Vietnam (ACV) plans to appoint consultants to prepare a feasibility study of the Long Thanh airport development project in Dong Nai Province, Vietnam. The project, comprising three phases, is scheduled to be completed in 2050, with the first stage due to be operational by 2023. The airport will have capacity to accommodate 25 million passengers and 1.2 million tonnes of goods a year. The public-private partnership project is estimated to involve a total investment of USD15.8 billion. The first phase will entail an investment of about USD4.76 billion, to be provided by Vietnam’s government, official development assistance loans and other sources. A number of investors have already expressed interest in the project.

Duyen Hai 2 Thermal Power Plant

In September 2015, Malaysia’s independent power producer Teknik Janakuasa Sdn. Bhd, a subsidiary of Malakoff Corporation Berhad has been licensed to develop a major coal-fired power plant in the southern Vietnamese province of Tra Vinh.

The power plant will have two turbines with a total capacity of 1,200MW. The BOT project has a registered capital of USD2.4 billion. Duyen Hai 2 is thus the second-largest among the foreign-invested projects that have been approved in Vietnam in the year to date, following the USD3 billion investment that Samsung has pledged to pump into a screen making facility in Bac Ninh.

The Kuala Lumpur-based Teknik Janakuasa is an independent power producer specializing in the provision of operation and maintenance service for the power generation and water desalination sectors.

Song Hau 2 Thermal Power Plant

Another Malaysian firm is also likely to develop a USD3.5 billion thermal power plant in southern Vietnam. Toyo Ink Group Bhd is reportedly concluding the final four agreements for the Song Hau 2 project, to be located in Hau Giang Province. Hau Giang is around 115km west of Tra Vinh and both provinces are located in Vietnam’s Mekong Delta. Song Hau 2 project will be built under the BOT method with a term of 25 years, starting 2021. The company is in the process of finalizing the deal on land leasing and coal supply, as well as the power purchase agreement (PPA), which is expected to be completed in 2016.

Bilateral Trade and Investment Relations

Links between Malaysia and Vietnam has flourished since diplomatic relations between the two countries was established more than 40 years ago in 1973.  Ties in trade and investments remain strong – Malaysia is one of Vietnam’s top trading partners and among the 10 largest foreign investors in Vietnam. In August 2015, the Prime Minister of Malaysia and the Prime Minister of Vietnam elevated relations between the two countries to a strategic partnership. 

Over the last ten years, bilateral trade between both countries has increased rapidly from USD 2.18 billion in 2005 to USD 9.27 billion in 2015, recording an average annual growth rate of 17 per cent.

Round Table Meeting with Captains of Industry from Malaysia and Vietnam, chaired by YAB Prime Minister of Malaysia in April 2014

In 2015, total trade increased by 2.6%, compared to USD9.04 billion in 2014, while Malaysia’s exports to Vietnam were valued at USD4.45 billion, an increase of 1.7 % from USD4.38 billion in 2014. Major export items to Vietnam were:

• Electrical and electronic products (USD 946 million);
• Chemicals and chemical products (USD 785 million);
• Petroleum products (USD 454 million);
• Machinery, appliances and parts (USD 400 million); and
• Palm oil and palm-based products (USD 369 million)

Malaysia’s imports from Vietnam were valued at USD4.82 billion, an increase of 3.4% from USD4.66 billion in 2014. Major import items were:

• Electrical and electronic products (USD 2.27 billion);
• Crude petroleum (USD 446 million);
• Rice (USD 294 million);
• Textile, clothing and footwear (USD 290 million); and
• Natural Rubber (USD 254 million)

Within the ASEAN region, Vietnam is Malaysia’s 4th largest trading partner and Malaysia is Vietnam’s third largest trading partner.

Up to 31 December 2015, Malaysia was the 7th largest foreign investors in Vietnam, with total investment of USD 13.2 billion in 500 investment projects in Vietnam. Among ASEAN countries, Malaysia was the 2nd largest investor in Vietnam, accounted for 23.1% total investment of ASEAN countries.

In 2015, among 58 countries that have invested in Vietnam, Malaysia is the 2nd largest investor with USD 2.4 billion, accounted for 14.6% of total FDI. Malaysian investments in Vietnam are mainly in sectors such as property development, industrial processing and manufacturing, water supply / waste treatment and construction.

