Vietnam -- Export Potential Assessment (2005)

Export potential assessment in Viet Nam

Draft version, August 2005

Project VIE/61/94: Support to Trade promotion and Export Development

in the Socialist Republic of Viet Nam

Implemented by the International Trade Centre UNCTAD/WTO (ITC) and the Vietnamese Trade Promotion Agency (Vietrade)

and financed by the Governments of

Switzerland (Swiss State Secretariat for Economic Affairs -- seco) and Sweden (Swedish International Development Cooperation Agency -- Sida).

Market Analysis Section International Trade Centre

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Table of contents

Preface .............................................................................................................................6

Executive summary........................................................................................................7

Background and purpose............................................................................................7 Method ......................................................................................................................8 Main results of the export potential of selected industries ..............................................9 Industry-specific priority actions................................................................................. 17 Cross-cutting issues ................................................................................................. 21 Cross-cutting recommendations ................................................................................ 21 Possible next steps .................................................................................................. 24

Introduction ...................................................................................................................25

Background ............................................................................................................. 25 Purpose................................................................................................................... 27 Selected product groups ........................................................................................... 28 Structure of the report ............................................................................................... 29

1. Comparative analysis of the export potential of industries................................30

Index 1: Viet Nam’s current export performance ......................................................... 33 Index 2: The domestic supply conditions .................................................................... 36 Index 3: World markets............................................................................................. 39

2. In-depth analysis by industry..................................................................................44 Mineral primary products and fuels ............................................................................ 45 Fishery products ...................................................................................................... 48 Agricultural products................................................................................................. 54 Industrial products.................................................................................................... 86 Arts and crafts........................................................................................................ 124

3. Crosscutting issues and recommendations .......................................................127

Key crosscutting issues .......................................................................................... 127 Key crosscutting recommendations ......................................................................... 129

Bibliography................................................................................................................133

Annex ...........................................................................................................................137

Annex 1. Data sources and issues........................................................................... 137 Annex 2. Composite indices .................................................................................... 138 Annex 3. Preferential tariff index .............................................................................. 141 Annex 4. Market attractiveness index ...................................................................... 142 Annex 5. Investment conditions in Viet Nam, Thailand and China: A comparison........ 143

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List of tables

Table 1. Summary assessment of the export potential of industries in Viet Nam .......................9 Table 2. Export potential of industries and priority actions .....................................................17 Table 3. Viet Nam’s main export products, 2004 ..................................................................26 Table 4. Overview of examined industries ............................................................................29 Table 5. Overall index of the export potential of industries.....................................................32 Table 6. Underlying indicators for the composite index “Viet Nam’s export

performance” ...............................................................................................................35 Table 7. Underlying indicators for the composite index “domestic supply” ..............................38 Table 8. Underlying indicators for the composite index “world markets” .................................41 Table 9. Order of industries to be examined.........................................................................44 Table 10. SWOT analysis for fishery products......................................................................48 Table 11. Viet Nam’s fishery exports ...................................................................................50 Table 12. Production and export targets for Viet Nam’s fisheries sector .................................53 Table 13. Exports of Viet Nam’s main agricultural products...................................................54 Table 14. Potential for agricultural commodities and processed products...............................55 Table 15. SWOT analysis for Vietnamese coffee and coffee products ...................................56 Table 16. A comparison of Arabica and Robusta beans ........................................................58 Table 17. SWOT analysis for rubber....................................................................................61 Table 18. SWOT analysis for rice........................................................................................64 Table 19. SWOT analysis for cashew nuts...........................................................................67 Table 20. Viet Nam’s exports versus world imports of nuts, 2003 ..........................................69 Table 21. SWOT analysis for fruits and vegetables...............................................................71 Table 22. SWOT analysis for pepper...................................................................................75 Table 23. Diversification: Viet Nam’s exports versus world imports of spices, 2003.................78 Table 24. SWOT analysis for tea.........................................................................................79 Table 25. Export potential of industrial products ...................................................................86 Table 26. SWOT analysis for clothing and accessories .........................................................87 Table 27. A comparison of wages in the apparel industry ......................................................89 Table 28. Lead times in the clothing industry for Viet Nam and selected competitors ..............90 Table 29. Import prices for clothing are on a downward trend in major markets ......................91 Table 30. SWOT analysis for footwear.................................................................................92 Table 31. SWOT analysis for furniture .................................................................................95 Table 32. Comparison of labour costs in furniture in the region .............................................97 Table 33. SWOT analysis for motor vehicles ...................................................................... 100 Table 34. Automobile manufactures in Viet Nam ................................................................ 101 Table 35. SWOT analysis for household utensils and appliances ........................................ 103 Table 36. SWOT analysis for bicycles ............................................................................... 105 Table 37. SWOT analysis for plastics ................................................................................ 107 Table 38. SWOT analysis for electric wire and cable .......................................................... 109 Table 39. SWOT analysis for agricultural machines ............................................................ 111 Table 40. Main agricultural machines produced in Viet Nam ............................................... 112 Table 41. SWOT analysis for shipbuilding.......................................................................... 113 Table 42. SWOT analysis for arts and crafts ...................................................................... 124 Table 43. Overall SWOT analysis for examined industries in Viet Nam ................................ 128 Table 44: How to standardise Viet Nam’s world market share from 1 (low) to 5 (high)........... 139 Table 45: Indicators for the composite index of export potential........................................... 140 Table 46. Market attractiveness index: Underlying indicators and thresholds ........................ 142 Table 47. Investment conditions in Viet Nam, Thailand and China ....................................... 143

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List of figures

Figure 1. Mapping industries: world markets versus Viet Nam’s export performance .............. 43 Figure 2. Production and exports of coffee in Viet Nam ........................................................ 57 Figure 3. Monthly averages of ICO coffee prices .................................................................. 59 Figure 4. Production and exports of rubber in Viet Nam ........................................................ 62 Figure 5. Production and exports of rice in Viet Nam ............................................................ 65 Figure 6. Production and exports of cashew nuts in Viet Nam ............................................... 68 Figure 7. Production and exports of fruits and vegetables in Viet Nam................................... 72 Figure 8. Production and exports of pepper in Viet Nam ....................................................... 76 Figure 9. Production and exports of tea in Viet Nam ............................................................. 80

List of boxes

Box 1. Doi Moi Policies....................................................................................................... 25 Box 2. Viet Nam’s Trade Agreements and WTO Accession .................................................. 27 Box 3. Supporting Industries ............................................................................................... 37 Box 4. Hazard Analysis and Critical Control Points (HACCP)................................................ 51 Box 5. US anti-dumping rulings against Viet Nam ................................................................ 52 Box 6. Recommendations for the seafood industry ............................................................... 53 Box 7. Paradigm shifts in global supply and demand of coffee .............................................. 60 Box 8. Improvements in productivity of rubber...................................................................... 63 Box 9. Spices are interesting for inter-cropping .................................................................... 77 Box 10. Progress in the textiles industry .............................................................................. 89 Box 11. Forest Stewardship Council (FSC) .......................................................................... 98 Box 12. Recommendations for the furniture industry ............................................................ 99 Box 13. The government counts on four SOEs to develop the auto industry......................... 102 Box 14. EU Anti-dumping suit against Vietnamese companies ............................................ 106 Box 15. Ambitious Government plans for the shipbuilding industry ...................................... 115 Box 16. Porter’s Stages of National Competitive Development ............................................ 132

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Preface

This export potential assessment for Viet Nam is part of the Technical Assistance Project “Support to Trade Promotion and Export Development in the Socialist Republic of Viet Nam” (VIE/61/94A). The project is implemented by the International Trade Centre UNCTAD/WTO (ITC) and the Vietnamese Trade Promotion Agency (Vietrade), and financed by the Governments of Switzerland (Swiss State Secretariat for Economic Affairs -- seco) and Sweden (Swedish International Development Cooperation Agency -- Sida). The project is intended to strengthen Vietrade's capacity to respond to the needs of exporting enterprises and to provide trade-related training, trade information and counselling services to trade support institutions and exporting enterprises on a substantial basis (www.mekongtpprojects.com).

This report was prepared by Dr. Michael Freudenberg (Senior Market Analyst) and Dr. Thierry Paulmier (Associate Expert) at the Market Analysis Section of the International Trade Centre UNCTAD/WTO (ITC).

The report benefits from major input of four teams of national consultants, who collected sector-specific information in Viet Nam and conducted interviews with enterprises:

− Prof. Dr. Phan Dang Tuat (General Director) and Mrs. Truong Chi Binh (Team leader, SMEs and Private Sector), Institute for Industry Policy and Strategy, Ministry of Industry (MOI) for industrial products;

− Dr. Dang Kim Son (Director), Mr. Tran Cong Thang and Ms. Pham Huong Giang (Information Analysis Division), Institute of Agricultural Economics, Ministry of Agriculture and Rural Development (MARD) for agricultural products;

− Dr. Nguyen Huu Dung (General Secretary) and Mrs. Nguyen Thai Phuong (Information Chamber Manager), Viet Nam Association of Seafood Exporters and Producers (VASEP) for fishery products; and

− Mr. Le Ba Ngoc (Senior Handicraft Expert), Viet Nam Handicraft Research And Promotion Center (HRPC) for arts and crafts and furniture.

The authors would like to thank Dr. Jean-Michel Pasteels (Senior Market Analyst at ITC) for the analysis of trade and market access data and for fruitful discussions and suggestions concerning the method to gauge the export potential of industries, and Ms. Joan-Ann Allan (Junior Consultant at ITC) and Matthias Schmidt (Intern) for excellent research assistance.

The authors would also like to thank the ITC/VIETRADE team for their support, especially Dr. Martin Albani (Senior Technical Adviser), Mrs. Bung Tu (National Project Manager), Mr. Bui Son Dzung (Deputy Director, Vietrade) and Mr. Alain Chevalier (seco).

Lastly, the authors would like to thank all interviewees from the private sector who had the kindness to answer the ITC questionnaire.

While efforts have been made to verify the information contained in this document, the International Trade Centre UNCTAD/WTO (ITC) cannot accept responsibility for any errors that it may contain. The opinions and comments reported in this study reflect those of the authors and do not necessarily concur with those of the experts, their organisations or Vietrade. The usual disclaimers regarding responsibilities apply to this report.

For further details on the present study, please contact Michael Freudenberg (email: [email protected]) or Thierry Paulmier (email: [email protected]).

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Executive summary

This study assesses the export potential of some forty sectors in Viet Nam, including mineral products and fuels, fishery products, agricultural commodities and products, industrial products, and arts and crafts. It compares and ranks sectors according to several dimensions, including the international environment (e.g. world demand), Viet Nam’s current export performance, and domestic supply conditions in the sectors. Statistical analysis and a literature survey are complemented by interviews with local stakeholders in Viet Nam, both from the public and private sector, to gain first-hand insights into the domestic business environment that affects enterprises in Viet Nam in the various product sectors.

The report also includes an in-depth analysis of individual industries, including an assessment of strengths, weaknesses, opportunities and threats (SWOT analysis), and identifies key areas of intervention and related policies that can promote future export growth. The study also identifies possible target markets for diversification for each industry.

Viet Nam’s export potential appears highest for nuts, oil, furniture, coal, footwear, arts and crafts, fishery, rubber, shipbuilding, glass, coffee, agricultural machinery, pepper, household utensils, toys and games, and clothing. In contrast, the export potential seems limited for dairy products, jute products, fruits and vegetables, rice, cut flowers, motor vehicles and household textiles.

Measuring the export potential of sectors and identifying industry-specific policies can only be part of a much larger undertaking that tackles the real issues at stake in Viet Nam. The authors would like to stress that Viet Nam’s best option is not to pick winners on export markets, but to provide a business environment that is conducive to risk-taking, entrepreneurship, creativity and innovation.

Background and purpose

Viet Nam is in the process of designing explicit trade development strategies with the objective of augmenting national competitiveness. Viet Nam has had impressive export growth rates over the last years, but exports are still concentrated on a limited number of sectors, including clothing, footwear, oil, and fishery products. In addition, products are typically at the lower market segment with low quality and low prices, which renders the country vulnerable to international business cycles and price variations. Broadening the industrial basis and diversifying the export base is thus a major issue for Viet Nam, and has become one of the key issues on the national policy agenda. Much of this involves creating a business environment that is conducive to creativity, entrepreneurship, and innovation. In some cases however, the governments need to complement these “horizontal” policies that apply to all industries with more targeted, sector-specific policies.

When a government wants to target specific sectors, it is essential to focus on those that are likely to make a difference, especially those with the highest potential for future growth. Governments, donors and other stakeholders need to make an informed decision on which priority sectors to select. This current study aims to facilitate this decision-making process by filling a void between broad, macro-economic competitiveness studies and detailed, sector-specific reports.

The objective of this study is to identify sectors that have significant potential for future export growth in Viet Nam. The study aims to enable the stakeholders participating in the design and implementation of export development programmes to take into account both quantitative and qualitative information in a consistent conceptual framework. It identifies

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those sectors that have significant potential for export growth. It has a strategic focus, and aims to guide the government, the private sector and civil society towards the most promising sectors.

This report updates and enlarges a previous ITC study from January 2002, Export Potential Assessment Viet Nam (ITC, 2002a). It covers mineral products, fishery products, agricultural commodities and products; industrial products; and arts and crafts. Services are excluded in this study.

Method

The export potential of a product group is defined here to include both those sectors that already have a proven track record and to those that do not yet export in a significant manner, but fulfil many of the necessary supply conditions of doing so. To gauge the export potential, each of the product sectors is examined along several broad dimensions, including:

− The current export performance of Viet Nam, such as its exports in value, the world market share, and growth rates of export.

− The domestic supply capacity, such as the quality of products and the efficiency of supporting industries.

− The characteristics of the international environment , such as growth of world demand and Viet Nam’s access to international markets;

In total, the study uses 14 indicators and provides rankings for each dimension as well as an overall ranking of export potential that can be used to draw the attention of policy-makers.

The study is based on inputs by ITC’s market analysis team and 4 teams of Vietnamese consultants from the Ministry of Agriculture and Rural Development (MARD), the Viet Nam Association of Seafood Exporters and Producers (VASEP), the Ministry of Industry (MOI), and the Viet Nam Handicraft Research And Promotion Center (HRPC).

The research was undertaken during Spring and Summer 2005. It combines desk research with fieldwork in the country, and is based both on quantitative and qualitative information.

− Quantitative information includes trade statistics and market access data. For market access conditions, tariff data are from ITC’s Market Access Map database (http://www.macmap.org/). Trade data come from ITC’s Trade Map (www.trademap.org), which is an online database of global trade flows and market access barriers for international business development and trade promotion, providing detailed export and import profiles and trends for over 5,300 products in 200 countries and territories. Users in Viet Nam have free access to Trade Map at least until 2007. Vietrade and the ITC Trade Promotion Project VIE/61/94 provide free usernames and passwords (see http://www.trademap.net/vietnam/login.htm).

− Qualitative information included a review of relevant literature and information collected from surveys based on an ITC questionnaire and interviews with enterprises and business associations. The latter is to validate the results and to gain first-hand insights into the domestic business and policy environment that affects enterprises in the various product sectors. In addition, national consultants identified sector-specific government strategies. It was unfortunately not possible to examine domestic supply conditions via interviews with enterprises for all industries.

The resulting industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision.

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Main results of the export potential of selected industries

In total, available evidence suggests that Viet Nam’s export potential is highest for cashew nuts, oil, furniture, coal, footwear, arts and crafts, fishery, rubber, shipbuilding, glass, coffee, agricultural machinery, pepper, household utensils, toys and games, and clothing. In contrast, the export potential seems limited for dairy products, jute products, fruits and vegetables, rice, cut flowers, motor vehicles and household textiles.

Clothing; footwear; oil; fishery products; furniture; and coffee are not only Viet Nam’s currently most important breadwinners in terms of export turnover, but also they are likely to remain so in the future, as they are among the industries with the highest export potential index (Table 1).

Medium-sized industries with high export potential include rubber; arts and crafts; coal; household utensils; pepper; and cashew nuts. Toys and games; glass; agricultural machines and shipbuilding are for the moment small in terms of export turnover, but have the potential to become more important in the future.

Table 1. Summary assessment of the export potential of industries in Viet Nam

Low potential Medium potential High potential

Important export sector (more than USD 500 million)

--- Electrical machinery

Clothing Footwear

Oil Fishery

Furniture Coffee*

Medium exports

Rice Fruits and vegetables

Household textiles Motor vehicles*

Stationery, office machine Bicycles

Image and sound

Rubber Arts and crafts

Coal Household utensils

Pepper Cashew nuts*

Few exports (less than USD 100 million)

Cut flowers* Dairy products* Jute products*

Plastics Construction materials

Wires, cables and conductors Tea

Instruments Electronics Hand tools

Industrial machinery* Wood*

Comm. and telecomm.* Packaging materials*

Honey*

Toys and games Glass

Agricultural machinery Shipbuilding

* The export potential for these industries is based only on Viet Nam’s current export performance and the international environment. It does not take into account domestic supply conditions due to lack of comparable data. Results are thus not directly comparable with the other industries.

The following summarises the main results for mineral products and fuels, fishery products, agricultural products, industrial products, and arts and crafts. Within each of these groups, industries presented in terms of their export value in 2003.

Mineral primary products and fuels Crude oil is Viet Nam’s most important export product in terms of gross revenue. The net foreign exchange earnings are much less, however, given Viet Nam’s total dependency on imported petrochemical products and the capital intensity of production. Exports have grown from nothing in 1986 when production started to currently about USD 3.9 billion in year 2003. The world market for oil is immense, and has been growing strongly in value terms because of rising oil prices. The export potential of this sector is considered high. The Vietnamese offshore oil fields are extensive, claimed to be some of the largest outside the Middle East. In general, the government expects to decrease the export of

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crude oil, giving emphasis to further exploitation of the offshore oil fields, while also prioritising domestic processing of crude oil for the purpose of substituting imports of petrol and other oil products.

Viet Nam is a small but fast growing net exporter of coal and the export potential of this sector appears high. Production has increased dramatically in the last few years and the industry enjoys a strong domestic demand. In general the market access conditions are good as tariffs are low and the world market is large and growing. Viet Nam continues to exploit new coal reserves within its borders and to upgrade mining technology and facilities to increase productivity.

Fishery products Viet Nam is among the top ten world exporters of fishery products. The sector is important for employment, with a labour force of around 3.4 million people, and has also had an active role in famine elimination and poverty alleviation among coastal inhabitants. Private small-scale operators dominate the industry. The production is mainly for the domestic market, but Viet Nam also has a thriving export sector. The average annual export growth rate from 1990 to 2004 was around 20%. According to Vietnamese statistics, the country exported approximately USD 2.4 million worth of marine products in 2004. Global demand in the medium term is good, and there are many trade opportunities but at the same time many challenges facing the industry: Viet Nam has faced two anti-dumping investigations in the United States. To ensure its sustainable development the sector has to assure reliable quality and enhance cost competitiveness. The export potential of this sector is high but Viet Nam needs to focus on the development of aquaculture by developing sufficient support systems, control of diseases and environmental controls, in order to improve yields, increase productivity and reduce risks for fish farmers. Also development of the hygienic control of processing is a priority. Further value adding through focus on high priced products on the global market, improved packaging, and processing of consumer-friendly products is also a key strategy in the sector.

Agricultural products Coffee is one of Viet Nam’s most important agricultural export commodities. The Vietnamese coffee sector is very export-oriented, with exports accounting for about 95% of the production. The coffee production –which consists mainly of the Robusta variety– has grown very rapidly since the late 1980s, and Viet Nam has, over a short period of time, established itself as a main player among the world exporters. Today Viet Nam is the world’s second largest exporter in volume terms and the third largest exporter in value terms. Viet Nam is highly competitive due to favourable climate and environmental conditions, low production costs, and yields that are among the highest in the world. However, Vietnamese coffee is of relatively low grade due to poor processing, drying facilities, and post-harvest technologies; it does not have a brand name and exporters still have limited marketing skills. As a result, Vietnamese coffee commands lower prices than the world average. Viet Nam has the potential to upgrade quality of its green coffee exports through investments in research, post-harvest technologies, storage and processing, and by shifting to the production of Arabica variety, which commands higher prices. Other options are niche coffees such as organic coffee, but quantities are small. Domestic processing to soluble coffee is expanding. Given Viet Nam’s strong world market position, and the opportunities for quality upgrading in processing and post-harvest handling, the export potential for the coffee industry is considered high, but the need for export development assistance medium.

Viet Nam is one of the top five exporters of natural rubber in the world. Rubber, of which 90% is exported, has become one of Viet Nam’s most important agricultural export commodities. Vietnamese rubber exports reached nearly USD 600 million in 2004, with

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China being Viet Nam’s main market, buying about half of the production. The export potential is deemed high, and with ambitious plans already underway for expansion of area devoted to rubber production, it is likely that production and exports will increase. Though suffering from low yields and outdated technology, Viet Nam is still cost effective compared to regional competitors. Performance has been very good recently, with substantial increases in both quantity and value. Given the volatile nature of prices in natural rubber, and Viet Nam’s current lack of diversification, export development should focus on improving efficiency in natural rubber and identifying prospects in industrial processing. Exports of rubber products are not substantial, and Viet Nam remains a net importer in almost all categories. Though rubber products do represent potential exports, they may continue to be a second or third tier export industry, and will continue to suffer from competition for latex by the local, domestic oriented industry. In the rubber industry, efforts should focus on improving yields, updating processing technology, exploring increasing production of types of rubber in high demand, and improving the profile of the “Viet Nam” brand. Strategy in rubber products is less clear and opportunities in the processing industry will be have to be chosen with care.

Rice plays the most important role among agricultural commodities in Viet Nam, in terms of food security, rural wages and employment, and export revenues. Rice is mainly a crop for the domestic market, but about 25% of the total production, was exported in 2004 with earnings of almost USD 1 billion in 2004, making it one of Viet Nam’s largest export revenue earners. The Government’s export strategy does not see any major expansion of Viet Nam’s export of rice during the 2000s, and assumes an annual export in the order of 4.5 million tons. The rice sector will need to focus on further development of new varieties and on upgrading of quality, however the export potential is considered low .

Viet Nam’s export performance for cashew nuts and other nuts over the past years has been impressive, especially for cashew nuts which are by far the main exported product within the nuts sector, followed by ground nuts (peanuts). Viet Nam exported more than 100,000 tons of cashew nuts in 2004, with earnings of USD 400 million, making cashew one of Viet Nam’s most important agricultural exports. For cashew nuts, Viet Nam has over the last years built up its capacity for processing and as a result shifted from an exporter of raw cashew to processed. With a world market share of 25%, Viet Nam has established itself as a leading player in the world: it has become the world’s second largest exporter of shelled cashew nuts after India, and before Brazil. The government has invested heavily in processing to the extent that the industry demand is larger than the domestic supply of raw cashew. As the domestic production of raw cashew is not sufficient, Viet Nam is importing raw cashew nuts to export them in processed form. The potential for enhanced exports is high, depending on price development and domestic production. The focus on export development needs to expand production of raw material; to improve quality of processed nuts; a long-term development of consumer packed products and diversified use, for example in processed foods.

Vietnamese exports of fruits and vegetables have grown strongly since the early 1990s. Viet Nam exports its fruits and vegetables mainly in processed form, especially canned, which tend to command lower prices than fresh produce. Vietnamese yields are low by international comparisons, partly because of inappropriate cultivation and post-harvest technologies. The export potential is considered low , though this is a very heterogeneous industry that includes commodities with very different profiles and potential. Export development needs to focus on quality of supply of raw materials and processing, a possible shift towards higher value added fresh produce, supporting infrastructure such as storage and refrigeration, and export marketing to selected markets. The government is taking various initiatives to boost production and exports, for example by promoting improved farm technology, information activities for farmers; upgrading the processing facilities, providing incentives to joint-ventures in fruits and vegetable production and processing. Viet Nam should also identify key agro-products for each region along their comparative advantages.

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Although black pepper has a history of 200 years in Viet Nam, pepper only emerged as a major export commodity during the 1990s due to dramatically expanded area under pepper. Viet Nam is a major exporter of spices, with a 5% world market share. In black pepper, the most important crop for Viet Nam within this sector, Viet Nam has become the world’s largest exporter. The Vietnamese pepper sector is very export-oriented, with exports accounting for about 95% of the production. Total pepper output has increased markedly over the period from 1998-2004, from 15,000 tons to more than 100,000 tons. Black pepper is one of six agro-commodities that have export value over USD 100 million per year. Not only does black pepper provide significant export earnings overall, it continues to be profitable for farmers despite dropping global prices. Viet Nam also enjoys relatively favourable market access, and, though quality concerns remain, has received a recent infusion of new companies and new investment which has opened up new markets and increased the proportion of high value ASTA pepper produced. Although the export potential is high, given the high supply relative to demand, downward pressure on global prices, and Viet Nam’s already dominant position in the market, expanded production is not a viable strategy. Viet Nam’s strategy on black pepper should focus on value added through quality upgrading and processing, and ensuring that plantations receive proper investment; there may also be opportunities in improving the market profile of pepper from Viet Nam to command higher prices. In the spices sector overall, there are other dynamic products Viet Nam is producing in small quantities, which may present opportunities for expansion such as spice mixtures, cinnamon and ginger. These need to be examined in more detail to assess their potential value.

Tea is a rather small export commodity for Viet Nam. However, tea exports have grown rapidly both in volume and value terms since the early 1990s, to a level of some 60,000 tons worth USD 60 million. Viet Nam tea yields are low by international comparisons. The quality of Vietnamese tea is generally considered to be of poor quality, reflected in lower prices on the world market by as much as 30%. The reasons for low productivity and low quality include cultivation techniques, and post-harvest technologies. Given these factors the export potential for the tea industry is medium. The strategy for export development should be focused on upgrading quality and improving yields.

For less examined agricultural products, export potential is medium or low. Unfortunately, for these sectors, this does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

− The export potential for wood products is medium. Viet Nam’s export performance appears relatively weak, as the country is a marginally bigger importer than exporter. There is now increasing scope to develop an export industry based on domestic raw materials, however there is considerable domestic competition for wood. The international environment is mixed, for products in this sector the market access conditions for Viet Nam are quite good however world demand has been sluggish in recent years.

− Honey can be considered to have a medium export potential for Viet Nam. Viet Nam has an impressive current export performance and international demand growth has been strong. However the country faces difficult market access conditions.

− Cut flowers appear to have a low export potential based on Viet Nam’s weak current export performance and the poor market access conditions.

− The dairy products sector is the weakest sector among those examined and the export potential is considered low . Viet Nam’s export performance was poor, since the country is a net importer and exports have recently fallen in value. The international environment is particularly unfavourable, with slow demand growth and the worst market access conditions of all examined sectors.

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− Jute and jute products appear to have a low export potential based on Viet Nam’s current export performance and the poor international environment: the world market is small and in decline and Viet Nam faces relatively poor market access conditions.

Industrial products Clothing is one of Viet Nam’s most important export sectors. With over 2 million workers, about a quarter of all industrial employment, the textiles and clothing industry represents a key source of industrial employment, especially for women. Viet Nam’s wages in the textiles and garment sector are among the lowest in the world, but the productivity also seems to be below that of China and other Asian competitors. Moreover the domestic supporting industries are not entirely satisfactory: the domestic textile sector is unable to supply needed material to garment manufacturing, explaining to some extent the lengthy garment lead times compared to China. Although Viet Nam faces discriminatory market access conditions in some markets, its export performance in this sector has been impressive. WTO accession represents an opportunity to improve Viet Nam’s access to world markets. The export potential of clothing can be considered high, given the great importance of the sector in Viet Nam’s exports, the government’s very ambitious targets for growth and the potential of the US market due to the bilateral trade agreement. The focus should be on a long-term shift from Viet Nam as a passive subcontracting CMT (cut, make, trim) producer to lower import content and a more active role on the markets. The clothing sector needs to improve domestic supporting industries, enhance the design capacity, improve productivity in garments, upgrade the technology in the textile sector, create links with final buyers, and move up the quality scale to higher value products.

Exports of footwear and leather products have experienced a dramatic increase since the early 1990s. In 2003 exports topped USD 2.9 billion, making Viet Nam the fourth largest exporter of footwear in the world. Growth has been averaging an exceptional 18% a year between 1999 and 2003, quite significant considering the highly competitive nature of the industry. Viet Nam’s competitiveness lies in the combination of one of the lowest labour costs in Asia with an easily trainable, disciplined and literate work force. However, the productivity in the Vietnamese industry is considered fairly low, creating a vicious circle of continuous low wages to maintain competitiveness. The Vietnamese industry is largely based on sub-contractual arrangements, with leading market players supplying the industry with designs, materials and sometimes also machinery. Footwear is a highly import dependent industry, with imports accounting for about 80% of the output value. To capitalise further on the high potential of this sector, export development would need to focus on increasing the domestic supply of inputs for production, improved productivity, diversifying production to higher valued products, exploiting the skills of Vietnamese labour by enhancing the design capacity, and further down the line, establishing own brand names and pro-active marketing.

The furniture industry has a long tradition with many small-scale family owned companies and large enterprises in Viet Nam. Recently, furniture export growth has been exceptional and in 2003 the sector was worth almost USD 1 billion. The main markets are the United States, Japan and the European Union, though currently Viet Nam exports to more than 120 countries. Viet Nam has a low-cost, skilful labour force that produces a diverse range of products, which tend to be about 10% cheaper than those made in China. However manufactures do not add much value, instead using designs from foreign buyers. Several factors are restricting the high potential of this industry, namely the shortage of skilled workers, outdated equipment, lack of certified forests to ensure domestic material supply, and limited business capacity to deal directly with buyers.

The Vietnamese motor vehicles industry is so far engaged mainly in assembly activities that have high import content. Viet Nam is for now a small though growing player in the world market, importing for the moment more than it exports. The potential of this sector is considered low , however the government has ambitious plans to develop the entire

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automobile industry significantly by 2010, and Viet Nam aims to produce popular and luxury vehicles and to export parts for specialized vehicles. In order to compete with countries such as Thailand and Malaysia, the development of supporting industries with companies specializing in spare parts, components, and accessories should be accelerated. It is estimated that these supporting industries would take five to ten years to develop; Viet Nam is expected to export 30% of the production capacity of automotive components by 2015.

The household appliance industry in Viet Nam is at an early stage of development, but has been growing rapidly in recent years and the export potential is considered high. Currently Japanese and Korean firms carry out almost 90% of production, with the former producing for the domestic market and the latter producing for export. These firms are constrained by a small domestic market, underdeveloped supporting industries and lack of locally produced components. Most producers have manufacturing capacity that is only sufficient to meet domestic demand, investment risks are high and profits are low. A possibility is to diversify to products with high technology content or products of good quality and low cost designed for markets in rural areas.

The export potential for bicycles is medium. China is clearly the leading world exporter of bicycles, though Viet Nam remains highly competitive due to its low labour costs and high quality products. Accordingly, export growth for bicycles has been exceptional over the past few years, and Viet Nam has become the fifth largest exporter of bicycles in the world. An important destination for Vietnamese bicycles is the European Union: in 2003 Viet Nam exported 1.3 million units there, translating to an 8.2% share of the market. However, in 2004 European manufacturers filed an anti-dumping suit against Vietnamese companies, which could impede the potential to expand Viet Nam’s exports as tariffs could more than double. A similar investigation is underway in Canada, another important market for Viet Nam.

The plastics industry is one of the fastest growing sectors in Viet Nam, showing 30% annual export growth rates over the last five years, and has become one of Viet Nam’s major export earners. However, the industry consists mainly of small and medium enterprises that cannot create economies of scale, and Viet Nam is dependent on imported inputs. Viet Nam is a substantial net importer of plastics: even using the most optimistic estimates, imports exceed exports by a factor of four. The government has provided support and will continue to do so. The industry is also investing over the long term, especially in raw and intermediate inputs, but Viet Nam will likely remain a net importer in this sector for some time. Investment in production capacity in some key products such as like PVC (Polyvinyl chloride) and PP (polypropylene foam) is only expected to reach 50-60% of raw material demand by 2010. Exports, however, are significant and can continue to grow so the potential is deemed to be medium. The strategy should be focused on identifying targets of opportunity for export promotion, and to leave other areas either for import substitution or better import sourcing.

The export potential of wires, cables, and conductors is medium. Government policy does not seem particularly supportive of the industry, which needs a stable business environment.

Growth in exports was extraordinary for agricultural machinery, and the sector has high potential to develop further to take advantage of the sizeable domestic and regional demand. Manufacturers have the capacity to expand production and the industry employs a skilled labour force that produces goods of relatively high quality compared to cost. Moreover the sector benefits from supportive government policies including financial assistance to manufacturers, reductions on tariffs for imported inputs and protection from cheaper imports. According to the Ministry of Transport, by 2010, the industry is expected to meet 45% - 50% of the country’s demand for agricultural machinery products, and exportable products are expected to account for 30% of total production value.

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Shipbuilding is developing rapidly in Viet Nam and has attracted several foreign investors and exporters. Viet Nam has more than 60 State-owned shipbuilding and repairing yards. For the moment, the local content of shipbuilding is limited, but the government is investing heavily to produce more local inputs as import substitutes. The quality of ships “Made in Viet Nam” has improved drastically over the last years. The sector can be regarded to have high potential and Government has ambitious plans for shipbuilding to become a key export industry and a key supporting industry for other industries. It has already invested to upgrade shipyards, and Viet Nam’s shipbuilding industry is planned to be a technological level equal to that in other regional nations by the year 2010.

For less examined industrial products, the export potential in general is medium. Unfortunately, for some of these sectors, this does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

− Viet Nam’s export performance for electrical machinery and equipment appears modest, since the country represents a small share of the world market and is a net importer. Viet Nam’s market access conditions for electrical machinery and equipment are good though overall growth in international demand over the past five years has been slow, thus making the export potential for this sector medium.

− Stationery and office machinery is considered to have medium potential. In this sector Viet Nam imports more than it exports, and its export make up a very small share of the world market. Viet Nam has a stable supply and low cost of labour in the industry, making it an attractive FDI destination. Though Viet Nam enjoys considerably good market access conditions, world import growth in value was slow between 1999 and 2003.

− For industrial machinery Viet Nam occupies just 0.04% of the world market and is principally a net importer. World import growth was moderate, and Viet Nam enjoys good market access conditions so industrial machinery and equipment is deemed to have medium potential.

− Communications and telecommunications equipment is regarded as a medium potential sector. Viet Nam is a net importer and makes up just a small percentage of the world market. However, world demand growth was considerable and Viet Nam is generally granted the same access conditions are the majority of exporters.

− Packaging materials is a medium potential sector. Despite high growth rates, the sector performed poorly since Viet Nam is a net importer with a marginal share of the world market. International demand for packaging materials is very dynamic and for the most part, Viet Nam faces the same conditions as the majority of its competitors.

− Image and sound equipment is considered to have medium potential. Viet Nam is a net importer and its exports constitute a small part of the world market but global demand grew at a pronounced pace and in general Viet Nam has neutral market access conditions.

− The export potential for household and furnishing textiles is considered low . Many textile companies in Viet Nam had to import 80% of materials and 100% of chemicals, leading to high cost prices. In recent years, textile enterprises have replaced most of their obsolete equipment, investing in modern machines with advanced technology in key areas such as dyeing, printing and finishing. Globally, this is a dynamic sector, though the market access conditions in this sector are unfavourable for Viet Nam.

− The toys and games sector is deemed to have high potential. Viet Nam was a net exporter and exports grew rapidly, at nearly 28% per year in value despite

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international demand growth being modest in recent years. Also, in general, Viet Nam faces low tariffs.

− For construction materials the export potential is considered medium. Viet Nam is a net importer but exports grew at nearly eight times the world average (47% p.a.) in value terms. The high economic growth has been accompanied by a surge in construction activities, which has created a strong demand for building and construction materials domestically. International demand growth for construction materials is stable and this is a somewhat protected sector.

− Measuring, checking and precision instruments is considered to have medium potential. The export performance was moderate since Viet Nam is a net importer and has a small market share. International demand growth has been stable and Viet Nam’s market access conditions are relatively good.

− The glass and glass products sector is regarded to have high potential. Viet Nam is a net importer of glass and its exports account for little in the world market however international demand grew remarkably, in terms of value growth was 14% a year, and in volume almost 11%. Market access conditions are satisfactory for Viet Nam.

− In the electronic equipment and components sector Viet Nam is a minor, but fast growing player in the world market. Foreign firms dominate production as the worldwide trend to outsource to low cost countries continues. Viet Nam is well positioned, as it is a low wage country with an adaptable workforce. Several dozen Japanese firms have taken advantage of the processing zone incentive schemes, and are engaged in the assembly of relatively simple components. The world market for electronics is enormous and has been growing solidly and Viet Nam enjoys relatively free access to the most important markets. Considering these factors, the export potential is deemed medium. Export development of electronics in the medium and longer-term is an issue of attracting foreign investments through a conducive policy framework, development of supportive infrastructure and human resource development, rather than conventional export development assistance focusing on marketing, quality upgrading etc.

− For hand tools, Viet Nam is not a significant world player in this sector, and imports more than it exports. World imports grew slowly over the five-year period. The export potential is considered medium.

Arts and crafts The socioeconomic impact of the arts and crafts sector is high, especially in terms of poverty reduction and rural development. It greatly contributes to income generation in rural areas, attracting investment for the improvement of infrastructure, and shortening the gap between urban and rural living standards. The export potential of this sector is high. Vietnamese arts and crafts are dynamic, and export growth in value terms was almost five times faster than the world average. Viet Nam’s market access conditions are relatively favourable in this sector. Vietnamese craft items are reputed for their affordable price tags as well as a large variety of unique and distinct designs owing to its ethnic diversity. However, the quality of products remains relatively poor for export markets. In addition, the production capacities are very scattered throughout the country. Consequently, it is difficult to standardize the products due to multiple subcontracting to small structures. In addition, the supply of materials for major handicraft products (bamboo, rattan, rush and leafs, wood and textile) is under threat, and transportation infrastructure conditions are far from satisfactory. Few craft villages have access to market information.

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Industry-specific priority actions

The study suggests that Viet Nam’s strategy for export development needs to be differentiated and industry-specific. In some cases, the export potential is almost exclusively dependent on enhancing supply, since markets are given and Viet Nam is a small producer. This is the case, for example, with crude oil. For some industries, the key issue is enhancing the quality of the current exports to attract better prices, and enhancing market share, especially for those where Viet Nam has already reached a significant world market share. This is, for example, applicable to rice, coffee, pepper and cashew nuts. Diversification of product ranges and development of processing is a key strategy for example for Vietnamese rubber. A shift from a passive sub-contractor exploiting low wage levels to a pro-active producer with higher degree of domestic inputs, design and active role on the market is a medium and long-term strategy for products such as garments and footwear. In some cases, the main strategy is to attract foreign investments in order to enhance know how, for example in electronics.

Below, the reviewed products and services are summarised in terms of the suggested key sector approaches for export development (Table 2).

Table 2. Export potential of industries and priority actions

Industries (ranked within each group by export value in 2003)

Evaluation by ITC

(Index)*

Evaluation by national consultants

Comments Priority actions

Mineral and mineral products

Oil High (3.4)

Biggest export earner for Viet Nam, further offshore oilfields still to be exploited.

Process crude oil domestically (first refinery to be operational by 2007).

Coal High (3.3) Small but fast growing exporter; strong

international demand. Exploit new coal reserves, and upgrade mining technology and facilities.

Fishery

Fishery High (3.2)

Important for employment and poverty elimination. Viet Nam is among the top ten world exporters of fishery products. Strong export performance, despite anti-dumping investigations (catfish and shrimps in the United States).

Develop aquaculture to avoid depletion of stocks; apply appropriate systems to assure reliable quality; upgrade products and processing; develop more varieties of consumer-friendly products; improve packaging and branding.

Agricultural products

Coffee High** (3.1) High

Highly competitive producer, with high yields and low production costs. Poor post-harvesting technology, storage and processing.

Upgrade quality of green coffee beans through investments in research, post-harvest technologies, storage and processing. Shift to the Arabica variety that commands higher prices. Other options are niche coffees such as organic coffee, though quantities are small.

Rubber High (3.2) High

One of the top five world producers. Though suffering from low yields and outdated technology, Viet Nam is still cost effective compared to regional competitors.

Improve efficiency in natural rubber; identify prospects in industrial processing; and improve branding.

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Evaluation by ITC

(Index)*



Rice Low (2.3) High

Important for food security and rural employment. Three quarters of production is for domestic consumption, one quarter for exports, but Viet Nam is still the world’s second largest rice exporter behind Thailand. High yields, and abundant workforce and low production cost in Mekong river delta. However, highly fragmented nature and small plot size affect negatively productivity, production costs and profitability. Inputs, such as seeds, fertilizers, and pesticides are costly or of poor quality. High post-harvest losses due to backward harvesting technology, poor transportation means, and poor infrastructure. Low though improving quality. Tariffs are high and discriminatory.

Develop new varieties and upgrade quality. Improve efficiency of supporting industries. Explore opportunities for diversification in Japan, China, Australia and New Zealand.

Cashew nuts and other nuts

High** (3.5) High

Viet Nam is one of the world’s largest exporters, but there is insufficient local supply of raw cashew nuts due to extensive processing.

Boost production of raw cashew nuts, improve quality of processed nuts, diversify their use, and target consumer-packed products.

Fruits and vegetables

Low (2.2) Medium

Exports are mainly in processed form, especially canned, which command lower prices. Main problems include poor quality, small quantities, low yields, partly due to inappropriate cultivation and post-harvest handling, and high prices.

Improve quality of raw materials and processing; improve supporting infrastructure such as storage and refrigeration. Register Vietnamese trademarks abroad. Explore opportunities for diversification in the European Union, the United States and Canada.

Pepper and other spices

High (3.1)

High

Very export-oriented sector, with exports accounting for about 95% of the production. Viet Nam is the world’s largest exporter of black pepper. Weaknesses include poor processing technologies and still low quality.

Upgrade quality and processing; ensure plantations receive proper investment; improve the market profile of Vietnamese pepper. Examine opportunities for diversification, such as spice mixtures, cassia, star aniseed and ginger.

Tea Medium

(2.7) Medium

High export growth, but in general yields and quality are low. Viet Nam mainly exports black tea, and small amounts of green tea and specialty teas such as Oolong and Suchong.

Improve quality, yields, cultivation techniques and post-harvest technologies. Diversify markets.

Wood and wood products

Medium** (2.7)

The world market for wood products has been characterised by sluggish demand, decreasing prices and oversupply. Viet Nam is a net importer and domestic demand for wood is considerable.

Not examined in detail here; need for more analysis.

Honey Medium** (2.6)

Small, fast-growing export sector in a dynamic world market, despite poor market access conditions. The United States is the main export destination.

Not examined in detail here; need for more analysis. Explore opportunities for diversification in Canada and Australia.

Cut flowers Low** (2.3)

Small, fast-growing export sector in a dynamic world market. Discriminatory market access conditions. Japan is by far the main market.

Not examined in detail here; need for more analysis. Explore opportunities for diversification in the European Union and the United States.

Dairy products Low** (1.1)

Small, declining export sector in a stagnant world market. Exports are concentrated in terms of products (bird’s eggs in shell) and partners (Hong Kong).

Not examined in detail here; need for more analysis. Indonesia is a growing market with high potential as a diversification market for Viet Nam.

Jute products Low** (2.2)

Small, fast-growing export sector in a declining world market. Viet Nam faces relatively poor market access conditions.

Not examined in detail here; need for more analysis. Explore opportunities for diversification in the United States, Iran and Hong Kong.

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Evaluation by ITC

(Index)*



Industrial products

Clothing and accessories

High (3.0)

High

Key source of industrial employment. Mainly sub-contracted by foreign firms due to very low wages. High import content, w here foreign companies supply materials and designs, and Vietnamese companies undertake CMT (cut, make, trim).

Shift from passive subcontracting CMT (currently some 70%) to lower import content and a more active role on the markets. Improve supporting industries, enhance design capacity, improve productivity in garments, upgrade technology in the textile sector, create links with final buyers, and move up the quality scale to higher value products.

Footwear and leather

High (3.2) Medium

Growing exports with high quality products. Tanned leather production has increased steeply. Low value-addition, highly import dependent industry that is largely based on sub-contractual arrangements (leading market players supply the industry with designs, materials and sometimes machinery)

Improve design, diversify production, increase productivity and attract investment in production of inputs and accessories. Move from passive subcontracting with high import content to more active marketing.

Furniture High (3.4)

Exceptional growth of a diverse range of inexpensive furniture produced by low cost, skilled workers. Low value-addition (almost 80% of raw wood is imported, and designs are often from foreign buyers).

Put in place adequate wood certification system (e.g. FSC Forest Stewardship Council), and improve design capacity.

Motor vehicles Low** (2.5)

Viet Nam is a small, but growing net importer. Industry does mainly assembly activities, with high import content. Exports of automotive components are concentrated in terms of products (ignition wiring sets) and partners (Japan). There are virtually no support industries in Viet Nam, but the government has ambitious plans.

Accelerate development of supporting industries. Focus on low -cost vehicles. Explore opportunities for diversification in the European Union and the United States.

Household utensils and appliances

High (3.1) Medium

Exports have grown rapidly, though Viet Nam is still at an early stage of development. Export potential is high mainly because international demand is very dynamic.

Attract foreign investment to upgrade the technology used in processing. Encourage enterprises to adopt new technologies to increase efficiency and reduce production costs. Develop supporting industries.

Bicycles Medium

(2.8) High

High quality, diversified range of products with European designs. Labour is low cost and highly productive. Anti-dumping investigations in key markets (European Union, Canada).

Enhance design capacity and continue diversification of products. Improve access to information on international markets.

Plastics Medium

(2.6) Medium

Fast growing export sector with large and growing international market. The sector has reached new markets. Industry consists mainly of small and medium enterprises that cannot create economies of scale, and Viet Nam is dependent on imported inputs

Focus on national trade promotion program. Identify targets of opportunity for export promotion, and leave other areas either for import substitution or better import sourcing.

Wires, cables, and conductors

Medium (2.7)

Medium (or high)

High quality products at reasonable prices, many of which produced in modern and large-scale production lines. Exports are concentrated on the Japanese market, and have grown significantly in rec ent years.

Reconsider the decision to impose a 5% import tax on galvanized steel, a previously untaxed material that cannot be domestically produced, and which has forced production costs up. Explore opportunities for diversification in the EU, the USA, Russia and Canada.

Agricultural machinery

High (3.1) Medium Regional demand is high and products

have good quality-to-cost ratio.

Create a national trade promotion program. Diversify the product range and improve industrial designs.

Shipbuilding High (3.1) High

The industry is becoming a key export industry. Quality of shipbuilding and repairing is considered high. Intense foreign and government investment and vast quality improvements.

Invest in infrastructure, develop supporting industries; improve design of ship models; and upgrade technologies.

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Evaluation by ITC

(Index)*



Electrical machinery

Medium (2.8)

Small, fast-growing export sector, with good market access conditions. Modest world import growth.


Stationery, office machine

Medium (2.9)

Stable supply and low cost of labour. Viet Nam has been successful in attracting foreign direct investments.

Encourage foreign direct investments through favourable policies.

Industrial machinery

Medium** (2.9) High

Small export sector with exceptional export growth. Japan is main destination. Good market access conditions.

Not examined in detail here; need for more analysis. Explore opportunities for diversification in the United States, China and the European Union.

Comm. and telecomm.

Medium** (3.0)

World demand growth has been considerable. Still a small sector in Viet Nam, but export growth has been impressive.


Packaging materials

Medium** (2.9) Small export sector with high export

growth. Dynamic world market. Not examined in detail here; need for more analysis.

Image and sound

Medium (2.8) Small, fast-growing export sector in a

dynamic world market. Not examined in detail here; need for more analysis.

Household textiles

Low (2.6)

Most inputs are imported, driving up costs. The import content has not changed significantly over time, reflecting the prolonged sluggishness of the textile sector and other supporting industries.

Develop supporting industries. Diversify export markets regionally, for example to Singapore and Hong Kong who offer Viet Nam free market access conditions.

Toys and games

High (3.0) Very strong export performance despite

slow global demand growth. Not examined in detail here; need for more analysis.

Construction materials

Medium (3.0) Medium Currently small amount of exports, strong

domestic demand.

Support policy for export. Target neighbouring countries as potential markets.

Measuring, checking and precision instruments

Medium (2.9)

Small export sector with exceptional export growth. Japan is main destination. Market access conditions are relatively good.

Not examined in detail here; need for more analysis. Explore opportunities for diversification in the United States, China and the European Union.

Glass High (3.1) Highly dynamic world market. Not examined in detail here; need for

more analysis.

Electronic equipment and components

Medium (2.9)

Fast growing export sector, consisting mainly of integrated circuits. Foreign firms, especially Japanese and Korean firms, are outsourcing production to Viet Nam due to low cost and adaptable workforce.

Attract foreign direct investment; develop supportive infrastructure and invest in human resources.

Hand tools Medium (2.7)

Small, fast-growing export sector in a slow growing world market.


Arts and crafts

Arts and crafts High (3.2)

Socio economic impact is high, in terms of poverty reduction and rural development. Affordable and unique crafts, but quality can be poor and inconsistent due to multiple subcontracting to small structures production that are scattered throughout the country. Supply of raw materials is under threat.

Improve access to market information; ensure raw material supply.

Source: TradeMap and Market Access Map, survey with enterprises and business associations in Viet Nam. * Points range from 1 (lowest potential) to 5 (highest potential). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. But very low rankings may indicate potential areas for improvement. ** The export potential does not take into account domestic supply conditions due to lack of comparable data.

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Cross-cutting issues

Measuring the export potential of sectors and identifying industry-specific policies can only be part of a much larger undertaking that tackles the real issues at stake in Viet Nam.

Though having been very successful over the past years, Vietnamese exporters are facing key challenges. With the increase in foreign direct investment inflows, the accelerated reform of stated-owned enterprises and the emergence of private enterprises, the business environment in Viet Nam is already changing. Entrepreneurs and officials from business associations from various sectors mentioned several crosscutting problem areas during interviews, many of which are related to the domestic supply side:

− Insufficient cost competitiveness. In several sectors, Viet Nam’s exports are curbed by high production costs, despite in general low labour costs. There are two major cost factors compromising Viet Nam’s competitiveness: unit labour costs (labour cost divided by labour productivity) and others costs, such as for intermediate inputs and transportation.

− Limited value added due to strong import dependency for raw materials and intermediate inputs. In several sectors, products are exported in crude or semi-processed form only, which limits the possibility to add value and diversify products. In other sectors, much of raw materials and intermediate inputs have to be imported, which drives up overall production costs.

− Low-quality and little differentiated products. Low quality and limited differentiation of products is not only linked to technical aspects of production (including technological backwardness), but also to limited know-how in design and marketing.

− Technological backwardness. The processing and harvesting technologies used in a number of sectors are outdated, partly because of insufficient financial resources at the enterprise level.

− Inadequate information, processing and transport infrastructure. Transportation infrastructure in the clothing sector for example is considered some 20% more costly than in Thailand and China. Supporting infrastructure, such as storage and refrigeration, is insufficient for many agricultural commodities. Viet Nam’s information infrastructure is considered weak and costly.

− Limited knowledge of foreign markets and international trade issues. Many exporters have only limited knowledge of foreign markets and need intermediaries in a number of sectors. Sales management remains reactive, with enterprises often passively waiting for clients rather than actively exploring new opportunities.

− Little openness to international investors. Though Viet Nam has received important foreign direct investments flows, foreign companies experience considerable problems with the bureaucratic procedures and legal framework of the country.

Cross-cutting recommendations

Enterprises in Viet Nam have to adapt substantially in order to address the changing international environment and the key supply-related challenges mentioned above.

− Improve product quality and design. For many industries, Viet Nam’s main strategy until now has been to specialise in low-quality low-priced products. However, enterprises should differentiate their products and upgrade in their specialisation, but

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this is dependent on several factors, including appropriate investments in human capital and infrastructure.

− Adapt Vietnamese standards to international standards and reduce health-related risks for agricultural products. This is particularly important for agricultural products because non-tariff barriers, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) have become increasingly important in recent years. Given health-related problems such as the avian influenza (“bird flu”) and the Severe acute respiratory syndrome (“SARS”), it is important for example to develop an effective veterinary system, a system to protect plants, and to predict natural disasters.

− Create brand names. It is important to increase the awareness of the importance of trademarks and the number of trademarks for exported products. It is estimated that up to 90% of Vietnamese agro-products exported to overseas markets are without a trademark, because enterprises have insufficient information on export markets, are unaware of the importance of trademarks, and are not familiar with the procedure and cost for registering brands, names and trademarks.

− Invest in upgrading the infrastructure and in science and technology. It is important to upgrade the infrastructure, as an ineffective information, processing and transport infrastructure is a serious constraint to Vietnamese exports. For the agricultural sector for example, there is a need for investment in post-harvest activities and in the processing sector. For fishery products, improved infrastructure includes modern ports and safety measures for fishermen, such as storm and flood warning systems. Research in the agro-food sector for example can improve product quality and render production techniques more efficient.

− Recognize the importance of supporting industries and improve their efficiency. Though supporting industries are beginning to develop in Viet Nam, policy makers and enterprises, both state-owned and private, need to recognize the importance of supporting industries, and to create and develop such industries by their own effort. Clear legal definition is still needed, and accordingly, effective promotion measures and supportive policies.

− Favour the development of clusters. Competitiveness depends on how well enterprises make use of their own assets and gain access to new assets by co-operating with other firms and institutions. The Government should consider organizing and developing clusters for manufacturers and businesses, located within a geographical region, that have common buyers, material suppliers or service providers. Regional co-operation will become increasingly important for Viet Nam.

− Improve access to information. Many newcomers to exports face serious difficulties, including lack of market information, inability to utilize information effectively, business and export financing, and lack of effective marketing strategies. Concerning access to information, it would be useful to develop a market information system that is accessible to individual enterprises.

− Diversify markets and develop trade promotion activities. Vietnamese exports in some sectors are very are concentrated geographically, and market diversification is important to reduce sensitivity to demand-side shocks in individual markets. Industries should focus on marketing activities in key markets (United States, Japan, European Union) plus in selected potential markets for which imports are important or fast growing, which are open or have preferential trade arrangement with Viet Nam.

− Improve access to information. Adequate and updated information is essential to survive in competitive markets. Producers, processors and exporters need information on international markets, including patterns and trends in production, consumption, market characteristics, market access, distribution channels, storage,

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packaging and labelling, pricing and market prospects. It would thus be useful to centralise this information and provide individual companies with constantly updated information.

− Secure access to raw materials. In several sectors, domestic supply of raw materials and intermediate inputs is insufficient, driving up production costs (at high import tariffs and transport costs) and sometimes disrupting production because of irregular foreign supply. In order to secure their supply to the processing sector, a specific plan is needed to create and develop a sustainable source of raw materials.

− Establish close and active cooperation between stakeholders and strengthen the role of business associations. The government, industry associations and enterprises have to work together to tackle the issues at stake and strengthen Viet Nam’s competitiveness. It is important that all stakeholders in a particular industry, such as farmers, processors, and exporters, work closely together, possibly coordinated by the responsible Ministry and the business association. The role of the association could also be enhanced, as it serves the common rights of the members, and presents on behalf of them its wishes, proposals and recommendations to the government or competent authorities relating to the policy and implementation of legal regulations

− Attract foreign investment. Though Viet Nam has been quite successful in attracting foreign direct investments flows, mainly related to the quality and cost of the human resources, it has inherent weaknesses that need to be tackled if Viet Nam wants to remain an attractive destination. These include the lack of transparency and consistency in the legal and policy framework, for example in relation to taxes, the many restrictions to investment, the general business environment, cumbersome procedures, inefficient bureaucracy and corruption.

− Invest in people. Viet Nam’s well-educated, disciplined labour force is no doubt its most important asset. For the future, an adequate supply of trained human resource, especially engineers and technicians, is vital to the development of any industry. A key strategy to enhance exports is to further strengthen human resources by continuing in investing in basic education, vocational training and language training, especially English.

− Invest in Viet Nam 2050. Viet Nam’s comparative advantages are for the moment in “factor-driven” activities (based on endowments of labour and natural resources) and “investment-driven activities” (where the government can still take a leading role in deciding which industries to target and in accumulating capital for investment). Viet Nam’s presence in “innovation-driven” activities is still marginal. However, the ability to create, distribute and exploit knowledge and information is now regarded as a key factor underlying the economic growth and the competitiveness of firms in many developed countries. Economic growth will increasingly result from ideas rather than the allocation of scarce resources. Intangible factors that relate to investments in research and development (R&D), human resources (training), computer software, organisational change and marketing, are increasingly supplanting traditional production factors such as (natural) resources, (physical) capital and (manual) labour as key to enterprise competitiveness in advanced countries. The Vietnamese government can choose to accompany this process also in Viet Nam. The knowledge-based economy is not only a change in the basis of the economy, but may also provoke changes in culture (the way we think) and organisation (the way information and knowledge is exchanged). Liberalisation of intellectual freedom and private sector initiative is probably the most essential factor if Viet Nam wants to excel in knowledge based industries and lay the foundations for a creative and innovative Viet Nam in the 21st century.

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Possible next steps

The study examines the potential for export growth in the selected product groups using a conceptual framework mainly based on relatively “objective” economic judgements (global demand patterns, Viet Nam’s export performance and supply conditions). There are three main extensions to the study:

− Make a special effort to obtain additional information on less-examined industries. For some industries, it was problematic to obtain background information (statistics, reports, studies, industry news) from business associations or relevant Ministries, and to find enterprises willing to take the time for an interview and to respond to the questionnaire. Though for some industries, absence of information might be an indication of missing export potential, this is certainly not true for all industries. For industries such as electronics, the world market is enormous and dynamic, and Viet Nam’s constraints lay rather on the supply side. Future studies should thus make a special effort to cover these industries better and monitor closely domestic supply conditions.

− Increase the scope of the study and include services. Services, which were excluded from the current study mainly for reasons of comparability of the method, were already treated in the 2001 study, which included tourism, labour exports, and information technology services. Future studies should certainly incorporate selected services, which are the fasted growing component of international trade.

− Select priority sectors out of those with potential. If the government wants to select a limited number of industries for particular treatment (e.g. sector-specific export strategies), the analysis of the export “potential” has to be complemented with an evaluation of various socio-economic criteria that allow identifying “priority” sectors. For this, more subjective criteria can be introduced, by taking into consideration sector socio-economic impact and political objectives. The Government of Viet Nam could set priorities in its export strategy taking into account factors, such as job creation, rural and female employment, poverty reduction, technology advancement and industrialisation, backward and forward linkages with other sectors, spillover effects to the rest of the economy, foreign currency generation, environment sustainability and food security. It would be interesting to compare the economic situation of particular sectors with their social desirability.

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Introduction

Background

With an annual economic growth (GDP) of 8% between 1990 and 1997, the Vietnamese economy grew more than three times as fast as the world average, surpassed only by China. The economic success of Viet Nam since Doi Moi (Box 1) is triggered by similar factors that made countries such as Singapore, Taiwan and South Korea ‘miracle economies’ of the 1970s and 1980s. These factors are strong emphasis on export development, a good human resource base with universal literacy and a high premium on education, a fair degree of equity in the society, social order and political stability, and a considerable degree of planning of a market based economy.

Viet Nam’s rapid economic growth is largely associated with strong exports growth. Thus, Vietnamese exports of non-oil goods and services grew by 19% per annum between 1991-2002, almost four times as fast as the annual growth of the world trade. Viet Nam has managed to become a key player on the global market for a series of commodities and products, notably rice, coffee, pepper and cashew nuts. Viet Nam is also a leading exporter of footwear. Some of the key factors behind Viet Nam’s success in exports include (ITC, 2002a):

− The government’s efforts in shifting the economic policy from import substitution to export orientation, liberalising the economy and embracing the market economy.

− The rapid response by Viet Nam’s farmers to the market liberalisation of agriculture after the Doi Moi reform.

− The interest by the global market to tap Viet Nam’s cheap, diligent labour. After Doi Moi, Viet Nam emerged as an attractive region for outsourcing of labour intensive production such as garments, footwear and electronics from the newly industrialised countries with escalating labour costs in the region.

Box 1. Doi Moi Policies

In 1986, the government of Viet Nam began a profound social and economic ideological renovation, termed “Doi Moi”. The Communist Party initiated the Doi Moi with the intent to develop a market economy, “but keep the social and political structure intact.” The program aimed at transforming the country from a centrally planned economy, where the state controls almost all economic activities and the private sector is constrained, to a more liberal market sys tem.

While the ideological shift towards a new market economy was developed in 1986, the actual practice and implementation of the policy did not fully take place until the mid-1990s. The reform relied on the private sector as an engine of economic growth and decentralised state economic management. It dismantled cooperatives, granted farmers transferable land tenure for a period of at least fifteen years, liberalised most prices, increased the autonomy of state enterprises and allowed and encouraged new private businesses in many fields. Economic reforms allowed new trade and investment opportunities, unified exchange rates and sharply devalued the currency, reduced fiscal deficits, and raised interest rates to positive real levels.

The economic reform appears to have been successful; poverty has been strongly reduced and Viet Nam has been one of the fastest growing countries in the world.

Source: Adapted from Mekong Economics (2002).

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Nevertheless, Viet Nam is facing several key challenges:

− Viet Nam remains a poor country, though it has been one of the most successful countries in the world in reducing poverty. Viet Nam is a developing country with a population of 81 million and a nominal gross domestic product (GDP) of USD 39 billion: nominal per capita GDP is about USD 480. The poverty rate in Viet Nam was halved within a decade, from nearly 60% in 1992 to 29% in 2002.

− Per capita exports are low compared to regional neighbours and competitors. Viet Nam’s per capita exports were USD 285 in 2003, as compared to USD 5155 for Malaysia, USD 1343 for Thailand and USD 439 for the Philippines.

− Viet Nam’s exports of manufactured products is narrow, and the transformation to a more diverse export structure is complex, especially since most of Vietnamese industry still is geared to import-substitution and heavily protected. Viet Nam’s merchandise exports were, according to official Vietnamese trade statistics, USD 26 billion in 2004 (Table 3). Of this, crude oil alone accounts for more than 20% of the total earnings, while five other product groups --textiles and garments, footwear, aquatic products, electronic components, and wood products-- together account for almost 60% of total export earnings.

Table 3. Viet Nam’s main export products, 2004

Million USD Share in

total exports (%) Cumulated share

(%)

Crude oil 5,666 21.8 21.8

Textiles and garments 4,319 16.6 38.4

Footwear 2,604 10.0 48.4

Aquatic products 2,397 9.2 57.6

Electronic components 1,077 4.1 61.8

Wood products 1,054 4.1 65.8

Rice 941 3.6 69.4

Coffee 594 2.3 71.7

Natural rubber 579 2.2 74.0

Cashew 425 1.6 75.6

Handicraft 410 1.6 77.2

Electric cables 385 1.5 78.6

Coal 319 1.2 79.9

Plastic finished products 259 1.0 80.9

Pepper 150 0.6 81.4

Sub-total 21,179 81.4 81.4

Total exports 26,003 100% 100

Source: Ministry of Trade (http://www.vietpartners.com/Statistic-Imex.htm).

− The value added to the economy from exports is overall fairly low and Viet Nam’s competitiveness to a large extent due to low wage levels in industry and agriculture.

− The Vietnamese economy is in the process of integration into the global economy, as the country prepares itself for the full implementation of tariff reduction based on the AFTA road map and the accession to the World Trade Organization (WTO) (Box 2). Viet Nam’s biggest challenge for the next five years will be to ensure a steady and sustainable growth in the face of intensifying global and regional competition and integration.

− Viet Nam has to maintain and improve the competitiveness of the country’s leading industries. According to the World Economic Forum’s (WEF) Global Competitiveness Report, Viet Nam ranked 77th of 104 countries in terms of the Growth Competitiveness Index (GCI) in 2004 (compared to rank 60 of 102 countries in 2003), and 73rd of 93 countries in terms of the Business Competitiveness Index (BCI).

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Although Viet Nam is recognized as having a stable macroeconomic environment, the report highlights important weaknesses in areas such as technology, public institutions and business environment. Corruption, inefficient bureaucracy and inadequate infrastructures are cited as the most problematic factors for doing business in Viet Nam.

Given these challenges, diversifying the economy is now considered key to reviving the economy. Broadening Viet Nam’s export base has become one of the key issues on its national policy agenda. Much of this involves creating a business environment that is conducive to creativity, entrepreneurship, and innovation. In some cases, however, governments need to complement these “horizontal” policies that apply to all industries with more targeted, sector-specific policies.

Box 2. Viet Nam’s Trade Agreements and WTO Accession

Since the early 1990s Viet Nam has pursued integration into the world economy.

− In 1995 Viet Nam joined the ASEAN Free Trade Area and also began negotiating its accession to the World Trade Organization (WTO).

− In 2001 the US-Viet Nam Bilateral Trade Agreement (BTA) was signed, giving Viet Nam Normal Trade Relations status and vital support to the country’s WTO accession.

− In 2003 the European Union and Viet Nam established a bilateral agreement allowing Viet Nam to be recognised as a developing country, thus receiving the Generalised System of Preferences (GSP) tariff schedule.

− It is expected that Viet Nam will accede to the WTO by late 2005, once all bilateral negotiations are complete.

The rationale for Viet Nam, as for most other developing countries, to join the WTO is the expected boost to their exports due to improved access conditions to international markets. Along with expanding sales of agricultural products and textiles, Viet Nam hopes to attract more foreign direct investment. Another important benefit for Viet Nam, especially after several anti-dumping measures/investigations in the United States (catfish, shrimp) and the European Union (bicycles), is the access to the WTO dispute-settlement mechanism. Finally, accession will give stronger motivation to further domestic, market-oriented reforms.

Viet Nam faces some potential danger in the WTO accession process. To join the WTO, not only must an aspirant country comply with all WTO rules, but also individual existing members are allowed to ask for further concessions, known as ‘WTO-plus’, from applicants in return for support for their application. A country cannot join WTO without the support of key WTO members, such as the United States and the European Union. Opening up its fast-growing but vulnerable economy further and faster than desirable may cause disruption for domestic producers. In addition to usual structural changes in the economy after accession, the protection of some sensitive products, including sugar, maize and corn, may be reduced significantly, causing income reduction, especially for the poor. A further threat to Viet Nam is its Non-Market Economy (NME) status, which could restrict access to some international markets, if used by WTO members as a cause for protection. Viet Nam could face some safeguard provisions in the most competitive sectors, like those imposed on China.

Source: Oxfam (2004), Thang (2004), and World Bank (2005).

Purpose

The objective of this study is to identify sectors that have significant potential for export growth in Viet Nam. This is of particular relevance in the initial stage of sector-specific export promotion programmes, which is the case here, as the report is part of a larger project. The study aims to enable the stakeholders participating in the design and implementation of export development programmes to take into account both quantitative and qualitative information in a consistent conceptual framework. It identifies those sectors that have significant potential for export growth. It has a strategic focus, and aims to guide the government, the private sector and civil society towards the most promising sectors.

This study also identifies interesting diversification markets for each industry. The market attractiveness index is a summary measure of the attractiveness of importing markets for

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products exported by Viet Nam. Contrasting with the other summary measures in this report (which are used to identify industries with the highest export potential), the market attractiveness index allows identification of those countries in which enterprises in Viet Nam have the potential of to export more.

The study may contribute to other activities within the project “Support to Trade Promotion and Export Development”, especially the formulation of a National Export Strategy. There is a lack of a clear and effective National Export Strategy by the Government formulated on the basis of sectoral export strategies for key export products and services (VIE/61/94A project document). Although, in some key sectors such as seafood, footwear and garment, sectoral export strategies have been formulated, in most cases, they are not based on an accurate assessment of the sectoral potential and need to be upgraded to reflect changing market situations. Furthermore, these strategies are not supported by coherent policies and measures to assist enterprises in formulating export marketing plans in order to reach the goals laid out in the sectoral strategies. A national export strategy, sectoral strategies, support policies and detailed export marketing plans must be formulated to support all three levels of the trade promotion network – government organization, trade support institutions and most of all, enterprises.

Selected product groups

Vietrade together with the Ministries of Planning and Investment, Agriculture and Rural Development, Industry and Fisheries and ITC’s market analysis team selected 38 product groups for an in-depth examination of their export potential (Table 4).

Manufactured goods now account for at least half of Vietnamese exports. Though primary and agricultural commodities still remain important, Viet Nam’s export base has definitely shifted to manufacturing. The selected industries however were not all treated to the same degree. For some industries, it was problematic to obtain background information (official statistics, reports, studies, industry news) from business associations or relevant Ministries, or to find enterprises willing to take the time for an interview and to respond to the questionnaire. While data availability for some industries has improved substantially over the last years, much of the information is still based on industry estimates and expert opinions.

It would have been desirable to include also services, such as tourism, to get an overall picture on potential sectors in Viet Nam, but it was decided to focus only on the goods sector, for which the assessment can be done in a comparable manner.

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Table 4. Overview of examined industries

Affiliated organisation of national consultants

Ministry of Agriculture and Rural Development (MARD)

Ministry of Industry (MOI) Viet Nam Association of Seafood Exporters and Producers (VASEP)

Viet Nam Handicraft Research And Promotion Center (HRPC)

In-depth treatment

Coffee Rubber Rice Cashew and other nuts Fruits and vegetables Pepper Tea

Oil Coal Clothing Footwear Motor vehicles Household utensils Bicycles Plastics Wires, cables & conductors Agricultural machinery Shipbuilding

Fishery Arts and crafts Furniture

Less or not examined sectors

Wood Honey Cut flowers Dairy products Jute products

Electrical machinery Stationery, office machine Industrial machinery Comm. and telecomm. Packaging materials Image and sound Household textiles Toys and games Construction materials Instruments Glass Electronics Hand tools

Structure of the report

The structure of the report is as follows:

− Chapter 1 compares and ranks the industries along each of the three main dimensions (world markets; Viet Nam’s current export performance and the domestic supply conditions) and along the overall index of export potential. It briefly discusses the conceptual framework, the definition of the relevant indicators, and the limitations of the method.

− Chapter 2 provides in-depth analysis for individual industries. It includes to the extent possible a SWOT analysis and identifies possible target markets for diversificat ion in each product group.

− Chapter 3 examines the major cross cutting issues that affect the competitiveness of all sectors and discusses some recommendations.

− Finally, the annex gives some information on particular aspects of the underlying data and the method used.

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1. Comparative analysis of the export potential of industries

This chapter seeks to estimate and compare the export potential of Viet Nam in selected industries. The term “export potential” is used here in a broad sense and is defined as the capacity to expand exports. Some industries can be considered as having high potential because they have an already established and proven export record: existing export capacity can be seen for example by high export values or high growth rates over the last years. For other sectors, however, exports may not yet exist or be negligible for a given sector, but many of the necessary conditions to be capable of doing so may be fulfilled.

An assessment of the export potential of industries requires taking into account very diverse multidimensional factors. The large amounts of heterogeneous information are summarised using composite indicators, which provide a broad, albeit simplistic, picture of reality that can be used to draw the attention of policy makers. To do so, each industry is examined along three main dimensions: Viet Nam’s current export performance; world markets; and Viet Nam’s domestic supply conditions. In total, 14 indicators are used in this study (see Annex, Table 45 on page 140).

To allow comparisons, the underlying variables for each dimension have to be normalised before they are aggregated into composite indicators. The normalisation method used here converts each indicator into a range of 1 (weak performance) and 5 (best performance). For each indicator, it gives 1 point to industries with values below a certain threshold value and 5 points to industries with values above the threshold value.

For the overall measure of export potential these three dimensions are combined: the most interesting industries are those where all three indices are high, i.e. industries for which there are not only an important and dynamic international demand, but also an efficient and competitive domestic supply and an already good export performance. In other terms, the export potential is likely highest in those industries in which international demand is growing faster than the overall world imports; which enjoy low or preferential market access to the major international markets; whose exports are important, represent a high world market share and are growing fast; in which production processes in Viet Nam’s enterprises is efficient and product quality high; and whose domestic supporting industries are efficient and enhance the sector’s competitiveness.

It must be noted here that composite indicators have some limitations. They are sensitive to the choice and weight of the underlying indicators. Therefore, the indices provide only a crude measure of the performance and potential of individual industries. The model should thus be seen as a prototype. The choice of indicators was partly driven by data availability. For example, in order to assess market access conditions, it would have been useful to incorporate not only tariff barriers but also non-tariff barriers, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS). However, though this information is available for many sectors, it does not lend itself easily to strict quantitative comparisons. In addition, the selected indicators are backwards looking (prospects are based on recent trend growth). Though a measure that takes into account the recent past does not necessarily have a strong predictive power of future trends, it reveals structural shifts in the world economy. Finally, the method cannot evaluate with accuracy the regional potential, because there are no reliable trade statistics for regional markets, such as Laos and Cambodia. Products that are exported informally, for obvious reasons, cannot be examined either.

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To minimise these limitations, the statistical analysis and literature survey are complemented with interviews with local stakeholders in Viet Nam, both from the public and private sector. National consultants carried out the survey of companies in Spring 2005, based on an ITC questionnaire. This was done not only to give a better understanding of the situation in the examined sectors, but also to come up with judgements that were used for the composite index to rank sectors according to their export potential.

Bringing together the three indices of world demand, country’s current export performance and domestic supply into a summary measure suggests that Viet Nam’s export potential is highest for nuts, oil, furniture, coal, footwear, arts and crafts, fishery, rubber, shipbuilding, glass, coffee, agricultural machinery, pepper, household utensils, toys and games, and clothing (Table 5). In contrast, the export potential seems limited for dairy products, jute products, fruits and vegetables, rice, cut flowers, motor vehicles and household textiles. It should be noted however that industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. In addition, it was unfortunately not possible to examine domestic supply conditions via interviews with enterprises for all industries.

The remainder of this chapter provides detailed information on these overall results and compares product groups along the three important dimensions of export potential: the first section examines the current export performance, the second one the domestic supply; and the final one presents findings relative to the world markets.

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Table 5. Overall index of the export potential of industries

Export value (USD

million)

Index* 1 Export

performance

Index* 2 World

markets

Index* 3 Domestic supply

conditions

Average index*

Evaluation by ITC**

Evaluation by national

consultants

Cashew nuts and other nuts 283 3.2 3.7 .. 3.5 High*** High

Oil 3,899 2.9 3.9 3.4 3.4 High

Furniture 956 2.8 4.1 3.2 3.4 High

Coal 250 2.5 4.2 3.4 3.3 High

Footwear 4,036 4.2 2.7 2.8 3.2 High Medium

Arts and crafts 351 2.4 3.8 3.3 3.2 High

Fishery 1,938 3.5 2.7 3.3 3.2 High

Rubber 393 2.9 3.9 2.7 3.2 High High

Shipbuilding 2 1.5 4.4 3.5 3.1 High High

Glass 23 1.5 4.4 3.4 3.1 High

Coffee 571 3.1 3.0 .. 3.1 High*** High

Agricultural machinery 7 2.2 4.0 3.1 3.1 High Medium

Pepper 105 2.9 3.5 2.8 3.1 High High

Household utensils 215 2.2 4.1 2.9 3.1 High Medium

Toys and games 81 2.2 3.8 3.0 3.0 High

Clothing 4,100 3.8 2.5 2.8 3.0 High High

Comm. and telecomm. 135 1.6 4.3 .. 3.0 Medium***

Construction materials 61 1.9 3.4 3.6 3.0 Medium

Stationery, office machine 240 2.1 3.8 2.9 2.9 Medium

Instruments 30 2.1 3.9 2.9 2.9 Medium

Electronics 23 2.1 3.9 2.7 2.9 Medium

Industrial machinery 143 2.0 3.7 .. 2.9 Medium***

Packaging materials 104 1.9 3.8 .. 2.9 Medium***

Image and sound 102 1.6 4.1 2.7 2.8 Medium

Electrical machinery 611 2.2 3.4 2.8 2.8 Medium

Bicycles 180 2.5 2.5 3.3 2.8 Medium High

Wires, cables, and conductors 51 1.7 3.3 3.2 2.7 Medium Medium-high

Wood 138 1.8 3.6 .. 2.7 Medium***

Hand tools 21 1.7 3.5 2.8 2.7 Medium

Tea 40 2.5 2.9 2.6 2.7 Medium Medium

Honey 22 3.1 2.2 .. 2.6 Medium***

Plastics 67 1.4 3.7 2.8 2.6 Medium Medium

Household textiles 101 2.2 2.9 2.7 2.6 Low

Motor vehicles 372 1.8 3.3 .. 2.5 Low***

Cut flowers 5 1.9 2.8 .. 2.3 Low***

Rice 318 3.0 1.0 2.9 2.3 Low High

Fruits and vegetables 178 2.2 1.8 2.6 2.2 Low Medium

Jute products 1 2.0 2.4 .. 2.2 Low***

Dairy products 4 1.0 1.2 .. 1.1 Low***

* The index ranges from 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. ** The following, arbitrary criteria are used to distinguish three broad categories of export potential: High (more than 3.0 points); medium (between 2.6 and 3.0 points); and low potential (less than 2.6 points). *** The export potential is based only on Viet Nam’s current export performance and the international environment. It does not take into account domestic supply conditions due to lack of comparable data. Source: Comtrade data (based on declarations of Viet Nam’s trading partners), ITC survey with enterprises in Viet Nam, background reports by national consults, calculations by ITC.

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Index 1: Viet Nam’s current export performance

The first main composite indicator for the study, Viet Nam’s current export performance, gauges how successful its enterprises perform in the international markets for the selected product groups. Well-performing sectors are considered to have already proven their export capacity and to thus have high potential for future exports. The composite index is made up of four sub-indices calculating (1) Viet Nam’s exports in value, (2) Viet Nam’s world market share, (3) Viet Nam’s relative trade balance by sector and (4) Viet Nam’s export growth.

The index of Viet Nam’s export performance is highest for footwear; clothing; fishery products; cashew nuts and other nuts; honey; coffee; and rice, followed by oil; pepper; rubber; furniture; bicycles; tea and coal (Table 6).

In contrast, Viet Nam’s export performance is particularly unfavourable for dairy products; agricultural machinery; plastics and plastic products; glass and glass products; image and sound equipment and accessories; and communications and telecommunications equipment.

Exports in value From a strategy point of view, big export sectors are Viet Nam’s current “bread winners”, and as such require special attention. Exporters in these sectors have already proven their competitiveness over recent years, and should be well positioned for future exports. In other words, the larger a sector’s exports are currently in value terms, the greater is its potential for future growth.

Viet Nam has significant exports for clothing; footwear; and oil (each accounting for roughly USD 4 billion); followed by fishery products (about USD 2 billion); furniture (almost USD 1 billion); electrical machinery and equipment; coffee; rubber; motor vehicles; arts and crafts; and rice (Table 6).

In contrast, exports are negligible for the moment for jute products; shipbuilding; dairy products; cut flowers; and agricultural machinery. It has to be mentioned however that these data are based on the trade statistics of Viet Nam’s partners (“mirror statistics”), which do not cover all partners: for example, imports by Lao and Cambodia from Viet Nam are not in TradeMap.

World market share This sub-index calculates Viet Nam’s world market share in each individual product group. This indicator is partly to compensate for the previous indicator --export value--, which favours large industries and thus introduces a bias against small industries. However, by dividing export value by world exports, even small sectors can achieve a high market share, as is for example the case for honey. The world market share is thus a good indicator of the competitiveness of an industry. In 2003, Viet Nam represented 0.3% of total world trade. A product group with a world market share above that number represents an “over-performer”, suggesting a competitive sector. Those below 0.3% are considered to be relative “under-performers”.

Viet Nam has a substantial world market share in coffee (5.8%); footwear (5.4%); pepper and other spices and culinary herbs (4.9%); rice (4.7%); cashew nuts and other nuts (4.2%); fishery products (3.7%); honey (2.2%); bicycles (2.1%); clothing (1.7%); and tea (1.2). Other industries with above-average values include furniture; rubber; and arts and crafts; coal; oil; household textiles; and fruits and vegetables (Table 6).

In contrast, Viet Nam’s world market share is particularly low for electronic equipment and components; shipbuilding; measuring, checking and precision instruments; plastics;

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industrial machinery; agricultural machinery; cut flowers; communications and telecommunications equipment; dairy products; stationary and office machines; motor vehicles; and image and sound equipment (all with a world market share of less than 0.1%).

Relative trade balance This sub-index uses Viet Nam’s trade balance as an indicator to gauge the efficiency of the productive capacity of industries. The trade balance for a product group is calculated as the difference between exports (X) and imports (M). If exports exceed imports representing a trade surplus, national production exceeds national consumption. All things being equal, this suggests that the industry has efficient productive capacity and can be considered competitive. In contrast, if exports are lower than imports representing a trade deficit, national production is not sufficient to cover national consumption. Rather than present the trade balance (X-M) in absolute terms (e.g. US dollar), it is presented relative to the industry’s total trade (X+M). This reduces bias against large industries, which tend to have either strong deficits or surpluses.

On the basis of the relative trade balance in 2003, it appears that Viet Nam is a strong net exporter for coffee, coal; rice; furniture; footwear; honey; tea; and fishery products (Table 6). Viet Nam is also a net exporter for clothing and accessories; cashew nuts and other nuts; household and furnishing textiles; arts and crafts; pepper and other spices and culinary herbs; toys and games; jute; rubber; and fruits and vegetables.

In contrast, Viet Nam was a net importer for plastics; industrial machinery and equipment; dairy products; measuring, checking and precision instruments; electronic equipment and components; communications and telecommunications equipment; agricultural machinery; wires, cables and conductors; and motor vehicles.

Export growth Sectors with rapid export growth in value terms between 1999 and 2003 suggest that Viet Nam is competitive on the world markets, while stagnant or declining growth rates indicate the reverse. Everything else equal, fast growing exports, even in small absolute numbers, point at product groups for which Viet Nam has a particular potential worth studying more in detail. These trends are likely to reflect Viet Nam’s future trade.

Electronic equipment and components; measuring, checking and precision instruments; and industrial machinery and equipment experienced exceptional growth, more than doubling on average every year between 1999 and 2003. Industries with growth rates between 50% and 100% per year include bicycles and other transport equipment; rubber and rubber products; stationery, office machine and supplies; honey and apicultural products; household utensils and appliances; electrical machinery and equipment; clothing and accessories; and communications and telecommunications equipment.

Most other industries experienced also positive growth, the exceptions being rice (-17% in value); pepper and other spices (-10% in value, but +25% in volume); coffee (-5% in value, but +10% in volume; and dairy products (-3%).