 
Part 2: Market Opportunities

CONSTRUCTION AND INFRASTRUCTURE

I. Overview

Construction services sector contributed 5.35% of GDP Vietnam. Vietnam’s infrastructure lagged behind other countries in the region. This is especially true for transport infrastructure including expressways, seaports, airports and utilities such as electricity and water.

Capital needed for this sector until 2020 is estimated to be in the range of USD 150 -160 billion, but regular capital sources including the government budget, state enterprises’ capital, official development assistance (“ODA”) and government bonds can meet just half of demand.

Public – Private Partnership (PPP)

A new decree (Decree 15/2015/ND-CP) set to be implemented from 10th April 2015 will smooth the implementation of PPP. The improvements should make it easier for private sector investment to flow into vital projects, as the country needs USD170 billion in funding to boost its infrastructure and competitiveness from this year until 2020.

This regulation will make PPP projects more feasible and attractive to private investors. Depending on the project, the Government or local authorities will decide how much state funding will be invested.

Therefore, according to the new decree, the PPP is an investment model implemented through a contract between a state authority and private invests to invest in infrastructure or public projects.

Apart from BOT, BTO and BT, PPP will include forms of build, own and operate; design, build, finance, maintain, operate and transfer; build, finance, operate and maintain, and operate and maintain forms.

II. Infrastructure

Among the major developments in Vietnam’s infrastructure sector were:

On October 28 2014, an international consortium led by India-based road developer IL&FS Transportation Networks (ITNL) signed a contract to acquire a 70% stake in an expressway project that connects the capital city of Vietnam, Hanoi, with the port city of Hai Phong. The contract was signed with state-owned entity VIDIFI, the owner of the 105km expressway project. Besides ITNL, the international consortium consists of Philippine-based Strategic Alliance Holdings and Hong Kong-based Tung Sing Group.

Under the terms of the contract, VIDIFI and the ITNL-led consortium are expected to form a joint-venture (JV) to manage the project over a 30-year period. About 70% of the expressway is completed, with the rest scheduled to be finished by the end of 2015.

View of the Long Thanh-Dau Giay Expressway, the first PPP project for expressway in Vietnam

The Vietnam Railway Administration has urged the transport ministry to appraise and approve an USD10 billion plan to upgrade the North-South railway in the country. According to the plan, the trans-Vietnam railway, from Hanoi railway station to the Hoa Hung railway station in Ho Chi Minh City, will be upgraded to grade II railway standards, from grade I. The average speed will increase from the current 50km/h to 80-90 km/h for passenger trains and 50-60 km/h for cargo trains. The upgrade plan will be implemented in three phases. The Hanoi-Vinh section will be upgraded in the USD580mn first phase, the Nha Trang-Saigon section will be upgraded in the USD5.7bn second phase and the remaining projects will be upgraded in phase three.

In December 2014, construction started on Cai Cui, the largest-ever seaport in the Mekong Delta (in the Vietnamese city of Can Tho), to handle the increasing demand for maritime transportation. The seaport’s capacity is expected to be 20,000 tonnes upon completion. The seaport would require a total investment of about VND1.2 trilion (USD57.1 million). The new port will have three wharves measuring 500 metres in length and a logistics area covering 37 hectares that will allow it to handle 2.3-2.5 million  rban of cargo yearly, according to Director of the Municipal Transport Department Lu Thanh Dong. The new Cai Cui port is expected to cater to the needs of the southern provinces of An Giang, Hau Giang, Kien Giang, Soc Trang, Bac Lieu and Ca Mau.

III. Vietnam Infrastructure Industry SWOT

Strengths

• The country’s strong project pipeline will sustain growth in the sector and add capabilities for further development, particularly as transport structure improves.

• Rapid growth and firm government commitment has attracted investment from many of the world’s largest infrastructure companies.

• The poor state of infrastructure in the country provides plenty of opportunities for foreign investors and construction companies.

• A hike in electricity prices should stimulate investment in the energy sector.

Weaknesses

• State-owned companies dominate the infrastructure market. This is especially the case in the utilities sector, where Electricity of Vietnam’s dominant position has deterred investors.

• Vietnam relies heavily on foreign imports and it is estimated that the country requires 2 million  rban of steel billets to be imported a year.

• The country offers a relatively risky environment for major infrastructure projects, especially in relation to project finance operations.