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Table 6. Underlying indicators for the composite index “Viet Nam’s export performance”

Export value, 2003

Viet Nam's world market

share

Relative trade balance

Export value growth,

1999-2003

(USD million)

Sub-index

% Sub-index

% Sub-index

p.a.% Sub-index

Index Current export

performance

Footwear 4,036 5.0 5.4 5.0 90 4.9 18 1.8 4.2

Clothing 4,100 5.0 1.7 2.4 82 4.8 52 2.9 3.8

Fishery products 1,938 3.0 3.7 4.0 89 4.9 25 2.0 3.5

Cashew nuts 283 1.3 4.2 4.4 81 4.7 34 2.3 3.2

Honey 22 1.0 2.2 2.8 89 4.9 83 3.9 3.1

Coffee 571 1.6 5.8 5.0 99 5.0 -5 1.0 3.1

Rice 318 1.3 4.7 4.8 93 5.0 -17 1.0 3.0

Oil 3,899 5.0 0.7 1.5 31 3.6 14 1.6 2.9

Pepper 105 1.1 4.9 5.0 75 4.6 -10 1.0 2.9

Rubber 393 1.4 1.2 1.9 54 4.1 91 4.1 2.9

Furniture 956 2.0 1.2 2.0 92 5.0 34 2.3 2.8 Bicycles 180 1.2 2.1 2.7 26 3.5 48 2.7 2.5

Tea 40 1.0 1.5 2.2 89 4.9 15 1.7 2.5

Coal 250 1.3 1.0 1.8 94 5.0 19 1.8 2.5

Arts and crafts 351 1.4 1.1 1.8 76 4.6 20 1.8 2.4

Toys and games 81 1.1 0.33 1.2 73 4.6 28 2.1 2.2

Household utensils 215 1.2 0.25 1.2 5 3.0 65 3.3 2.2

Electrical machinery 611 1.6 0.28 1.2 -5 2.8 57 3.0 2.2

Agricultural machinery 7 1.0 0.05 1.0 -57 1.6 117 5.0 2.2

Household textiles 101 1.1 0.60 1.5 78 4.7 7 1.4 2.2

Fruit and vegetables 178 1.2 0.37 1.3 40 3.8 36 2.4 2.2

Stationery, office machine 240 1.2 0.06 1.0 -35 2.1 90 4.1 2.1

Electronics 23 1.0 0.01 1.0 -69 1.4 129 5.0 2.1

Instruments 30 1.0 0.04 1.0 -69 1.3 122 5.0 2.1

Industrial machinery 143 1.1 0.04 1.0 -84 1.0 116 5.0 2.0 Jute products 1 1.0 0.24 1.2 56 4.2 13 1.6 2.0

Cut flowers 5 1.0 0.05 1.0 4 3.0 44 2.6 1.9

Construction mat. 61 1.1 0.14 1.1 -8 2.7 47 2.7 1.9

Packaging materials 104 1.1 0.23 1.2 -9 2.7 44 2.6 1.9

Wood 138 1.1 0.21 1.1 -3 2.8 23 1.9 1.8

Motor vehicles 372 1.4 0.06 1.0 -45 1.9 58 3.1 1.8

Hand tools 21 1.0 0.13 1.1 -30 2.2 43 2.6 1.7

Wires, cables, and conductors 51 1.0 0.13 1.1 -56 1.6 53 2.9 1.7

Image and sound 102 1.1 0.09 1.0 -29 2.2 24 2.0 1.6

Comm. and telecomm. 135 1.1 0.05 1.0 -59 1.6 51 2.8 1.6

Shipbuilding 2 1.0 0.01 1.0 -12 2.6 .. .. 1.5

Glass 23 1.0 0.13 1.1 -41 2.0 18 1.8 1.5

Plastics 67 1.1 0.04 1.0 -86 1.0 41 2.5 1.4

Dairy products 4 1.0 0.06 1.0 -84 1.0 -3 1.1 1.0

Upper threshold (5 points) 3,899 4.92 93 117

Lower threshold (1 point) 4 0.04 -84 -5

The indices range between 1 (lowest ranking) and 5 (best ranking). For each indicator, the three industries with values above the upper threshold obtain 5 points, and the three with values below the lower threshold value obtain 1 point. All other industries obtain between 1 and 5 points, depending on their distance from the two threshold values. Industry rankings should be interpreted with caution, since many indicators lack precision. Source: Comtrade, calculations by ITC.

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Index 2: The domestic supply conditions

For domestic supply conditions, the study is based on qualitative information stemming from a survey of companies with a questionnaire and interviews carried out by national consultants during Spring 2005.

Favourable supply conditions may not only exist in already exporting industries (those that score high in the index “current export performance”), but also in industries that do not yet export but that are “export ready”. The better the supply conditions and competitiveness, the greater the future export potential, everything else equal. The composite index concerning Viet Nam’s domestic supply conditions used here indicates whether domestic productive capacities are well-performing and competitive in terms of (1) the efficiency of the production process and the product quality, and (2) the importance of backward and forward linkages and efficiency of supporting industries.

In total, the index of domestic supply conditions is highest for construction materials; shipbuilding; oil; coal; glass and glass products; bicycles; fishery products; arts and crafts; wires, cables and conductors; and furniture (Table 7).

In contrast, Viet Nam’s domestic supply is unfavourable for tea; fruits and vegetables; rubber; electronic equipment and components; image and sound equipment and accessories; and household and furnishing textiles.

Product quality and efficiency of production processes An efficient production process means that the process technology is state of the art (or at least meets international standards), and unit labour costs are low (that is that productivity is high and production costs are low). The more efficient the production process, and the higher the product quality, the higher the export potential can be considered.

The questionnaire used for this study included five questions: (1) The quality of exported products; (2) Labour productivity in comparison with major world and regional exporters; (3) Labour cost relative to major world and regional exporters; (4) Production cost relative to major world and regional exporters; and (5) The state of the process technology in the sector. Each of these criteria was scored from 1 (worst possible performance) to 5 (best possible performance). A simple average score for “process and products” was then calculated (Table 7).

Among those industries for which the information is available, the composite index for “process and products” is highest for shipbuilding; wires, cables and conductors; furniture; bicycles; arts and crafts; glass; toys and games; fishery products; and construction materials.

In contrast, the index is low for image and sound equipment and accessories; rubber; electrical machinery and equipment; electronic equipment and components; household and furnishing textiles; fruits and vegetables; household utensils and appliances; and plastics and plastic products.

Importance of backward and forward linkages and efficiency of supporting industries

Industries that are strongly integrated into the national economy through backward (upstream) and forward (downstream) linkages and that benefit from efficient supporting industries tend to have a higher export potential. A dollar of exports of one industry may not affect the economy in the same way as a dollar of exports of another industry, as their added value may be very different. Industries differ substantially in the way they are linked to the rest of the domestic economy. Some industries are effectively integrated into

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the national economy (through backward linkages to suppliers and forward linkages to clients for further processing), whereas others are not. As such, strongly integrated industries can exert positive pull and push effects for other domestic industries. But the effect can also go the other way, i.e. industries with important upstream linkages tend to benefit more if the supporting industries are efficient. Thus, the higher the upstream or downstream linkages to the economy and the more efficient the supporting industries, the more attractive it is for the economy, everything else being equal.

The questionnaire thus included two questions relative to (1) the general efficiency of supporting industries (Box 3); and (2) the extent of upstream or downstream inter-industry linkages. Each criterion was scored from 1 (worst possible performance) to 5 (best possible performance).

Among those industries for which the information is available, the composite index for “supporting industries” is highest for construction materials; oil; coal; glass; and fishery products (Table 7). In contrast, the index is low for tea; clothing; fruits and vegetables; footwear; hand tools; pepper and other spices and culinary herbs; measuring, checking and precision instruments; stationery, office machine and supplies; and toys and games.

Box 3. Supporting Industries

Supporting industries refers to the supply of intermediate inputs into the production of finished products, i.e. the “industry” in the middle of a vertical supply chain. Activities include parts manufacturing (screws, springs etc) and processes (pressing, forging etc.), though the definition of supporting industries depends on the sector (some also include services, such as human resource development). The type of industry also determines the scale of supporting industry necessary. The rationale for supporting industries is to increase competitiveness of assembly firms, so it is vital that these companies can satisfy quality, cost and delivery standards.

In Viet Nam the development of supporting industries has not reached a sufficient level, with the motorcycle and home appliance industries being exceptions (local content is estimated at 70-80%). Previously, vertically integrated state-owned enterprises undertook most production, with all parts and processes done internally, so the concept of supporting industry is relatively new. Though supporting industries are beginning to develop in Viet Nam, particularly in high volume industries such as those mentioned above, their importance is still not totally recognised. Clear legal definition is still needed, and accordingly, effective promotion measures and supportive policies.

Source: Ichikawa (2005), Ohno (2005)

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Table 7. Underlying indicators for the composite index “domestic supply”

Sub-index 1 Process and product

Sub-index 2 Supporting industries

Number of inter-

viewed companies

Pro

duct

qu

ality

Labo

ur

prod

uctiv

ity

Labo

ur

cost

s

Pro

duct

ion

cost

s

Pro

cess

te

chno

logy

Ave

rage

In

fra-

-st

ruct

ure

Link

ages

Ave

rage

Index Domestic supply

conditions

Construction materials 2 3.5 2.0 4.3 4.0 3.0 3.4 3.5 4.3 3.9 3.6

Shipbuilding 3 4.2 3.8 4.7 3.7 4.0 4.1 2.0 3.7 2.8 3.5

Oil 3 3.3 2.7 3.7 3.3 3.7 3.3 3.7 3.2 3.4 3.4

Coal 3 3.3 2.7 3.7 3.3 3.7 3.3 3.7 3.2 3.4 3.4

Glass and glass products 1 3.5 3.5 4.5 3.0 3.0 3.5 2.5 4.0 3.3 3.4

Bicycles 3 3.5 3.0 4.3 3.8 3.3 3.6 2.7 3.3 3.0 3.3

Fishery products 8 3.8 3.1 3.3 3.1 3.5 3.4 3.6 2.8 3.2 3.3

Arts and crafts 8 3.8 3.4 3.6 3.6 3.6 3.6 3.4 2.6 3.0 3.3

Wires, cables and conductors 2 4.5 3.3 4.3 3.0 3.5 3.7 2.5 3.0 2.8 3.2

Furniture 8 3.8 3.8 3.3 3.6 3.5 3.6 3.4 2.2 2.8 3.2

Agricultural machinery 2 3.8 2.5 4.0 1.8 3.5 3.1 3.0 3.0 3.0 3.1

Toys and games 1 4.0 2.0 4.5 3.0 4.0 3.5 2.5 2.5 2.5 3.0

Rice 3 3.8 3.0 3.0 .. 2.7 3.1 3.0 2.5 2.8 2.9

Household utensils and appliances 3 2.6 2.2 4.2 2.3 2.7 2.8 3.0 3.0 3.0 2.9

Stationery, office machine and supplies 2 3.3 2.0 4.3 3.5 3.0 3.2 2.5 2.5 2.5 2.9

Measuring and precision instruments 1 3.0 2.0 4.5 3.5 3.0 3.2 3.0 2.0 2.5 2.9

Electrical machinery and equipment 2 2.5 1.8 4.5 2.8 1.5 2.6 3.5 2.5 3.0 2.8

Pepper and other spices 2 3.5 3.0 3.5 3.0 2.5 3.1 3.3 1.8 2.5 2.8

Hand tools 1 2.3 2.0 4.5 4.5 2.0 3.1 2.5 2.5 2.5 2.8

Plastics and plastic products 3 2.7 2.2 4.2 3.3 2.0 2.9 3.2 2.2 2.7 2.8

Footwear 3 3.4 2.7 4.5 2.5 2.0 3.0 3.0 2.0 2.5 2.8

Clothing and accessories 3 2.9 2.5 4.2 3.7 2.7 3.2 2.2 2.5 2.3 2.8

Household and furnishing textiles 3 1.2 2.0 4.7 4.5 1.3 2.7 2.5 3.0 2.8 2.7

Image and sound equipment 1 2.3 2.0 3.0 3.0 2.0 2.5 3.0 3.0 3.0 2.7

Electronic equipment and components 1 2.5 2.0 3.5 2.5 3.0 2.7 3.0 2.5 2.8 2.7

Rubber and rubber products 3 4.0 1.0 4.0 3.0 1.0 2.6 3.5 2.0 2.8 2.7

Fruits and vegetables 3 3.0 2.8 3.0 3.0 2.0 2.8 3.5 1.5 2.5 2.6

Tea and tea products 3 3.0 2.5 4.0 3.0 2.3 3.0 3.0 1.5 2.3 2.6

The indicators and indices range between 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. No information is available for cashew nuts and other nuts; coffee; communications and telecommunications equipment; cut flowers; dairy products; honey; jute and products made from jute; packaging materials; and wood and wood products. Source: Based on ITC survey with enterprises and business associations in Viet Nam, calculations by ITC.

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Index 3: World markets

The second composite indicator concerns the characteristics of world markets, examining whether the international environment is favourable for Viet Nam for the selected product groups. It is made up of two sub-indices taking into account respectively (1) the dynamism of world imports between 1999 and 2003 and (2) Viet Nam’s relative market access conditions. Where import markets are dynamic and access conditions are favourable, this study assigns a higher potential.

Based on the indicators used, the international environment is most favourable for shipbuilding; glass; communications and telecommunications equipment; coal; furniture; image and sound equipment and accessories; household utensils and appliances; and agricultural machinery (Table 8). World markets are also favourable for oil; electronic equipment and components; rubber; measuring, checking and precision instruments; packaging materials; stationery, office machine and supplies; arts and craft; and toys and games.

In contrast, the international environment is particularly unfavourable for rice; dairy products; fruits and vegetables; honey; and jute products; bicycles and clothing.

Dynamism of world imports Fast growing global markets are more likely to produce net gains for an exporting country than slow growing, stagnant or declining markets. All things being equal, the more dynamic world imports, the higher the probability of future export growth. The dynamism of international demand for each industry is measured by the trend growth rate of world imports between 1999 and 2003. The growth rate of imports is measured both in value terms (e.g. US dollar) and in volume terms (e.g. tons). The difference between these two measures can be substantial. For example, world imports of oil grew on average by 43% per year between 1999 and 2003 in value terms (the highest of all industries under review), but were stagnant in volume terms (+0.4%, one of the lowest growth rates): the strong value growth of world imports was thus exclusively due to increases in oil prices.

World demand between 1999-2003 was highest for glass and glass products; image and sound equipment; and household textiles, all with average annual growth rates between 10% and 15% in value and in volume terms (Table 8). Other dynamic industries include communications and telecommunications equipment; household utensils; furniture; packaging equipment; and coal (volume and value growth in general between 5% and 10%), and shipbuilding and honey (high value growth of about 20%, but low volume growth).

In contrast, world imports declined for jute products and rice (both in volume and value terms); and for coffee and pepper (in value terms, thus due to declining world prices). World demand is also low for tea; dairy products; and bicycles.

Market access for Vietnamese exporters Tariffs can penalize and even prevent an export-ready industry from translating export potential into real exports. All things being equal, the better the country’s market access conditions, the higher an industry’s export potential. These conditions can be absolute and relative, i.e. tariff barriers can be low in absolute terms or low relative to main competitors.

Viet Nam benefits from various international trade agreements. The “preferential margin index” indicates to what extent Viet Nam enjoys preferential treatment in international markets in terms of tariff barriers. Based on the data, industries are generally determined as either having preferential or discriminatory access to world markets. In the case of

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Viet Nam, however, all industries tend to face discriminatory access, though to different degrees, and are at the best “neutral”.

Relative to the other product groups, Viet Nam enjoys the most favourable market access conditions for coal; electronic equipment and components; stationary, office machine and supplies; shipbuilding; agricultural machinery; measuring, checking and precision instruments; furniture; industrial machinery and equipment; toys and games; communications and telecommunications equipment; oil; rubber and rubber products; and wood (Table 8).

In contrast, Vietnamese exporters face high tariffs throughout the world for dairy products; rice; honey; fruits and vegetables; household and furnishing textiles; clothing; and cut flowers.

It would have been useful to incorporate not only tariff barriers but also non-tariff measures, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS). Non-tariff measures have become more and more important for several reasons: the growing concern of consumers (especially in developed countries) regarding environmental and sanitary risks; the argument of environmental risks is sometimes a convenient justification to protectionism; and the growing relative importance of residual obstacles when tariffs are very low. Unfortunately, though this information is available for some sectors, it does not lend itself easily for strict quantitative comparisons, and these measures are thus not included in the indices.

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Table 8. Underlying indicators for the composite index “world markets” World

imports* Growth of

world imports Viet Nam's access to

international markets

(USD million)

(Value, % p.a.)

(Volume, % p.a.)

Sub-index

(-100, 100)

Sub-index

Index World

markets

Shipbuilding 8,385 22.9 4.8 3.9 -0.5 5.0 4.4

Glass 18,272 14.3 10.7 4.4 -2.7 4.3 4.4

Comm. and telecomm. 257,073 8.3 10.6 3.9 -1.2 4.8 4.3

Coal 31,864 10.3 6.8 3.3 -0.2 5.0 4.2

Furniture 84,868 8.5 8.1 3.4 -0.9 4.9 4.1

Image and sound 114,484 12.0 15.6 4.2 -4.0 4.0 4.1

Household utensils 86,629 8.6 10.0 3.8 -2.6 4.4 4.1 Agricultural machinery 15,186 7.4 6.5 3.0 -0.6 5.0 4.0

Oil 581,536 43.1 0.3 3.0 -1.2 4.8 3.9

Electronics 315,275 8.0 4.9 2.8 -0.3 5.0 3.9

Rubber 34,292 8.0 6.2 3.0 -1.3 4.7 3.9

Instruments 78,593 5.9 6.1 2.8 -0.8 4.9 3.9

Packaging materials 44,232 8.1 8.1 3.4 -3.0 4.3 3.8

Stationery, office machine 389,148 2.3 6.9 2.7 -0.4 5.0 3.8

Arts and crafts 38,574 3.6 8.2 3.0 -1.8 4.6 3.8

Toys and games 33,972 3.8 7.2 2.9 -1.2 4.8 3.8

Industrial machinery 313,245 4.7 6.0 2.7 -1.1 4.8 3.7

Cashew nuts 6,275 5.3 7.3 3.0 -2.3 4.5 3.7

Plastics 167,490 7.3 7.0 3.1 -3.1 4.2 3.7

Wood 69,449 2.9 6.0 2.5 -1.4 4.7 3.6

Hand tools 15,643 4.4 4.6 2.4 -1.7 4.7 3.5 Pepper 2,161 -1.3 6.8 2.3 -1.9 4.6 3.5

Construction mat. 40,758 6.2 5.1 2.6 -3.4 4.2 3.4

Electrical 212,451 3.3 3.5 2.1 -1.6 4.7 3.4

Motor vehicles 602,732 6.6 5.5 2.8 -4.8 3.8 3.3

Wires, cables, and conductors 38,574 2.5 3.9 2.1 -2.5 4.4 3.3

Coffee 10,310 -6.6 3.7 1.7 -2.8 4.3 3.0

Tea 2,479 -0.4 1.0 1.3 -2.0 4.5 2.9

Household textiles 15,486 10.0 14.8 4.1 -12.0 1.7 2.9

Cut flowers 11,156 5.9 6.0 2.8 -8.5 2.7 2.8

Fishery products 54,776 3.8 4.5 2.3 -7.0 3.1 2.7

Footwear 81,813 4.6 4.0 2.3 -7.5 3.0 2.7

Clothing 238,095 5.5 7.2 3.0 -10.9 2.0 2.5

Bicycles 7,914 1.8 1.7 1.6 -6.3 3.3 2.5

Jute products 468 -2.4 -2.1 1.0 -4.8 3.8 2.4

Honey 1,009 21.2 1.9 3.3 -14.6 1.0 2.2 Fruit and vegetables 51,490 6.2 3.7 2.4 -13.5 1.3 1.8

Dairy products 6,587 3.3 0.3 1.5 -21.8 1.0 1.2

Rice 6,186 -4.8 -0.4 1.0 -17.0 1.0 1.0

For information:

Upper threshold (5 points) 21.2 10.7 -0.4

Lower threshold (1 point) -2.4 -2.1 -14.6

* For information only The indices range between 1 (lowest ranking) and 5 (best ranking). For each indicator, the three industries with values above the upper threshold obtain 5 points, and the three with values below the lower threshold value obtain 1 point. All other industries obtain between 1 and 5 points, depending on their distance from the two threshold values. Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. Source: Comtrade, calculations by ITC.

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Comparing the indices for “world markets” and “Viet Nam’s current export performance”

Mapping the industries along the two dimensions of “world markets” and “Viet Nam’s export performance” allows distinguishing four polar cases (Figure 1).

− “Performers in attractive markets”, where both world markets and Viet Nam’ export performance are high and/or dynamic. The following industries are part of this group: oil; furniture; rubber and rubber products; cashew nuts and other nuts; and pepper and other spices. Exporters of these products from Viet Nam have proven their competitiveness over recent years. Trade promotion efforts for these products are less risky, as there are national success stories that can serve as reference points. Promotional efforts should particularly aim at broadening the supply capacity.

− “Underachievers in unattractive markets” represent the opposite case, as both world markets and export performance for these industries are low and/or have little dynamism. This is especially the case for fruits and vegetables and dairy products, and to a lesser extent for jute products; bicycles; cut flowers; household textiles; and tea. Trade promotion efforts for product groups in this category face an up hill task, as export prospects tend to be bleak.

− “Performers in unattractive markets”: Viet Nam's export performance is strong, but the international environment is unfavourable for rice and honey, but also though to a lesser extent for some of Viet Nam’s leading industries, such as clothing, footwear, fishery products, and coffee. These industries represent particular challenges for trade promotion efforts in Viet Nam. Niche marketing strategies are required to isolate the positive trade performance from an unfavourable environment in these markets.

− “Underachievers in attractive markets”: World markets are favourable, but export performance by enterprises from Viet Nam is at present weak for these industries; which include technology -intensive sectors, such as electronic equipment and components; communications and telecommunications equipment; image and sound equipment and accessories; and measuring, checking and precision instruments. Other industries include electrical machinery and equipment; motor vehicles; agricultural machinery; industrial machinery and equipment; household utensils and appliances; plastics and plastic products, packaging materials; construction materials; and wood and wood products. These industries represent particular challenges for trade promotion efforts in Viet Nam, as the bottleneck is in general not the international environment (demand is strong and/or markets are open), but domestic factors. It is essential to identify and remove the specific bottlenecks that impede a more dynamic expansion of exports.

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Figure 1. Mapping industries: world markets versus Viet Nam’s export performance

Clothing

Footwear

Oil

Fishery

Furniture

Electrical

Coffee

Rubber

Motor vehicles

Arts and crafts

Rice

Cashew nuts

Coal

Stationery, office machine

Household utensils

Bicycles

Fruits and vegetables

Industrial machinery

Wood

Comm. and telecomm.

Pepper

Packaging materials

Image and sound

Household textiles

Toys and games

Plastics


Wires, cables, and conductors

Tea

Instruments

Glass

Electronics

Honey

Hand tools

Agricultural machinery

Cut flowers

Dairy products

Shipbuilding

Jute products

1

1.5

2

2.5

3

3.5

4

4.5

5

1 1.5 2 2.5 3 3.5 4 4.5 5

Current export performance

World markets

Underperformers inattractive markets

Performers inattractive markets

Underperformers inunattractive markets

Performers inunattractive markets

Source: Comtrade and Market Access Map, calculations by ITC. The size of the bubbles corresponds to the value of Viet Nam’s exports in 2003.

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2. In-depth analysis by industry

This chapter provides in-depth analysis for individual industries. It includes to the extent possible a SWOT analysis and identifies possible target markets for diversification in each product group. It presents first mineral and mineral products; fishery; agricultural products; industrial products; and arts and crafts. Within each major group, industries are presented in order of importance of export value in 2003 (Table 9).

Table 9. Order of industries to be examined

Export value (USD million)

Average index*

Evaluation by ITC**

Evaluation by consultants

Mineral and mineral products Oil 3,899 3.4 High Coal 250 3.3 High

Fishery 1,938 3.2 High Agricultural products

Coffee 571 3.1 High* High Rubber 393 3.2 High High Rice 318 2.3 Low High Cashew nuts and other nuts 283 3.5 High* High Fruits and vegetables 178 2.2 Low Medium Pepper 105 3.1 High High Tea 40 2.7 Medium Medium

Wood 138 2.7 Medium* Honey 22 2.6 Medium* Cut flowers 5 2.3 Low* Dairy products 4 1.1 Low* Jute products 1 2.2 Low*

Industrial products Clothing 4,100 3.0 High High Footwear 4,036 3.2 High Medium Furniture 956 3.4 High Motor vehicles 372 2.5 Low* Household utensils 215 3.1 High Medium Bicycles 180 2.8 Medium High Plastics 67 2.6 Medium Medium Wires, cables, and conductors 51 2.7 Medium Medium Agricultural machinery 7 3.1 High Medium Shipbuilding 2 3.1 High High

Electrical machinery 611 2.8 Medium Stationery, office machine 240 2.9 Medium Industrial machinery 143 2.9 Medium* High Comm. and telecomm. 135 3.0 Medium* Packaging materials 104 2.9 Medium* Image and sound 102 2.8 Medium Household textiles 101 2.6 Low Toys and games 81 3.0 High Construction materials 61 3.0 Medium Medium Instruments 30 2.9 Medium Glass 23 3.1 High Electronics 23 2.9 Medium Hand tools 21 2.7 Medium

Arts and crafts 351 3.2 High

* The export potential does not take into account domestic supply conditions due to lack of comparable data.

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Mineral primary products and fuels

Various geological statistics have indicated that Viet Nam is well endowed with a wide range of mineral resources. The country has some of the world’s biggest resources of phosphate, bauxites, rare earths and large, commercially viable deposits of oil, coal, tin, copper, graphite and other industrial minerals. Viet Nam exports mainly oil and coal.

Oil Crude oil is Viet Nam’s most important export product in terms of gross revenue. The net foreign exchange earnings are much less, however, given Viet Nam’s total dependency on imported petrochemical products and the capital intensity of production. The export potential of this sector is considered high.

Current situation and trends in exports

Crude oil is currently Viet Nam's by far most important export product in gross revenue terms. Exports have grown from nothing in 1986 when production started to currently about USD 3.9 billion in year 2003. Viet Nam is a net exporter of oil, but still imports a significant amount. Crude oil is 100% exported, as Viet Nam currently lacks refineries. Despite registering significant growth in value terms (14%), the country has underperformed compared to the world market; on the other hand in volume exports have increased faster than at the world level.

The main destinations for Viet Nam’s exports are in the Pacific region, namely Australia, China, Singapore, Japan and United States. We have identified opportunities for diversification in Indonesia, Canada and the European Union (Belgium, Germany, Spain, Hungary, Italy).

Domestic supply conditions and competitiveness

Viet Nam has 600 million barrels of proven oil reserves, but that total is likely to increase as exploration continues. In 2004 crude oil production averaged some 400,000 barrels per day (bbl/d), making Viet Nam the third-largest oil producer in Asia, and had net exports of more than 190,000 bbl/d. Export markets include the United States, Japan, Singapore and Korea.

PetroViet Nam has revised its crude oil export target this year to 19.5 million tons; 1.5 million tons higher than its initial target, as oil prices continue to rise sharply in the first quarter of 2005. Therefore earnings from oil exports hit USD 1.6 billion in the first three months of the year, a 30% increase year-on-year, while the volume of oil exports reached 4.5 million tons, 10% lower than the same time in 2004. Oil sales were backed by higher crude oil prices that rose 48% compared with the same time last year. The state oil and gas giant PetroViet Nam estimated oil export earnings this year would probably reach USD 5.5 billion continue to above USD 50 per barrel in coming months.

The Vietnamese offshore oil fields are extensive, claimed to be some of the largest outside the Middle East. National estimates indicate exploitable reserves in the order of 0.4 billion tons of crude oil and 0.7 billion tons of gas. Viet Nam’s oil production has been developed through FDI, first by Soviet Union joint ventures in the mid 1980s. Currently, Russian, Malaysian, Japanese and Canadian firms participate in the exploration and production. The production is anticipated to grow about 20 million tons per annum by year 2005.

Although it is a significant oil producer, Viet Nam remains reliant on imports of petroleum products due to lack of refining capacity. In the first quarter of the year, the country spent more than USD 900 million to import 2.8 million tons of petroleum products. It is estimated Viet Nam will import 12.4 million tons of petroleum in 2005 at cost about USD 3.6 billion; therefore net income from oil should be approximately USD 1.9 billion.

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Viet Nam is in the process of building its first refinery. The USD 1.5 billion Dung Quat Refinery, located in Quang Ngai province, will have a capacity of about 140,000 bbl/d has yet to be installed after the project was launched more than five years ago. It may be fully operational until 2007. Viet Nam‘s distribution infrastructure is discontinuous, with the north and south of the country functioning largely as separate markets. Completion of Dung Quat Refinery, located in the center of the country, should lead to greater interaction between the regions.

A second refinery is under consideration at Nghi Son, north of Hanoi in the Thanh Hoa province. It has estimated the 150,000-bbl/d plants will cost USD 2.5 billion. In August 2004, Mitsubishi Corporation agreed to participate in building Nghi Son for completion in 2010.

In December 2004, Viet Nam contracted the International Business Company for the British Virgin Islands to conduct a feasibility study for a third oil refinery, to be located at Vung Ro in the southern Phu Yen province.

Global demand conditions

The world market for oil is immense, and has been growing strongly in value terms because of rising oil prices. Imports amounted to over USD 580 billion in 2003 and have been increasing at a stunning 43% p.a. in value. In contrast in volume terms growth stuttered at a marginal 0.3%. The largest importing countries are the United States, Japan, Germany, the Republic of Korea and China.

Viet Nam’s main markets are open for Vietnamese oil. Almost all of Viet Nam’s exports in this sector are earned from one product “Petroleum oils…” (HS 270900). This product also represents almost 80% world trade in this sector. The largest market, the United States, does not impose tariffs, nor does Japan or the European Union. Viet Nam does suffer from higher tariffs than most countries in Taiwan and Australia.

Government strategy

In general, the government expects to decrease the export of raw material. It gives emphasis to further exploitation of the offshore oil-fields, while also prioritising domestic processing of crude oil for the purpose of substituting imports of petrol and other oil products. In the government’s export strategy 2001 – 2010, the expectation is that the exports of surplus crude oil after 2005, with the start of the Dung Quat refinery, will be in the order of 12 million tons, but decline during the latter part of the decade with further processing facilities coming on stream. The anticipated export output of crude oil by 2010 is 8 million tons, generating revenues in the order of USD 1,6 billion, hence about half of the current revenues.

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Coal Viet Nam is a small, but fast growing exporter of coal, especially anthracite. Production has increased dramatically in recent years, and Viet Nam continues to exploit new coal reserves within its borders order to avoid depletion of its stocks. The export potential of this sector is considered to be high, partly because the world market for coal is large and import demand is growing.


Viet Nam is a small but fast growing net exporter of coal. In 2003, Viet Nam exported a record volume of 5 million short tons (Mmst), or USD 250 million, corresponding to a world market share of 0.1%. Exports grew in value terms by almost 20% a year, but by only 3% in volume. The primary destinations are Japan, China, Thailand, Belgium and Korea. According to Vinacoal (Viet Nam Coal Corporation), Brazil and Mexico are also important markets.


Viet Nam contains reserves estimated at 165 Mmst, the majority of which is anthracite. Production has increased dramatically, with Viet Nam producing over 14 Mmst in 2003, 11 Mmst more than 2002. Vinacoal hopes to produce 30 Mmst of coal in 2005, and export at least 11 Mmst. As a result, reserves may soon be depleted.

Viet Nam thus continues to exploit new coal reserves within its borders. In March 2003, a significant coal bed was discovered in the Red River Delta region of northern Viet Nam. Vinacoal plans to use the reserve for thermal power plants. In October 2004, Vinacoal entered talks with China’s Fujian Province Coal Industry Corporation to jointly exploit the Coc Sau mine in the Quang Ninh province. Vinacoal will spend USD 340 million to upgrading mining technology and facilities to increase productivity, and US D 227 million developing the coal mining industry. About USD 116 million was spent on open pit and underground mining equipment, including exploration devices, heavy-duty excavators, trucks and conveyer belts. The industry has closed its open pit facilities while using improved technology for hard rock mining. According to Vinacoal, yearly demand of coal estimates for 2010 puts at between 33 and 36 million tons, export will total 10-13 million tons of this.

The coal industry enjoys a strong domestic demand for electricity, paper, transport industries and household usage. Although Viet Nam has historically relied on hydropower for electricity, it has recently promoted the construction of coal-fired power plants. Vinacoal plans to build eight coal-fueled thermal power plants with a total capacity of 2,900 MW by 2010. Coal-fired power plants are to expect to eventually account for 25% of Viet Nam’s total electricity production. The National Industry Strategy until 2015 estimates that 10.2 Mmst of coal is needed yearly to meet increasing domestic demand, projected at 20,000 MW by 2010.


The world market for coal is large and import demand is growing. In 2003 the world market was worth almost USD 32 billion. Japan imports more than a fifth of global exports. Korea, Taiwan, Germany and the United Kingdom are also important markets. Between 1999 and 2003 world demand grew in value by 10% a year, with growth in volume less dynamic, at nearly 7% per annum.

In general the market access conditions are good as tariffs are low. Viet Nam faces similar conditions to the majority of its competitors. Large markets such as Japan and the EU grant free access to most exporters. In general, in markets where tariffs are applied, these are applied across the board giving no significant advantages or disadvantages.

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Fishery products

Viet Nam is among the top ten world exporters of fishery products. The country is blessed with a very long coastline of almost 3300 km and huge tidal areas, creating favourable conditions for marine fishing. Viet Nam also possesses vast areas of fresh- and brackish-water suitable for aquaculture. Production is undertaken by offshore, coastal and fresh water fishery, as well as by aquaculture. Marine products include fish, shrimps, cephalopods such as octopus and squid, and molluscs. The fishery industry is a significant contributor to the Vietnamese economy. The sector is important for employment, with a labour force of around 3.4 million persons, and has also had an active role in famine elimination and poverty alleviation among coastal inhabitants. Private small-scale operators dominate the industry.

The production is mainly for the domestic market, but Viet Nam has also a thriving export sector. Seafood is now one of the highest export earners for the country, behind oil, garments and footwear. Since the Doi Moi policies were introduced in the mid-1980s, seafood exports have been increasing every year. The average annual growth rate from 1990 to 2004 was around 20%. According to Vietnamese statistics, the country exported approximately USD 2.4 million worth of marine products in 2004.

Table 10. SWOT analysis for fishery products Strengths Weaknesses

Favourable natural conditions for marine fishing and aquaculture: long coastline (3,260 km) and vast areas of fresh and brackish-water Endowed with high value species, such as shrimps, finfish, molluscs, and cephalopods Many companies meet the requirements of international markets in term of quality, hygiene, seafood safety, adhering to HACCP standards

Experience in organic aquaculture (especially black tiger prawns, now expanding to other species) Aquaculture is planned to be developed in a sustainable manner and applied with Good Aquaculture Practice and Code of Conducts farming

Lack of raw materials between two harvest seasons Low value-added, since Viet Nam mainly exports seafood in the form of raw materials Product quality is currently not uniform

Only 60% of processing factories meet the standards of hygiene and seafood safety regulations Difficulties in controlling the level of antibiotics, residues in exported seafood products

Lack of co-operation between exporters, resulting in low bargaining power Packaging and convenience features of the products are still inadequate.

Few brand names, and with little reputation Little market information on importing markets Lack of experience and skills for long-term production plans Lack of capital for investments

Opportunities Threats

Deep sea fishery resources are still under-exploited Aquaculture production can be doubled Seafood imports are increasing all over the world Increasing demand of clean and organic aquatic products in the Western markets Diversification of products to adapt to changing demand (ready-to-eat or ready-to-cook products packaged in small size to be sold by retailers) Chinese and Indian economic growth increases demand in the long-term (but also competition) Decision by the EU Fishery Commission to limit Wild catch quotas

Global competition is increasing Seafood prices tend to fall US anti-dumping cases on Vietnamese catfish (tra or basa) and shrimps

Source: Field work interviews, desk research.

The export potential of this sector is high, and there are many trade opportunities and at the same time many challenges facing the industry. Viet Nam has faced two anti-dumping investigations in the United States, firstly for catfish (tra or basa) and in 2004 for shrimp, Viet Nam’s main export product. To ensure its sustainable development in the international market, the sector has to improve its cost competitiveness and adapt itself to global economic requirements. Viet Nam needs to focus on the development of aquaculture to avoid depletion.

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Viet Nam also needs to apply appropriate systems to assure reliable quality, e.g. by applying the HACCP program, including Good Manufacturing Practices (GMP) and Sanitary Standard Operation Practice (SSOP) in seafood processing factories, and safety standards, responsible farming practices and traceability for aquaculture areas. The industry also has to upgrade through a focus on high priced products on the global market, improved packaging, and processing of consumer-friendly products. This includes creating convenience to the consumers, by developing more varieties of prepared or ready-to-eat products, packaged in small sizes to be sold by retailers.


Viet Nam’s export performance for fishery products has been impressive. By 2003, Viet Nam exported more than USD 1.9 billion worth of fishery products. According to Vietnamese statistics, exports in 2004 amounted to USD 2.4 billion. Viet Nam ranks seventh in the world in seafood exports after China, Thailand, Norway, the United States, Canada and Denmark. Many countries are facing depleted stocks and the trend has been a shift towards aquaculture, particularly farmed shrimp and fish. On top of being a net exporter and possessing a high world market share (about 4%), the country is bucking the global trend with formidable growth rates. At a time when global imports have grown at less than 4% per annum, Viet Nam’s exports have registered more than 25% p.a. in value between 1999 and 2003.

Fishery products are Viet Nam’s fourth most important export sector after crude oil, garments and footwear. Fishery product exports is a fairly old industry in Viet Nam, and also one in which Viet Nam has long established trade with non-socialist countries, even prior to Doi Moi. Japan is traditionally a key market for Viet Nam’s marine products. The United States has become the largest importer of Vietnamese fishery products, but imports have considerably declined in 2004 due to the anti-dumping cases for Vietnamese catfish (tra or basa) and especially for shrimps (Table 11). Market diversification is considerable, as Viet Nam currently supplies about 75 countries. In spite of strict seafood safety standards, Viet Nam is looking to strengthen its position in the EU, in order to reduce reliance on the American and Japanese markets.

Frozen shrimp accounts for nearly half the value of total exports, and Viet Nam holds a particularly strong position for black tiger prawns , exporting some 120,000 tons. Most fishery products are exported in frozen form, but there are also exports of dried, canned and fresh products. According to Vietnamese statistics, in 2003 total fisheries production totalled 2.5 million MT (metric tons, of which the marine catch was 1.4 million MT and aquaculture and inland catches reached 1.1 million MT.

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Table 11. Viet Nam’s fishery exports

Exports in 2004 Growth rate 2003-2004 (%)

Volume

(mt) Value

(USD million) Volume Value

By importing market

Japan 118,042 754,946 +20.1 +29.5 United States 89,768 592,824 -27.3 -24.2 European Union 75,411 243,938 +83.0 +91.7

ASEAN countries 42,650 165,681 +49.5 +126.7 South Korea 69,944 139,981 +24.9 +31.2 China and Hong Kong 47,720 131,198 +11.2 -11.2 Taiwan 31,195 105,916 +58.6 +49.1

Other countries 44,018 226,297 -9.0 -18.2 By product

Frozen shrimps 141,197 1,261,123 +12.8 +19.2 Frozen fish 209,083 552,392 +34.9 +18.4 Frozen cephalopods 60,535 162,462 +32.7 +42.7 Dried seafood 30,089 101,847 +54.7 +38.2

Other products 77,843 322,957 -31.3 -36.0 Total 518,747 2,400,781 +13.1 +8.3

Source: Viet Nam Association of Seafood Exporters and Producers (VASEP)


Viet Nam has favourable conditions for marine fishing, though over-fishing along coastal areas is putting resources under pressure. The country has a long coastline of 3,260 km, with an Exclusive Economic Zone (EEZ) of more than 1 million square kilometres, with many diversified tropical and sub-tropical ecosystems. Viet Nam has over 4,000 islands and the coast has more than 400,000 hectares of mangrove stands. Marine products include fish, shrimps, cephalopods such as octopus and squid, and molluscs. The coast is long and difficult to monitor, and as the industry develops in a largely unorganised fashion there is a risk of depleting stocks. The use of quotas and control is still at an early stage in Viet Nam.

Viet Nam has vast areas of fresh and brackish-water suitable for aquaculture. In 1990 less than 500,000 hectares were used for aquaculture, by 2002 the area used reached 955,000 hectares. The Viet Nam Association of Seafood Exporters and Producers (VASEP) estimates that only half the area suitable for aquaculture is currently being used, with approximately 800,000 hectares that can still be developed. Shrimp, catfish and various carp are the principle products of this industry.

However, Viet Nam’s coastal waters display signs of over-fishing, and the policy is now to shift to offshore fishing and aquaculture. Offshore fishing is still in an early stage of development, and the fishing fleet, on-board technology and post-harvest technologies far from the most modern. Aquaculture has grown rapidly, and over recent years changed from small scale to increasingly commercial operations. There is an on-going transformation of many coastal farms from rice, coconut etc. to fish farming, often mixed with rice cultivation. Also foreign investments, including from Japan, Hong Kong, and Taiwan are taking place in aquaculture. However, the productivity is considered low in comparison to some of Viet Nam’s competitors in the region. As a result, the cost of production tend to be higher in Viet Nam, than in, for example, Thailand.

Private small-scale operators dominate the industry. There are still many state-owned companies, but the general trend has been a shift towards private enterprises. It is estimated that some 3.4 million people derive their livelihood from fishing or aquaculture.

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Most work is carried out manually, as labour costs in Viet Nam are very low. However productivity is considered low in comparison to some Asian competitors.

An increasing number of processing plants are able to assure high quality and hygiene standards. Traditionally Viet Nam has produced and sold to Japan, a market with high quality standards, therefore quality and hygiene standards are relatively high. Viet Nam is considered to have a fairly developed fishery export system with fair quality standards, implementing the Hazard Analysis and Critical Control Points programme (HACCP, Box 4). According to Globefish (2004), 175 out of 300 seafood processing plants work according to HACCP standards, and of these, 100 have been approved for export to the EU. Vietnamese producers also face stringent regulation regarding the use of antibiotics. Ten common antibiotics are prohibited from use.