• Power outages are occurring daily in Vietnam, highlighting the country’s severe electricity problems.

Opportunities

• Demand for urban infrastructure projects in transport and sanitation over our 10-year forecast period to 2023 will rise, in tandem with urbanization.

• Severe drought is driving demand in electricity generation sources besides hydropower, such as gas-fired and wind-powered plants.

• If the government’s attempts to cool the overheating economy are successful, Vietnam will see a more stable growth trajectory over the long term.

• Greater opportunities for public-private partnerships (PPP) – the country is offering the Dau Giay-Phan Thiet expressway project, the first road project and the largest infrastructure project to be developed under a PPP format.

Threats

• A possible shift in the Vietnamese government’s focus – from driving economic growth towards fighting inflation and addressing macroeconomic imbalances – could have a cooling effect on the sector.

• Without foreign capital, public spending cuts and tighter credit conditions are likely to keep economic activity depressed.

• Lack of energy infrastructure holds downside risk to nearly all projects and presents a significant bottleneck to development.

• Should any significant events occur to highlight Vietnam’s structural difficulties, uncertainty and downside risks in the business environment could have a negative impact going forward.

• The EU predicts Vietnam will not become a true market economy until 2018, and even this forecast is somewhat ambitious.

The 2.1KM Phu My Bridge, connecting District 2 and 7 of Ho Chi Minh City

OIL & GAS

I. Overview

The government of the Socialist Republic of Vietnam controls both the upstream and downstream sectors, through the national oil company PetroVietnam (PVN). PVN is a major contributor to government revenue; its earnings account for around 25% of the state budget.

Petronas was among the first to start its first international venture in Vietnam when the Vietnam economic liberalisation policy “Doi Moi” began in the 1980s that has attracted many foreign investments. Nowadays, more than 30 international oil companies (IOCs) now operate in the offshore of Vietnam, although several firms have chosen to exit the country, citing regulatory problems and below-expectation reserves.

In 2009, Vietnam’s proven oil reserve is 4.7 billion of barrels, ranking 26th in the world. Vietnam’s gas reserve is 610 billion cubic metres, ranking 31st in the world. Vietnam is ranked 36th for oil production and 45th for gas production in the world. Vietnam is an emerging and important regional producer of oil and natural gas, ranking 3rd in South East Asia for petroleum resources. Export markets include the United States, Japan, Singapore, and South Korea. Vietnam is focused on raising production by opening new fields and exploration activities.

The total investment needs for 2006-2025 period for the petroleum sector are projected at USD 30 billion, in which the investment from partners is about USD 14 billion. State owned PetroVietnam, together with foreign investors are to actively invest in the infrastructure such as harbour, petroleum port system, gas pipeline, and gas consumption projects such as LPG, gas-fired power plants, fertilizer plants, etc. to develop the gas market, petroleum refining, petrochemical, petroleum trading and distribution, expansion and development of petroleum services to build an integrated petroleum industry.

II. Opportunities

Vietnam offers good business opportunities for upstream oil and gas, with attractive fiscal terms generating quick payback and a high internal rate of return. Exploration and development costs are low compared with the rest of the world at about US$8 /barrel with operating costs of US$4.50 /barrel.

There is a need for investment in both upstream and downstream production to tap into the country’s resources effectively. Regarding upstream opportunities, ongoing explorations continue to yield new discoveries of oil and gas reserves. PetroVietnam is encouraging foreign investment to help locate and tap oil and gas reserves. All foreign oil firms active in the market operate through production sharing contracts (PSCs) or joint operating contracts (JOCs) with PetroVietnam.

In the last few years, Vietnam has showed a strong demand for basic and less expensive equipment and services. However, given the country’s need to develop the oil & gas industry in the coming years, more sophisticated imports will inevitably be required. Vietnam’s expanding offshore exploration and production and upcoming oil refinery plants offer numerous opportunities for suppliers of equipment and services.

In 2010, the equipment and services’ market was estimated at $2 billion. The demand for upstream equipment and services include but are not limited to drilling equipment, fire-fighting, underwater tools, towing and rescue vessels, as well as oil spill control. For midstream and downstream, pipes, valves, supporting equipment, maintenance services for gas power plants, fertilizer plants, and oil refinery plants are high on the demand list.