At the same time, however, product quality is not uniform, and there are still problems with the hygienic facilities in processing plants due to old technologies. Only 60% (239 out of 405) processing factories meet the standards of hygiene and seafood safety regulations stipulated by the industry, and firms have difficulties in controlling the level of antibiotics and residues in exported seafood products. By the year 2005, all seafood-processing establishments in Viet Nam have to apply the industrial standards issued by the Ministry in 2003. For many small-scale firms, financial problems make necessary investments difficult to undertake. A major problem affecting the supply and the economics of fish farming is poor disease control. For example, outbreaks of shrimp fever are regularly reducing the output of shrimps in aquaculture in Viet Nam. There are also environmental concerns as the industry develops in a largely unorganised fashion. The industry is also having problems related to infrastructure, including modern ports and safety measures for fishermen, such as storm and flood warning systems.

Box 4. Hazard Analysis and Critical Control Points (HACCP)

Hazard Analysis and Critical Control Points (HACCP) is a production control system for the food industry. It is a process used to determine the potential danger points in food production and to define a strict management and monitoring system to ensure safe food products for consumers. HACCP is designed to prevent potential microbiological, chemical, and physical hazards, rather than catch them. The Food and Drug Administration (FDA) and the United States Department of Agriculture (USDA) use HACCP programs as an effective approach to food safety and protecting public health.

HACCP involves seven principles

− Analyze hazards. Potential hazards associated with a food and measures to control those hazards are identified. The hazard can be biological, such as a microbe; chemical, such as a toxin; or physical, such as ground glass or metal fragments.

− Identify critical control points. These are points in a food's production--from its raw state through processing and shipping to consumption by the consumer--at which the potential hazard can be controlled or eliminated. Examples are cooking, cooling, packaging, and metal detection.

− Establish preventive measures with critical lim its for each control point. For a cooked food, for example, this may include setting the minimum cooking temperature and time required to ensure the elimination of any harmful microbes.

− Establish procedures to monitor the critical control points. Such procedures may include determining how and by whom cooking time and temperature should be monitored.

− Establish corrective actions to be taken when monitoring shows that a critical limit has not been met. For example, reprocessing or disposing of food if the minimum cooking temperature is not met.

− Establish procedures to verify that the system is working properly. For example, testing time-and-temperature recording devices to verify that a cooking unit is working properly.

− Establish effective recordk eeping to document the HACCP system. This may include records of hazards and their control methods, the monitoring of safety requirements and action taken to correct potential problems. Each of these principles must be science-based such as published microbiological studies on time and temperature factors for controlling foodborne pathogens.

Source: Food Safety Research Information Office (FSRIO, http://www.nal.usda.gov/fsrio).

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International demand has been growing, but slowly, with prices lower than usual. The total world trade of fishery products, fresh, chilled or frozen, is worth about USD 52 billion. Between 1999 and 2003, exports in value terms grew by about 4% per annum, and slightly faster in volume terms, at 4.5% a year. International demand is concentrated in three major markets: Japan (with a 20% world market share), the United States and the European Union. Within this sector, Viet Nam is predominantly an exporter of shrimps and prawns, the most important product in this sector globally. In the past few years international shrimp prices have experienced declines and continue to remain weak. Despite lower than usual prices, demand in Japan has slumped recently. In 2004, the United States imposed anti-dumping measures on the six largest suppliers (including Viet Nam), greatly affecting volumes traded for these countries (Globefish, 2004).

Several key import trends are emerging in this sector. Imports in the main international markets (Japan, United States and EU) have been increasing, and demand in developing countries is increasing in line with increasing incomes, particularly in ASEAN and other Asian countries. Demand in the EU is likely to increase because of more stringent wild catch quotas imposed by the EU Fishery Commission. Wild catch landings between 1995-2002 in the EU reduced by 17%. In African waters, cephalopod resources are diminishing. Seafood is seen as a healthy alternative to poultry and meat, given outbreaks of various diseases in different regions in the world, including BSE (bovine spongiform encephalopathy, or “mad cow disease”), foot and mouth disease, dioxin contamination in chicken, and the avian influenza (“bird flu”).

Market access conditions for Vietnamese fishery products tend to be fairly good, but two anti-dumping cases increase considerably the price of Vietnamese shrimps and catfish in the United States. For the most important product in the sector “Frozen shrimps and prawns” (HS 030613) Viet Nam used to have free access to the US market, the largest, and a low tariff in the Japanese market, the second largest market. However, there are anti-dumping cases in the United States for shrimps and Vietnamese catfish (Box 5).

Box 5. US anti-dumping rulings against Viet Nam

In June 2003, the United States alleged that catfish imports from Viet Nam damage materially the domestic catfish industry and imposed anti-dumping duties on Vietnamese basa (tra) fillets. Since then, tariffs imposed range from 37 and 64%, considerably raising the price of Vietnamese products. As a result, sales in the United States have been divided by two. Vietnamese producers are now looking to diversify to European markets.

In 2004, the United States launched anti-dumping investigations into the six largest shrimp producers: China, Brazil, India, Ecuador, Thailand, and Viet Nam. Vietnamese shrimps face duties ranging from 4% to almost 26%. Viet Nam attributes their failure to reach their export target for 2004 to the unfavourable ruling.

Government strategy

The government has ambitious plans for fishery products, especially for aquaculture. As coastal fishing resources are depleting, the focus will shift onto increasing offshore fishing and sustainable aquaculture development. The export strategy anticipates fishery exports up to USD 3,5 billion by 2010 (Table 12). The government continues to privatise state-owned companies, changing them into joint-stock companies, with the government holding 30% of company shares. Another government strategy is to attract foreign investment in the sector to upgrade the technology used in processing.

Viet Nam needs to focus on the development of aquaculture to reduce exploitation of coastal resources . Measures include developing sufficient support systems, control of diseases, and environmental controls to improve yields, productivity and reduce risks for fish farmers (Box 6). Also, further development of the hygienic control of processing is a priority. Further value adding through focus on high priced products on the global market,

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improved packaging, and processing of consumer friendly products is also a key strategy in the sector.

Table 12. Production and export targets for Viet Nam’s fisheries sector

Unit 2001 2005 2010

Fisheries production Million tons 2.17 2.5 3.4 Marine exploitation Million tons 1.32 1.3 1.4 Aquaculture Million tons 0.85 1.2 2.0

Export turnover USD billion 1.65 2.5 3.0 - 3.5

Source: Master Plan of Social-Economic Development of the Fishery Sector, Ministry of Fisheries, 1999.

Box 6. Recommendations for the seafood industry

Increase the supply of raw material. Increase the supply of farmed fish and shellfish to secure their supply to the processing sector. The Government already plans this measure.

Promote modern processing equipment and technology. Promote modern machinery and new technologies in processing, in order to improve productivity, improve product quality, and increase the share of value-added and retail-packed products. New post-harvest technologies are very important to preserve the raw material of wild catch landings , as well as from aquaculture. At present, about one third of the value of caught fish is lost because of insufficient preservation (e.g. refrigerated storage facilities) and means of transport.

Improve access to financing. Seafood processing factories and exporters, which tend to be small or medium -sized, lack capital to invest in machinery and facilities for environmental treatment and to reduce production waste which remains a big problem. Enterprises need help in building their business plans or strategies, and guidance to fulfil the procedures to apply to financial organizations.

Improve product quality. World seafood markets are likely to apply stricter hygiene and food safety regulations, as well as traceability in the future. This requires seafood producers and processors to enhance their capacity of quality control through the entire seafood chain, from farming and catching to transport and processing.

Provide updated information on international markets. Updated information is essential to survive in competitive markets. Fishery producers, processors and exporters need adequate information of the international seafood market, including patterns and trends in production, consumption, and trade, market characteristics, market access, distribution channels, storage, packaging and labelling, pricing and market prospects.

Diversify markets and develop trade promotion activities. Trade promotion activities should be pushed up to expand current markets and acquire new customers. Currently, Vietnamese exports are concentrated on some of the world’s most important markets, but they have encountered difficulties there, including technical barriers to trade (TBT) and anti-dumping cases. Therefore, market diversification is very important to reduce such risks. However, many exporters lack the experience and expertise on marketing skills on pricing, promotion, distribution, etc. For example, building up brand names and trade marks for Vietnamese seafood is now well acknowledged by the processors and exporters, but the results are still limited.

Invest in human resources. Currently, almost all seafood-processing factories in Viet Nam need skilled and trained workers with technical capabilities and knowledge on hygiene, food safety etc. to meet international standards . The training activities should be organised or carried out by the industry or VASEP.

Establish close links between farmers, processors, and exporters and strengthen the role of VASEP. In order to strengthen the competitiveness in international markets, it is important that all stakeholders in the Vietnamese seafood industry work closely together, possibly coordinated by the Ministry of Fishery and VASEP. The role of the Association should also be enhanced, as it serves the common rights of the members, and presents on behalf of them its wishes, proposals and recommendations to the government or competent authorities relating to the policy and implementation of legal regulations.

Source: Adapted from the background report by VASEP.

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Agricultural products

Viet Nam has had a remarkable success in agricultural exports since the Doi Moi policies were taking effect in the end of the 1980s. Viet Nam is large in terms of area (330,363 square kilometres), and since land is an abundant factor, Viet Nam has naturally an advantage for industries that use land intensively. Viet Nam established itself as a leading world market player for several commodities during the 1990s, in particular for rice, coffee, pepper and cashew nuts. Viet Nam’s rural economic growth and poverty reduction have been remarkable. Since 1990, agriculture GDP growth has been on average over 4% per year. Given the weight of agriculture in total employment, agriculture has contributed to the strong decline of the poverty rate in Viet Nam, which was divided by two within a decade, from nearly 60% in 1992 to 29% in 2002.

However, despite of this impressive record, the share of agricultural commodities in Viet Nam’s total exports has gradually declined, from over 50% of Viet Nam’s total merchandise exports in 1991 to currently about 15%. This trend is likely to continue, possibly even at a stronger pace, with depressed prices for many key commodities, capacity limits in several commodities and fiercer competition from other exporters, while the exports of manufacturing products and particularly services is taking off.

With the expansion of production, Viet Nam’s agricultural exports have grown strongly. Vietnamese agriculture and forestry exports have increased rapidly, from USD 800 million in 1991 to over USD 3 billion in 2004, and this despite a trend of declining export prices for important products. Forestry products, most of which being wood products, also increased strongly to about USD 1 billion in 2004. Viet Nam has to a certain degree become a victim of its own success as an exporter of agriculture commodities, making it vulnerable to oversupply and the cyclical changing prices of some key commodities.

Rice plays the most important role among agricultural commodities Viet Nam, both in terms of food security and export turnover. In 2004, the export value from rice was nearly USD 1 billion according to Vietnamese statistics, followed by coffee, rubber, cashew nuts, fruits and vegetables, pepper and tea (Table 13). Currently, Viet Nam is the world’s biggest pepper exporter and the second biggest coffee exporter. Apart from those commodities, which are reviewed in depth in this report, honey and cut flowers have also experienced strong export growth, but there are no exact Vietnamese trade statistics. International statistics, however, based on import data reported by most of Viet Nam’s trading partners (Table 14), confirm the high growth rates for honey and cut flowers; for honey, Viet Nam has an impressive world market share of more than 2%.

Table 13. Exports of Viet Nam’s main agricultural products

Volume (thousand tons)

Value (million USD)

2003 2004 2003 2004

Rice 3813 4070 721 947

Coffee 749 936 505 616

Rubber 433 485 378 565

Cashew nut 84 107 284 425

Fruits and vegetables .. .. 151 170

Pepper 74 109 105 148

Tea 60 96 60 92

Pork 12 20 16 30

Forest products .. .. 633 1123

of which: wood products .. .. 567 1055

Source: MARD.

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There are two different estimations of the export potential for agricultural and processed products:

− The export potential by ITC is based only on Viet Nam’s current export performance and the international environment, and does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

− The export potential by MARD takes into account various indicators and factors, including export volume and value, market share, output, yield, cost of production, export price, post harvest losses, and technology.

In total, it appears that the export potential is high for nuts (especially cashew nuts); rubber; spices (especially pepper); and coffee (Table 14). In contrast, tea and fruits and vegetables appear to have a medium export potential, though it has to be mentioned that fruits and vegetables are a very heterogeneous product group that includes commodities with very different profiles and potential. The export potential of other product groups that were not examined in detail here is high for honey; medium for wood and wood products; low for dairy products, cut flowers; and jute and jute products.

Table 14. Potential for agricultural commodities and processed products

ITC calculations* MARD evaluation***

Export value (USD

million)

World market share

(%)

Export growth in

value (% p.a.)

Export growth in

volume (% p.a.)

Index* export

potential

Implicit export

potential

Long term export potential

Coffee and coffee products 571 5.78 -5.2 10.0 3.3 High** High Rubber and rubber products 393 1.19 90.6 71.3 3.4 High High

Rice 318 4.68 -17.0 -2.4 2.5 Low High

Cashew nuts and other nuts 283 4.24 34.4 65.8 3.8 High High (cashew nuts)

Fruits and vegetables 178 0.37 36.0 8.3 2.4 Low Medium

Pepper and other spices 105 4.92 -10.2 24.5 3.3 High High (pepper)

Tea and tea products 40 1.52 14.8 18.9 2.8 Medium Medium

Wood and wood products 138 0.21 22.7 2.6 2.8 Medium** .. Honey and apicultural products 22 2.18 82.9 .. 3.0 Medium** ..

Cut flowers 5 0.05 44.0 .. 2.5 Low** ..

Dairy products 4 0.06 -2.9 .. 1.2 Low** ..

Jute and products made of jute 1 0.24 13.0 11.1 2.3 Low** ..

* The index ranges from 1 (lowest ranking) and 5 (best ranking). ** The export potential is based only on Viet Nam’s current export performance and the international environment. It does not take into account domestic supply conditions due to lack of comparable data. *** The export potential by MARD takes into account various indicators and factors, including export volume and value, market share, output, yield, cost of production, export price, post harvest losses, and technology. Source: Comtrade data (based on declarations of Viet Nam’s trading partners), calculations by ITC. Background report by MARD.

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Coffee and coffee products Coffee is one of Viet Nam’s most important agricultural export commodities. The coffee sector provided 600,000 permanent jobs and around 1 million part-time jobs in 2001, thus contributing to poverty reduction in rural areas. The Vietnamese coffee sector is very export-oriented, with exports accounting for about 95% of the production. The coffee production –which consists mainly of the Robusta variety-- has grown very rapidly since the late 1980s, and Viet Nam has over a short period of time established itself as a main player among the world exporters. Viet Nam is today the world’s second largest exporter in volume terms (after Brazil, with a world market share of some 15%), and the third largest exporter in value terms (after Brazil and Columbia).

Viet Nam is highly competitive as a coffee producer and exporter due to favourable climate and environmental conditions, low production costs, and yields that are among the highest in the world. However, Vietnamese coffee is of relatively low grade due to poor processing, drying facilities, and post-harvest technologies; it does not have a brand name and exporters have still limited marketing skills. As a result, Vietnamese coffee commands lower prices than world average. Viet Nam has the potential to upgrade quality of its green coffee exports through investments in research, post-harvest technologies, storage and processing, and by shifting to the production of Arabica variety, which commands higher prices. Other options are niche coffees such as organic coffee, but quantities are small. Domestic processing to soluble coffee is expanding.

Given Viet Nam’s strong world market position, and the opportunities for quality upgrading in processing and post-harvest handling, the export potential for the coffee industry is considered high, but the need for export development assistance medium.

Table 15. SWOT analysis for Vietnamese coffee and coffee products

Strengths Weaknesses

Suitable natural conditions for coffee Low labour and production cost High yield as a result of intense cultivation Good experience in coffee cultivation Concentrated production close to ports Short inland transport distance positively affecting the share of the export price received by Vietnamese farmers Large export market share, especially for Robusta Development of private export

Lack of irrigation, overuse of fertilizer and pesticides Over-expansion of coffee area Lack of storage facilities, marketing services Lack of risk management (for example insurance for coffee producers) Underdevelopment of future market, transaction floors Viet Nam standards are inconsistent with international standards No brand name of exported coffee, thus exports through intermediaries


Recovery of world market Export market diversification Development of wet processing technique Government support to develop brand name, trade promotion

Competition from other crops Competition from other exporters Over-expansion of Robusta Inefficient plan for Arabica development Unstable export prices Drought Water resource limitation



Viet Nam’s export performance for coffee over the last years has been notable. The export value of Vietnamese coffee increased nine-fold from some USD 100 million in the early 1990s to about USD 900 million in 2004 (MARD estimates). International statistics however suggest somewhat lower figures: USD 571 million in 2003 (Trade Map). Given the strong volatility of world coffee prices, the evolution has been very uneven. For example, export revenues grew rapidly from 1991 to 1998. The declining export value from 1998, despite a considerable increase in exported volume, is explained by the

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dramatic decline of the world market prices. Export revenues have only started to increase again after 2003. Viet Nam has become the second largest exporter in the world in volume (after Brazil) and the third largest in value (after Brazil and Columbia). For the Robusta variety, Viet Nam is the biggest exporter in the world, with a market share exceeding 40% in 2001.

The bulk of Viet Nam’s coffee export are made up of green or un-roasted coffee. “Coffee, not roasted, not decaffeinated” (HS 090111) amounted to more than USD 550 million in 2003, representing more than 10% of the world market. In contrast, roasted coffee, whether decaffeinated (HS 090122) or not (HS 090121), play only a marginal role in Viet Nam’s exports, even if these products show very high growth rates, both in Viet Nam and the world.

Vietnamese coffee is exported to over 50 countries in the world. The main import markets for Vietnamese coffee are the United States, the European Union (Germany, United Kingdom, France, Netherlands, Spain and Italy), Switzerland and Asian countries (Japan, Singapore, China, Philippines, Malaysia and Indonesia). Based on ITC calculations, Canada and Russia seem attractive candidates for export diversification.

Figure 2. Production and exports of coffee in Viet Nam

Area and yield in Viet Nam Exports

Source: MARD.


Coffee production in Viet Nam has substantially increased since the mid 1990s, due to an expansion of the coffee area and to increases of the yield (tons per hectare). The coffee area in Viet Nam was only several tens of thousand hectares in the early 1980s, and had slowly grown to about 150,000 hectares by 1994, accounting for some 1.3% of the total area for different trees in Viet Nam (ICARD, 2002). The sudden strong increases of world prices in the mid-1990s encouraged Vietnamese coffee growers to rapidly expand --in a rather uncontrolled way-- the land area for planting coffee and to increase intensive farming. As a result, the coffee area in Viet Nam developed rapidly to represent about 560,000 hectares in 2000 (or 4% of the total area for different trees in Viet Nam), and ranked third after two food crops, rice (about 60% of the total area) and maize (almost 6%). Total coffee output reached 800,000 tons in 2000, of which about 95% was exported. Compared to 1980, the Vietnamese coffee area in 2002 was 23 times higher and coffee output was 83 times higher.

Viet Nam produces mainly Robusta coffee. There are several types of coffee beans, the two most popular of which are coffee arabica and coffee canephora or Robusta coffee (Table 16). Arabica beans account for over 70% of world production. Robusta beans, which tend to command lower prices than Arabica beans, make up 90% of the total coffee area in Viet Nam (ICARD, 2002).

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The Vietnamese coffee industry is important for rural employment and wages. It is estimated that the coffee sector provided 600,000 permanent jobs and around 1 million part-time jobs in 2001, thereby contributing to poverty reduction in rural areas (Agroviet, 2002).

Table 16. A comparison of Arabica and Robusta beans

Arabica beans Robusta beans

Can be consumed as straight or in blends Less caffeine than Robusta beans (1-1.5%) Are more labour-intensive to grow, harvest (usually hand-picked) and process Are most costly, but can command very high prices (speciality coffee)

Are almost always used in commercial blends More caffeine than Arabica beans (1.5-2%) Are often machine harvested (Brazil) Have harsh, bitter taste qualities Are less costly More resistant to diseases

Vietnamese coffee production has contributed to the oversupply and price declines of the world coffee market. Currently, Vietnamese coffee production is in a stage of turmoil due to the dramatic changes in world market prices, which declined since the peak in 1995. In 2000, the price of coffee was only one third of the level in 1998 and about one fifth of that in 1995. Uncontrolled expansion of coffee area in Viet Nam –which has become a major coffee producer– contributed to the oversupply of coffee and price decline in the world. With very low price, even lower than production cost, many farmers did not want to invest any longer and even abandoned coffee. In the export strategy 2001-2010, the government predicted a basically stable volume in terms of exports of 700,000 - 750,000 tons, and assumed growth in revenues by some 70% by 2010 as compared to 2000. However, in order to limit the problem of oversupply and depressed prices, the government has been actively involved in reducing the area under coffee. As a result, the coffee area in 2004 was about 500,000 ha, or 60,000 ha less than in 2000. Many coffee growers changed to produce other crops, such as food crops and cashew nuts.

Viet Nam is highly competitive as a coffee producer and exporter due to favourable climate conditions, and low labour and production costs. Vietnamese yields are among the highest in the world: in 2004, average coffee yield in Viet Nam was 1.6 tons/ha (and even 4-5 tons/ha in some regions), against only 0.30-0.35 tons/ha in Brazil, Indonesia and Africa, and about 0.8 tons/ha in India. The high yields are a result of intense cultivation.

However, Vietnamese coffee is of relatively low quality due to poor processing, drying facilities, and post-harvest technologies, manifested for example in a high moisture content. In addition, Vietnamese exporters have still limited marketing skills, and Vietnamese coffee does not have a brand name. As a result, Vietnamese coffee prices are lower than world prices. Over the next years, the government plans to focus on yield and quality.

According to FAO, the world market situation for coffee does not justify large-scale expansion of coffee plantations and processing facilities. Consequently the approach has been to plant coffee as an inter-crop in combination with oil palm or coconuts, with import substitution objectives. This mixed farming has helped to minimize the risk involved with single crop farming.

Recently, coffee producers have been regrouping and focusing on a three-pronged goal to turn around the industry: increase the acreage of arabica coffee, improve export quality and diversify distribution channels (Viet Namnet.vn, 24 June 2004). Producers plan to increase the area of Arabica coffee, which they hope will obtain higher export prices. However, Arabica coffee programs so far in Viet Nam have failed in many places for various reasons, including inefficient investment, production in areas with no natural advantages, and poor management.

Concerning the distribution channels, Viet Nam’s exporters cannot sell products directly to coffee processors, but must deal through international trade groups with representative

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offices in Viet Nam. The Vietnamese government launched in 2004 a transaction floor for a future market in order to facilitate trading between domestic exporters and world importers, but its efficiency is still limited because of lack of awareness among exporters and insufficient regulation.

Vietnamese standards for classification of coffee are not harmonized with international standards, and importers often do not accept Vietnamese standards (Viet Namnet, 23 February 2005). According to the Ministry of Industry, about 40% of the food and foodstuffs standards set before 1990 is out of date. Applying new standards may increase production costs in the short-term, but larger export volumes at high quality coffee prices should compensate for higher production costs in the long-term (Agroviet, Coffee Report, 3rd quarter 2003).


In recent years the global coffee market has been characterised by declining demand, over-supply, and volatile prices with record lows. The global coffee sector is in decline, with international demand in value falling by 6.6% a year between 1999 and 2003, while growing slowly in volume by 3.7% a year. In 2003, world imports amounted to some USD 10 billion, with the five largest markets being the United States (20% of total imports), Germany, France, Japan and Italy. Although prices have recovered somewhat since the record low in 2001, downward pressure remains as the global over-supply is predicted to continue (EIU, 2005).

According to recent surveys, there has been a notable increase in the world market price of coffee in the course of 2004 and 2005 (Figure 3). While high-quality coffees have generally fared significantly better than Robusta beans, prices of Robusta have been firm in 2005, partly because of the drought problems in Viet Nam.

Figure 3. Monthly averages of ICO coffee prices

0

50

100

150

200

250

300

350

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Colombian Mild Arabicas Group

Brazilian and Other Naturals Group

Other Mild Arabicas Group

Robustas Group

US cents per pound

Source: International Coffee Organization (www.ico.org).

It is estimated that international demand for coffee will remain stagnant, particularly in the mature European market (partly due to increasing retail prices for coffee in these markets), a situation that will only be partially offset by increasing growth in newer markets, such as the newly industrialised Asian countries. One World Bank study suggests that the global coffee market has undergone structural changes, which concern both the supply side, which becomes more concentrated, and the demand side, which includes an increasing demand for high-end, differentiated coffee (Box 7).

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In general, tariffs in the coffee sector are low and Viet Nam’s market access conditions are reasonable. In general in this sector, the largest single market, the United States, offers free access to most exporters, so Viet Nam gains no advantage. In Japan, another important market, Viet Nam has slightly privileged access. For Viet Nam’s most important product, “Coffee, not roasted, not decaffeinated” (HS 090111), Viet Nam enjoys free access, like most exporters, in the largest markets. However in Switzerland, Viet Nam receives substantially discriminatory treatment (a 29% tariff, whereas most receive 11% and some have free access).

Box 7. Paradigm shifts in global supply and demand of coffee

According to the World Bank, apart from over-supply, there are two types of paradigm shifts underlying the current situation:

− A structural change in the nature of supply, particularly increases in both the quantity and quality of Brazil and Vietnamese coffees. As a result, the global supply has become more concentrated.

− Structural changes in demand, comprising increasing demand for high-end, differentiated products, new technology allowing greater flexibility in blending, and geographic-generational shifts in the appeal of different types of coffee products.

Paradigm shifts in consumer markets and roaster behavior have occurred in importing countries, and these changes have consequently affected producing countries.

− Demand in the major importing countries is growing only slowly.

− New markets are emerging and growing fast, driven by the availability of cheap coffees in soluble form.

− New channels for higher quality and differentiated markets are emerging rapidly in many countries.

− Roasters have learned to increase their use of natural and Robusta coffees by processes, such as steaming to remove the harshness of taste.

− Roasters have learned to work with lower working stocks, but this has increased the logistical demands made on suppliers that favor the largest trading companies. This has led to concentration of the supply chain in the hands of fewer major traders.

− Roasters have become more flexible and willing to make short-term switches between coffee types in order to take advantage of lower prices.

− The concentration of roasters, particularly in a period of oversupply, demonstrates the fact that consumer coffee markets are “far from a model of textbook economic efficiency” with rapidly clearing markets and without high-cost barriers to entry (Lindsey 2003). Instead, price responses can be slow and lag well behind perceived changes in events. For instance, reported retail price falls hardly reflect the changes in green coffee prices in the world markets even though, as a report commissioned by the Dutch government states, “At the supply chain down to the countries of origin, there is no evidence of cartel behavior of the roasting industry (RIAS 2002)”.

Source: The World Bank, “Coffee Markets: New Paradigms in Global Supply and Demand,” Agriculture and Rural Development Discussion Paper 3, 2004.

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Rubber and rubber products Viet Nam is one of the top five exporters of natural rubber in the world. Rubber, of which 90% is exported, has become one of Viet Nam’s most important agricultural export commodities. While rubber was introduced in Viet Nam in the end of the 19th century, production and exports did not take off until the 1990s as a result of rapid increase of area under rubber and improved yields. Vietnamese rubber exports reached nearly USD 600 million in 2004, with China being Viet Nam’s main market, buying about half of the production. Viet Nam currently exports little in higher value processed segments

With ambitious plans already underway for expansion of area devoted to rubber production, it is likely that production and exports will increase. Though suffering from low yields and outdated technology, Viet Nam is still cost effective compared to regional competitors. Performance has been very good recently, with substantial increases in both quantity and value. And though prices for rubber were depressed for some time, in 2003 buoyant demand in Asia and the United States pushed prices upward. In the near term this may mean higher export earnings-especially with demand for rubber rising and the cost for oil-based substitutes increasing-making the export potential of this sector high.

Given the volatile nature of prices in natural rubber, and Viet Nam’s current lack of diversification, export development should focus on improving efficiency in natural rubber and identifying prospects in industrial processing. In the rubber industry, efforts should focus on improving yields, updating processing technology, exploring increasing production of types of rubber in high demand (such as SVR 10 or SVR 20), and improving the profile of the “Viet Nam” brand. Strategy in rubber products is less clear. Exports of rubber products are not substantial, and Viet Nam remains a net importer in almost all categories. Though rubber products do represent potential exports, they may continue to be a second or third tier export industry, and will continue to suffer from competition for latex by the local, domestic oriented industry. Opportunities in the processing industry will be have to be chosen with care.

Table 17. SWOT analysis for rubber


Suitable natural conditions for rubber cultivation Production areas are concentrated Low production costs

Production is insufficiently diversified and concentrated on unprocessed, natural rubber with little value addition Low technology Low yield Poor management and poor marketing skills in state-owned farms Poor processing Rubber trees in many plantations are too old


Development of domestic tyre industry Recovery of world demand, especially in the region Proximity to major markets, such as China Increase in domestic production (many farmers are changing from coffee to rubber because of low coffee prices) Price for inputs to synthetic substitutes are high New production coming on line

High risk of natural disasters in rubber areas (such as Central Viet Nam) Strong competition from countries in the region Limitation of water and land resources



Viet Nam’s growth in exports is part icularly good for rubber and rubber products. Despite a modest share of the world market, Viet Nam is a net exporter with impressive growth rates from 1999 to 2003: growth was effervescent, at 90% per year in value and 70% in volume; by 2003 Viet Nam’s exports earned USD almost 400 million (TradeMap). According to Vietnamese statistics, Vietnamese rubber exports reached nearly 600 million USD in 2004, or over 100 million USD higher than in 2003.

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Viet Nam is a world-leading exporter of natural rubber, but it exports little in higher value processed segments. According to the International Rubber Organization, Viet Nam is now ranked the 4th rubber exporter in the world after Thailand, Indonesia and Malaysia. In 2004, Viet Nam was asked to join the rubber exporter’s cartel, The Rubber Fund, which was established by the three nations to stabilise rubber prices on the world market (Viet Nam News, 19 March 2004). Viet Nam’s exports, however, are heavily concentrated in un-processed natural rubber, with almost 60% of exports in the sector accounted for by technically specified natural rubber (TSNR) and natural rubber in primary form.

Viet Nam exports rubber to over 40 countries in the world, especially to China, which is still the largest importer (40-50% of total export), followed by Singapore, South Korea, Taiwan, Germany, the United States, and Japan. Viet Nam could diversify its export markets to other EU members such as France and the Czech Republic.

Despite recent improvements, Viet Nam is still receiving low export prices relative to its competitors. This is likely due to specialization in export of pre-processing SVR (Standard Viet Nam Rubber classification) 3L rubber, much of which is exported to China for the production of low quality tires. In addition to an overall lack of diversity of products, there is also relatively low recognition of the “Viet Nam” brand in the market place. Though there is demand for other categories of natural rubber, for instance SVR 10 and SVR 20, Viet Nam cannot meet the requirements for various reasons, which is a major issue question for processors and exporters.

Figure 4. Production and exports of rubber in Viet Nam

Area and output Exports

Source: MARD and GSO.


Production and area devoted to rubber plantations are both increasing. Since early 1990, the area devoted to rubber production has increased dramatically. In the period from 1990 - 2004 period, rubber area grew at an average of over 5% per year and production increased at 15% per year.

Yields are low for natural rubber, but cost is competitive. Though area devoted to rubber and yields have both increased, Viet Nam still lags its regional competitors in terms of productivity (Box 8). The rubber yield in Viet Nam, around 800 kg/ha is still substantially lower than regional competitors such as Thailand (1,807 kg/ha), and is under the world average of 1,067 kg/ha, according to FAO and MARD estimates. This is mainly due to aging plantations and trees, an emphasis on low yield varieties, and rubber development in comparatively unsuitable areas. For some new plantations, yields can be expected to increase over time as they mature. Despite the low yields, due to abundant low cost labour and efficient cultivation, the cost of producing natural rubber in Viet Nam is still

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about 60% of that in Malaysia and 70% of that in Indonesia and Thailand (Son, 2000). This gives Viet Nam a cost advantage in natural rubber production.

Other sectors within rubber products should be analysed more closely for opportunities . Within the sector large industries exist in manufacturing of vulcanized rubber, washers, and gaskets among others. Though these industries are large and growing in value terms, they all are experiencing dropping unit values, so they may not present immediate opportunities for diversification. Since Viet Nam is also a net importer in many of these categories, any production would likely be directed first at the domestic market rather than being exported. In fact, domestic rubber processing companies have begun to complain about shortages of raw materials. As these mostly state owned companies invest in expanding capacity, suggestions have been made of imposing an export tax, or even to ban exports of dry latex to divert supply. It should be noted that rubber tyres, another relevant product, are not included in this sector, but are treated as part of the automotive industry.

Box 8. Improvements in productivity of rubber

Rubber is easily grown in hilly terrain, and has been successfully established in degraded deforested areas, leading to improved land use and a reduction of erosion, siltation (deposition of fine mineral particles –silt– on the bottom of stream and river beds and lakes) and flooding.

Productivity has increased enormously in many Asian countries through improved varieties (including better quality rootstocks) and innovations in agronomic practices, including exploitation methods (e.g. low intensity tapping with chemical stimulation to optimize productivity), advanced planting material and micro-tapping (to reduce immaturity period), and other innovations such as high intensity planting.

Source: FAO (1999).


World imports grew strongly between 1999 and 2003, averaging almost 8% per year in value and 6.2% in volume terms. The rubber and rubber products sector totalled about USD 35 billion in 2003. With 15% of the world market, the United States is the leading importer in this sector, followed by Germany, China, France and Canada. The market was particularly dynamic, growing at 15%, for three of the four main products for Viet Nam.

Prospects are good for short term natural rubber demand. Economic and industrial recovery in the region should bring increasing demand for automobiles and a corresponding increase in demand for rubber tires, a good leading indicator for rubber exports. Increases in the price of crude oil also signal increases in the price of compost rubber, a good sign for higher demand for natural rubber.

For rubber, Viet Nam benefits from free access, and generally low tariffs or tariffs comparable to those of competitors. For its second largest product Viet Nam faces discriminatory tariffs in Taiwan whereas the majority of competitors enjoy tariff free access to that market.

Government strategy

Viet Nam has ambitious plans to expand rubber production. The area under rubber production is anticipated to increase from about 400,000 ha to about 700,000 ha by year 2010 of which about 40% would be state farms. In the government’s export strategy for 2001 – 2010, rubber exports are anticipated to grow considerably to about 500,000 tons by 2010, with an estimated export value of USD 500 million.

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Rice Rice plays the most important role among agricultural commodities in Viet Nam, in terms of food security, rural wages and employm ent, and export revenues. Rice is planted on half of all agricultural land and involves nearly 80% of the farm population. Rice is mainly a crop for the domestic market, but 4 million tons, or about 25% of the total production, were exported in 2004 with earnings of almost USD 1 billion in 2004, making it one of Viet Nam’s largest export revenue earner, after oil, garments and textiles and footwear.

The government’s past concern for food security, hence focus on rice, has been reduced in view of the fact that Viet Nam has basically ensured food security for the whole nation: domestic rice consumption is quite high and accounts for over 75% of total output. As a result, increased diversification of agricultural land and market mechanisms have become the driving principle of policy today. However, at region level, province level or district level, especially in remote and mountainous areas, ensuring food security has not been solved yet and support policies are still needed.

The Government’s export strategy does not see any major expansion of Viet Nam’s export of rice during the 2000s, and assumes an annual export in the order of 4,5 million tons. The rice sector will need to focus on further development of new varieties and on upgrading of quality, however the export potential is considered low.

Table 18. SWOT analysis for rice


Suitable natural conditions for paddy production Abundant workforce in rural areas Low production cost in Mekong river delta High yields Long experience in rice cultivation Priority policies from Government

Sensitivity to natural disasters (drought, storm) Strong dependency on paddy seedling from China Small and fragmented farm land High post harvest losses Poor storage facilities and other infrastructure (loading, port), leading to high transaction cost No policies for price stabilization Inefficient marketing channel Lack of credit access by exporters in peak harvest No brand name of exported rice Low percentage of rice is exported directly


New varieties New cultivation methods Market expansion due to economic integration Priorities from Government to invest in technology improvement, seeding, research Priorities from Government to develop post harvest and processing technologies, marketing services

Natural disasters (drought, storm) Competition from other exporters, especially Thailand, China and India Competition from potential exporters, such as Cambodia and Myanmar Competition from more profitable crops Increase in input price Yield is reaching the ceiling, so there is little potential to improve further Reduction of profit for farmers



Rice is by far Viet Nam’s most important crop in terms of food security, rural wages and employment, and export revenues. It is planted on half of all agricultural land, involves nearly 80% of the farm population, and according to Vietnamese statistics, rice exports amounted to almost USD 1 billion in 2004, after USD 720 million in 2003. However, according to alternative data sources (TradeMap), Viet Nam’s exports in 2003 came to only about USD 320 million, representing nearly 5% of world exports.

Viet Nam achieved self-sufficiency in 1989, and has become the world’s second largest rice exporter behind Thailand. Until 1989, Viet Nam was a rice importer, importing as much as 300,000 tons of rice in 1985. In 1987-1988, Viet Nam even had to request for

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foreign aid to satisfy domestic demand which exceeded production. The Government introduced Resolution 10 in 1988, which brought motivation for producers, helped farmer households to produce and extended cultivation areas. One year later Viet Nam was already exporting more than 1 million tons of rice. Stable growth followed. Between 1989 and 2004, Viet Nam exported over 40 million tons of rice to more than 30 countries (mainly Asian markets), with a value of nearly USD 10 billion. Rice export quantity growth was about 11% per year on average and over 8% per year in term of value in the same period.

Viet Nam exports mainly to Asia and Africa. Indonesia imports almost a quarter of Viet Nam’s rice, the Philippines and Cuba are also big importers, followed by Malaysia, Senegal and Tanzania (TradeMap data). Opportunities for market diversification exist in Japan, China, Australia and New Zealand.

Recently, export volume and earnings have declined considerably due to ailing world demand and prices. In value terms, exports decreased by 17% a year between 1999 and 2003. In view of forecast of slow growth in world demand, and Viet Nam’s already dominating position, the forecast for growth is limited.

Figure 5. Production and exports of rice in Viet Nam


Source: GSO for production, MARD for exports.


Since the early 1980s, Vietnamese paddy production has rapidly developed due to the government’s reform policies. Rice production has increased markedly since the launching of the government’s Decree 100 of January 1981, which was the first step to support production, trade promotion, and export of rice in Viet Nam. Government policy, which prohibited the conversion of wetland rice production areas to alternative uses, has become more flexible since 2001, and now some low yield paddy land is allowed to produce more profitable products such as fruits vegetables, and fishery. Within three years, over 300,000 hectares of rice land have been transformed to cultivate fruits and shrimps.

Paddy yields in Viet Nam are high in an international comparison due to intensive farming, but high post harvest losses persist. The average rice yield has increased by about 3.6% per year in the period of 1980-2004 (GSO). In 2004, rice yield was estimated at over 4.6 tons/ha on average, more than double the 2 tons/ha in 1980, owing to factors such as land distribution policies, stimulated production, enhanced investment in infrastructure and application of new technologies. Viet Nam was considered to have one of the lowest production costs in the world due to low wage levels prior to the Asian crisis, producing a ton of paddy just above half the cost of Thailand, but this cost advantage has declined with the depreciation of most Asian currencies. Despite high yields, there are still

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very high post-harvest losses due to backward harvesting technology, poor transportation means, and poor infrastructure: losses account for 10–12% of the harvest.

Although Viet Nam is a competitive rice producer, its exported rice is for the moment of lower quality internationally, though there are signs of improvement. Export prices for Vietnamese rice are lower than for example rice from the United States and Thailand, but the price gap has reduced in recent years, suggesting quality improvement. The domestic demand for rice has increasingly diversified in recent years, requiring higher quality varieties, especially in Hanoi, Ho Chi Minh City and other big cities. Some specialties like Tam Thom, Bac Thom, Nang Thom, Hai Hau or organic rice have gained potential markets, not only for domestic markets, but also for export.

There are several constraints to improved rice quality, production and efficiency. The main problems of rice producers are the highly fragmented nature and the small plot size, which affect negatively productivity, production costs and profitability and which caused some farmers to abandon their activity and try to find employment in a city. As a result, land consolidation is supported by Government to increase rice land efficiency and land farm size.

Inputs, such as seeds, fertilizers, and pesticides are costly or of poor quality. Furthermore, rice farmers have difficulties in getting good quality seeds, and produce the main part of rice seeds themselves. Farmers in some regions, especially North Upland, import improved seeds from China, but the supply is unstable. More investment in rice seed and stronger participation of research institutes may contribute to alleviate this problem. Another problem is the high, and growing, price of other inputs such as fertilizers, and pesticides, which constitute a large share of production cost. The government has recently released policies to subsidise imports of hybrid paddy varieties, to stabilise fertilizer price, and to reduce irrigation fee.


Rice is the second largest produced cereal in the world, but only roughly 6% of this is traded. The world market for rice declined strongly between 1999 and 2003. The market contracted, falling in value by almost 5% a year and in volume by 0.4% a year. By 2003 world imports totalled just over USD 6 billion. The world market is not highly concentrated, as Saudi Arabia (almost 6% of the world market) imports the most, though Brazil, Indonesia, United Kingdom, France and several others take in a roughly similar share of the world market. Pressure on prices, reflected by market decline in value faster than in quantity, can be seen right across the board for virtually all importers in 2003.

Downward pressure on prices has since eased during 2004 and predictions are suggesting an upward trend. Paddy rice output depends on favourable weather conditions and most countries produce firstly to satisfy domestic demand. According to UNCTAD (2005), international rice prices are highly volatile: if harvests are good and stocks are high, import demand slows; in contrast, poor harvests and/or low stocks tend to increase demand which puts pressure on prices. Thailand is the leading rice exporter (around 40% of international supply) and “Thai White Rice, 5% Broken” is generally used as an indicator on how international prices are moving. The EIU (2005) predicts in the coming year that although international demand is not set to increase by much, competition for Thai rice remains weak and stocks in exporting countries are low, so the upward trend of prices will remain.

Market access conditions for Vietnamese exporters are very poor, as tariffs are high and discriminatory. In general this is a highly protected sector, though the country does have preferential tariffs in Japan.

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Cashew nuts and other nuts Viet Nam’s export performance for nuts over the last years has been impressive, especially for cashew nuts which are by far the main exported product within the nuts sector, followed by ground nuts (peanuts). Viet Nam exported more than 100,000 tons of cashew nuts in 2004, with earnings of USD 430 million, making cashew one of Viet Nam’s most important agricultural exports after rice, coffee and rubber. For cashew nuts, Viet Nam has shown rapid growth of exports over the last five years, capturing market shares from its main competitors, India and Brazil. Viet Nam has over the last years built out its capacity for processing and as a result shifted from an exporter of raw cashew to processed. With a world market share of 25%, Viet Nam has established itself as a leading player in the world: it has become the world’s second largest exporter of shelled cashew nuts after India, and before Brazil. As the domestic production of raw cashew is not sufficient, Viet Nam is importing raw cashew nuts to export them in processed form.

The government has invested heavily in processing to the extent that the industry demand is larger than the domestic supply of raw cashew. The potential for enhanced exports is high, though dependent on the evolution of prices and the domestic production. There are plans to expand area under cashew cultivation, but the maturity before harvest is four to five years, hence no short term pick up in domestic supply can be foreseen. The focus on export development needs to enhance production of raw material; to improve quality of processed nuts; a long-term development of consumer- packed products and diversified use, for example in processed foods.

Table 19. SWOT analysis for cashew nuts


Availability of land for increasing cultivation Abundant workforce in rural areas Capacity of processing factories Effective cashew nut business association

Shortage of raw cashew nuts for further processing Low yield due to low quality of variety and extensive farming Small and backward processing households Poor infrastructure Underdevelopment of storage facilities, marketing service, trade promotion Lack of information systems No brand name


Strong growth in domestic and world market demand High recent world market prices Reduction of production in competitor countries Yield can be increased due to intensive farming

Natural disasters (drought, flood, diseases) Over-expansion of processing factories Unstable prices Strong competition from exporters in Asia, Africa, and South America



Viet Nam’s export performance for nuts over the past years has been remarkable. Viet Nam holds more than 4% of the global nuts market. Over the five-year period exports registered healthy growth rates of more than 30% p.a. in value, and more than twice as fast in volume terms. The country’s largest markets are the United States, where it holds a market share of 15% in the sector, followed by the Netherlands, Australia, the United Kingdom and Canada.

Cashew nuts are by far the main exported product within the nuts sector, accounting for some 85% of nut exports in 2003, followed by groundnuts (peanuts) and coconuts (Table 20). Both cashew nuts and groundnuts are almost exclusively sold in shelled form, while those in shells are marginal. Viet Nam’s exports for shelled cashew nuts account for more than one quarter of world exports: Viet Nam has become the second largest exporter of shelled cashew nuts in the world after India, and before Brazil. Viet Nam also

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exports other nuts, including almonds and pistachios, even if it does so only in small quantities. However, almonds and pistachios are not only the two main imported nuts in the world, but also among those with the highest growth rates between 1999 and 2003, both in volume and value terms. This suggests that these could be potential diversification products for Viet Nam.

Cashew nuts have grown rapidly as an export sector in the early 1990s, and have increased sharply again since 1999. According to GSO data, the export of Vietnamese cashew nuts increased strongly between 1999 and 2004, both in volume (from 16,600 tons to over 100,000 tons) and value (from less than USD 100 million to USD 400 million). Current exports are thus already higher than the prediction in the Vietnamese government’s export strategy for 2010 (80,000 tons and USD 400 million). The United States is still Viet Nam’s biggest export market for cashew nuts, followed by China, Australia, and the Netherlands, but Vietnamese exporters expand also to new markets, including Russia and New Zealand.

Figure 6. Production and exports of cashew nuts in Viet Nam


Source: MARD.

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Table 20. Viet Nam’s exports versus world imports of nuts, 2003 Viet Nam’s exports World imports Product (HS code)

Value (USD 1,000)

Growth in value

Growth in volume

Value (USD 1,000)

Growth in value

Growth in volume

Viet Nam's

market share

Fresh or dried cashew nuts, shelled (080132)

236,971 40 62 889,809 -1 11 26.6%

Shelled ground-nuts, whether or not broken (120220)

26,323 4 10 833,540 0 2 3.2%

Desiccated coconuts (080111) 5,149 -34 -24 193,869 -4 2 2.7%

Ground-nuts, prepared or preserved (excl. preserved with sugar) (200811)

4,496 9 10 475,241 5 10 0.9%

Fresh coconuts, whether or not shelled or peeled (080119)

4,187 31 40 75,104 3 .. 5.6%

Other nuts (080290) 2,912 63 180 624,011 7 9 0.5%

Ground-nuts in shell, not roasted or otherwise cooked (120210)

1,648 -14 -3 143,948 4 6 1.1%

Fresh or dried cashew nuts, in shell (080131)

1,200 5 21 326,005 3 19 0.4%

Mixtures of nuts or dried fruits (081350)

380 -6 -1 100,118 17 25 0.4%

Fresh or dried walnuts, shelled and peeled (080232)

132 .. .. 326,761 11 41 0.0%

Fresh or dried walnuts in shell (080231)

54 .. .. 156,875 -1 32 0.0%

Fresh or dried pistachios (080250) 36 .. .. 1,045,118 18 17 0.0%

Fresh or dried almonds, shelled and peeled (080212)

3 .. .. 1,301,126 10 10 0.0%

Fresh or dried chestnuts "Castanea spp." (080240)

2 .. .. 240,751 4 2 0.0%

Fresh or dried hazelnuts or filberts "Corylus spp.", in shell (080221)

2 .. .. 50,916 11 16 0.0%

Fresh or dried hazelnuts or filberts "Corylus spp.", shelled and peeled (080222)

0 .. .. 595,844 -4 4 0.0%

Fresh or dried almonds in shell (080211)

0 .. .. 109,688 7 8 0.0%

Fresh or dried brazil nuts, shelled (080122)

0 .. .. 61,663 4 11 0.0%

Fresh or dried brazil nuts, in shell (080121)

0 .. .. 11,779 -12 -8 0.0%

Note: Growth rates are in% per year from 1998-2003. Source: ITC’s TradeMap.


The area under cashew production has increased rapidly since Doi Moi, from 30,000 ha in the end of the 1980s 195,000 ha in 1996 to more than 282,000 ha in 2004. Despite problems during the late 1990s linked to droughts, the cashew nut output in Viet Nam reached more than 200,000 tons in 2004, up from only 70,000 tons in 1999.

Viet Nam has over the last years built out its capacity for processing and as a result shifted from an exporter of raw cashew to processed. The processing sector has developed rapidly, along with the increase of cashew nut production: while there were only six cashew nut processing factories in 1986, currently there are about one hundred factories, many of which are state-owned enterprises. Despite efforts to further increase

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the area under cultivation, the domestic production of raw cashew is below the export capacity and Viet Nam imported more than 20,000 tons in 2003 for further processing, mainly from Indonesia, but also the Philippines and African countries. The Agricultural Masterplan expects cultivation of cashew tress to expand by one third in the next five years to 500,000 hectares, and foresees significant investments to raise the processing capacity by 75% to 700,000 tons of raw cashew nuts a year by 2010.

Cashew is an important cash crop, especially for poorer segments of the rural population in some areas of the country. Cashew nuts are a high-value crop, and the development of cashew nuts in Viet Nam is due to profits that are higher than for many other crops. One estimate (based on the so-called domestic resource costs index DRC) suggested that in 1999, resource costs of only VND 20. - were necessary to generate profits of VND 100.- via exports.

Viet Nam has favourable soils and climatic conditions for growing cashew nuts, though cashew has a high drought tolerance, and is generally grown under rainfed conditions on soils of low fertility (O’Farrell, 1998).

Viet Nam has a number of weaknesses in the production and processing of cashew nuts. According to experts of the Cashew Research Centre, cashews are generally considered as an easy-to-plant-crop, and farmers often do not pay much attention to which breed they choose and do not take much care in farming, thus negatively affecting quality and yields. Though yields differ strongly across regions, average cashew yield in Viet Nam is lower than other countries such as Thailand and India. The supply of raw cashew nuts for further processing is inadequate and unstable, so that Viet Nam has to import. In addition, infrastructure is poor, storage facilities, marketing service, and trade promotion are underdeveloped, and Vietnamese cashew nuts do not have a brand name.


World imports of nuts has been growing steadily at more than 5% p.a. in value and 7% in volume, and amounted to more than USD 6 billion in 2003. The world’s largest importers of nuts during that year were the United States and Germany. For cashew nuts (without shell), the United States absorbs almost half of global imports, followed by the Netherlands: the Netherlands’ prominent position is certainly due to their role as re-exporters to other European countries.

Despite fluctuations, world prices for cashew nuts have been increasing recently, driving up benefits for stakeholders in the Vietnamese cashew value chain and favouring intensive farming by producers and expansion of factories in Viet Nam. However, the prospects for the coming years are unclear; some industry representatives expect no major uptake of world prices, while others see a persistent shortage of cashew nuts on the market, resulting in better prices. India, the largest producer and exporter which wants to produce one million tons of raw nuts by 2010, needs to import about half of its demand for processing, but is meeting increasing difficulties to do so due to export restrictions of raw cashew in some producing countries.

All major markets grant free access to Viet Nam. Viet Nam benefits from free access for shelled groundnuts, and even has a substantially preferential tariff advantage in Japan, offsetting disadvantages of the marginally higher than most tariffs it receives in Ukraine, Norway and the United States.

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Fruits and vegetables Vietnamese exports of fruits and vegetables have grown strongly since the early 1990s. Viet Nam exports its fruits and vegetables mainly in processed form, especially canned, which tend to command lower prices than fresh produce. Vietnamese yields are low by international comparisons, partly because of inappropriate cultivation and post-harvest technologies.

The export potential for the fruits and vegetables is considered low, though this is a very heterogeneous industry that includes commodities with very different profiles and potential. Export development needs to focus on quality of supply of raw materials and processing, a possible shift towards higher value added fresh produce, supporting infrastructure such as storage and refrigeration, and export marketing to selected markets. The government is taking various initiatives to boost production and exports, for example by promoting improved farm technology, information activities for farmers; upgrading the processing facilities, providing incentives to joint-ventures in fruits and vegetable production and processing. Viet Nam should also identify key agro-products for each region along their comparative advantages.

Table 21. SWOT analysis for fruits and vegetables


Climate is diverse and suitable for temperate and tropical fruits and vegetables Diversified products Support from Government

Backward and small processing households No concentrated areas for production Poor performance of technical monitoring and inspection systems Poor infrastructure Shortage of materials for processing factories Underdevelopment of storage facilities, marketing services Overuse of pesticides and fertilizers Low and inconsistent quality Poor varieties Diseases Lack of marketing skill, trade promotion Lack of powerful brand name Lack of bilateral trade agreements Lack of SPS with large importers (China)


Possibility for suitable land expansion Processing capacity is still under-utilised Increased public investment in science and technology Growing domestic and world market demand Support program from Government Proximity to big markets, such as China, Japan, Taiwan, and Singapore

Natural disasters (drought, flood) Overuse of pesticide and fertilizers Competition from other exporters (such as Thailand) in both domestic and international markets Reduction of imports of main markets (such as China)



Viet Nam is a minor world player for fruits and vegetables, but Vietnamese exports have grown strongly since the early 1990s. In 2004, Viet Nam produced about 4 million tons of fruits and 8 million tons of vegetables (MARD), of which about 15-20% were exported. Viet Nam has relatively small share in the world market, which is in the order of USD 70 billion. The export value of Vietnamese fruits and vegetables increased ten-fold from some USD 30 million in the early 1990s to USD 330 in 2001, was then divided by a factor of two within two years (to USD 150 million in 2003), and increased again in 2004 (GSO statistics). The government expects exports of fresh and processed fruits and vegetables to grow to USD 1,6 billion by 2010.

Viet Nam exports mainly fruits and vegetables in processed form, especially canned, which tend to command lower prices than fresh fruits and vegetables. The main species

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of exported fruits are pineapple, banana, mango, litchi, watermelon, longan, blue dragon fruits and rambutan. Exported vegetables include baby cucumbers, potatoes, onions, tomatoes, beans, cauliflowers and chilli. While the fruits and vegetables sold in the domestic market are mainly in unprocessed form, Viet Nam’s exports are mostly in processed form, mostly canned, but also to some extent dried and frozen. Exports of fresh fruits and vegetables are limited. However, contrasting with many other agricultural commodities, the value added and profitability of the market for fresh fruits and vegetables tend to be higher than for processed products, especially canned (ITC, 2002a).

Until recently, exports were overly depended on a limited number of markets, even if Viet Nam now exports fruits and vegetables to nearly 50 countries. These concern mainly countries in the region: in 2003, 55% of exports were sold to China, followed by Korea and Taiwan. Vietnamese exporters have experienced radical changes geographically, with their main trading partners (Soviet Union, then China) sharply reducing their imports. Viet Nam established early on an export-oriented canning industry to supply mainly tropical fruits to CMEA countries: before 1991, Viet Nam exported almost exclusively to the Soviet Union and other CMEA countries, but had to redirect exports with the collapse of the Soviet Union. More recently, Vietnamese exporters had to witness a sharp reduction of its sales to their main market, China, from over USD 140 million in 2001 to only about USD 25 million in 2004. Some observers link this reduction to the Fruits Trade Agreement between China and Thailand, which eliminated tariffs for fruits and vegetables between these two countries in 2004, whereas tariffs imposed on fruits and vegetables from Viet Nam range between 12% and 24.5%. The share of China in Vietnamese exports dropped from more than 55% to only about 15% in 2004. By contrast, exports to important markets such as the United States, Japan, the European Union, the Russian Federation and Hong Kong have increased lately. For example, the share of the United States in Vietnamese exports increased from 1% in 2000 to almost 10% in 2004: the Bilateral Trade Agreement (BTA) with the United States is one of main factor pushing agricultural export to United States.

Market diversification strategies are essential, if Viet Nam wants to avoid relying on a limited number of markets, as was the case for example for tea. This report has identified opportunities for diversification in the European Union (United Kingdom, France, Italy, Spain, Germany) and North America (United States, Canada).

Figure 7. Production and exports of fruits and vegetables in Viet Nam


Source: GSO.


Generally, the area and production of fruits and vegetables in Viet Nam has been increasing steadily since the early 1990s. The area for vegetables almost tripled between

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1990 and 2003 to more than 570,000 ha, and the area for fruits doubled during the same time period to about 650,000 ha. The four main kinds of fruits are litchi, longan and rambutan, followed by bananas, citrus and mangos. The overall increase in the fruits area and production in volume and value is due to several factors, including the liberalization of trade policies (which have stimulated the business environment, especially for high-value products like fruit); to the strategy of agricultural diversification (which has encouraged farmers to diversify from rice production to more fruits and livestock production); and to the increase in living standards, especially in the urban areas (encouraging people to consume better quality products). Finally, the increase of the total population in Viet Nam has contributed to a strong demand for food in general. The fruits area is forecast to expand to 750,000 hectares with annual output of nine million tons by 2010 (http://vnexpress.net/).

Viet Nam has a number of advantages for the production of fruits and vegetables, including a favourable climate and ecological conditions for temperate and tropical fruits and vegetable, and a high domestic demand.

However, Viet Nam has also some features, which constrain the development of food and vegetable exports. For example, small farmers and households undertake much of the fruits and vegetable production in Viet Nam, which creates problems such as insufficient quality and consistency of supply. It has been suggested that farming households join cooperatives to reduce production costs and provide a large and stable supply to companies at competitive prices.

Main problems include poor quality, small quantities, low productivity and high prices. Yields are below world average; the strains common in Viet Nam are often not suitable for export markets; the transport system and post-harvest handling inadequate (e.g. lack of refrigeration facilities), and processing technology tends to be outdated. As a result, Viet Nam competes on the export market at the low price segment.

High production costs bring down margins. For example, one study suggested that production costs of canned pineapple (a main export fruits of Viet Nam) are much higher in Viet Nam than in Thailand in all important stages: material (pineapples are 15% more expensive), processing and transport (40% more expensive). Since the average export price of Vietnamese canned pineapple in the United States is 5-10% higher than export price of Thailand, the export margin must be much lower in Viet Nam than in Thailand.

Many types of equipment in food processors are backward which affect negatively quality and processing productivity. Viet Nam has more than 70 fruits processing factories, most of which are state owned or owned by the provinces, with a combined annual capacity of 290,000 tons but only operating at 30% capacity. Many food-processing companies have not been certificated according to international standards, such as the Hazard Analysis and Critical Control Points programme (HACCP, see Box 4 on page 51). Besides, the lack of modern storages and appropriate preserve chemicals impact negatively on the quality of the produce, especially fresh fruits that are easily perishable.

Up to 90% of Vietnamese agro-products exported to overseas markets are without a trademark, which may correspond to the loss of hundreds of million USD annually to the Vietnamese economy. It is important to register Vietnamese fruits trademarks abroad. Among 173 companies in the industry, only 36 have registered its fruits trademarks locally and five abroad. Nine out of 11 corporations under the Ministry of Agriculture and Rural Development have registered trademarks of 107 fruits categories in foreign countries. The establishment of trade mark for agro-products requires a long term development strategy and synchronous coordination of all stages from selecting varieties, planting, caring, harvesting and post harvest storing, which requires close cooperation between farmers, scientists, communicators, enterprises and the State.

Viet Nam exporters of fruits and vegetables have to cope with fierce competition from other exporters, both in the Asia region (such as Thailand, the Philippines and China) and

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worldwide. According to the President of the Viet Nam Fruits Association, Dr. Do Mai, “Viet Nam’s fruits can hardly compete with those from other countries in the ASEAN Free Trade Area, and when Viet Nam becomes an official member of the World Trade Organization, the competition will get even tougher (http://vnexpress.net/)”. The lack of Vietnamese trademarks may even intensify this problem.

Cooperation among all relevant stakeholders and actors is needed to improve the competitiveness of the Vietnamese fruits industry. According to the president of An Giang University, Professor Vo Tong Xuan at a seminar on Nov. 16, 2005 (http://Vnexpress.net ), “in order to sharpen the competitiveness of the local fruits market, close cooperation among the State, businesspeople, farmers, scientists, banks and mass media needs to be established.” The state and banks can also contribute to the local fruits industry, e.g. by focussing on the technical transfer of latest techniques and equipment and providing financial support for projects to establish more orchard areas. Other suggestions include that current orchard areas should be restructured so that each area grows a specific fruits variety: “Growing many fruits varieties in the same area has so far limited output and the quality of key fruits” (Dr. Chau, Head of the Southern Fruits Institute).


World demand for fruits and vegetables has being growing, but not remarkably. Globally, almost USD 70 billion of fruits and vegetables were imported in 2003, the largest importers being the United States, Germany, the United Kingdom and France. Between 1999 and 2003, the global demand for fruits and vegetables grew at a rate of more than 6% per year in value terms, but by just over half that rate in volume terms.

Viet Nam faces highly unfavourable market access conditions. For some of Viet Nam’s most important export products, such as “Manioc (cassava)…” (HS 071410) and “Frozen fruits and nuts…” (HS 081190), Viet Nam faces higher tariffs than most of its competitors particularly in Taiwan and Malaysia. In large markets like the United States and Japan, the conditions are the same as for most, as is also the case in Viet Nam’s major markets (China and Korea).

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Pepper and other spices and culinary herbs Although black pepper has a history of 200 years in Viet Nam, pepper has emerged as a major export commodity only during the 1990s due to dramatically expanded area under pepper. Viet Nam is a major exporter of spices, with a 5% world market share. In black pepper, the most important crop for Viet Nam within this sector, Viet Nam has become the world’s largest exporter. The Vietnamese pepper sector is very export-oriented, with exports accounting for about 95% of the production. Total pepper output has increased markedly over the period from 1998-2004, from 15,000 tons to more than 100,000 tons. Black pepper is one of six agro-commodities that have export value over USD 100 million per year.

Not only does black pepper provide significant export earnings overall, it continues to be a profitable for farmers despite dropping global prices. Viet Nam also enjoys relatively favourable market access, and, though quality concerns remain, has received a recent infusion of new companies and new investment that has opened up new markets and increased the proportion of high value pepper produced.

Although the export potential is high, given the high supply relative to demand, downward pressure on global prices, and Viet Nam’s already dominant position in the market, expanded production does not seem a viable strategy. Viet Nam’s strategy on black pepper should rather focus on value added through quality upgrading and processing, and ensuring that plantations receive proper investment. There may also be opportunities in improving the market profile of pepper from Viet Nam to command higher prices. In the spices sector overall, there are other dynamic products Viet Nam is producing in small quantities, which may present opportunities for expansion such as spice mixtures, cassia, star aniseed and ginger. These need to be examined in more detail to assess their potential value.

Table 22. SWOT analysis for pepper


Low production cost High yield Experience with black pepper production Large export share and market power Emergence of large exporting companies

Growing pepper is very capital-intensive Fragmented area and limited land Procurement is not well organized, and there is strong competition between processors in procuring materials from farmers Poor processing technologies Quality is still low


Market diversification Quality improvement Recovery of pepper price Development of direct exports to overseas markets

Disease Unstable prices Low investment due to low prices Strong international competition Water resource limitation



Viet Nam has a high world market share for pepper. In 2003, Viet Nam exported spices and culinary herbs at a value of over USD 100 million. This translates into a market share of almost 5%, among the highest for any export sector of the country. However, while registering healthy growth in volume in recent years (almost 25% p.a. between 1999 and 2003), in value terms exports decreased significantly (by 10% p.a. over the same period). The main destinations of Vietnamese spices were the United States, India, Germany, Singapore, Pakistan and the Netherlands. Out of these, India is the fastest growing market with an average increase of 25% per year.

Vietnamese exports are heavily concentrated in black pepper. By far the most important commodity for Viet Nam within the sector is “Pepper of the genus piper, neither crushed nor ground” (HS 090411), which accounts for 85% of total exports of spices. Most of the

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pepper produced in Viet Nam is exported to the world market. Viet Nam has market power in black pepper, and the quality and timing of the harvest in Viet Nam determines how the market will move. At present, black pepper is ranked as a competitive product within agro-product group of Viet Nam and it is one of six commodities that have export value over USD 100 million per year. Total pepper output has increased markedly over the period from 1998-2004, from 15,000 tons to more than 100,000 tons.

The importing markets for Vietnamese black pepper are diversified. Before 2000, Viet Nam exported pepper mainly to Asian countries, especially Singapore. Recently, however, pepper exporters have expanded to other markets, and Viet Nam now exports pepper to 40 countries in the world, almost half of the total going to the EU, followed by the United States (25%), Asian countries (13%) and the Middle East (almost 10%). This market diversification helped exporters increase export volume, encouraged domestic production and reduced the risk they ran depending on only a few big markets. Opportunities for further diversification exist especially in the European Union (especially France, Spain, Poland), Japan, Australia, and Malaysia, and Iran and South Africa.

Viet Nam receives low prices compared to competitors. Even with many efforts to improve the quality and “name” of Viet Nam pepper, prices enjoyed by Vietnamese exporters generally remain lower than world price, though the gap is closing, possibly as a result of improving quality. This indicates there may be opportunities to get higher prices through improving the brand reputation employing better processing equipment, and marketing more effectively.

Figure 8. Production and exports of pepper in Viet Nam


Source: GSO.


Production of black pepper has increased markedly in the past 5 years. Though pepper vines were introduced into Viet Nam at the end of the 19th century, in 1975 there was still only about 500 hectares of land in Viet Nam, producing only about 500 tons annually. In the period of 1975-1981, the amount of land for pepper never exceeded 1,000 hectares. In the 1990s, however, especially since 1996, the area devoted to pepper production has increased sharply, from 7,500 hectares in 1996 to approximately 52,000 hectares by the end 2004. In that year, pepper output was nearly 80,000 tons and Viet Nam became the largest black pepper exporter in the world.

At present, most pepper is produced in the South East (more than half of total area) and Central Highlands (almost one third). The North Central, Central coast and the Mekong Delta also have some production. The South East and Central Highland have advantages in soil that produce higher yields, while the Mekong Delta (Phu Quoc) and North Central

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pepper benefit from favourable climatic conditions that give solid seed pepper and special flavour (Box 9).

Foreign companies have recently entered the pepper industry driving the increasing volume and quality of exports. In 2003, of the more than 70 companies exporting pepper, the 10 largest accounted for half of total pepper exports (Custom Statistics, 2003). Most foreign companies are recent arrivals, and have pushed, in part, the rapid increase in Vietnamese pepper exports. Foreign companies who have recently entered the market include EDF Man (Netherlands) and Harris Freeman (United States), established in 1998, and Olam (Singapore), which was established in 2003. Because these companies are bringing in modern equipment to process high-quality ASTA-grade (American Spice Trade Association) pepper, they have opened up new markets, especially in Europe.

Exporting black pepper is profitable, despite dramatic price fluctuations. Pepper requires high initial investment, but is a profitable export crop for Viet Nam. Pepper exports continued to remain profitable even in the low price environment of 2003. The export price of pepper in 2003 was still higher than cost, even for high-quality pepper. This varies considerably, however, across regions in Viet Nam depending on the suitability of the soil. In locations with favourable soil and climate conditions like Binh Phuoc, pepper yields average 3.5 tons per ha, whereas in other regions, yields can be as low as 2.0 ha, thus substantially pushing up average production costs. It is this comparative advantage that allowed Viet Nam to take a dominant position in the market even during a price downturn. Low prices, however, may be leading to low investment. Farmers have been taking very high yields, and may have been hesitant to invest in necessary upkeep of their plantations. Big harvests may also be “exhausting” the vines signalling lower harvests.

Box 9. Spices are interesting for inter-cropping

Perennial spice crops such as pepper, nutmeg, cinnamon, cardamom and cloves play an important part in the agriculture of some countries in Asia, particularly in smallholder agriculture. Spice crops are cultivated both in home gardens and as a mono-crop.

Spices offer a small but extremely remunerative market and are considered for application in inter-cropping, e.g. cloves, nutmeg and pepper with coconuts, or cardamom with coffee; for diversification; and as an alternative to tea for specific environmental conditions, e.g. cinnamon in sandy soils and, cardamom at high altitudes; and for import substitution, e.g. cloves in Indonesia, pepper in India. Being labour-intensive, these crops and other spices also offer attractive prospects for generating employment.

Source: FAO (1999).


The world market for spices and culinary herbs amounted to just over USD 2 billion in 2003, with the United States as the largest importer, absorbing almost a quarter of all exports. International demand for spices was depressed between 1999 and 2003: in terms of value, world imports actually fell by 1.3% a year, although in volume imports grew by almost 7% a year, suggesting falling prices.

Black pepper prices have fluctuated dramatically. The price of pepper has been highly variable over the period since 1970. Since 1998, the price of pepper has decreased after experiencing a steady increase from the beginning of 1990s. The increase in price during the early 1990s allowed farmers to invest in increased pepper production. Price decreases since 1998 negatively affected all the players across the industry including the pepper growers, processors and traders, but a recent up turn starting in 2004 has begun to relieve the pressure and increase profits. Bumper harvests in Viet Nam have continued to keep supply ahead of demand, even through 2004. The size of the Vietnamese harvest, and whether producers are able to maintain high yields, will continue to determine price movements for the foreseeable future.

This sector is characterised by either free access or very high tariffs, generally applied across the board. Viet Nam faces the same market access conditions for black pepper as

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most exporters. The exceptions are Taiwan, where tariffs are higher, and the Philippines, where Viet Nam enjoys lower tariffs than most of its competitors.

Diversification options, including exporting crushed or ground pepper, oleoresins and white pepper should be explored carefully. As the world market for this product has been shrinking substantially in value terms (by more than 20% p.a. between 1999 and 2003, though increasing in quantity), possibilities of increasing the export of the crushed or ground pepper should be explored, where world demand has remained much more stable. There are also a number of other products within the sector that Viet Nam is producing in small quantities such as ginger, cassia, star aniseed, and spice mixes, which may present opportunities for diversification (Table 23). These should be researched in more detail.

Government strategy

In the Government’s export strategy, only a smaller expansion of exported volume is foreseen with a growth of 20% by 2010 as compared to year 2000. Earnings are expected to increase to USD 250 million.

Table 23. Diversification: Viet Nam’s exports versus world imports of spices, 2003 Viet Nam’s exports World imports Product (HS code)

Value (USD 1,000)

Growth in value

Growth in volume

Value (USD 1,000)

Growth in value

Growth in volume

Viet Nam's market share

Pepper of the genus Piper, neither crushed nor ground (090411)

89,320 -13 17 428,933 -22 3 20.8%

Cinnamon and cinnamon-tree flowers (excl. crushed and ground) (090610)

4,273 1 12 103,150 -3 2 4.1%

Pepper of the genus Piper, crushed or ground (090412)

3,572 6 31 92,734 -3 30 3.9%

Seeds of anise or badian (090910) 3,547 0 7 25,068 2 8 14.1%

Turmeric "curcuma" (091030) 1,019 26 29 42,617 0 2 2.4%

Other spices (091099) 1,012 29 23 193,610 8 10 0.5%

Crushed or ground cinnamon and cinnamon-tree flowers (090620)

852 2 12 20,168 8 33 4.2%

Thyme and bay leaves (091040) 456 .. .. 40,688 9 19 1.1%

Ginger (091010) 451 0 1 183,935 0 12 0.2%

Fruits of the genus Capsicum or of the genus Pimenta (090420)

263 18 33 502,579 7 12 0.1%

Mixtures of different types of spices (091091)

208 18 23 130,990 9 6 0.2%

Nutmeg (090810) 134 .. .. 80,432 -4 -3 0.2%

Cardamoms (090830) 78 -9 -2 124,070 3 11 0.1%

Cloves, whole fruit, cloves and stems (090700)

64 .. .. 113,776 1 -3 0.1%

Curry (091050) 38 11 10 46,846 14 13 0.1%

Caraway seeds (090940) 19 .. .. 14,935 11 2 0.1%

Cumin seeds (090930) 18 67 69 110,926 0 -6 0.0%

Seeds of fennel; juniper berries (090950) 9 41 38 22,604 -3 0 0.0%

Vanilla (090500) 0 .. .. 548,093 66 7 0.0%

Saffron (091020) 0 .. .. 95,283 13 25 0.0%

Coriander seeds (090920) 0 .. .. 51,608 7 2 0.0%

Mace (090820) 0 .. .. 16,547 -7 3 0.0%

Note: Growth rates are in% per year from 1998-2003. Source: ITC’s TradeMap.

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Tea and tea products Tea is a rather small export commodity when compared to rice, coffee, rubber, pepper and cashew nut, fruits and vegetables and pepper. However, Viet Nam’s tea exports have grown rapidly both in volume and value terms since the early 1990s, to a level of some 60,000 tons worth USD 60 million.

Viet Nam tea yields are low by international comparisons. Vietnamese tea is generally considered of poor quality, reflected in lower prices on the world market by as much as 30%. The reasons for low productivity and low quality include cultivation techniques, and post-harvest technologies.

The strategy for export development should be on upgrading quality and improving yields. The reasons for Viet Nam’s better performance in green tea markets should be looked at carefully to determine if this is replicable to make Viet Nam competitive at a larger scale. Given the world market position and the opportunities for quality upgrading in processing and post-harvest handling, the export potential for the tea industry is considered medium.

Table 24. SWOT analysis for tea


Suitable natural conditions for tea cultivation Long experience in tea cultivation Enhancement of product diversification Presence of foreign and joint-venture companies

Generally old tea plantations, low varieties, poor irrigation system, and low yield Overuse of fertilizers and pesticides Domination of unlinked value chain with farmers Domination of foreign brands of black tea in domestic market Lack of storage facilities Strong competition between State and private sector Poor marketing skills of State factories Inconsistent export quality Exports of semi-processed tea with low value Dependence on some big markets (Iraq) with risk No brand name


Development of processing at household level as a main source income for producers Development of private sector exports Product diversification, e.g. tea as a fresh drink (ice tea, fruit tea) Development of technology application Equitization process (most companies are required to equitize by Government)

Unstable export markets Strong competition among Viet Nam exporters Competition with other exporters



The export performance has been more than satisfactory in recent years. Though Viet Nam is not in the league of the world’s top suppliers such as India, Sri Lanka and Kenya, Viet Nam’s world market share is relatively high (1.5%). On top of that, the sector has experienced strong growth in exports, with an average annual increase of almost 15% in value terms between 1999 and 2003. According to Vietnamese statistics, tea exports exceeded USD 60 million in 2003. This is substantially higher than according to international trade statistics which exclude Iraq (a major trading partner) and which estimated exports at USD 40 million, with the main destinations for Vietnamese tea being Taiwan, Russia and Germany.

Though the main export product is black tea (“Black fermented tea in immediate packing of >3kg”, HS 090240), which constitutes three quarters of tea exports, Viet Nam also exports small amounts of green tea and specialty teas such as Oolong and Suchong. The

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share of green tea has increased recently, thus matching with changes in international preferences.

Vietnamese exporters have experienced radical changes geographically, with their main trading partners (Soviet Union, then Iraq) sharply reducing their imports. Until 1991, Viet Nam mainly exported semi-processed tea to the Soviet Union and Eastern Europe, where it was reprocessed and repackaged prior to sale. Following the Soviet Union’s collapse, Viet Nam’s overseas markets have expanded. It exported tea to more than 50 markets as of early 2004, though 80% of exports are destined for Iraq, Taiwan, India, Pakistan and Russia. Iraq was one of the key buyers of Vietnamese tea.

Market diversification strategies are essential. The dangers of relying on a limited number of markets became apparent when the war in Iraq in 2003 led to the collapse of demand for Vietnamese tea. This had sharp repercussions for all participants in the tea sector, particularly those affiliated with SOEs that were exporting through VINATEA: in 2003, VINATEA exported just 15,000 tons of tea to Iraq despite contracts to sell 30,000 tons. Moreover, Iraq was unable to make payments on delivered products, thereby incurring debts of euros 1.3 million with VINATEA.

Gradual recovery took place in 2004 as the exports were redirected elsewhere to avoid a repetition of the 2003 crisis. Recently, Viet Nam has attempted to expand and diversify its markets for exporting tea. It has focused particular efforts on European countries, such as Germany and the United Kingdom. Viet Nam has also expanded export sales to the United States and Asian countries, such as Japan, Indonesia, and Singapore. For black tea, Iraq, Pakistan and India used to be the main buyers (Accenture, 2000), and opportunities for market diversification exist mainly in the Middle East (Saudi Arabia, Oman) and the European Union (France, Hungary, United Kingdom). For green tea, Taiwan, Singapore and Japan are the main buyers of green tea. Whilst the Taiwanese market is currently showing healthy growth rates of more than 30% annually, Vietnamese dependence on this market has to be considered as too high. Regarding the penetration of new markets, Viet Nam may be able to realise synergies by tapping into its existing distribution channels for coffee.

Figure 9. Production and exports of tea in Viet Nam

Area and output Exports and output (dried tea tons)

0

20000

40000

60000

80000

100000

120000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

AREA (ha)

OUTPUT (fresh tea tons)

0

10

20

30

40

50

60

70

80

90

100

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Export

Total output

Source: Background report by MARD.


Tea production in Viet Nam grew strikingly in the 1990s, with expansion in planted area contributing more than improvements in yields. As of 2003, Viet Nam had a total of 99,000 ha of tea, of which smallholders farmed over 70% was and State plantations and Joint -Venture companies approximately 30%. The share of smallholders has increased sharply since 1995, when they were allocated land following Decree 01. Over the 1990-2003 period, production grew an average of 7% yearly, while area and yield grew 3.5% and 3.1% each year, respectively. Production slumped in 2003, when the market collapsed owing to war with Iraq, but it is expected to reach record levels in 2004.

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The yields of Vietnamese tea are low when compared to other major producers. Though yields depend on the variety of tea planted, cultivation techniques, and agro-ecological conditions, international comparisons suggest that average dry tea yields in Viet Nam (0.8-1.2 tons/ha) are substantially lower than in other major producers, such as Kenya (2.2 tons/ha) India (1.8 tons), Japan (1.7 tons), Sri Lanka (1.5 tons) and Taiwan (1.1 tons, Vo Thi Hoai, 1998). The reasons for low productivity are manifold, including cultivation techniques, and post-harvest technologies.

The tea sector in Viet Nam is strongly export-oriented, with 85% of production destined for foreign markets in 2001/02, a striking jump from the share of some 30% in 1991. Viet Nam produces three types of processed tea – orthodox black tea (60%), Cut, Tear, and Curl (CTC) black tea (7%) and green tea (33%) (Accenture 2000). Most tea consumed domestically is green tea; indeed, 90% of green tea produced is consumed locally (Accenture 2000). Green tea flavoured with jasmine, lotus, and other fragrant flowers is common, accounting for about 20% of domestic consumption (Vo Ngoc Hoai 1998). Black tea is only consumed in big cities, and even there it accounts for just 1% of total consumption. However there is growing urban demand for flavoured and scented black tea, first introduced locally by Dilmah, a Sri Lankan company, which together with Lipton, accounts for about 70% of the market in major cities and industrial zones. There are also some Vietnamese companies that produce such small bag tea, but they cannot compete with foreign companies. Concerning product diversification, other processed products based on tea, such as soft drinks, candy and biscuits, are not available in Viet Nam.

About 130 Vietnamese companies export tea, 40 of which are specialized tea exporters. Viet Nam does not have an auction system because the volume of sales is not large enough to require it and most exporters have already established long-term relationships with buyers. Rather, tea exports are channelled through VINATEA or private traders. VINATEA is no longer dominant in exports, commanding less than 50% of exports, as compared to 40% for limited companies and 8% for joint venture companies. In 2003, VITAS announced plans to open a tea trading floor to promote countries’ tea exports and host trading sessions via auctions, as a prelude to opening an online trading floor on its website. Nonetheless, these plans have so far not materialized, and as noted above, there are reasons to caution against such a development.

The biggest difficulty Vietnamese tea faces is that it does not have a well-known trademark and its price and quality are not competitive. The quality of Vietnamese tea is generally considered to be below the world average, reflected in lower prices on the world market by as much as 30%. Most of the tea (both black and green) is sold in bulk, without labels, branding or packaging. For example, only 17% of VINATEA’s exported tea carries a VINATEA label, whereas 70% is remixed and labelled abroad. There is a significant price gap between export prices for Viet Nam and the average world price is large. While the gap between Viet Nam’s export price and the world price has narrowed, the gap remains relatively high. At the same time, the gradual reduction in the price gap between the export price and world price suggests that the tea sector in Viet Nam is becoming more integrated into the world market. In addition, some joint ventures have proven that Vietnamese green tea can fetch a premium price on the global market.

Despite a long tea-consuming tradition, FAO estimated that tea consumption per capita in Viet Nam (260 grams in 1997) is much lower than in other Asian countries, where drinking green tea is customary, such as Hong Kong (1400 grams), Taiwan (1300 grams), Japan (1050 grams), and China (340 grams). Projections over 2000 to 2005 suggested that tea consumption would increase 5% per year to 380 grams per capita, but quantitative figures to confirm this are not available.

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The world market for tea of 1,4 million tons is dominated by Sri Lanka, Kenya, China and India, jointly accounting for about two thirds of total exports. Viet Nam has 2 - 3% of the world market, but with a stronger position for green tea. The spread of tea cultivation to new countries is likely to enhance world supply, while the growth in demand for tea is slow.

The world market for tea and tea products was depressive, shrinking by 0.4% a year in value between 1999 and 2003, and growing by just 1% per year in volume. By 2003 the market was worth some USD 2,480 million. The largest importers are the United Kingdom (10.8%), Russia, Pakistan, the United States and Japan. Amongst those, only the United States achieved positive growth over the past five years. The market for black tea is more than five times the size of that for green tea, but in recent years the latter has fared better in terms of growth.

Over the last decade key features of the tea market have been low prices, oversupply and in turn, fierce competition. The EIU (2005) notes that 2004 provided an exception to this and prices increased. However the prospect of oversupply in 2005 will dampen further price recovery. Demand in Middle Eastern countries in particular is growing.

Overall market access conditions are reasonably good. The most important product globally and for Viet Nam is “Black fermented tea…” (HS 090240). For Viet Nam this product accounts for 77% of export earnings in this sector. Generally speaking Viet Nam enjoys free access or similar conditions to its competitors. However, in South Africa the country faces a tariff of 107%, more than double the tariff imposed on most other exporters. Viet Nam also faces discriminatory tariffs in its biggest tea market Taiwan, and in smaller world markets like Ukraine and Botswana.

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Brief information for less examined agricultural commodities and processed products

Wood and wood products

As a marginally bigger importer than exporter, Viet Nam’s export performance appears relatively weak. According to TradeMap data, Viet Nam exported wood and wood products for almost USD 140 million in 2003. With a market share of 0.2%, the country’s exports form just a small part of the world’s supply. However, Viet Nam’s experience over the 1999-2003 period is inverse to that of the world: exports in volume terms grew slowly at only 3% p.a. but in value terms increased at a considerable rate, 23% per year. Nearly three quarters of Viet Nam’s exports go to its East Asian neighbours: Japan (more than half), China and Taiwan. Viet Nam could diversify its export markets to growing transition economies in Europe, such as Croatia and Hungary.

Forestry export of Viet Nam reached over USD 1 billion in 2004, of which wood products accounted for nearly 95%, according to Vietnamese data. However, Viet Nam has to import a large amount of inputs (mainly wood), about 60% of the export value. The Vietnamese government has plans to support forest products.