The lack of skilled workers and professionals to meet the growing demand of Vietnam’s petroleum industry also offer opportunities for education and training institutes. Currently, only a few training centres belonging to state-owned PetroVietnam are in existence. Although the corporations provide training for the industry, their programs are limited. Generally, training programs are not updated regularly, the local trainers are not qualified to deliver programs that meet the local demand, and lack good facilities for training support.

III. Market Access Considerations

The sector is dominated by state-owned enterprises, PetroVietnam and its subsidiaries, which are also primary clients. International oil companies are requested to order equipment and services through PetroVietnam’s affiliates which serve as either EPC contractors or their service/procurement partners. Foreign Service suppliers are often requested to work through a joint venture with one of the affiliates. Foreign equipment suppliers are encouraged to either establish themselves in the market or to team up with a local company to pursue new opportunities.

Malaysian suppliers interested in the market should be prepared to work with a local representative and show their commitment with regular visits to meet with potential customers.

Site Visit to PTSC Supply Base in Vung Tau, during the Specialised Marketing Mission for Oil & Gas to Vung Tau

IV. Challenges

Vietnam is normally sourcing machineries/equipments and services from U.S, Europe and Japan. It is not easy to make any changes in customer buying behaviour if there is no major problem with existing suppliers. This will be a strong challenge for Malaysian exporters while competition of suppliers from USA, Europe and Japan remain strong.

Bio-fuel factories are operating in a very difficult business because their products are not consumed domestically because they are not distributed widely due to the high costs to establish ethanol stations. By the end of 2012, there were six plants engaging in bio-fuel production in Vietnam. Their capacity is estimated at 535 million litres per year. However, only 20 per cent of this is consumed in the country, 80 per cent is for export to Japan, Korea and the Philippines at prices barely covering production costs.

SUPPORTING INDUSTRIES

I. Overview

The emerging position of Vietnam as the destination of choice for global manufacturers of cars, electric and electronics, and industrial parts is undeniable. This is a proof that the manufacturing and supporting industries not only have a bright future but also play vital roles in the well-being of the economy. There is no wonder why the government has put a lot of efforts in developing the sector.

Machinery, parts and equipment is the 5th largest exporting category from Malaysia to Vietnam with value of USD230 million. This shows the interests and preferences of Vietnam’s business to Malaysian machinery and equipment.

For the period 2008-2013, total trade between Malaysia and the Viet Nam showed an upward trend with an average annual growth of 17.07 per cent. For the trade activities between Malaysia and Vietnam, in particular E&E sector, has been surge along many cooperation and internal arrangements of big corporations like Samsung, Canon, Sony have been made in optimizing the supply chain value.

Industry sectors reached only 7 percent per year, compared to their set targets of between 9.5-10.2 percent per year. To reach higher growth in the coming time, Vietnam should further improve the investment environment and competitiveness by using modern technologies. Cooperating with foreign invested companies to join regional distribution systems should also be boosted.

With an aim to become an industrialized country by 2020, Vietnam’s manufacturing industry has been undergoing major changes as a result of government initiatives, WTO commitments and industrial liberalization. Industrial development strategy for the period 2011-2020 to focus on the development of Automotive, Electronics, Information, Communications, etc. technologies are expected benefit from the industrial development strategy. Due to improving business climate, increased trade and investment cooperation, low labour cost and Vietnam is expected to emerge as a major manufacturing hub in the ASEAN region.

II. Opportunities in Supporting Industries

Automobile giants like Toyota, Ford and Honda plan to expand production in ASEAN countries like Indonesia and the Philippines, but not Vietnam due to the country’s weak support industries. This crucial factor is still pinpointed to the development of Supporting Industries in Vietnam.

Government is now aiming at six industries to be prioritized for development: Mechanical engineering; Electronics & informatics; Manufacturing and assembly of automobiles; Textiles and garments; Leather-footwear; and Supporting industries for high-tech industry development.

The private sector is considered to drive the collaboration in building up the network and help develop the supporting industries to cover the value chains. As an example, as many as 36 countries and territories have invested in Dong Nai, mainly from Taiwan, South Korea, Japan, ASEAN countries, Europe and the US. 

1. Electronics Manufacturing

Helped by latest facilities of MNC’s like Sony, Samsung, Intel, Foxconn, the country is aiming to become Southeast Asia’s fastest-growing contract manufacturing hub. As expected, Intel’s $1 billion investment was pivotal in raising Vietnam’s profile and has since helped attract other IT companies.