Originally a country under considerable forest cover, Viet Nam experienced a period of rapid deforestation from the 1950s to the 1980s. In the 1990s, Viet Nam has been able to halt the deforestation and is one of the more successful countries in the world in terms of increase area under forest cover. The so-called “5 million ha reforestation programme” has partly contributed to this.

There is now increasing scope to develop an export industry based on domestic raw materials, while neighbouring countries Laos and Cambodia are large exporters, legally and illegally, of timber. Several foreign direct investments in the wood processing industry, establishing plantations for wood supply are also being set up in Viet Nam. However, there is considerable competition with domestic demand for wood, for construction materials, fuel and as input to domestic processing. For example, Viet Nam is expanding its production of paper, and is currently importing pulpwood for this purpose. The wood sector is plagued by inefficiencies due to various distortions at the market, making, for example, farmers less inclined to move into agro-forestry.

Over the five-year period, world import growth in volume was nearly 6% per year, but much slower in terms of value at 2.9% a year. The wood and wood products sector totalled over USD 69 billion in 2003. The United States made up 21% of global demand, with Japan taking 12% of the world market, followed by China, the United Kingdom and Germany.

The world market for wood products, in recent years, has been characterised by sluggish demand, decreasing prices and oversupply (CBI, 2004). The movements in this sector are dependent on the activities of the building industry, which in turn is related to the global economy. In the EU, for instance, the last few years has seen demand slow and even a contraction of the market size. In 2003, the United States and some Asian countries provided stimulus for growth. According to the International Tropical Timber Organisation (2004) the sector is recovering and prices are starting to reach previous levels.

For products in this sector the market access conditions for Viet Nam are especially good. Nearly 50% of exports in this sector are of “Wood in chips or particles” (HS 440122). Japan imports more than 80% of the world supply and in this market Viet Nam benefits from free access. For “Other articles of wood not elsewhere specified” (HS 442190), more countries apply tariffs and generally this is across the board. Viet Nam has preferential tariffs in Malaysia and only faces higher than average tariffs in Thailand, the smallest market.

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The export potential for wood is considered medium. Viet Nam has very good market access conditions however world demand has been slow. Unfortunately this does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

Honey and apicultural products

Viet Nam’s export performance was striking as exports grew in value by 83% a year between 1999 and 2003, outstripping the already high world average growth rate. Moreover, Viet Nam possessed a relatively high world market share, of 2%, approximately USD 22 million, and is a net exporter. About three quarters of Viet Nam’s honey exports go to the United States. Canada is a highly attractive diversification market for Viet Nam, offering free access as well as growing demand for honey. Australia is another such country offering similar conditions and potential for Viet Nam.

The world honey sector is highly dynamic, recording fast growth rates. Exports in value terms grew by more than 20% between 1999 and 2003, but by only 2% in volume, implying increasing world prices during that period. By 2003 the sector recorded USD 1 billion in imports.

The world market for honey is highly concentrated, with the top five importers accounting for two thirds of the total. Germany (with a 25% world market share) and the United States (22%) are clearly the leading importers, followed by the United Kingdom, Japan and France.

Viet Nam faces difficult market access conditions for honey. There are two products in this sector; the key product is “Honey, natural” (HS 040900) for which tariffs are high and pervasive. The United States imposes a higher tariff to Viet Nam than to most, but in Switzerland, albeit it a much smaller market, Viet Nam does enjoy preferential access in comparison to the majority of its competitors. For “Beeswax…” (HS 152190), Viet Nam, like most countries, benefits from free access or low tariffs, and from privileged access to the Japanese markets.

Honey can be considered to have a medium export potential for Viet Nam, given Viet Nam’s impressive current export performance and the strong international demand. Unfortunately, this does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

Cut flowers and ornamental plants

With sales of USD 5.5 million in 2003, Viet Nam is only a small player in the world market for cut flowers, covering a share of 0.5% of the total. Viet Nam has nonetheless seen a fruitful expansion in recent years, with average growth rates of 44% per annum. In terms of geography there is a visible concentration, as three quarters of Vietnamese exports in the sector go to Japan. Promising opportunities to diversify are in the European Union (United Kingdom, Czech Republic, Poland, Ireland, Denmark) and the United States.

International demand for cut flowers is dynamic. In 2003, cut flowers and ornamental plants were imported worldwide at a value of USD 11 billion. For the five-year period leading up to that year, the sector experienced an average growth rate of about 6% per annum in value and in volume. The largest importing markets are the EU (Germany, United Kingdom, France, Netherlands, Italy) and the United States.

Market access conditions for Vietnamese cut flowers are poor. The largest product in this sector globally, and for Viet Nam (more than two thirds of export revenue in this sector come from a single product), is “Fresh cut flowers and flower buds…” (HS 060310). Viet Nam enjoys tariff free access to the major markets, not unlike its competitors. The conditions are similar for some other products.

Cut flowers appear to have a low export potential based on Viet Nam’s current export performance and the international environment. However, it has to be mentioned that this

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does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

Dairy products

The dairy products sector had the weakest export performance among those examined. Viet Nam is a net importer, by a large margin and its exports, USD 4.3 million in 2003, represented a small share of the world market. In addition, exports actually fell in value by 3% p.a. between 1999 and 2003, further diminishing Viet Nam’s already small world market share. The principle product in the sector for Viet Nam, “Birds' eggs, in shell, fresh, preserved or cooked” (HS 040700), did not grow at all in value terms over the period examined.

Viet Nam’s exports are highly concentrated in the East Asian region; Hong Kong accounts for 60%, while Singapore and China together make up one quarter of exports. In East Asia, Indonesia is a growing market with high potential as a diversification market for Viet Nam.

Growth of world demand over the five-year period was slow, averaging 3.3% p.a. in value terms, and stagnant in volume terms. Dairy products as a sector amassed approximately USD 6.5 billion in 2003. European Union markets dominate world demand, with Germany as the leading importer, taking a 14% share of the world market.

Viet Nam’s market access conditions for dairy products are the worst of all sectors, as this sector is in highly protected in many countries. For the most important product for Viet Nam, “Birds' eggs, in shell, fresh, preserved or cooked” (HS 040700), most countries impose some form of tariff barrier.

Dairy products have a low export potential based on Viet Nam’s weak current export performance and the unfavourable international environment (which however does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data).

Jute and jute products

Viet Nam exported only USD 1 million of jute in 2003, corresponding to a very small portion of the world market (0.24%). However, the country is a net-exporter and exports increased at a significant rate between 1999 and 2003: 13% in terms of value and 11% in volume. Italy takes in almost a third of Viet Nam’s exports, with Senegal, Taiwan, Korea and Japan receiving the bulk of the rest. Interesting candidate for market diversification for Vietnamese jute products include the United States, Iran and Hong Kong.

The world market for jute and jute products is small and in decline. Between 1999 and 2003 the world market contracted, with imports falling in value by 2.4% a year and in volume by 2.1%. By 2003 the world market was worth USD 468 million, making this the smallest product sector of those examined. The largest importer is India (10%), followed by the United States, Syria, Iran and Pakistan.

Viet Nam faces relatively poor market access conditions. However Japan offers Viet Nam free market access, unlike the majority of exporters.

Jute and jute products appear to have a low export potential because of Viet Nam’s current export performance and the international environment. However, it has to be mentioned that this does not take into account Viet Nam’s domestic supply conditions due to lack of comparable data.

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Industrial products

Viet Nam is in a process of market-oriented and outward-oriented industrialisation, undergoing a transformation from an industrial structure focused on import substitution to an export-oriented industry that is competitive on world markets. This implies generally a shift from often capital-intensive industries towards light industries that exploit Viet Nam’s generally good quality labour at low costs. For several sectors, including clothing, footwear, and electronics, Viet Nam has become an attractive destination for outsourcing of labour intensive production from countries well established in the sector, but with escalating labour costs.

This transformation is showing signs of considerable success. Industry and construction continued to be the biggest contributor to gross domestic product (nearly 40% of GDP) and employment (over one-thirds of the nation’s total), and recorded a growth rate of about 10% in 2004. Industrial exports have grown from about USD 300 million in the early 1990s to almost USD 14 billion, accounting for three quarters of total Vietnamese export earnings. In the following, the industries are presented in descending order in terms of the export value in 2003.

Table 25. Export potential of industrial products

Export value (USD million)

Index* 1 Export

performance

Index* 2 World

markets

Index* 3 Domestic supply

conditions

Average index*

Evaluation by ITC**

Evaluation by national

consultants

Sectors examined in-depth

Clothing 4,100 3.8 2.5 2.8 3.0 High High

Footwear 4,036 4.2 2.7 2.8 3.2 High Medium

Furniture 956 2.8 4.1 3.2 3.4 High

Motor vehicles 372 1.8 3.3 .. 2.5 Low*** Household utensils 215 2.2 4.1 2.9 3.1 High Medium

Bicycles 180 2.5 2.5 3.3 2.8 Medium High

Plastics 67 1.4 3.7 2.8 2.6 Medium Medium

Wires, cables & conductors 51 1.7 3.3 3.2 2.7 Medium Medium-high

Agricultural machinery 7 2.2 4.0 3.1 3.1 High Medium

Shipbuilding 2 1.5 4.4 3.5 3.1 High High Sectors examined in less detail

Electrical machinery 611 2.2 3.4 2.8 2.8 Medium

Stationery, office machine 240 2.1 3.8 2.9 2.9 Medium

Industrial machinery 143 2.0 3.7 .. 2.9 Medium***

Comm. and telecomm. 135 1.6 4.3 .. 3.0 Medium***

Packaging materials 104 1.9 3.8 .. 2.9 Medium***

Image and sound 102 1.6 4.1 2.7 2.8 Medium

Household textiles 101 2.2 2.9 2.7 2.6 Low

Toys and games 81 2.2 3.8 3.0 3.0 High

Construction materials 61 1.9 3.4 3.6 3.0 Medium Medium

Instruments 30 2.1 3.9 2.9 2.9 Medium

Glass 23 1.5 4.4 3.4 3.1 High Electronics 23 2.1 3.9 2.7 2.9 Medium

Hand tools 21 1.7 3.5 2.8 2.7 Medium

* The index ranges from 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. ** The following, arbitrary criteria are used to distinguish three broad categories of export potential: High (more than 3.0 points); medium (between 2.6 and 3.0 points); and low potential (less than 2.6 points). *** The export potential is based only on Viet Nam’s current export performance and the international environment. It does not take into account domestic supply conditions due to lack of comparable data. Source: Comtrade data (based on declarations of Viet Nam’s trading partners), ITC survey with enterprises in Viet Nam, background reports by national consults, calculations by ITC.

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Clothing and accessories Clothing is one of Viet Nam’s most important export sectors. With over 2 million workers, about a quarter of all industrial employment, the textiles and clothing industry represents a key source of industrial employment, especially for women, and is a leading industry for overall growth and industrialisation. Although Viet Nam faces discriminatory market access conditions in some markets, its export performance in this sector has been impressive.

Viet Nam’s exports of clothing are almost entirely in the form of sub-contracts to foreign firms. Vietnamese wages in the textiles and garment sector are among the lowest in the world, but the productivity seems also to be below that of China and other Asian competitors . Moreover the domestic supporting industries are not entirely satisfactory: the domestic textile sector is not able to supply needed material to garment manufacturing (about 70-80% is imported), explaining partly that garment lead times from Viet Nam are lengthy compared to China.

So far Viet Nam success has been based on low labour cost and an attractive location for outsourcing of production from Asian manufacturers, but major changes are taking place on the global market, especially since the expiry of the Agreement on Textiles and Clothing (ATC) in early 2005. Vietnamese clothing is now facing tough competition from China and India. Moreover, until Viet Nam joins the WTO, importing countries can continue to maintain quotas without falling foul of the WTO. WTO accession represents an opportunity to improve Viet Nam’s access to world markets.

The export potential of clothing can be considered high, given the great importance of the sector in Viet Nam’s exports, the government’s very ambitious targets for growth, the potential of the US market due to the bilateral trade agreement, and despite threats to the sector with China’s entrance into WTO and the end of ATC.

The focus should be on a long-term shift of Viet Nam as a passive subcontracting CMT (cut, make, trim) producer (currently about 70% of the activity) to lower import content and a more active role on the markets (currently some 30%). The clothing sector needs to improve domestic supporting industries, enhance the design capacity, improve productivity in garments, upgrade the technology in the textile sector, create links with final buyers, and move up the quality scale to higher value products.

Table 26. SWOT analysis for clothing and accessories Strengths Weaknesses

Low labour cost Protected domestic market High skill labour for hand-made commodities (e.g. embroidery) High quality silk-material

Most production is sub-contracted by foreign partners Low productivity Lack of skilled workers and technicians Poor business management skills and no middle-management Poor domestic supporting industries Higher lead times than some neighbouring competitors Problem with quota mechanism About 20% higher transportation cost than China


Access to US market WTO accession Small scale of production accords with small contracts of skilful commodities (niche market)

End of ATC Garment industry in China Tougher competition in the domestic market

Source: Fieldwork interviews, desk research.


The industrial transition in Viet Nam has been spearheaded by an export-oriented clothing sector, as was the case also in many countries in an early stage of industrialisation. Viet Nam has had a textile and garment industry for over hundred years,

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and been an exporter since the 1970s mainly to the Comecon countries. However, it is with the Doi Moi reform that the industry has taken off and also shifted markets.

Viet Nam’s export performance for clothing has been exceptional. Viet Nam exported clothing articles for USD 3.8 billion in 2003, representing almost 2% of the world market. Growth has been outstanding over the past five years, averaging more than 50% per year in value terms between 1999 and 2003. The United States is by far the largest market for Viet Nam, accounting for two thirds of total exports, followed by Japan. Viet Nam is a significant player in certain clothing articles. For example, Viet Nam is ranked second in the world for “Mens/boys anoraks…” (HS 620193), supplying 8.5% of the world market.

Viet Nam’s rapid increase in textiles and garment exports has taken place in a highly competitive global environment and, until recently, in spite of Viet Nam’s lack of Most Favoured Nation status in the United States, the world’s largest importer of garments. Japan, Viet Nam’s most important market, is considered highly competitive, as it doesn’t operate on quotas, and Viet Nam’s strong position on this market is considered a sign of a high degree of competitiveness.

However, experts from the Ministry of Industry fear that the development is unsustainable. The Vietnamese clothing industry has continued to make a substantial contribution to the overall growth of the economy in 2004. Large export earnings and hundreds of thousands of new jobs have been bought by capitalizing on cheap labour and the opening of the US market. However, added value is low and experts estimate that the industry was not well prepared for the end of the Agreement on Textiles and Clothing (ATC) in early 2005, when quotas were abolished for Viet Nam’s main competitors in this sector. This view seems to be confirmed by the Vietnamese performance over the first quarter of the year 2005: exports of some key categories, which had had great turnover in major markets like the United States and the European Union, fell by 30% - 40%. Clothing exports rose only 2.9% year-on-year, due mainly to the removal of clothing quotas for WTO members.


The textile and garment sector is a major source of employment. The sector employs over 2 million workers, about a quarter of all industrial employment. The garment industry is particularly an important employer of women, accounting for 80% of the labour force in the sector.

The private sector is playing an increasingly important role, especially in garment and knitwear production, where it accounts for about three quarters of garment outputs. The yearly production capacity now reaches 500 million pieces of clothing and 70.000 tons of knitted wears. The industry is made up of over 1,100 companies, including 231 SOEs, over 500 private enterprises and 354 foreign-invested enterprises (Annual report 2004, Ministry of Industry).

Viet Nam’s exports of garments are almost entirely in the form of sub-contracts to foreign firms. Foreign companies tend to supply materials and designs, and sometimes machinery, while Vietnamese companies cut, make and trim (CMT). As a result, the import content of clothing articles is substantial (about 70%). During the 1990s until the Asian crisis, foreign direct investment in the sector amounted to over USD 100 million per annum, the important investors being Taiwan, South Korea and Malaysia. The total foreign direct investment in the sector is estimated to USD 1,8 billion (2000). Enterprises based on FDI account for about a third of the exports in garments, while one state owned conglomerate, Vinatex, accounts for almost half of the total exports.

Vietnamese wages in the textiles and garment sector are low, but so is productivity. Prior to the Asian crisis, and the depreciation of many currencies as a result of it, Vietnamese wages in the textiles and garment sector were among the lowest in the world. After the crisis, which hit some of Viet Nam’s competitors harder than Viet Nam, Vietnamese

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wages in the sector have risen. Though labour cost remains relatively cheap compared to some major competitors such as China, India or Pakistan (Table 27), the productivity in Vietnamese textiles and garments seems to be well below that of China and other Asian competitors (ITC, 2002a). Viet Nam lacks of skilled workers and technicians and business management skills are poor.

Table 27. A comparison of wages in the apparel industry

Wages/hour (US cents)

Lao PDR 12.5

Bangladesh 18 - 25

Cambodia 23

Viet Nam 26

Indonesia 27

India 38

Pakistan 41

Sri Lanka 48

China 68 - 88

Source: Stuart-Smith, Dayal, Brimble and Holl (2004).

The domestic supporting industries in Viet Nam are not entirely satisfactory. Viet Nam’s textiles production is considered old-fashioned with outdated machinery, at least in the state sector, although there is progress (Box 10). Weaving looms are mostly narrow shuttle, limiting the production variety to low quality cloth. As such, the textile sector is unable to supply needed material to garment manufacturing (ITC, 2002a). The domestic textile sector can meet only 25% of the fabric needs of the garments. It also fails to meet other demands of garment exporters, such as fibers, chemicals, cotton (80% is imported), and especially machinery and parts (import share: 100%). The import content has not changed significantly over the last years, reflecting problems in the textile sector, although machinery, labour quality seems be upgraded in the industry since 2001. Besides the quality and quantity of supply, experts attribute the lack of co-ordination to poor trade promotion and careless service by domestic textile enterprises. As a result, garment firms pay a little attention to domestic fabric, even though some argue it is of similar quality to imported products.

Box 10. Progress in the textiles industry

Within the textile industry, the needle-knitting branch is developing rapidly to meet domestic and foreign demand. Many businesses are now also investing in shuttle knitting technology, which has a large scope of development.

However, Viet Nam’s cotton industry is still importing 60.000 tons of raw materials, worth USD 80-100 million per year to meet the demand of the garment and textile sectors. The cotton processing plants now have a capacity of 30.000 tons/year.

Two polyester fiber factories, each with capacity of 30,000 tons per year, are planned at a cost of USD 50 million.

There are currently 19 state-owned natural silk processing plants and more than 100 private ones with a total capacity of 2,000 tons/year, of which 40% is high quality silk for exports. The sector processes yearly about 5,5 million meters of silk and nearly 800.000 silk products.

In addition, transportation infrastructure is more costly than, for example, Thailand and China (about 20% more compared to China, according VINATEX), and garment lead times from Viet Nam remains lengthy compared to China (Table 28). The lead-time issue relates largely to the backward linkages. The encouragement of up-stream parts of the textile supply chains might enable to provide shorter lead times.

In addition, the domestic market for textiles and garments is under a considerable degree of protection with effective rate of about 50%. The industry will be under increased pressure on the domestic market due to the AFTA agreement, and expected Viet Nam’s

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accession to join WTO. Smuggling of Chinese garments into Viet Nam is claimed to be considerable.

Table 28. Lead times in the clothing industry for Viet Nam and selected competitors

(days)

Circular knit garments Woven garments

50 - 60 60 - 70 60 - 80 90 - 120

40 - 60 China

50 - 70 India

60 - 90 Malaysia Thailand

Indonesia Viet Nam

90 - 120 Bangladesh Cambodia

Source: Gherzi Textile Organisation.


The world market for clothing and accessories is immense and growing, totalling USD 230 billion in 2003. Between 1999 and 2003, world demand grew in value terms by some 5% p.a. and even faster in volume terms, at 7% per year. The United States is the largest market accounting for nearly 30% of world imports; Germany, Japan, United Kingdom and Hong Kong are other large importers.

After agriculture, no other product has been subject for so much political interference in the market as clothing. Thus, quotas to the key markets the EU and United States used to be a major competitive determinant for exporting nations of mass products. These restrictions were removed as a part of the multilateral trade agreements under WTO’s Agreement on Textiles and Clothing (ATC). Since the ATC came to an end at the end of 2004, liberalising the world market, the world market has been flooded with cheap products from China. According to ITC (2005) “there is an over capacity of apparel on the world market due to the increasing numbers of garment manufacturers, resulting in a buyers’ market”. Import prices for clothing are on a downward trend, especially in the European Union and the United States (Table 29).

China’s entry in WTO and the end of ACT have had a profound impact on world trade of textiles and garments. However, the creation of various trading blocks, such as NAFTA and AFTA, also influences the trade of textiles and garments, giving preferential treatment to producers within the blocks.

For clothing and accessories Viet Nam faces discriminatory market access conditions . The United States, the largest single market, treats Viet Nam in the same manner as most exporters. However, exports from Viet Nam continue to be restricted by quotas. Although most world trade was freed from quotas at the end of 2004, the liberalisation process applied only to trade between WTO members. Until Viet Nam joins the WTO, importing countries can continue to maintain quotas without falling foul of the WTO. However, quotas are putting Viet Nam at a major competitive disadvantage. Since recently, EU does not discriminate anymore Viet Nam vis-à-vis its competitors and even grants it a preferential access to EU markets under the Generalised System of Preferences (GSP). Japan and Canada, grant preferential tariffs compared to the majority of competitors as well. Hong Kong offers free access, but does so to all exporters. Some smaller markets, such as Romania and Taiwan discriminate significantly against Viet Nam.

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Table 29. Import prices for clothing are on a downward trend in major markets

Unit 1990 1997 1998 1999 2000 2001 2002 2003

European Union Euro per kg 17.1 17.2 17.3 17.1 18.3 17.4 16.3 14.4

United States USD per SME 2.2 2.4 .. 2.2 2.2 2.1 1.9 1.8

Japan USD per kg .. .. .. .. 19.6 18.4 17.9 18.4

Source: Textile Intelligence (2004).

Government strategy

The Government continues giving the industry a strong priority in its export strategy. There is a complicated quota mechanism, which partly depends on the production capacity of enterprise, partly directly on the exporter’s demand. It has been rendered more transparent recently, but many enterprises still find it difficult to understand.

According to the draft National Industrial Strategy, the domestic industrial output value of the garment industry is expected to reach USD 8 billion until 2010 and USD 15-16 billion until 2020, meeting about three quarter of domestic demand. Exports of the garment industry are expected to reach USD 9 billion in 2010 and USD 15-16 billion until 2020. The major axes of this industrial strategy are to strongly develop the domestic supporting industries (raw material, process and components) by 2015; to speed up the restructuring of production and increase rural employment; and, from 2015 onwards, to develop high-quality products that are to improve the image of the Vietnamese clothing sector.

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Footwear and leather products Exports of footwear and leather products have experienced a dramatic increase since the early 1990s. Within less than one decade, footwear and leather products have emerged as one of Viet Nam’s most important export sectors. In 2003 exports topped USD 2.9 billion, making Viet Nam the fourth largest exporter of footwear in the world. Growth has been averaging an exceptional 18% a year between 1999 and 2003, quite significant considering the highly competitive nature of the industry. According to Vietnamese statistics, in 2004 exports surpassed the targeted amount by USD 100 million. The dominating export market is the EU, accounting for about 80% of Viet Nam’s total exports. Viet Nam is a highly competitive producer on the EU market, second only to China. After the United States granted most favoured nation status to Viet Nam, the volume of Vietnamese footwear shipped to this market increased dramatically.

Viet Nam’s competitiveness lies in the combination of one of the lowest labour costs in Asia with an easily trainable, disciplined and literate work force. However, the productivity in the Vietnamese industry is considered fairly low, creating a vicious circle of continuous low wages to maintain competitiveness. The Vietnamese industry is largely based on sub-contractual arrangements, with leading market players supplying the industry with designs, materials and sometimes also machinery. Footwear is a highly import dependent industry, with imports accounting for about 80% of the output value.

The export potential of footwear can be considered high, though the industry will have to put emphasis on its key products that are competitive and fashionable to achieve the goal of increased exports, according to the Viet Nam Leather and Footwear Association. The industry body has asked the Government to issue preferential policies for attracting foreign investment in the domestic production of raw materials and accessories, in order to trim input costs. Export development would need to focus on increasing the domestic supply of inputs for production, improved productivity, diversifying production to higher valued products, exploiting the skills of Vietnamese labour by enhancing the design capacity, and further down the line, establishing own brand names and pro-active marketing.

Table 30. SWOT analysis for footwear


Low labour cost High quality products Relatively efficient and cost effective international transport and shipping facilities Increase of tanned leather production since 2004

Young industry with lack of experience, lack of know -how in design and marketing High production costs due to imported chemicals, machinery and components (upper parts, soles) Poor technical skills


Preferential treatment by EU (GSP) Low tax rates within AFTA market until 2006 Very low tariffs in the United States market due to the bilateral trade agreement (USBTA)

Strong competition from China due to low production cost



Footwear is one of Viet Nam’s export success stories and the best performing sector of all examined. Footwear has the highest world market share of all the examined sectors and Viet Nam is a net exporter. In 2003 Viet Nam’s exports amounted to some USD 4 billion, making the country the fourth largest exporter of this product in the world, after China, Hong Kong and Italy. However, according to Vietnamese statistics, the country earned only USD 2.6 billion from footwear exports in 2004, a 15% increase from 2003, which is less than the 2003 TradeMap total. Footwear exports grew by about 20% a year in value terms between 1999 and 2003, strongly outpacing the world average, which is significant in the context of the competitive environment. Exports of footwear have shown a dramatic increase since the early 1990s. Over a decade footwear emerged

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as Viet Nam’s fourth most important export product after crude oil, garments and seafood.

The European Union remains Viet Nam's key customer, though the United States has emerged as a lucrative market for Vietnamese footwear products. The EU accounts for about 80% of Viet Nam’s total exports (with Germany, the United Kingdom and France making up almost 50% of the final export destination), and has given preferential treatment (GSP-General System of Preferences) to Viet Nam in terms of tariffs and quotas. After the United States granted Most Favoured Nation (MFN) status to Viet Nam in 2001, the volume of Vietnamese footwear, mainly sport shoes, leather shoes and sandals, shipped to this market has increased dramatically. Regarding market diversification opportunities, Korea, Indonesia, and Russia are growing markets with high potential

Despite growing export turnover, production and trading faced difficulties in 2004. In 2004 fewer orders were placed for canvas shoes and state-owned shoe companies had to narrow their production. Viet Nam’s leather and footwear industry is aiming for an export turnover of USD 3.3 billion in 2005. According to the Viet Nam Leather & Footwear Association, to achieve this goal the industry will have to put emphasis on its key products that are competitive and fashionable.


Footwear and leather are important for employment, and are dominated by foreign companies. The Vietnamese leather and footwear industry includes more than 200 enterprises, employing between 400,000 and 500,000 persons, mostly women. Some of the worlds leading sport shoe brands have established production facilities in Viet Nam. Foreign-owned manufacturers represent about a quarter of the enterprises and account for two thirds of the production and half of the exports. Despite growing export turnover, production and trading of the industry in 2004 faced difficulties. There were fewer orders for canvas shoes, and State-owned shoe companies had to narrow their production.

The footwear industry’s added value remains modest because domestic footwear companies still manufacture footwear on a contract basis. The overall pattern in global shoe production during the 1990s was a continuous shift of production by Western companies, especially of low-cost shoes, from the newly industrialised countries in Asia (mainly Korea and Taiwan) to low wage countries in Asia, notably China, Indonesia and Thailand, and more recently also Viet Nam. The determining factor behind outsourcing to countries like Viet Nam has been cost of production, reflected in wage levels. As a result, the Vietnamese industry is largely based on sub-contractual arrangements to leading market players such as Nike, Adidas, Reebok, Bata etc., which supply the industry with designs, materials and sometimes also machinery. As such, it is a vulnerable industry, dependent on ‘foot-loose’ multinationals. It is estimated that around 80% of materials used for footwear production are imported, though domestic leather production has sharply increased recently. Domestic materials are available only for manufacturing fabric shoes and in-door slippers. Vietnamese manufacturers can only supply basic equipment such as shoe-shapers and cutters. Most of the enterprises have neither bargaining capability nor technical expertise for establishing sound business relations with their foreign suppliers. However the total tanned leather production has increased steeply in 2004 when several major tannery projects coming into operation.

Viet Nam’s competitiveness lies in its labour: the combination of one of the lowest labour cost in Asia with an easily trainable, disciplined and literate work force has made Viet Nam one of the most attractive places for outsourcing production from producers in industrialised countries. However, the productivity in the Vietnamese industry is considered fairly low, creating a vicious circle of continuous low wages to maintain competitiveness. “If we want to have high added value, companies have to produce for

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themselves. But it requires large amounts of capital, and diverse markets and designs. Only one company in Thai Binh Province is capable of producing about 6 million pairs of shoes a year. Other companies cannot spare that much capital up front," said Nguyen Gia Hao, chairman of the Viet Nam Footwear Association. As a result, most domestic companies use contracts to avoid risks and to ensure a profit.


The world market for footwear is enormous, though grew slowly during the 1999-2003 period. World imports stood at USD 81 billion in 2003, with average yearly growth rates of about 5% in value and 4% in volume. The United States is the largest market in this sector, garnering 30% of total world imports. Hong Kong has about 9% of the world market, whilst Japan and the EU countries make up a large proportion of the remaining important importers.

China is by far the largest exporter of footwear in the world, followed by Hong Kong and Italy. China’s entry into WTO in 2001/2002 has created a considerable challenge to exporters competing in similar market niches, including Viet Nam. However, with the ratification of the US -Viet Nam trade agreement that considerably reduced tariffs, Viet Nam has seen a major upswing in exports of footwear to the United States. Industry representatives in Viet Nam anticipate that the United States would be an equally large market as currently the EU, i.e. worth over USD 1 billion.

The footwear and leather sector is highly protected and Viet Nam faces discriminatory treatment. For the most important products in the sector, Viet Nam only receives free access in Hong Kong and Singapore. When exporting to the United States, Viet Nam is treated the same as the majority of exporters. However in Japan (for some products), the country suffers from tariffs significantly higher than its competitors. In addition, the Vietnamese footwear industry is likely to face a dumping lawsuit in the European Union.

Government strategy

Foreign investments are seen as the principle source of needed investment to extend production capacity and market links. According to the National Industrial Strategy, foreign companies would receive incentives to invest in the domestic footwear industry until 2015.

The Vietnamese strategy is to move from passive subcontracting with high import content to more active marketing, own design and a higher domestic content in the production. The industry needs also more investment in domestic companies that specialize in the manufacture of raw materials, as the development of this would help reduce production costs. Local raw material supplies could match 20-25% of industry.

Export development needs to focus on improved productivity, better design and diversified production, from sport footwear and textile footwear to higher value products. The industry must enhance their design capacity and over a longer time establish own brand names and pro-active marketing. The Viet Nam Leather and Footwear Association has devised a master development strategy for the industry and is awaiting approval from the Government. Under the plan, the industry would focus on training workers and raising the abilities of the design and marketing staff. The industry has already run two training courses for its marketing department where staff learned where to buy the cheapest raw materials and how to sell finished products at the highest price. The Government has set up trade promotion centres in HCM City and Ha Noi, in an attempt to promote products in international markets in a more organized fashion, and to lift the competitiveness of the footwear enterprises. Experts from the Ministry of Industry estimate supporting programs as rather efficient.

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Furniture The furniture industry has a long tradition with many small-scale family-owned companies and large enterprises in Viet Nam. Recently, furniture export growth has been exceptional and in 2003 the sector was worth almost USD 1 billion. The main markets are the United States, Japan and the European Union, though currently Viet Nam exports to more than 120 countries, up significantly from 58 countries in 1998.

Viet Nam has a low-cost, skilful labour force that produces a diverse range of products. The country is particularly competitive for inexpensive desks, chairs, and household sets made from pine or rubber wood, and products tend to be about 10% cheaper than those made in China. However manufactures do not add much value, instead using designs from foreign buyers.

Despite its rapid development, the industry still faces many difficulties. The export potential of furniture can be considered high, despite weaknesses such as the shortage of skilled workers, outdated equipment, lack of certified forests, passiveness in material supply and limited business capacity to deal directly with buyers.

Table 31. SWOT analysis for furniture


Low labour costs Skilled workers who learn new processes quickly and can produce a wide range of products Reputation for inexpensive furniture (10% cheaper than from China)

Production of outdoor furniture (which accounts for 90% of all products) is seasonal; the year-round market is not yet established Product quality is considered average and not uniform, to limited use of ISO practices Low value-addition (almost 80% of raw wood is imported, and designs are often from foreign buyers) Few companies have good quality machinery Lack of organization among local producers Absence of technology transfer between producers Viet Nam does not have an FSC certification-type system (International Forest Stewardship Council) for local forests or lumber, required for export to certain markets High transportation costs for imported raw material (Laos and Cambodia are traditional suppliers) Lack of supporting industries Lack of effective support from trade associations Trademark protection for furniture manufacturers in Viet Nam is still not well organized Technicians and managers are often not well trained


Growing demand for diversified designs US anti-dumping duties against Chinese producers opens up opportunities in that market Supportive government policies

Traditional raw material supply from Laos and Cambodia under threat due to government export bans of unprocessed wood Competition from neighbouring countries set to intensify with implementation of AFTA


The sourcing of raw material is a serious constraint to the industry and Vietnamese producers import almost 80% of the wood they use. Laos and Cambodia are the traditional suppliers though even these sources are under threat due to export bans. The Vietnamese government imposes logging quotas and encourages reforestation through planted forests. However the wood from planted forests is considered to be of inferior quality for furniture purposes. Due to environmental concerns in major markets, Vietnamese producers must increasingly use wood that is certified to come from sustainable forests. However, there is currently no such certification system in Viet Nam, and manufacturers that want to fulfil such contracts have to import certified wood, which adds to production costs.

A few companies are well organised and well managed with staff that have specialised skills and well-defined functions. However in general the industry has a shortage of highly skilled workers to use advanced machinery, and of managers with language and marketing skills.

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Some production facilities use machinery that is up to date, though the vast majority of manufacturers do not use machinery that meets international standards for noise levels, pollution and safety.


Viet Nam’s export performance for furniture has been impressive, with fast growth rates over the past few years and a relatively high world market share. Viet Nam recorded exports totalling more than USD 900 million in 2003, capturing 1.2% of the world market. Moreover, Viet Nam’s export growth was much faster than world market growth, with export values increasing by more than 30% annually. These figures are higher than Vietnamese statistics, according to which exports grew from USD 120 million in 1999 to an estimated USD 615 million in 2004. The United States, Japan and Europe are Viet Nam’s main markets for furniture, and demand from these markets is expected to keep growing.

Viet Nam’s furniture exports are very diversified. Viet Nam sells its products to more than 120 countries in the world, up significantly from 58 countries in 1998. Further opportunities for diversification exist particularly in new EU countries, such as Slovakia, Hungary and the Czech Republic.

Wooden furniture is the major source (75%) of export turnover in the sector. The sector has been developing rapidly in recent years, becoming one of the biggest export earners for the country and making Viet Nam one of the largest exporters of processed wood in South East Asia. The major product groups include upholstered and non-upholstered furniture, seats and parts, for both indoor and outdoor furniture. Dining and living room furniture made of wood (excluding seats) is the leading export product, accounting for 40% of the sector. Furniture made of bamboo and rattan, metal and plastic is still underdeveloped and currently accounts for just a small part of export turnover in furniture.

Viet Nam is rapidly emerging as a supplier of some of the cheapest woodwork exports in the world, with goods nearly 10% cheaper than those made in neighbouring China. Viet Nam is especially competitive for inexpensive desks, chairs, and household sets made from pine or rubber wood. Recently the oversupply of furniture resulted in intensified price competition.


There is large variation within the industry, with production ranging from highly industrialised, large-scale production to small-scale household production. Household furniture making in villages is very common. Skilful workers produce a wide range of products, working mainly by hand but supported by some simple machinery. As this furniture is handmade, using traditional methods and designs, it can be marketed as specialty hand-made products. However production management and quality consistency are real constraints. There is no organisational structure in place so production is not systematic. Only when a large order is made do many small units engage together to fulfil it, however even this is done in a largely unorganised manner.

In Viet Nam there are about 2,000 wood processing enterprises, including state owned enterprises and limited companies. Approximately 450 companies export furniture, of which about 120 are garden/outdoor furniture makers, and 330 make indoor furniture, with an annual capacity of 2.2–2.5 million m3 of round wood. The industry benefits from foreign direct investment from Singapore, Taiwan, Malaysia, Norway, China and Sweden. Some of these companies are able to meet the quality and quantity demands of their customers, mass-producing a broad range of products that have ISO certification. Their factories are well organised and well managed with workers who have specialised skills and defined functions.

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Viet Nam has low labour costs and workers with excellent techniques (Table 32). Workers are able learn to use new technologies quickly and can produce a diverse range of products, from architectural materials (e.g. doors, window frames), general furniture (e.g. tables, chairs), to furniture with carvings or special accessories. However the industry lacks skilled professionals to meet the various business requirements, for example foreign languages and marketing skills. As a result, Vietnamese manufacturers in general do not deal directly with buyers and potential buyers, but with intermediaries that are often foreign, for example from Singapore and Hong Kong. The buyers of Vietnamese furniture are mainly discounters and non-specialists such as do-it-yourself (DIY) stores, mail order operators and direct sales.

Table 32. Comparison of labour costs in furniture in the region

Wages/hour (USD)

Viet Nam 0.2 – 0.6 Indonesia 0.3 – 0.4

China 0.5 – 0.75 Malaysia 1.25 – 1.40

Thailand 1.5 Taiwan 5.0

Source: Ngoc (2005).

Most Vietnamese furniture products are considered “average quality” with low value-addition. The low and medium end of the market requires competitive prices, fast delivery, good packaging and, increasingly, certified wood. All of these are still big challenges for Vietnamese producers. On top of that, not all manufacturers adhere to the ISO quality management system so the quality of the products is not consistent. The value added by Vietnamese manufacturers is low, as designs are often not created actively by the manufacturers, but mostly passively received from the foreign buyers. However, consumers are increasingly demanding diversified designs, presenting an opportunity for Vietnamese producers to capitalise on and a way to ward off fierce competition from the existing strong suppliers such as China, Thailand, Indonesia, and Malaysia.

The material shortage in Viet Nam has for a long period slowed down the furniture processing industry, but Viet Nam now imports almost 80% of the wood used. The fall in domestic supply, due to government logging quotas, and increase in demand has forced many enterprises to import from neighbouring countries. In 2003, Viet Nam’s wood processing industry spent about USD 350 million on imports of wooden materials and forestry products, a year-on year increase of 39%. Log wood and sawn wood accounted for 80% of imports. Asian countries, including Laos, Cambodia, Myanmar, Indonesia, and Malaysia, were Viet Nam’s key suppliers of log and sawn wood. Other suppliers include the Solomon Islands, New Zealand, Sweden, Brazil, the United States and former Soviet Union countries, translating in high transport costs.

There is a growing demand for certified wood, but Viet Nam still has to put in place an adequate certification system. More and more customers (mostly the EU) demand products made from wood that is certified by organisation such as the Forest Stewardship Council (FSC) (Box 11). Currently Viet Nam does not have such a system in place. As a result, in order to fulfil contracts requiring FSC wood, manufacturers have to import certified wood, which increases production costs.

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Box 11. Forest Stewardship Council (FSC)

The Forest Stewardship Council (FSC) is a stakeholder-owned organisation that promotes environm entally appropriate, socially beneficial, and economically viable management of the world's forests. Forest certification is the process of evaluating forests or woodlands to determine if they are being managed according to an agreed set of standards. FSC certification guarantees that forest products (timber or non-timber) originate in forests managed to these standards. The FSC-labelling scheme is the preferred scheme for buyer groups in the United Kingdom, the Netherlands, Belgium, Austria, Switzerland, Germany, Brazil, the United States and Japan.

Source: www.fsc.org

Companies in the sector are very heterogeneous, some using outdated machines and others modern technology. In Viet Nam domestically produced machinery is mostly defective and does not meet international requirements for safety, pollution and noise. Machinery imported from Taiwan, China, Japan or Germany is usually outdated and in poor condition, consequently not meeting international standards either. Some companies have highly industrialized production, with machinery emitting low levels of pollution, noise below 90 decibels and high safety standards, as well as good production flows. Unfortunately as there are only a few of these companies in Viet Nam and due to a lack of organisation among producers, no technology transfers are made.


International demand growth for furniture was strong. Between 1999 and 2003, imports grew on average by more than 8% annually, both in volume and value terms. In 2003 the furniture sector was worth almost USD 85 billion. The largest single market is the United States, accounting for one third of world trade, whilst EU countries make up the remaining big importers.

Viet Nam benefits from relatively free access to major markets; conditions are similar for the majority of its competitors. For some products Viet Nam even enjoys preferential access compared to most exporters, in countries such as Malaysia and New Zealand. One notable exception is the treatment by Taiwan, where Viet Nam faces discriminatory tariffs for some products.

However, the competition from Viet Nam’s neighbouring country is expected to intensify as a result of the coming implementation of the Asian Free Trade Agreement (AFTA). Presently, tariffs on wood products are at 11,9% (weighed average). Wood products are included in the group of products where tariffs according to the AFTA will be reduced to between 0 and 5% before 2006. Whereas the reductions in tariffs make it easier for other Asian countries to enter the Vietnamese market, one should not expect an offsetting effect from lower import tariffs on raw materials.

Government strategy

The Government of Viet Nam gives many priorities and incentives for the sustainable development of the furniture industry. It has created policy structures to encourage enterprises to strengthen production and business capacity, at the same time strictly limit the use of natural forestry wood.