The recently launched USD2 billion Samsung High-tech Complex in Thai Nguyen, a mobile phone factory was put into production in March 2014. Along with Bac Ninh’s Samsung Electronics Vietnam (SEV) will churn out 250 million mobile phone a year, spending USD1.9 billion of its registered capital of USD2.5 billion, mainly on technology and sets to achieve USD23.5 billion in exports this year, making Vietnam the major production hub.

Intel has only 18 Vietnamese partners among hundreds of companies providing materials and components for its production. While Samsung Electronics Vietnam has only five Vietnamese partners in its 60-strong supply chain, and they do simple jobs like packaging and printing. The others are mainly companies from South Korea or other ASEAN countries, or joint ventures between Vietnamese firms and foreign partners. Therefore, supporting industries for the electronics sector would create a huge opportunities for Malaysian companies to cater for the growing demand in the industry.

2. Automotives

Foreign investment is expected to increase in Vietnam’s automobile industry in the coming years as the government explores measures to expand the local market. Comparing the automotive sector in the region, Vietnam is still very young. Vietnam now has some 210 businesses making auto parts in support for 18 automobiles manufacturers. Locally-made automobile components and spare parts accounts for only 25 percent of the total parts used to manufacture a car, compared to some 60 percent in Indonesia.

To take advantage of the market trend, many foreign companies has invested in supporting the newly developed automotive sector. As an example the Chinese Sailun Tyres Co. invested a new USD400 million tyre factory in Tay Ninh’s Phuoc Dong-Boi Loi Industrial Park with annual production capacity of 150,000 tyres, including semi and full-steel radical tyres and speciality tyres, hiring 1,000 workers.

Tan Chong Motor Holdings Berhad aggressive expansions has also been observed through the vehicle assembly plant in Danang inaugurated in 2013, 2 flagship and 13 authorised dealers nationwide and the most recent 2 investments to distribute cars and motorcycles, parts and components in 2014.

Tan Chong’s vehicle assembly plant in Da Nang, Vietnam

III. Market Trend

The development of supporting industries in Vietnam suggests new trends and opportunities for industrial development in developing economies. The development of global production and technologies leads to new potentials for building the supporting industries, as well as the overall industry. While developing economies have to compete to attract FDI, Malaysian manufacturers and service providers could compete to enter new developing economies to sell technologies, set up production bases and gain the advantage of being a forerunner.

INFORMATION AND COMMUNICATIONS TECHNOLOGY (ICT)

I. Overview

Many believe that Vietnam’s IT market will be a regional outperformer over 2016-2019 due to strong growth dynamics for retail and enterprise market demand. Broad-based economic growth is expected to have a positive impact on the household income profile of Vietnam over the medium term, which will deepen the retail hardware market, as well as easing price sensitivity in the higher-value replacement market.

Meanwhile, Vietnam’s broader economic development including the expansion of higher productivity verticals and the modernisation of traditional sectors, will unlock demand for IT software and services solutions. There is also increasing momentum towards Vietnam becoming a global centre for electronics production as wages rise in China and manufacturers look to protect margins by moving to Vietnam, where wages are as low as a third of those in China. It has been forecasted a Compound Annual Growth Rate (CAGR) for the market of 13.5% over 2016-2019, with total spending expected to increase to VND99.1 trillion (USD4.72 billion) in 2019.

The government’s policy of promoting the development of the local IT industry in Vietnam is another supporting factor in 2016. An important component is the government’s Hi-Tech Park policy, which was extended in June 2015, with new parks set to be constructed between 2015 and 2030 through a combination of central government direction, local government funds and private capital. Investors in Vietnam’s Hi-Tech Parks benefit from a corporate tax rate of 10% for the first 15 years, plus a complete exemption from corporate income tax in the first four years and a 50% reduction for the subsequent nine years. In addition to creating new parks, it also plans to further develop existing facilities including Hoa Lac Hi-Tech Park in Hanoi City, Saigon Hi-Tech Park in Ho Chi Minh City and Danang Hi-Tech Park.