Viet Nam’s total wood processing production uses wood from both natural and planted forests. The Ministry of Agriculture and Rural Development (MARD) sets the annual quota for logging from natural forests: currently the total quota is 300,000 m3. The alternative source is planted forests, however the wood is considered to be of inferior quality, coming from fast growing trees, such as the eucalyptus and unsuitable for furniture making. More than 80% of this wood is used in the paper industry. A small part of the planted forests (around 300-400,000 m3) is better quality wood (rubber, pinewood, acacia) and is used by the furniture or handicraft industries.

There is no import duty for wood materials (logs, lumber and wooden sheets for veneering). Since 1998 the government has limited the use of wood from natural forests

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and put in place measures to encourage raw material imports for use in the furniture industry. Gradually the use of imported wood has increased. To reduce the transports costs of imported raw materials the Government also encourages and supports the formation of a specialized “wood importer”: manufacturer orders will be collected, a source for raw materials found and a large quantity imported for distribution.

The Ministry of Trade has a long-standing programme to encourage enterprises to develop export markets for Vietnamese products. Exporters who undertake trade missions or participate in trade promotions or overseas exhibitions are eligible for a 50% reimbursement for airfare, accommodation, booth rental and other related costs. Furniture exporters can apply for this reimbursement through the Viet Nam Forestry Association or through Vietrade. For additional recommendations, see Box 12.

Box 12. Recommendations for the furniture industry

Secure access to raw materials. A specific plan is needed to create and develop a sustainable source of raw materials. The reforestation programme should not only ensure a stable source of low cost raw materials , but also improve ecological conditions, enhance the community health, reduce natural disasters and generate income for farmers. This programme should also cover rattan, a material that is considered very important for the development of the furniture industry in Viet Nam. A qualified organisation needs to be put into place to certify that the forests are managed appropriately and qualify for FSC certification.

Favour the development of clusters.: The Government should consider organizing and developing craft clusters for furniture manufacturers and businesses, located within a geographical region, that have common buyers, material suppliers or service providers. Companies can specialise in producing either the necessary parts, tools and equipment or chemicals and other accessories for the furniture industry.

Invest in human resources.: Viet Nam has an abundant labour force, but the lack of technical capabilities is diminishing competitiveness. The Government may wish to consider a training strategy at two levels: vocational training for workers in factories to reduce training expenses for enterprises, and for managers to effectively grow their businesses.

Invest in marketing activities. The furniture industry should focus on marketing activities in key markets (United States, Japan, European Union). The marketing strategies are manifold and may include exhibitions; websites; participation in international trade fairs; in-depth market analyses to identify promising products and markets; and an environment to encourage importers and retail buyers to visit Viet Nam. Efforts in intermediate markets like Singapore, Taiwan, South Korea should be maintained so that the image of Vietnamese furniture can be disseminated more broadly. The physical distribution is also a problem, and it could be useful to have a warehouse in an importing country (Germany, for example).

Improve product quality. The quality of furniture products relies on the quality of raw materials, production techniques as well as effective management. Due to insufficient skills and facilities, as well as the lack of quality standards and regulating agencies conducting inspections, quality suffers. Quality enhancement and standardization is thus needed and all furniture manufacturers should adhere to the quality management system (ISO).

Improve design. The government may wish to consider creating easily accessible design libraries in each region of the country. These libraries could contain trend reports, contemporary design books, consumer magazines, mail-order catalogues, trade publications, raw material samples and authentic crafts. They should also have permanent Internet access and mini design libraries that accompany national designers as they visit remote regions to work with artisans. The government should also encourage institutions and NGOs to train talented contemporary national designers to work in the industry, since they best understand traditional design and its heritage. This should be in conjunction with international designers who know about international trends.

Provide information on the furniture industry. Information on market characteristics (for example trends in materials, colours, and shapes) and market access (tariff and non-tariff barriers) is often very difficult. It would thus be useful to centralise this information (e.g. Viet Nam Wood Association) and provide individual exporters with constantly updated information, for example in the form of newsletters or consultant services.

Assist the creation of a specialized “wood importer.” To minimize transport and transaction costs, this association could collect manufacturer orders, find a supplier and import large quantities for distribution.

Source: Adapted from the background report by Ngoc (2005).

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Motor vehicles The Vietnamese auto industry is so far engaged mainly in assembly activities that have high import content. Viet Nam is currently a small though growing player in the world market, importing for the moment more than it exports.

The potential of this sector is considered low, however the government has ambitious plans to develop the entire automobile industry significantly by 2010, and Viet Nam targets to produce popular and luxury vehicles and to export parts for specialized vehicles. In order to compete with countries such as Thailand and Malaysia, the development of supporting industries with companies specializing in spare parts, components, and accessories should be accelerated. It is estimated that these supporting industries would take five to ten years to develop; Viet Nam is expected to export 30% of the production capacity of automotive components by 2015.

Table 33. SWOT analysis for motor vehicles Strengths Weaknesses

Low labour cost Relatively good infrastructure for manufacturing

The auto industry is engaged mainly in assembly, with only 15% local content Lack of skilled staff High production costs due to high import content of materials (components and accessories) Lack of domestic supporting component industries Capacity utilization of assemblers is very low Small domestic market


Supporting policies of the government Competition from existing and emerging producers



Viet Nam is a small but very fast growing world player for motor vehicles, and imports for the moment more than it exports. In 2003, Viet Nam earned about USD 370 million in exports. Growth has been remarkable, at a rate of almost 60% p.a. in value between 1999 and 2003.

Vietnamese exports of automotive components are concentrated in terms of partners and products. Viet Nam exports mainly one product, “Ignition wiring sets and other wiring sets for vehicles, aircraft or ships” (HS 854430), which accounts for two thirds of exports. Almost three quarters of Vietnamese exports are shipped to Japan. Opportunities for market diversification have been identified in the United States and the European Union (Germany, the Czech Republic, Slovakia, France and the United Kingdom).


Car density is still low in Viet Nam, especially when compared with motorcycles. With 142 people per car (Viet Nam Automobile Manufacturers Association), the rate of car owners in Viet Nam is low, especially when compared to some 8 persons per motorcycle. Though the market has great potential, the transport infrastructure remains poor (Viet Nam Business Forum, 5 July 2005).

The Vietnamese auto industry is engaged mainly in assembly activities that have high import content. Since 1995, Viet Nam has seen significant investment in automotive production facilities, although its actual market is limited. There are currently 11 carmakers in Viet Nam (Table 34), but many companies do not operate at full capacity: when issued with licenses, the 11 joint ventures were expected to produce 148,000 units annually, but rolled off only 43,000 units in 2003 (Viet Namnet.vn 4 June 2004). So far, the domestic auto industry has been constrained due to the small domestic market and poor infrastructure.

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The production costs of domestically manufactured cars are high because of the high import content of materials. The local content is only about 15%. The import prices of automobile component parts have been higher than imported vehicles, exclusive of depreciation, production costs and distribution costs. There are virtually no support industries in Viet Nam.

Table 34. Automobile manufactures in Viet Nam

Name Date of establishment

Country of origin Design capacity (units / year)

Ford Viet Nam Sept. 95 United States 26,000 Toyota Viet Nam Sept. 95 Japan 20,000 Viet Nam Motors Aug. 91 Philippines 20,000 Mekong Motors Dec. 91 Japan 20,000

Star Motor Apr. 94 Japan 17,800 Viet Nam Suzuki Apr. 95 Japan 10,000 Vindaco Viet Nam (Daihatsu) Apr. 95 Japan 10,000 Viet Nam Daewo Motors Dec. 93 Korea 9,500

Mercedez- Benz Apr. 95 Germany 7,000 Isuzu Viet Nam Oct. 95 Japan 6,000 Hino Motors Viet Nam June 96 Japan 2,600

Total 148,900

Source: Ministry of Industry, taken from ITC (2002).


The world market for motor vehicles is large and dynamic. The world imported about USD 603 billion worth of products in this sector in 2003, which represents 7% of total world trade. The United States accounts for almost a third of that, followed by Germany, United Kingdom, Canada and France. Overall, imports in the sector grew by 6% p.a. in value and 5% over the past five years.

In general the market access conditions for Vietnamese exporters of automotive components and accessories are good. For some products, Canada, Japan, Malaysia and Indonesia grant Viet Nam preferential access compared to the majority of competitors. In the United States, the largest market, Viet Nam is treated the same as most exporters. In Thailand, one of Viet Nam’s ASEAN counterparts, the country faces discriminatory tariffs. For example, for “pneumatic tires” (HS 401199), Thailand applies a tariff of 32%, five percentage points higher than the tariff applied to the majority of Viet Nam’s competitors.

Government strategy

The government has ambitious plans to develop the Vietnamese automobile industry significantly by 2010 (Box 13). According to the MOI, the Vietnamese auto industry should focus on the development of two lines of vehicles: low-cost, specialized vehicles and high-class vehicles. Auto manufacturers in Viet Nam have so far focused only on luxury vehicles that are out of the reach of the majority of the population, as Viet Nam is a poor country with an average annual per capita income of USD 400. It is estimated that low-cost vehicles will be in great demand and provide a lucrative market for local auto manufacturers.

In this situation, experts from the Ministry of Industry suggests that the auto industry make a drastic shift in the future. As foreign car makers will continue to dominate the luxury vehicle segment, local manufactures should focus on low-cost vehicles, which is a lucrative market. According to MOI forecasts, Viet Nam will produce 120,000 vehicles in 2005, about 240,000 in 2010 and some 400,000 in 2020. While no more capacity is

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needed for production of sedans and 26-46-seat buses, all other sectors are calling for more investment.

The government provides preferential treatment to develop the Vietnamese automobile sector until 2010. In order to boost demand, the State will lower loan interests for customers buying domestic vehicles, especially for peasants buying vehicles for agricultural cultivation, and adjust import tariffs on popular and specialized vehicles. The government had imposed a high tariff import tax on the imported automobile spare parts which can be produced locally, and import tax tariff rate of 100% on vehicles of less than 50 seats and on trucking vehicles with the tonnage of less than 5 tons.

Box 13. The government counts on four SOEs to develop the auto industry

The Ministry of Industry’s (MOI) master plan for the development of the auto industry by 2010 foresees that four SOEs develop the auto industry.

− The Viet Nam Auto Industry Corporation will produce buses, light and medium trucks, cars, engines and gearboxes.

− The Viet Nam Engine and Agricultural Machines Corporation (VEAM) will take responsibility of putting out buses, medium and light trucks, and some car parts.

− The Viet Nam Coal Corporation will specialise in medium and heavy trucks, specific vehicles and associated components.

− The Saigon Auto Mechanical Company will concentrate on producing buses, specialised vehicles, and specific spare parts.

Source. Viet Namnet.vn 4 June 2004.

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Household utensils and appliances The household appliance industry in Viet Nam is at an early stage of development, but has been growing rapidly in recent years and the export potential is considered high. Currently Japanese and Korean firms carry out almost 90% of production, with the former producing for the domestic market and the latter producing for export. These firms are constrained by a small domestic market, underdeveloped supporting industries and lack of locally produced components.

Most producers have manufacturing capacity that is only sufficient to meet domestic demand, investment risks are high and profits are low. A possibility is to diversify to products with high technology content or products of good quality and low cost designed for markets in rural areas. The former strategy of the Ministry of Industry, which focused on manufacture of components, cannot be achieved. Change in production and competition was envisaged in Viet Nam’s home appliances manufacturing establishments, but the Ministry has not established any new strategies for the industry.

Table 35. SWOT analysis for household utensils and appliances


Skilled labour Small-scale production Small domestic market Lack of locally produced components Undeveloped supporting industries Domestic producers are unable to produce software (for LCD television) No brand new products


Increasing regional and worldwide demand for household appliances

Cheaper imports Strong competition in domestic markets



Though a minor player in the world market, Viet Nam has experienced high export growth rates for household utensils and appliances. Viet Nam sold USD 215 million worth of goods abroad in the sector in 2003, but imports almost as much. The three main markets are Japan, Germany and China. Viet Nam’s exports increased by more than 60% a year between 1999 and 2003, and almost tripled to the Chinese market. Opportunities for market diversification could be found in the United States and the European Union (United Kingdom, Spain, Hungary, Latvia).


The household utensils and appliance industry in Viet Nam is at an early stage of development. In this sector, home appliances are the leading products, accounting for over 90% of gross industrial output value of the industry.

Nearly 90% the production of home appliances, such as refrigerators and washing machines, is undertaken by Japanese and Korean firms, including Sanyo Electric, Toshiba, LG Electronics, and Samsung Electronics. However, in the case of refrigerators and washing machines, only Sanyo has developed a production system with high local content and sizeable exports, while other firms are constrained by undeveloped supporting industries and remain at the level of turnkey, knockdown production: they import kits for local final assembly and sale in the domestic market. Currently, there are no big-name foreign companies that produce air-conditioners, microwave ovens, vacuum cleaners, rice cookers, water heaters, or gas cookers in Viet Nam. Given the growing importance of foreign direct investment and production transfers abroad, the Vietnamese

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government has made efforts to convince foreign transnational companies, such as Toshiba, Panasonic, Hitachi, Samsung, and LG, to shift production facilities to Viet Nam

In general Korean firms produce for export and Japanese firms produce for the domestic market. Korean firms tend to produce for exports, whereas Japanese firms used to produce for the purpose of import-substitution and target the Vietnamese market, but have now also become significant exporters. According to experts from the Ministry of Industry, foreign investors have faced difficulties from local content regulations, high tariffs on imported components, and export obligations from the very beginning, and are still struggling to achieve profitability.

Only 10% of the televisions sold annually in Viet Nam are manufactured domestically and Viet Nam represents only 0.7% of the world television market. With such low output, domestic companies cannot invest in making components. Moreover, locally-assembled televisions may have difficulties competing with those imported from ASEAN countries from next year on, when import duty rates on finished electronic products will be reduced to between 0%-5% in accordance with the AFTA schedule. Due to small-scale production, domestic companies have to buy components at higher prices and cannot take advantage of economies of scale like bigger international corporations. Consequently many firms have stopped assembling and now tend to be distributors for foreign companies. In addition, consumer preferences are changing and demand for LCD televisions is increasing and prices falling, but Vietnamese companies have been unable to react, since domestic manufacturers cannot produce the necessary software for LCD televisions. Companies need to shift to creating brand-new products, which are of high value and high profit.

The former strategy of the Ministry of Industry, which focused on manufacture of components, cannot be achieved. The main strategy of Government is to attract foreign investment in the sector to upgrade the technology used in processing, but it is not clear how technology would be transferred to domestic firms. The Ministry has not established any new strategies for the industry.


International demand growth for household utensils and appliances has been striking, averaging 8.6% growth in value annually over the past five years and 10% a year in volume. For 2003, the sector exceeded USD 85 billion in imports worldwide. The United States is by far the largest importer for the sector taking in over 20% of global exports. The United Kingdom, Germany and France, who follow in places two to four, account for a combined share roughly equal to that of the United States.

Viet Nam faces satisfactory market access conditions, though this varies with product. Of the most important products the situation is variable. The biggest export earner in this sector is fans ("Table, floor, wall, window, ceiling or roof fans”, HS 841451), a product for which Viet Nam enjoys free access to two of the biggest markets, Japan and Hong Kong. For washing machines and refrigerators Viet Nam faces the same conditions as most of its competitors.

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Bicycles China is clearly the leading world exporter of bicycles, though Viet Nam remains highly competitive due to its low labour costs and high quality products. Accordingly, export growth for bicycles has been exceptional over the past few years, and Viet Nam has become the fifth largest exporter of bicycles in the world.

An important destination for Vietnamese bicycles is the European Union: in 2003 Viet Nam exported 1.3 million units there, translating to an 8.2% share of the market. However, in 2004 European manufacturers filed an anti-dumping suit against Vietnamese companies, which could impede the potential to expand Viet Nam’s exports as tariffs could more than double. A similar investigation is underway in Canada, another important market for Viet Nam. The export potential of bicycles is thus considered medium.

Table 36. SWOT analysis for bicycles Strengths Weaknesses

Large and experienced workforce Low labour cost High labour productivity High quality products

Lack of market information


Diversification of products Anti-dumping investigations in the EU and Canada



Viet Nam has recorded an impressive performance and is now the fifth largest exporter in the world. Based on TradeMap statistics, bicycle exports increased on average by some 50% a year between 1999 and 2003, amounting to USD 180 million by 2003. According to Vietnamese statistics, the export value of bicycles and parts in 2004 rose by nearly 50% from 2003 USD 230 million. In particular Viet Nam's exported bicycle volume and its EU market share have rapidly increased in recent years, from 250,000 units (or 1.6% share of the EU market) in 1999 to more than 1.3 million units (or 8.2% share) in 2003, and Vietnamese estimates for shipments in 2004 are as high as 1.5 million units. The United Kingdom and Germany are the biggest EU importers of Vietnamese bicycles. Market diversification opportunities include other European countries (Norway, Czech Republic) as well as Japan, Singapore and Indonesia. However, the implication of the anti-dumping measures currently underway in EU and Canada could significantly dampen growth prospects.


Vietnamese enterprises are highly competitive, as they can sell bicycles at low prices because of low labour cost and high labour productivity. Moreover, domestic producers such as Dragon Bicycle Viet Nam do not strongly rely on imported inputs, as they manufacture 70% of the required components. In addition, the quality of the bicycles is considered high, as manufacturers use European designs with iron or aluminium bodies, and the product range is diverse, varying from sports, mountain to city bikes.


The world market for bicycles expanded slowly, 1.8% p.a. in value in recent years with growth in volume slower at 1.7%. In 2003 the sector was worth almost USD 8 billion. The largest markets are the United States absorbing about 16% global imports, followed by Germany, Japan, France and the United Kingdom.

Viet Nam is significantly disadvantaged by its market access conditions. When exporting bicycles to its biggest market, the EU, Viet Nam faces a tariff of 11%. The next biggest

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market is Canada, where exporters face a tariff of 9%. However, Vietnamese bike manufacturers are facing stiffer challenges in these important markets. In the middle of 2004, the European Union investigated an allegation that the country dumped bicycles in the EU market (Box 14). The Canadian International Trade Tribunal is also conducting a similar investigation after receiving a complaint from the Canadian Bicycle Manufacturers Association.

Box 14. EU Anti-dumping suit against Vietnamese companies

Vietnamese bike manufacturers are facing stiff challenges in the international market. In 2004 the European Union started investigating an allegation made about by the European Bicycle Manufacturers Association that the country has dumped bicycles on the EU market. At present, Viet Nam's bicycle exports to the EU are taxed at a rate of 15%. If the EU rules that Vietnamese bicycles are dumped in the EU, they will be subject to an anti-dumping tax (estimates are as high as 34.5%). Although a final decision has not yet been made, the volume of bikes exported from Viet Nam this year is expected to decrease due to this issue. According to the Financial Times (2005), “Universal Cycles, which imports 600,000 bicycles into the UK a year, said it had already stopped placing orders in Viet Nam in readiness for the curbs”.

Earlier this year, the Canadian International Trade Tribunal conducted a similar investigation after receiving a complaint from the Canadian Bicycle Manufacturers Association.

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Plastics and plastic products The plastic industry is one of the fastest growing sectors in Viet Nam, showing 30% annual export growth rates over the last five years, and has become one of Viet Nam’s major export earners. However, the industry consists mainly of small and medium enterprises that cannot create economies of scale, and Viet Nam is dependent on imported inputs. Viet Nam is a substantial net importer of plastics: even using the most optimistic estimates, imports exceed exports by a factor of four.

The government has provided support and will continue to do so, including attendance at trade shows and other promotion. The industry is also investing over the long term, especially in raw and intermediate inputs, but Viet Nam will likely remain a net importer in this sector for some time. Investment in production capacity in some key products such as like PVC (Polyvinyl chloride) and PP (polypropylene foam) is only expected to reach 50-60% of raw material demand by 2010. Exports, however, are significant and can continue to grow so the potential is deemed to be medium. The strategy should be focused on identifying targets of opportunity for export promotion, and to leave other areas either for import substitution or better import sourcing.

Table 37. SWOT analysis for plastics Strengths Weaknesses

Supporting programs from Government

Dependence on imported raw materials Limitations of technology Limitations of production scale associated with dominance of SME firms Investment policy and other “business infrastructure”


Reaching new markets Investments in raw materials (PVC, PP) over next 5 years Growing demand from China

Unstable domestic demand Unstable prices of raw plastic Increase in the price of plastic grains because of higher oil prices Strong competition within the region, including China

Source: Field-work interviews, desk research.


Viet Nam’s export performance appears weak due to the small portion of the world market and it being a net importer. On a positive note, growth in export value has been impressive. After a phase of solid growth of more than 40% p.a. in value terms for the period 1999-2003, Viet Nam’s exports amounted to more than USD 65 million in 2003 based on data from Comtrade. Because Viet Nam exports to non-reporting countries such as Laos and Cambodia, these statistics may not fully capture the industry. Vietnamese data suggest significantly higher exports, reaching almost USD 260 million in 2004. Vietnamese statistics also show a high export growth rate from 2003 to 2004 of 34% and forecast an increase of 35% in 2005.

For the moment, Viet Nam exports mainly to Asian countries, but the United States have become an increasingly important market. The main importers of Vietnamese plastics are Japan, China and the Philippines according to Comtrade, and Japan, the United States, Cambodia, Taiwan, the Philippines, Korea, Australia, France and Malaysia according to Vietnamese sources (VN News 21 February 2005). The United States ranked as the second biggest importer in 2004, moving from its fifth position in 2003. In 2004, the industry saw more demand from ASEAN countries and tapped into Africa and made some initial sales in the Commonwealth of Independent States (CIS) countries. Opportunities for diversification exist especially in the new member states of the European Union (Lithuania, the Czech Republic, Slovakia, Estonia, Hungary, Poland), as well as the United States and Iran, which has been growing at more than 20% p.a. in recent years.

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According to Vietnamese sources, exports consist mainly of roofing sheets, packages and household utensils. More detailed information from the industry is necessary to understand the subs-sectors within plastics and the drivers of each of the individual markets. However, trade data for this sector is not well defined in Comtrade: the biggest product for both Viet Nam and the world is the residual category called “Articles of plastics not elsewhere specified” (HS 392690), followed by “Plates, sheets, film, foil and strip”; “Flexible tubes, pipes and hoses of plastics”, and “PVC (Polyvinyl chloride)”.


The plastic sector is concentrated in SMEs and dependent on imported inputs. It is estimated that over 80% of enterprises in this sector are small- to medium-sized, which weakens the industry. Workers’ skills remain low because equipment and facilities are outdated, and Viet Nam must import most materials used for manufacturing. The country imports raw materials for plastic manufacturing from the Republic of Korea, Thailand, Singapore and Taiwan. Korea is Viet Nam’s biggest supplier, selling about USD 100 million worth of plastic, more than 17% of the country’s total plastic import value.

Input prices, tied to oil prices, increased dramatically in 2004, but may be easing. Prices for raw plastic, the major input in this sector, has increased almost 250% since the beginning of 2004. Forecasts indicate that the price should decrease during the remainder of the year thanks to easing oil prices on the world market.


The sector is dynamic, as international demand has been growing at a fast pace. Over the five-year period growth averaged about 7% in value and in volume annually. The world market for plastics and plastic products came to almost USD 170 billion in 2003. China, the United States and Germany are the largest importers of products in the sector. The major products in this sector, apart from the “not elsewhere specified” category, are intermediate products such as polyethylene, polypropylene, and others in which economies of scale may be critical.

Viet Nam faces relatively good access conditions and low tariffs in major markets. In general tariffs are low in important markets, or Viet Nam is treated the same as other exporters. For articles of plastics not elsewhere specified, Viet Nam enjoys the same conditions as most exporters, and even has preferential tariffs in Malaysia.

Government strategy

Government policy has been mixed, but is becoming more supportive. According to the Viet Nam Plastics Association, policies on customs, tariffs, and investment incentives remain incomplete, and supporting industries remain unsatisfactory. According to the Trade Ministry, plastic products have high export potential and will be the focus of the national trade promotion program over the next years. The government has earmarked almost USD 1 billion to support the construction and renovation of five plants manufacturing raw materials like PVC (Polyvinyl chloride) and PP (polypropylene foam). Slated for completion in 2010, the plants are projected to meet 50-60% of the industry’s demand for raw materials. In 2005, the State will funnel USD 700,000 into the industry’s promotional activities, including firms’ participation in international fairs (in China and Poland) and working visits (Africa, Eastern Europe). State money will also help fund the Viet Nam Plastics Fair, the establishment of an industry data center, training, and technical assistance on purchasing equipment and renovating facilities.

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Wires, cables and conductors Viet Nam has currently about 60 businesses producing and trading high quality electric wires, cables and conductors at reasonable prices, many of which produced in modern and large-scale production lines. Exports have grown significantly in recent years, and are concentrated on the Japanese market. However, the export potential appears medium, partly because of government policy that does not seem particularly supportive of the industry.

Table 38. SWOT analysis for electric wire and cable


High quality Reasonable price Modern and large-scale production lines High domestic demand

Imported material Changes in tax on imported material Higher value added tax (VAT)


Growing demand from neighbouring countries Lengthy bidding process Unstable policies of the Government for the industry



Estimates on Vietnamese exports of wires, cables and conductors differ substantially between Vietnamese and international sources of information. According to TradeMap statistics, Viet Nam’s exports in 2003 amounted to more than USD 50 million (growing in value by more than 50% a year between 1999 and 2003). However, Vietnamese trade statistics suggest much higher figures: USD 300 million in 2003 (up 56% over 2002 with 186 USD million), and USD 385 million in 2004. The latter sources suggest that the major import markets of Vietnamese electric cable are Japan (90%), Hong Kong, Australia, South Korea and member countries of ASEAN.


Viet Nam has currently about 60 businesses producing and trading in cable and wire, many of which use modern and large-scale production lines. Their products are collectively accounting for over 70% of the domestic market, and many of these have also made great strides in overseas markets, thanks to a favourable price-quality ratio: quality is considered high and prices reasonable.

Future export growth may be hindered by taxes levied on imported inputs. Despite the robust growth of Viet Nam’s cable and wire production industry in recent years, many manufacturers have complained that the import tax levied on certain materials used by the sector has become a serious financial hindrance, shrinking profits and restricting competitiveness.


The world market grew slowly between 1999 and 2003, averaging just 3% in value and 4% in volume. In 2003 the sector was worth USD 38 billion. The world market is not highly concentrated in terms of demand. The United States is the largest market, followed by Germany, China, Mexico and France.

Viet Nam’s market access conditions are reasonable, since most importers apply tariffs across the board. Most countries impose some form of tariff barrier and Viet Nam faces the same treatment as most exporters.

Government strategy

Government policy does not seem particularly supportive of the wires, cables and conductors industry. The decision to impose a 5% import tax on galvanized steel, a

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previously untaxed material that cannot be domestically produced, has forced production costs up. According to the interviewed companies, the import tax has been introduced at a particularly difficult time for the industry, as it accompanies a significant increase in the price of galvanized steel over the last year.

The interviewed enterprises also criticized the increase of value added tax (VAT) on cable and wire products from 5% to 10% as an additional burden for the industry, and estimates that the protracted VAT rebate process slows the industry’s growth. The slow VAT rebate process means that enterprises must pay high banking interest rates until the money is returned, as the majority of their working capital is borrowed from banks. The current bidding process for materials has also been complicated by the monthly fluctuations of material prices for the industry.

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Agricultural machinery Growth in exports was extraordinary, and the sector has high potential to develop further to take advantage of the sizeable domestic and regional demand. Manufacturers have the capacity to expand production and the industry employs a skilled labour force that produces goods of relatively high quality compared to cost. Moreover the sector benefits from supportive government policies including financial assistance to manufacturers, reductions on tariffs for imported inputs and protection from cheaper imports. According to the Ministry of Transport, by 2010, the industry is expected to meet 45% - 50% of the country’s demand for agricultural machinery products, and exportable products are expected to account for 30% of total production value.

Table 39. SWOT analysis for agricultural machines Strengths Weaknesses

Skilled-labour Low price Good quality-to-cost ratio High domestic demand Supporting strategy from the Government including lower tariffs for imported inputs

Industrial designs and patterns Product diversification Small-scale production


High demand from neighbouring countries Lower cost of Chinese products



Exports of agricultural machinery are very small however export growth has been extraordinary, one of the highest growth rates of all examined sectors. In 2003 exports totalled USD 7 million in 2003, more than doubling over the five-year period. Despite this the country remains a net-importer. More than half of Viet Nam’s exports go to the United States, with Asian markets receiving the bulk of the rest, and Uganda being the other major extra-regional destination. Viet Nam could explore diversification opportunities in countries such as Indonesia and Korea, where demand for agricultural machinery is growing.


Manufacturers have the capacity to expand production. The industry employs a skilled workforce that manufactures products that are of relatively high quality, considering the low cost of production. For example, the Vietnamese Engine Agricultural Machines (VEAM) produces goods comparable to Japanese products that are 80% of the quality, but cost half as much to produce. Other agriculture machines such as tractors and rice mills, which compared to the products from ASEAN countries are similar in quality, but cost only 70-80% to produce. VEAM is now beginning to export to these countries and the Middle East.

The government encourages local medium and small-sized mechanical manufacturers to take part in the production of equipment and machinery, and to collaborate with mechanical engineering enterprises in and outside the city or province.

Demand for agriculture and processing machines on the domestic market is very high and domestic producers have to compete with cheap Chinese imports. In order to differentiate from competitors, Vietnamese producers could look to diversify the product range or improve industrial designs and patterns.

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Table 40. Main agricultural machines produced in Viet Nam

Units 1995 2000 2001 2002 2003

Tractor and lorry 2,709 1,932 2,885 3,052 3,205

Threshing machinery 1,482 11,877 12,013 12,997 13,200 Rice mill 2,043 12,484 18,298 13,433 13,510 Machine tool 1,358 431 655 661 650 Diesel motor 4,217 15,623 18,721 32,570 55,678

Insecticide pump 26,000 70,400 52,800 52,400 51,700 Agricultural pump 547 3,496 4,238 3,578 3,510

Source: Statistical yearbook 2003.


World demand grew solidly during the five-year period: imports increased by 7.4% on average in value and in volume terms at a rate of 6.5% annually. The agricultural machinery sector was worth over USD 15 billion in 2003. The United States (with a 12% share of the world market), Germany, France, Canada and the United Kingdom are the largest importers in the world.

Viet Nam benefits from free access to all the major markets for the most important products in the sector, though so do the majority of countries. Where tariffs are applied, except in a few cases, all exporters receive the same treatment.

Government strategy

The Ministry of Industry has a Master Plan in place until 2010 for this sector. In order to improve the competitiveness of the agricultural and processing industry, financial support is awarded to farmers and enterprises that invest in agricultural machinery. Also, tariffs on imported accessories and components for the industry are decreasing, and those on imported agricultural machines are increasing.

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Shipbuilding Shipbuilding is developing rapidly in Viet Nam and has attracted several foreign investors and exporters. Viet Nam has more than 60 State-owned shipbuilding and repairing yards. For the moment, the local content of shipbuilding is limited, but the government is investing heavily to produce more local inputs as import substitutes. The quality of ships “Made in Viet Nam” has improved drastically over the last years.

The sector can be regarded to have high potential and Government has ambitious plans for shipbuilding to become a key export industry and a key supporting industry for other industries. It has already invested to upgrade shipyards, and Viet Nam’s shipbuilding industry is planned to be a technological level equal to that in other regional nations by the year 2010.

Table 41. SWOT analysis for shipbuilding Strengths Weaknesses

Coastal line of more than 3,200 km Low cost, experienced labour force Quality of shipbuilding Quality of repairing Brand name of Vinashin Advanced technologies in one company (Vinashin)

Poor infrastructure Limited local content (30-35%) Weak design of ship models Weak flotation and performance tests (which are needed to check ships before they are launched) Rudimentary technologies in general


Strong domestic and world demand Geographic location in a growing region Upgrading of human resources with overseas training

Strong regional competition



The Government decided several years ago to make shipbuilding a key export industry. According to Vietnamese data, the sector earned about USD 250 million from local sales and USD 70 million from exports by 2003 and local sales plus exports are expected to increase to more than USD 5 billion by 2010. Locally built light vessels are exported to neighbouring countries like Laos, Cambodia and China. Local shipyards are capable of repairing up to 50,000 DWT vessels.

However, these numbers are substantially different from international data, which estimate Vietnamese exports in 2003 at only USD 2 million. The discrepancy may be partly due to differences in industry definitions, and that Viet Nam exports to countries such as Laos and Cambodia, which do not report trade data to the United Nations and which are thus not covered in TradeMap.

According to TradeMap, Viet Nam occupies just 0.2% of the world market for products in the sector and is principally a net importer. Exports in 2003 amounted to USD 2 million. Japan absorbs almost three quarters of exports, while the rest is mainly disseminated amongst other East Asian countries, India, Spain, Belgium and the Netherlands. Potential diversification markets include Poland, Italy, and Sweden.


Viet Nam has more than 60 shipbuilding and repairing yards, owned by the Ministry of Defense, the Ministry of Fisheries and especially the Ministry of Transport, which owns more than 70% of the shipbuilding capacity. The main products of the shipyards are steel vessels for cargo transport and offshore fishing, though light tonnage oil tankers, dredges and passengers ships are also built in increasing numbers. Local shipyards are currently able to build cargo ships of 6,500 DWT.

The local content of shipbuilding is limited, but the government has plans to produce more local inputs as import substitutes. At present, the local content is only 30-35%,

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consisting mainly of labour, secondary material and some minor equipment, while the main equipment and engines are imported. So far imported equipment generally include marine diesel engines, electronic-hydraulic steering gears, cranes up to 120 ton, air compressors, crankshaft grinders, plasma cutting machines, welding machines and other equipment on board. The large majority of steel is imported and accounts for a considerable proportion in the value of a Vietnamese-made ship. Vinashin (Viet Nam Shipbuilding Corporation) is therefore investing in a steel mill to produce steel sheets for building ships. The steel mill has a capacity of 350,000 tons per year. The biggest company also has a steel billet factory with the capacity to produce 500,000 tons per year in Central of Viet Nam, and has set up factories for assembling 6,000 hp diesel engines and spare parts in Northern Viet Nam. Another important aspect is the ability to design ship models and test flotation and performance.

The quality of “Viet Nam made” ships has improved drastically over the last years, attracting foreign users. Moreover, foreign ships on their voyages have approached Vietnamese shipbuilders for repairing. Currently, “Viet Nam made” ships under marks of Vinashin are navigating worldwide. Vinashin has also sent a number of managerial-level officials of Vinashin member companies to short-term training courses at Polish, Danish, German shipbuilding factories to learn management skills and improve their designing abilities.


World imports grew very fast between 1999 and 2003, increasing by more than 20% in value and 5% a year in volume. The world market for industrial machinery and equipment came to USD 8 billion in 2003, with the United States as the leading importer, followed by Poland, Italy, Spain, France, Germany, and Canada.

Broadly-speaking Viet Nam enjoys good market access conditions for industrial machinery and equipment. The country has free access or low tariffs and conditions are the same as for most exporters allowing it to remain competitive.

Government strategy

The Government has ambitious plans for shipbuilding to become a key export industry and a key supporting industry for other industries. It has already invested to upgrade shipyards, and Viet Nam’s shipbuilding industry is planned to be a technological level equal to that in other regional nations by the year 2010 (Box 15).

In its shipbuilding development strategy, which has been approved by the government, Vinashin (Viet Nam Shipbuilding Corporation) states that it aims to internationalize Viet Nam’s shipbuilding industry. From now to 2010, besides building ships to meet domestic demand for ships, Vinashin will attempt to produce USD1 billion worth of ship exports per year, according to Vinashin’s shipbuilding strategy. Vinashin has already reached world-class status in some technology areas, such as welding rods, ship equipment, and ship repairing.

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Box 15. Ambitious Government plans for the shipbuilding industry

The Government has ambitious plans for shipbuilding to become a key export industry and a key supporting industry for other industries.

− From 2000 to 2002, the government invested some USD 65 million to upgrade Viet Nam’s shipyards, especially for slipways and cutting and welding equipment. Major products had includes ships ranging from 6,500 to 11,500 tons, 3,500 tonnage oil tankers, passenger shops, tug boats and dredgers. All meet the standards for international registration.

− Vinashin (Viet Nam Shipbuilding Corporation) is currently expanding its shipyards to integrate with the economy of the Association of Southeast Asian Nations (ASEAN). These would enable Vinashin to build 30 ships of between 6,500-35,000 tons each year. It has built large-scale shipyards for building and repairing oil tankers of up to 100,000 tons. It has also built a factory to laminate steel for making hulls in a northern-costal province, a factory for making diesel engines and other factories making accessories.

− From 2006-2010, the industry is expected to focus on internationalisation and competitiveness and to hire non-Vietnamese experts to make large ships for export. The industry will have to cope with challenges such as raising capital, training human resources, and regional competition. So far, there is a strong competition especially from the suppliers like Japan, Singapore, South Korea and China who have been traditional trading partners to Viet Nam. In additional to this, Poland, Norway and Finland have also been quite active in the market.

− By the year 2010, Viet Nam is expected to become a nation having a shipbuilding industry with a technological level equal to that in other regional nations. Accordingly, the share of domestically made products in total output is expected to rise to 60-70%, effectively serving the plan to promote export and create favourable conditions for other industries to develop. The industry expects to increase domestic sales and exports to more than USD 5 billion by 2010. The building capacity will be extended to container ships of 14,000 tons, freighters of 12,500 tons, cargo ships of 6,500 tons and oil tankers of 100,000 tons. Europe and Japan are targeted to become Viet Nam’s main export markets in the future.

Source: Background report by Ministry of Industry.

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Brief information for less examined industrial products Viet Nam’s industrial exports are increasingly being diversified with a number of new sectors at an early stage of exports. Examples are chemicals, mechanical products, electrical and electronic products, and construction material. The key markets are generally the neighbouring countries. Some of these industries were promoted during the Planned Economy Era as a means of industrialisation based on import substitution, and were given top government priority in investments and protection from the 1950s to the 1980s. The technology was usually imported from the Soviet Union, but also China and other countries. Many of these industries are still mainly State-owned. These industries are generally exporting a quite small percentage of their production, and the main market is the domestic one, for most of these products are heavily protected with import duties often over 100% (ITC, 2002a).

External assessments of some of these industries indicate that the production technology, design and productivity leave much to be desired. For example, a study of the competitiveness of the mechanical engineering industry found the sector non-competitive, as the machinery generally was outdated, the operations far from efficient, support systems poorly developed, and the financial strength of the enterprises poor for upgrading its technology. The companies tend to operate with low level of specialisation, aiming at producing all components needed due to a complicated system of supplies from the outside. A sign of the low productivity in the Vietnamese industry is generally higher cost at the local market than world market prices (ITC, 2002a).

Yet, the government places high hopes of the rapid expansion of these promising export industries. It is not clear how the government envisage this transformation to take place, especially as Viet Nam is subject from fierce competition on export markets, especially from China.

This study has not investigated the supply situation in as much detail as the industries coved before. For some industries, it was problematic to find enterprises willing to take the time for an interview and to respond to the questionnaire, and to obtain background information (statistics, reports, studies, industry news) from business associations or relevant Ministries. Though for some industries, absence of information might be a good indicator of the export potential of the sector, this is certainly not true for all industries. However, for some of those industries, the world market is enormous and dynamic, and future studies should certainly put a special effort to cover these better and monitor changes in local supply conditions.

Electrical machinery and equipment

Viet Nam is a small, but fast-growing exporter of electrical machinery and equipment. Exports skyrocketed between 1999 and 2003, averaging more than 50% per year growth in value and almost 5% in volume. In 2003, Viet Nam earned more than USD 610 million from exports in this sector. The electrical machinery industry is in early stage of development, and Viet Nam is a net importer, representing a very small share of the world market. “Printed circuits” (HS 853400) is the largest product for Viet Nam and for the world, with growth in value averaging more than 75% per year.

Exports are highly concentrated, with nearly 80% going to just five neighbouring countries: Japan (almost one third), the Philippines, Thailand, China and Singapore. Growing markets in former Eastern-bloc countries such as Russia, the Czech Republic and Slovakia are potentially new diversification markets, particularly the new EU members where Viet Nam enjoys relatively free access.

Overall growth in international demand over the past five years has been slow, with imports increasing in value and volume by only 3% a year. The electrical machinery and equipment market recorded just over USD 210 billion in 2003. The United States is the

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largest market with a share of nearly 14%, followed by China, Germany, Hong Kong and Mexico.

Viet Nam’s market access conditions for electrical machinery and equipment are good. In general Viet Nam enjoys free access or similar conditions to its competitors in the major markets. For the most important product in the sector (for Viet Nam and globally) “Printed circuits” (HS 853400), Viet Nam benefits from free access of low tariffs, only receiving discriminatory tariffs from Taiwan and Israel.

The export potential for electrical machinery is considered medium given that Viet Nam enjoys favourable market access conditions and its exports have grown remarkably. However world market growth has been slow.

Stationary, office machine and supplies

Compared to the world average Viet Nam’s export growth was staggering, at nearly 90% per year, over the 1999-2003 period. In 2003 exports amounted to USD 240 million, making up a very small share of the world market (0.06%) with the United States and Japan as the primary destinations. Viet Nam currently imports more than it exports. Based on our calculations, new EU countries such as Hungary, Slovakia and the Czech Republic provide interesting market diversification opportunities for Viet Nam.

Viet Nam grossed USD 240 million from stationary, office machine and supplies exports in 2003. Formerly, Viet Nam did not have any large-scale production of information equipment other than the small assembly of personal computers by state and private enterprises for domestic sale. However, Canon had invested nearly 10 billion yen in a new ink-jet printer plant in Thang Long Industrial park in the suburbs of Hanoi. Other major foreign firms are planning to follow Canon’s lead. This points to the possibility that Viet Nam may become a favoured foreign direct investment destination for this purpose in light of the availability of stable supply and low cost of labour in the industry.