II. Prospects and Opportunities

Computer Hardware Sales: Total expected spending of VND42.7 trillion in 2016 to VND55.6 trillion in 2019, a CAGR of 10.7% in local currency terms. Significant growth potential exists due to low device penetration rates, which is expected to be unlocked due to the strength of potential income growth trends in Vietnam over 2016-2019.

Software Sales: Total expected spending of VND10.9 trillion in 2016 to VND16.0 trillion in 2019, a CAGR of 15.7% in local currency terms. Low enterprise software penetration is a major opportunity as firms modernise and become integrated into the global supply chain, with lower cost of cloud software also expected to deepen the market.

IT Services Sales: Total expected spending of VND17.2 trillion in 2016 to VND27.4 trillion in 2019, a CAGR of 18.9% in local currency terms. IT services are forecast to outperform over 2016-2019 due to increased domestic demand for cloud computing and outsourcing services from the private and public sectors.

Apparently, Vietnam market is becoming attractive and revealing opportunities for IT businesses:

• Decision in July 2014 to enable state agencies to use outsourced information technology providers for the first time opens a new growth channel for vendors.

• E-government adoption deepening, with opportunities in government administration, alongside sector-specific markets such as healthcare.

• Vietnam is a popular destination for software development and IT services outsourcing, with particularly strong growth potential from Japanese enterprises that are turning away from Chinese based providers.

• Small- and medium-sized enterprises have much potential to increase spending on basic solutions, including customer relationship management and security.

• The government’s drive to create an IT services industry over the next 15-20 years – including the National Technology Innovation Fund – is expected to accelerate the development of local enterprises.

• Cloud computing awareness has risen fast and adoption is expected to accelerate in the short-to-medium term as network infrastructure improves and awareness levels increase.

• It is expected the growth of Hi-Tech Parks to generate demand for IT products and solutions directly.

III. Challenges

There are also challenges that foreign players as newcomers should consider:

• IT spending per capita is much lower than in neighbouring countries like Malaysia and Thailand, reflecting a much lower GDP per capita.

• Highly price-sensitive market, putting pressure on vendor margins.

• High level of software piracy, with a stall in the reduction from 2011 to 2013.

• Cybersecurity measures by the government have been pushed through with state security measures, with potential human rights implications.

• Cybersecurity issues could also undermine confidence in IT solutions and services, with big data and cloud computing vulnerable

COSMETICS AND PERSONAL CARE PRODUCTS

I. Overview

Vietnam cosmetics market is an emerging market with huge potential that has been experiencing impressive growth; growing at a rate of 30% per annum for the past few years, thus creating vast opportunity for Vietnam to become a major player in cosmetics industry within ASEAN.

For skincare products, the market has observed a strong growth of 21% in 2013 to reach VND4.2 trillion, due to diversified products that meet demands of different consumer segments in the country. Meanwhile, general purpose body care saw the strongest growth of 27% in 2013 as consumer’s preference beginning to look at premium brands.

The drive in growth were supported by existing factors such as robust cross-border supply of labour and capital, increased organic components harvesting and higher consumer demand for specialized products. Especially the increasing consumer awareness regarding benefits of greener products, rising disposable income and increasing investments by local companies are expected to fuel the demand for organic cosmetics in Vietnam particularly.

Market Trends

The market is more of a follower than an innovator. However, Vietnam is home to a number of herbal and natural ingredients favoured by both Vietnamese and Western consumers. It is expected that both foreign companies operating within Vietnam and domestic manufacturers will be using these ingredients as inspiration for innovation.

The market for natural personal care products in Vietnam is on the rise. Vietnam has an abundance of natural ingredients, such as essential oils and lemongrass, both of which are popular with both Western consumers and domestic consumers.

Market behaviour and demands

When people think of Vietnam, they often think of one market. In fact, the market is very fragmented, not only due to huge differences in income but also because of cultural heritage. The established international brands are able to provide products at a range of price points serving the larger market as a whole, whereas domestic brands have a great potential to meet specific needs of consumers.

From north to south, Vietnam is a long country; therefore, it has a range of different climates. The north has four seasons, whereas the south experiences tropical weather that is hot and humid. Consumers in the north generally purchase far more hydrating moisturizers to combat the effects of colder weather, whereas matte products are generally favoured in tropical areas, where complexions tend to be oily.

Like everywhere, women in Vietnam want to look younger and prettier. However, a common challenge that the cosmetic industry faces in most emerging markets including Vietnam is that consumers wanting a quick efficacy.

II. Opportunities

Vietnam has implemented the ASEAN Cosmetics Directive and this has made life for the cosmetic industry much easier. While a reduction in tariffs is financially beneficial, technical obstacles being removed also benefits the cosmetic industry, resulting in more collaboration between companies in member states.

The market is still under-developed, so opportunities are present in all segments. More than half of Vietnam’s 90 million people are aged 30 and below, and this demographic tends to favour more sophisticated products and brand names. This will result in local manufacturers spending more money on the research and development of new skin care products, as they look to use their more comprehensive domestic knowledge to gain an advantage over global manufacturers.

III. Market Access Considerations

The market is also following the trend of ASEAN market, the leading distribution channels is forecasted to include beauty specialist salons (23% of market share by 2020), franchise outlets (CAGR of 10.3% by 2020) and department stores (18.7% market share by 2020), where the latter is driven by new entrants to the category.

Health and Beauty Retailers like Medicare Co Ltd leads the competitive landscape with a 1% value share. Although it seems small, it is significant given the highly fragmented landscape of health and beauty specialist retailers in Vietnam. Medicare is a successful Malaysian investment (Medicare Inc.) in Vietnam since 2003.The unique setup of Medicare Co Ltd’s modern chained drugstore/pharmacy largely contributes to its success. As counterfeits arise as a big concern among consumers, especially in urban areas, this company has successfully emerged as a modern trustworthy brand, with stores located in the biggest shopping centres. Capturing consumer demand, Medicare Co Ltd is able to generate substantial revenues, recording 17% growth in health and beauty specialist retailers in Vietnam in 2014.

Franchise Outlets includes TBS (The Body Shop), which is also a Malaysian invested establishment since 2009. Representing a more traditional market approach, local company Hoa Sen Viet Co Ltd achieved the biggest increase in value sales, with a rise of 35% in 2014. Present since 2005, this cosmetics distributor and retailer have gradually expanded its store network to 42 outlets, located across the country. It has the highest number of outlets in the channel. It has imported The Face Shop brand, selling cosmetics products and demonstrates an attachment to its Korean origins whilst gaining strong brand awareness in Vietnam. It is gaining popularity among loyal middle- to higher-income consumers in urban areas.

 
Part 3: MATRADE’s Trade Promotional Programs in      

             Vietnam

As part of an on-going effort to further strengthen bilateral trade and investment relations between Malaysia and Vietnam, MATRADE organise various trade promotion programs in Vietnam. These programs cover different platforms such as trade exhibition, specialised marketing mission and international sourcing programs. Among the industry sectors that are being focused on are:

• Construction and infrastructure
• Oil & gas
• Water supply and treatment
• Supporting industries, and
• Consumer goods

MATRADE’s participation at Viet Water Exhibition 2014 with six Malaysian companies

For 2016, MATRADE will lead the participation of Malaysian companies at the Viet Build Exhibition in Hanoi, from 20 – 24 July 2016. Malaysian companies in the building materials and construction sector are invited to participate in the event and explore the business opportunities available in the Vietnamese market. To value add the participation, MATRADE will arrange business matching session with potential Vietnamese importers and clients, as well as arrange visit and meeting with relevant government agencies and project owners.

In addition, we will also identify and recruit potential buyers/clients to participate in the International Sourcing Programs (INSP) that will be organised in Malaysia. The sectors include:

• Halal industry
• Medical and healthcare
• Green technology
• Aerospace
• Oil & gas
• Information and Communication Technology, and
• Electronics

MATRADE’s participation at the Vietnam International Construction and Building Exhibition (VICB) 2015 with 23 Malaysian companies

Among the previous trade promotion programs organised by MATRADE Ho Chi Minh City in Vietnam were:

MATRADE Ho Chi Minh City  would also be able to assist Malaysian  companies  to  look for business partners and potential clients in Vietnam and facilitate the export promotion visits into the country.

For further information and assistance, please contact us at the following details:

MATRADE Ho Chi Minh City
Consulate General of Malaysia, Trade Section
1206-1207, 12th Floor, Me Linh Point Tower
No. 2,  Ngo Duc Ke Street, District 1
Ho Chi Minh City, Vietnam
Tel  : (848) 38221468, 38298256
Fax : (848) 38231882
Email: hcmc@matrade.gov.my