Over the 1999-2003 period import growth in value was slow, at 2.3% per year, whilst growth in volume was three times this at about 7% a year. The stationary, office machine and supplies sector was worth almost USD 390 billion in 2003. The United States is the leading importer with almost a fifth of the world market; Germany, the Netherlands, United Kingdom and Japan are other leading importers.

Viet Nam enjoys considerably good market access conditions. The country has free access to the most important markets, and in the few countries that do impose tariffs, tariffs are applied indiscriminately therefore not disadvantaging Viet Nam. The sole exception is Taiwan where most exporters have free access whereas Viet Nam faces barriers of 9% for its most important products.

The potential for this sector is deemed to be medium. Viet Nam is a small player with high growth rates in a slow growing world market and the country benefits from good market access conditions.

Industrial machinery and equipment

Viet Nam's export growth was impressive (export value more than doubled every year between 1999 and 2003) though the country remains principally a net importer. In 2003 exports amounted to USD 143 million, occupying just 0.04% of the world market. In terms of current markets, Japan absorbs almost three quarters of exports, while the rest is mainly disseminated amongst other East Asian countries. Viet Nam could diversify its export markets particularly to China, the United States and the European Union.

Import growth was moderate over the period 1999-2003, increasing by some 5% a year in value and 6% in volume. The world market for industrial machinery and equipment came to more that USD 313 billion in 2003, with the United States as the leading

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importer, accounting for 13% of the total. Other large importers include China, Germany, France and Canada.

Viet Nam enjoys good market access conditions for industrial machinery and equipment. The country has free access or low tariffs and conditions are the same as for most exporters allowing it to remain competitive.

For industrial machinery Viet Nam’s export potential is medium. The international environment is good, as was Viet Nam’s export growth, however the country is a net importer.

Communications and telecommunications equipment

Viet Nam is a small but highly dynamic exporter: exports averaged 50% p.a. in value over the last five years. Viet Nam earned USD 135 million in this sector in 2003 accounting for just a small percentage of the world market. The country is currently a net importer but the performance of recent years bodes well for the future. East Asian countries make up the majority of Viet Nam’s export markets, with Japan and Hong Kong taking in more than two thirds of exports, followed by Thailand, Malaysia and China. Viet Nam could diversify its markets to EU countries such as Germany, the United Kingdom and Spain.

World demand growth between 1999 and 2003 was considerable, increasing at a rate of 8% in value terms and even faster in volume, at 10% per year, over the five-year period. The communications and telecommunications equipment sector was worth almost USD 260 billion in 2003. The largest importer in the world is the United States with a 20% share of the world market, followed by Hong Kong, China, Germany and the United Kingdom.

Viet Nam is generally granted the same access conditions are the majority of exporters. For “Transmission apparatus ” (HS 852520), which accounts for a third of exports in this sector, Viet Nam only faces higher tariffs in Taiwan. This is also the case for “Parts suitable for use solely or principally with transmission“ (HS 852990), which also accounts for approximately a third of exports.

Viet Nam’s export potential in this sector is considered medium due to a favourable international environment and high export growth rates, yet it remains that the country is a net importer.

Packaging materials

Viet Nam is a net importer with a marginal share of the world market, but exports have grown strongly over the last few years. Viet Nam exported USD 104 million worth of products in 2003, thanks to a growt h rate of more than 43% annually in recent years. This trend has been largely stimulated by a rapid rise in exports of “Folding cartons, boxes and cases” (HS 481920), the country’s fourth largest item in the sector. Currently, Japan (20%) and Malaysia (13% ) are the most important markets for Viet Nam. The United States, which is in third place (almost 9%), is also gaining in importance, as Viet Nam’s exports to this market have increased more than two and a half fold annually over the past five years. Opportunities for diversification are in the European Union (Germany, Belgium, Slovakia, Latvia, France).

International demand for packaging materials is dynamic. Between 1999 and 2003 the market grew by 8% p.a. in value and in volume, and in 2003 imports amounted to almost USD 45 billion. The largest importers were the United States (13%), France, Mexico and Germany.

For the most past, Viet Nam faces the same conditions as the majority of its competitors. For the most important product in the sector for Viet Nam “Sacks and bags” (HS 392321), Viet Nam has no disadvantage in large markets such as the United States, Mexico or Japan. However in Thailand, Viet Nam faces tariffs that are higher than most exporters

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(albeit marginal, at 4 percentage points). This is the case for the other two important products for Viet Nam, which combined make up more than 50% of export earnings in this sector.

The export potential for packaging materials is medium. World demand is dynamic and market access conditions are satisfactory, but current export performance is modest.

Image and sound equipment and accessories

Export earnings in 2003 exceeded USD 100 million, as Viet Nam benefited from the dynamic international environment; and growth in exports, in value terms, were nearly two and a half times faster than the world average, at 24%. Still Viet Nam is a net importer and its exports constitute a small part of the world market. Korea accounted for one third of Viet Nam’s exports, followed by Singapore, the United States, China and Russia. When considering diversification markets, Viet Nam could look to Hong Kong, a growing market that offers free market access, and to European countries such as the United Kingdom, Norway, Croatia and Spain. The three leading exports products are “Colour cathode-ray tubes for television pictures and video monitor“ (HS 854011) “Colour television receivers” (HS 852812) and “Loudspeakers, without enclosure” (HS 851829).

Between 1999 and 2003 world demand grew at a pronounced pace, with imports in value terms increasing by 12% p.a. and in volume by more than 15% per year. In 2003 the world market for image and sound equipment and accessories was worth almost USD 115 billion. The United States dominates with a 22% share of the world market, followed by Germany, Hong Kong, United Kingdom and France.

In general Viet Nam has no advantage or disadvantage compared to its competitors. However for “Colour television receivers” (HS 852812), the second most important product for Viet Nam and the most important product globally, importing markets are characterised by high tariffs, and Viet Nam suffers from significantly higher tariffs than most of its competitors.

For image and sound equipment Viet Nam’s export potential is medium. The world market conditions are good but Viet Nam is a net importer.

Household and furnishing textiles

Viet Nam’s export performance for household and furnishing textiles over the five-year period was decent. Viet Nam is a net-exporter and exports earned USD 100 million in 2003, growing in value by nearly 7% a year between 1999 and 2003. However, Viet Nam accounts for just a small portion of the world market.

“Toilet linen and kitchen linen…” (HS 630260) accounts for more than half of the exports in this sector and gives Viet Nam a 2% share of the world market. The trend over the last five years was positive on a world level, but Viet Nam is not capitalising on this. On the contrary, exports fell in value terms on average by 1% per year.

Japan is the leading importer of Vietnamese household and furnishing textiles with a 40% share; the United States, Germany, Taiwan and France are also major importers. Viet Nam could look to diversify its export markets regionally, for example to Singapore and Hong Kong who offer Viet Nam free market access conditions.

Many textile companies of Viet Nam had to import 80% materials and 100% chemicals leading to high cost prices. The import content has not changed significantly over time, reflecting the prolonged sluggishness of the textile sector and other supporting industries. However in recent years, textile enterprises have replaced most of their obsolete equipment, investing in modern machines made in Europe or Japan, associated with advanced technology in such key areas as dyeing, printing and finishing.

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This is a dynamic sector as world imports have grown in value by 10% p.a. over the five-year period and even faster in volume terms, by almost 15% per year. The household and furnishing textiles sector is estimated at USD 15.5 billion in 2003. Leading importers in the world include the United States (30% world market share), Germany (10%), United Kingdom, Japan and France.

The market access conditions in this sector are unfavourable for Viet Nam. However in most major markets Viet Nam faces the same circumstances as most of its competitors.

Household textiles is a low potential sector for Viet Nam. Viet Nam is small world player and potential is hindered by poor market access conditions.

Toys and games

Viet Nam’s export performance was quite good for toys and games. Over the five-year period exports grew rapidly, at nearly 28% per year in value with exports totalling USD 81 million in 2003. Its world market share is just above average and the country is a net exporter. Over half of Viet Nam’s exports went to four EU countries: the United Kingdom, Germany, Belgium and France. New EU countries such as the Czech Republic and Slovakia are growing markets for these products; Croatia is another such country.

International demand growth has been modest, increasing slowly, at a rate of just 3.8% per annum in value over the 1999-2003 period. Imports in volume terms expanded faster, at 7.2% per year. The toys and games sector amounted to just under USD 34 billion in 2003. The largest market is the United States, accounting for a little over a third of total world imports, followed by Hong Kong, Germany, the United Kingdom and Japan.

Viet Nam’s market access conditions are reasonable. In general tariffs are low and Viet Nam has free access to the US market. On the other hand the country does face higher tariffs in Taiwan and Turkey, though these are marginally higher than tariffs for most exporters.

The toys and games sector is considered a high potential sector. Viet Nam is a net exporter and export growth was high, despite a sluggish world market.


Viet Nam’s export performance appears to be below average, but the sector experienced very high growth rates. Over the five-year period the country’s exports grew at nearly eight times the world average (47% p.a.) in value terms, and though growth in volume was slower, at 9%, it still outpaced the world average. In 2003 exports in this sector came to USD 61 million. Viet Nam has an infinitesimal share of the world market and marginally imports more than it exports. The most important product in the sector (in value terms) is “Glazed ceramic flags and paving, hearth or wall tiles…” (HS 690890), representing a seventh of the total. Viet Nam’s performance in this product is stellar with exports growing at 130% p.a. in value terms.

The bulk of Viet Nam’s exports go to regional counterparts, with Taiwan as the leading importer (30%); Indonesia, Japan and Philippines are also major destinations. The only non-Asian country in the top five is Belgium, possibly the principle destination for the entire EU market. Viet Nam could diversify into North America, as the United States and Canada are relatively open markets.

The high economic growth in Viet Nam has been accompanied by a surge in construction activities, which has created strong demand for building and construction materials. From this, Vietnamese cement, glass and glass products have the potential to export.

International demand growth for construction materials is stable. Between 1999 and 2003, world imports grew by more than 6% in value, and by 5% in volume terms. In 2003

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the construction materials market amounted to more than USD 40 billion. Leading the world in imports in the United States with an 18% share of the world market, followed by Germany, France, United Kingdom and Italy.

In a somewhat protected sector, Viet Nam’s market access conditions vary depending on the product under consideration. The most important product in this sector globally is “Glazed ceramic flags…” (HS 690890) which is Viet Nam’s second most important export. In only six countries (including Switzerland and Japan) Viet Nam has free access. In most large markets (including the United States) and some smaller markets (Saudi Arabia, Russia, Thailand) Viet Nam not only faces tariffs, but significantly discriminatory treatment, compared to the majority of its competitors. For Viet Nam’s most important product in this sector “Towers and lattice masts, of iron or steel “ (HS 730820) the situation is less unfavourable where Viet Nam enjoys preferential treatment from relatively large markets such as Indonesia and Malaysia.

Construction materials are considered of medium export potential for Viet Nam. The international environmental is satisfactory, however the country is a small player and currently imports more than it exports.

Measuring, checking and precision instruments

During the five-year period exports of instruments grew by over 122% a year in value. This outstanding performance is far more dynamic than the overall global trend but the country is principally a net importer. In 2003 Viet Nam’s exports amounted to USD 30 million, still a very small share of the world market. Japan plays a dominant role in its capacity as recipient of more than two thirds of Viet Nam’s exports in the sector. Opportunities for diversification can be identified in the United States, China and the European Union (Slovakia, Hungary, Germany). In 2003 the country earned about USD 80 million from measuring, checking and precision instruments exports.

International demand growth has been stable, growing on average by some 6% per year in value and in volume. The world market for measuring, checking and precision instruments was worth almost USD 79 billion in 2003. The United States, China and Germany are the largest importers of products in the sector.

Market access conditions are relatively good. Viet Nam faces the same conditions as most other exporters, giving it no advantage but more importantly no disadvantage compared to its competitors. “Parts and accessories for regulating…” (HS 903290) accounts more a third of this sector.

The export potential for this sector is deemed to be medium. The international environment is quite favourable and Viet Nam’s export growth has been notable. However the country is currently a net importer.

Glass and glass products

Exports reached USD 23 million in 2003, resulting from a formidable average growth of almost 18% per year. However the export performance is weak because Viet Nam is a net importer of glass and its exports account for little in the world market. One should also note that growth is very unevenly distributed among the products in the cluster. The most significant importers of Vietnamese glass were the United States and the Philippines, absorbing a quarter of its glass exports each. Markets for diversification have been identified in the European Union, where all of the nine top-scorers in our index of market attractiveness are located.

International demand for glass and glass products grew remarkably between 1999 and 2003. In terms of value, growth was 14% a year, and in volume almost 11%. In 2003, the world imported USD 18 billion worth of goods in this sector and the main markets were the United States, China, Germany, France and Korea.

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Market access conditions are satisfactory for Viet Nam. For the most important product globally and for Viet Nam, “Carboys, bottles, flasks…” (HS 701092), most countries offer free access to their markets, however to Viet Nam generally some tariff barrier exists.

The export potential for this sector is high. The world market is dynamic and Viet Nam enjoys good market access conditions.

Electronic equipment and components

Viet Nam is a minor, but fast growing player in the world market of electronic equipment and components. Though being a net importer, Viet Nam exported electronics for more than USD 22 million in 2003, corresponding to a market share of less than 0.01%. Viet Nam exports mainly integrated circuits, and exports are very concentrated in terms of geography, with almost half of exports going to Japan, and one quarter to the Republic of Korea. It is the recent expansion in these two markets that has propelled Viet Nam’s overall growth of this export sector to extreme heights, at over 128% in value per year. Opportunities for diversification could lie in China and Hong Kong, as well as in the European Union (Germany), and particularly the recently integrated economies there (Hungary, Poland, Slovakia, Czech Republic).

The worldwide trend to outsource the production of electronics to low cost countries continues. The production of microchips and other electronic components is extremely research and development intensive, the leading firms often investing 10-15% of their turnover in research. The process of outsourcing the routine production from countries with rising labour costs to low wage countries, especially in Asia, continues. In this process Viet Nam is well positioned.

Foreign firms, especially Japanese and Korean firms, such as Fujitsu, Sony and Daewoo, dominate the production of electronic equipment and components. Many firms started investing in Viet Nam from the mid-1990s onwards. Several dozens of Japanese firms, including Mabuchi Motor, Tokin, and Fujitsu, take advantage of the incentive schemes in processing zones and are engaged in the assembly of relatively simple components, such as transformers, coils and motors.

Viet Nam is an attractive destination for outsourcing of labour intensive production from countries well established in the sector, but with escalating labour costs. The out-sourced production concerns generally some components in the investing company’s integrated system of production. Viet Nam’s comparative advantage to attract such export-oriented investments is to a large extent related to the quality and price of the human resources. Important factors are also the incentives, facilities and services provided to the foreign companies. Political and social stability is also essential. Viet Nam has very low labour costs, its workforce is well known for adaptability, there is a high degree of political and social stability.

On the other hand, foreign companies experience considerable problems with the bureaucratic procedures and legal framework of the country; the taxation system is not investment friendly, and Viet Nam’s information infrastructure is weak and costly (ITC, 2002a). The competition amongst developing nations wanting to attract foreign investments for export -oriented production is fierce, as such a process is increasingly seen as a key vehicle for economic development. It is claimed that Japanese companies consider Viet Nam a source of higher value added components as compared to, for example, China.

The world market for electronics is enormous and has been growing solidly. International trade amounted to USD 315 billion in 2003, and grew by 8% a year in value and almost 5% in volume between 1999 and 2003. The largest importers are located in East Asia, with the United States being the only exception in the top five. China is leading the pack, followed by Singapore and Hong Kong. Among the largest importers, China is also by far the fastest growing, averaging almost 45% per year.

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Viet Nam enjoys relatively free access to the most important markets. For Viet Nam’s most important product “Electronic integrated circuits…” (HS 854230), the country has free access to major markets, like its competitors, with the only exception being Taiwan where Viet Nam faces a 1% tariff. These are generally the conditions for most products in the sector.

The export potential is medium and the development of electronics in the medium and longer-term is an issue of attracting foreign investments through a conducive policy framework, development of supportive infrastructure and human resource development, rather than conventional export development assistance focusing on marketing, quality upgrading etc.

Hand Tools

Viet Nam is not a significant world player in this sector, but export growth in the past years has been considerable, with export value increasing by 43% a year. Viet Nam still imports more than it exports and with export earnings of approximately USD 20 million in 2003, Viet Nam is just a small world player. Just over 60% of Viet Nam’s exports go to the Philippines, followed by Ukraine, Chile, Morocco and Columbia. Viet Nam could look to diversify to open and growing markets, such as Japan and Norway.

Almost half of the earnings in hand tools come from the product “Interchangeable tools for pressing, stamping or punching” (HS 820730). This is quite a dynamic product for Viet Nam, as exports have grown by 60% per year on average over the last five years.

World imports grew slowly over the five-year period, in volume terms by 4.6%, and by only 4.4% in value terms. By 2003 the world market for hand tools amounted to USD 15.6 billion. World demand is lead by the United States absorbing nearly a fifth of the world market, followed by Germany, France, United Kingdom and Canada.

Viet Nam enjoys similar market access conditions to most of its competitors. In general the country has free access to the EU and Japan, and low tariffs in the United States. In regional markets Viet Nam faces tariff barriers, though so do most competitors. Notably, in Taiwan Viet Nam faces higher tariffs than the majority, for most products.

This is a medium potential sector due to an average international environment and Viet Nam being a net importer.

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Arts and crafts

The socio economic impact of the arts and crafts sector is high, especially in terms of poverty reduction and rural development. The sector greatly contributes to income generation in rural areas, thereby narrowing the gap between urban and rural living standards. Arts and crafts represent about 2% of total export revenues.

The export potential of arts and crafts is considered high. Vietnamese arts and crafts are dynamic, and export growth in value terms was almost five times faster than the world average. Viet Nam’s market access conditions are relatively favourable in this sector. Vietnamese craft items are reputed for their affordable price tags as well as a large variety of unique and distinct designs owing to its ethnic diversity. However, the quality of products remains relatively poor. In addition, the production capacities are scattered throughout the country. Consequently, it is difficult to standardize the products due to multiple subcontracting to small structures. In addition, the supply of materials for major handicraft products (bamboo, rattan, rush and leafs, wood and textile) is under threat and transportation infrastructure conditions are poor. Few craft villages have access to market information.

Table 42. SWOT analysis for arts and crafts


Unique and distinct designs Poor product quality Lack of materials for production Lack of standardized processes Production capacities are scattered throughout the country Poor roads conditions Insufficient cooperation among crafts persons Absence of capable national craft development specialists to meet the market needs Limited access to market information


US market Expansion of domestic tourism Craft development specialists

Deforestation of forests Material lacking (bamboo, rattan, rush and leafs, wood and textile)

Source: ITC survey with enterprises in Viet Nam.


Exports of arts and crafts totalled USD 350 million in 2003. This is a dynamic sector for Viet Nam, as growth in exports in value terms was almost five times faster than the world average, at 20% per annum. The largest markets for Vietnamese exports are Germany, the United States, Japan and the United Kingdom. Viet Nam could explore opportunities to diversify its export markets, particularly to new EU countries, such as Poland, Slovakia and the Czech Republic.


Viet Nam has long traditions in artistic crafts. The range of Vietnamese art and craft products is wide: wood crafts; bamboo; rattan, rush and leafs; ceramic; embroidery and lace; textile; metal arts; handmade paper; stone arts; born, horn, glass or combination; works of art. Vietnamese craft items are reputed for their affordable price tags as well as a large variety of unique and distinct designs owing to its ethnic diversity, the main features that fuel their growing popularity in overseas markets (Ngoc, 2005).

Exports account for a small share of the production. The domestic market accounts for about half of the total craft products made. The overseas market and personal consumption each accounted for a fourth of total output.

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The production capacities are very scattered throughout the country. There are 2,017 craft villages nationwide, of which almost 80% are located in the North, especially in the Red River Delta. It is difficult to standardize the products due to multiple subcontracting to small structures.

The major handicraft products (bamboo, rattan, rush and leafs, wood and textile) are threatened to lack material. Arts and crafts products have a very low import content of less than 5%, as most inputs are of domestic origin (Ngoc, 2005).

Transportation infrastructure conditions are poor. Transport links are necessary for the sector’s growth and development. Since most local roads in the craft villages are made of gravel, craft items such as ceramics and baskets suffer damages during delivery because they are mainly transported either through bicycle, animal-driven carriage or manually carried in baskets. Roads within the craft villages are also often too narrow for the passage of delivery vehicles, thereby preventing the delivery of raw materials in bigger sizes or larger volumes. Thus, producers are forced to obtain already processed materials, such as cut bamboo. If rural roads were wider, production costs could be reduced since raw material processing could be done right in the village premises. The proper development of roads is thus indispensable in achieving ideal distribution and cost reduction (Ngoc, 2005).

Few craft villages have access to market information. Producer in rural areas have little or even no information on markets, types and prices. They produce according to orders of distributors who only visit the villages from time to time to make the orders. While private enterprises in urban areas can get some market information and are more competitive, those in rural areas depend only on orders of intermediaries or tourists. As a result, the products lack creativeness. They are copied or modelled after existing designs. According to Ngoc (2005), there are no capable national craft development specialists in Viet Nam to assist craft producers in adapting specific designs to the market needs.

However, the contribution of the artisan craft to poverty reduction and rural development is high. Exported handicrafts provide employment and revenues in mainly rural areas as a source of additional income to farming, often in poor communities. It greatly contributes for income generation in rural areas, thus narrowing the gap between urban and rural living standards. Handicraft production is the main source of income for about 10% of households in rural areas (1.42 million households), according to a recent survey conducted by MARD & JICA. The 2,017 craft villages employ approximately 1.35 million people (62% female, 38% male). Bamboo and rattan craft employs the highest number of people (342,000 persons), followed by rush (233,000), weaving (136,000), and embroidery (129,000). Bamboo and rattan craft making is considered as suitable for promotion and job creation due to its easy production techniques and accessibility to local raw materials. The poverty rate of households in craft villages is at 3.7%, compared to the average poverty rate in Viet Nam of 10.4% (Ngoc, 2005).


International demand growth for cultural goods was satisfactory. Over the period 1999-2003, exports grew by 8.2% per annum in volume, and 3.6% in value. The market for cultural goods came to USD 36 billion in 2003, with the United States clearly the leading world importer, accounting for 37% of the world market. Other large importers include the United Kingdom, Hong Kong, Germany and Japan.

Viet Nam’s market access conditions are relatively favourable in this sector. The United States, overall the largest importer, applies either low or no tariffs; towards Viet Nam its treatment is the same as towards the majority of competitors. Viet Nam also benefits from free access to the EU market and for some products in this sector. Canada and Malaysia offer Viet Nam preferential access compared to the majority of exporters. Mexico, albeit a small market, discriminates against the country, sometimes substantially.

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Government strategy

The Vietnamese government strives to utilize the craft sector as a tool for countryside development, preservation of a cultural frame of reference and a vehicle to pump prime economic activity in the rural areas and help alleviate rural poverty. The Government targets for the industry to reach an annual turnover of USD 1 billion by 2005 and USD 1.5 billion by 2010, and create jobs for 1.8-2.4 million people by 2005 and 4.5-6 million people by 2010.

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3. Crosscutting issues and recommendations

While this report has focused on the export potential of specific industries, the authors would like to stress that Viet Nam’s best option is not to pick winners on export markets, but to provide a business environment that is conducive to risk-taking, entrepreneurship, creativity and innovation.

Measuring the export potential of sectors and identifying industry-specific policies can only be part of a much larger undertaking that tackles the real issues at stake in Viet Nam. There is a debate among experts and policy makers about the usefulness of “picking winners”, i.e. favouring some sectors to the detriment of others, rather than “creating a level playing field” that improves the business environment for all industries. In reality, many governments are taking a pragmatic approach that lies somewhere in-between these two extreme cases, and that includes elements of both. Though in specific cases, for example in the case of market failure, targeted, sector-specific interventions might be justified, priority should be given to creating a favourable business environment for the commercial operators, both domestic and foreign. The authors of this study thus recommend that the government complement sector-specific strategies with horizontal policies that address the major crosscutting issues.

Key crosscutting issues

Though having been very successful over the past years, Vietnamese exporters are facing key challenges. Entrepreneurs and officials from business associations from various sectors mentioned several crosscutting problem areas during interviews, many of which are related to the domestic supply side (Table 43):

− Low-quality and little differentiated products. One of the major obstacles to export growth in several sectors (oil and some agricultural products) is that products are exported in crude or semi-processed form only, which limits the possibility to add value and diversify products. The issue of low quality products, for which competition is tends to be high and which command low prices, is crucial in many sectors, especially for industrial products. Low quality and limited differentiation of products is not only linked to technical aspects of production (including technological backwardness), but also to limited know-how in management, design and marketing.

− Limited value added due to strong import dependency for raw materials and intermediate inputs. In some sectors, products are exported in processed form, but raw materials and intermediate inputs have to be imported, partly at high import tariffs and transport costs, which drive up overall production costs, and for which regular supply is not always assured. Viet Nam’s key manufacturing exports, clothing and footwear, are both highly import-dependent, low value-adding activities, with Viet Nam largely operating as a re-active subcontractor without direct market links.

− Technological backwardness. The processing technologies used in a number of sectors are considered outdated, which is partly due to insufficient financial resources at the enterprise level.

− Access to financing. Many companies, especially small or medium-sized ones in the private sector, lack capital to undertake necessary investments in expansion, machinery and human resources. Enterprises also need help in building their business plans or strategies, and guidance to fulfil the procedures to apply to financial organizations.

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− Inadequate infrastructure. Transportation infrastructure in the clothing sector for example is considered some 20% more costly than in Thailand and China. Supporting infrastructure, such as storage and refrigeration, is insufficient for many agricultural commodities. For rice, for example, post-harvest losses are high and account for 10–12% of the harvest, mainly due to backward harvesting technology, poor transportation means, and poor infrastructure.

− Insufficient cost competitiveness. In several sectors, Viet Nam’s exports are curbed by high production costs, despite in general low labour costs. The government and other stakeholders need to pay attention to two major cost factors compromising Viet Nam’s competitiveness: unit labour costs (labour cost per unit of output, which is equal to the ratio of labour cost and labour productivity) and others costs, such as for intermediate inputs and transportation. For footwear, for example, labour costs are low, but production costs are high because of imported chemicals, machinery and components. While both productivity and labour costs tend to be low by international comparisons, the cost of skilled-labour in some sectors is higher than in other countries in region.

Table 43. Overall SWOT analysis for examined industries in Viet Nam

Strengths (to build on) Weaknesses (to cover)

Political, social and financial stability Good geographic location in a dynamic region Abundant production factors (labour, agricultural, fishery and forestry resources) Relatively low labour costs Disciplined labour force

Corruption and inefficient bureaucracy High cost of skilled-labour c ompared to other countries in region Low productivity Low-quality products Modest technology Little value-added in production due to limited domestic raw materials and components Inadequate infrastructure High inland transaction costs compared to other countries in the region Limited know-how in design and marketing Large gap between rural and urban industries Slow VAT rebate process of the government Lack of branding for agricultural products

Opportunities (to capture) Threats (to defend against)

WTO accession Regional integration (notably AFTA) and future bilateral trade agreements Product and market diversification Technology’s transfer due to foreign direct investment Upgrading of product quality and infrastructure

WTO accession and regional integration Increased competition, both on domestic and international markets, through reduction of protection for domestic enterprises Non-tariff barriers


− Limited knowledge of foreign markets and international trade issues. Information on international markets is crucial for enterprises wanting to export directly to important markets such as the United States and the European Union. However, many exporters have only limited knowledge of foreign markets and need intermediaries in a number of sectors. As a result of greater trade liberalization in Viet Nam, a growing number of enterprises, both public and private are entering the export trade, but they are facing serious problems and difficulties, including lack of market information and inability to utilize information effectively. However, Viet Nam’s information infrastructure is considered weak and costly, though progress has been made in recent years. Sales management remains reactive, with enterprises often passively waiting for clients rather than actively exploring new opportunities. Coordination between institutions and local authorities has improved, but remains weak.

− Little openness to international investors. Though Viet Nam has received important foreign direct investments flows, foreign companies experience considerable

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problems with the bureaucratic procedures and legal framework of the country. In addition, the taxation system is perceived as not investment friendly, and Viet Nam’s information infrastructure is weak and costly.

Key crosscutting recommendations

Enterprises in Viet Nam have to adapt substantially in order to address the changing international environment and the key supply-related challenges mentioned above. This is particularly important if Viet Nam wants to achieve a leading status in at least a few high-quality manufactured products or processes. With the increase in foreign direct investment inflows, the accelerated reform of stated-owned enterprises and the emergence of private enterprises, the business environment in Viet Nam is already constantly changing. This concluding section cannot tackle all the issues at stake, but highlights selected priority actions to improve the competitiveness and the export potential of the examined industries.

− Improve product quality and design. For many industries, Viet Nam’s main strategy until now has been to specialise in standardised, mass-produced products. For such products, price is the main selection criterion on the market, and cost-reduction is the only viable strategy for enterprises that want to compete in a market where international competition is fierce. However, many products can be differentiated by quality (which relates not only to objective factors, such as reliability and after-sales services, but also to subjective criteria, such as design and reputation) and this increases the choices for companies in which segments they want to compete. A reasonable price-quality ratio can be found at the low-end and the high-end market segments. While firms in developed countries tend to go for the high-price, high-quality segment (where wages are high), firms in developing countries often have to opt for the low-price, low-quality and low-wage segment. Vietnamese companies need to upgrade in their specialisation, but this is dependent on many factors, including appropriate investments in the quality of raw materials, production techniques, infrastructure, effective management and more generally human capital.

− Adapt Vietnamese standards to international standards and reduce health-related risks for agricultural products. Quality suffers partly because of the lack of quality standards and regulating agencies conducting inspections. It is necessary to adapt Vietnamese standards to render them consistent with international standards. This is particularly important for fishery and agricultural products, where world markets are likely to apply stricter hygiene and food safety regulations, as well as traceability in the future. Non-tariff barriers, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) have become increasingly important in recent years, partly because of the growing concern of consumers (especially in developed countries) regarding environmental and sanitary risks. In addition, given health-related problems such as the avian influenza (“bird flu”) and the Severe acute respiratory syndrome (“SARS”), it is important to reduce natural or health-related risks by developing an effective veterinary system, a system to protect plants, and to predict natural disasters. This requires producers and processors to enhance their capacity of quality control through the entire value chain, from farming and harvesting/catching to transport and processing. Quality enhancement and standardization is also needed for industrial products manufacturers should adhere to the quality management system (ISO).

− Create brand names. It is important to increase the awareness of the importance of trademarks and the number of trademarks for exported products. For example, it is estimated that up to 90% of Vietnamese agro-products exported to overseas markets are without a trademark, which may correspond to the loss of hundreds of million USD annually to the Vietnamese economy. This is because exporting enterprises

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have insufficient information on export markets, are unaware of the importance of trademarks, and are not familiar with the procedure and cost for registering brands, names and trademarks.

− Invest in upgrading the infrastructure and in science and technology. An ineffective infrastructure is a serious constraint to Vietnamese exports. For the agricultural and fishery sector for example, there is a need for investment in post-harvest activities and in the processing sector. Poor chilled or frozen storage facilities for example are a major issue, and less than 3% of Vietnamese fruit and vegetable traders had refrigerated storage facilities according to an International Food Policy Research Institute (IFPRI) survey in 2002. For fishery products, one third of the value of caught fish is lost because of insufficient refrigerated storage facilities and means of transport. For this sector, improved infrastructure includes also modern ports and safety measures for fishermen, such as storm and flood warning systems. It is also crucial to promote modern machinery and new technologies to improve productivity and product quality, and increase the share of value-added. Research in the agro-food sector for example can improve product quality and render production techniques more efficient.

− Recognize the importance of supporting industries and improve their efficiency. Modern companies focus on what they do best and buy other inputs and services on the market. The rationale for supporting industries is to increase competitiveness of assembly firms, so it is vital that these companies can satisfy quality, cost and delivery standards. Though supporting industries are beginning to develop in Viet Nam, policy makers and enterprises, both state-owned and private, need to recognize the importance of supporting industries, and to create and develop such industries by their own effort. Clear legal definition is still needed, and accordingly, effective promotion measures and supportive policies. According to experts from the Ministry of Industry, the home appliance industry has the potential to become the initial core industry for fostering supporting industries in Viet Nam. Domestic intermediate inputs for this industry correspond already to 70-80% of output. Industries with strong needs for supporting industries include audiovisual consumer electronics and the automobile industry, which currently faces a small domestic demand and requires a relatively high level of technology.

− Favour the development of clusters. Competitiveness depends on how well enterprises make use of their own assets and gain access to new assets by co-operating with other firms and institutions. The Government should consider organizing and developing clusters for manufacturers and businesses, located within a geographical region, that have common buyers, material suppliers or service providers. Companies can specialise in producing either the necessary parts, tools and equipment and other accessories. Regional co-operation will become increasingly important for Viet Nam.

− Improve access to information. Adequate and updated information is essential to survive in competitive markets. Producers, processors and exporters need information on international markets, including patterns and trends in production (for example trends in materials, colours, and shapes), consumption, market characteristics, market access (tariff and non-tariff barriers), distribution channels, storage, packaging and labelling, pricing and market prospects. It would be useful to centralise such information and provide individual companies with constantly updated information.

− Diversify markets and develop trade promotion activities. Vietnamese exports in some sectors are very concentrated geographically, and market diversification is important to reduce sensitivity to demand-side shocks in individual markets. The war in Iraq in 2003 for example led to the collapse of demand for Vietnamese tea. Trade

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promotion activities should be pushed up to expand current markets and acquire new customers. Industries should focus on marketing activities in key markets (United States, Japan, European Union) plus in selected potential markets for which imports are important or fast growing, which are open or have preferential trade arrangement with Viet Nam.

− Secure access to raw materials. In several sectors, domestic supply of raw materials and intermediate inputs is insufficient, driving up production costs (at high import tariffs and transport costs) and sometimes disrupting production because of irregular foreign supply. In order to secure their supply to the processing sector, a specific plan is needed to create and develop a sustainable source of raw materials. For fishery products, investing in aquaculture is already planned. For arts and crafts, furniture and wood products, the reforestation programme should not only ensure a stable source of low cost raw materials, but also improve ecological conditions, enhance the community health, reduce natural disasters and generate income for farmers. A qualified organisation needs to be put into place to certify that the forests are managed appropriately and qualify for FSC certification.

− Establish close and active cooperation between stakeholders and strengthen the role of business associations. The government, industry associations and enterprises have to work together to tackle the issues at stake and strengthen Viet Nam’s competitiveness. It is important that all stakeholders in a particular industry, such as farmers, processors, and exporters, work closely together, possibly coordinated by the responsible Ministry and the business association. The role of the association could also be enhanced, as it serves the common rights of the members, and presents on behalf of them its wishes, proposals and recommendations to the government or competent authorities relating to the policy and implementation of legal regulations.

− Attract foreign investment. The competition between developing nations to attract foreign direct investments (FDI) is fierce, as investment --in general in the form of joint ventures or 100% owned foreign enterprises-- is increasingly seen as a key vehicle for economic development, and an indication of a nation’s overall economic health and its economic potential. FDI is an efficient means to upgrade production technologies, management skills and general transfer of business know how, with spill over effects outside the foreign enterprises. Furthermore, FDI tend to stimulate economic integration and provide access to global marketing and distribution channels, especially when investment is export-oriented and the target company is part of the investing company’s integrated system of production. Though Viet Nam has been quite successful in attracting FDI flows, mainly related to the quality and cost of the human resources, it has inherent weaknesses that need to be tackled if Viet Nam wants to remain an attractive destination. These include the lack of transparency and consistency in the legal and policy framework, for example in relation to taxes, the many restrictions to investment, the general business environment, cumbersome procedures, inefficient bureaucracy and corruption.

− Invest in people. Viet Nam’s abundant, well-educated, and disciplined labour force is no doubt its most important asset, but the lack of technical capabilities is diminishing overall competitiveness. For example, almost all seafood-processing factories in Viet Nam currently need skilled and trained workers with technical capabilities and knowledge on hygiene, food safety etc. to meet international standards. For the future, an adequate supply of trained human resource, especially engineers and technicians, is vital to the development of any industry. A key strategy to enhance exports is to further strengthen human resources by continuing in investing in all levels of education and training: basic education, vocational training and language training, especially English, and university education. The Government may wish to consider a training strategy at two levels: vocational training for workers in factories to

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reduce training expenses for enterprises, and for managers to effectively grow their businesses. Training activities could be organised or carried out by the respective industry associations.

− Invest in Viet Nam 2050. Viet Nam’s comparative advantages are for the moment in “factor-driven” activities (based on endowments of labour and natural resources, see Box 16) and “investment-driven activities” (where the government can still take a leading role in deciding which industries to target and in accumulating capital for investment). Viet Nam’s presence in “innovation-driven” activities is for the moment marginal. However, the ability to create, distribute and exploit knowledge and information is now regarded as a key factor underlying the economic growth and the competitiveness of firms in many developed countries (OECD, 2001). The intangible assets of a firm relate to its investments in research and development (R&D), human resources (training), computer software, organisational change and marketing and other immaterial goods or activities, as compared to tangible assets such as plant and equipment. Intangible factors are increasingly supplanting traditional production factors such as (natural) resources, (physical) capital and (manual) labour as key to enterprise competitiveness in advanced countries. Economic growth will increasingly result from ideas rather than the allocation of scarce resources. The Vietnamese government can choose to accompany this process also in Viet Nam. The knowledge-based economy is not only a change in the basis of the economy, but may also provoke changes in culture (the way we think) and organisation (the way information and knowledge is exchanged). Liberalisation of intellectual freedom and private sector initiative is probably the most essential factor if Viet Nam wants to excel in knowledge based industries and lay the foundations for a creative and innovative Viet Nam in the 21st century.

Box 16. Porter’s Stages of National Competitive Development

As nations develop, they progress in terms of their characteristic competitive advantages and modes of competing. This process can be described as a sequence of stages, each with a different set of economic characteristics and challenges.

− The first stage is the Factor-Driven Stage, in which competitive advantage is based exclusively on endowments of labour and natural resources. This supports only relatively low wages.

− In the Investment-Driven Stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. Economies at this stage concentrate on manufacturing and on outsourced service exports. They achieve higher wages, but are susceptible to financial crises’ and external, sector-specific demand shocks.

− In the Innovation-Driven Stage the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage. At this stage, the national business environment is characterised by strengths in all areas of the diamond together with the presence of deep clusters. Clusters become critical motors in generating not only productivity but innovation at the world frontier. Institutions and incentives supporting innovation are also well developed, increasing the efficiency of cluster interaction. Companies compete with unique strategies that are often global in scope, and invest strongly in advanced skills, the latest technology, and innovative capacity.

Source: Michael E. Porter and Christian H.M. Ketels, UK Competitiveness: Moving to the next stage, UK Department of Trade and Industry DTI Economics Paper No. 3, May 2003.

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Annex

Annex 1. Data sources and issues

ITC’s Internet-based tools Trade Map and Market Access Map World markets, Viet Nam’s market access conditions and its current export performance are essentially analysed on the basis of desk research and on two Internet-based tools.

− For market access conditions, tariff data are from ITC’s Market Access Map database (http://www.macmap.org/). Market Access Map is a comprehensive source of tariffs and market access measures applied at the bilateral level by 170 importing countries to the products exported by 239 countries and territories. Products are described at the most detailed level, the national tariff line. It includes MFN tariffs as well as multilateral, regional and bilateral preferences; bound tariffs; multilateral and bilateral tariff-quotas; anti-dumping duties; and Rules of Origin and Certificates of Origin.

− Trade data come from ITC’s Trade Map (www.trademap.org) Trade Map is an online database of global trade flows and market access barriers for international business development and trade promotion, providing detailed export and import profiles and trends for over 5,300 products in 200 countries and territories. Based on the world’s largest database COMTRADE, Trade Map presents import/export values and quantities, growth rates, market shares and market access information. It allows users to analyse markets, select priority countries for export diversification, review the performance of competing countries and assess opportunities for product diversification by identifying existing and potential trade between countries.

It has to be mentioned here that Viet Nam has free access to Trade Map at least until 2007. Vietrade and the ITC Trade Promotion Project VIE/61/94 provide free usernames and passwords (for more information, see http://www.trademap.net/vietnam/login.htm).

Concerning trade data, Viet Nam has not reported trade data for the year 2003 to the United Nations’ Statistical Division (UNSD) in the Harmonised System HS 6-digit. In that case, ITC’s Trade Map uses partner country data, an approach referred to as “mirror statistics”. In other words, the sum of all reporting partner countries’ imports is taken as a proxy for Viet Nam’s exports for a given industry. Though it may generally be better to have mirror statistics rather than no data at all, they have a number of shortcomings, of which the most important is that mirror statistics do not cover trade with other non-reporting countries, as is the case for example with Lao PDR.

Despite their shortcomings, this current study is based on mirror data for 2003. However, trade statistics should never be the sole source of insight but need to be complemented by other sources and in particular cross-checked by product specialists and industry insiders. This is why this study combines desk research with fieldwork.

Survey of companies based on an ITC questionnaire For domestic supply conditions, the study is largely based on qualitative information stemming from a survey of some 80 companies with a questionnaire and interviews carried out by national consultants during Spring 2005.

The fieldwork is done not only to give a better understanding of what is going on in the particular sectors and obtain a SWOT analysis, but also to come up with judgements that were used for the composite index to rank sectors according to their export potential.

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Annex 2. Composite indices

An assessment of the export potential of industries requires taking into account very diverse multidimensional factors. Composite indicators are valued because they enable to integrate large amounts of heterogeneous information and to provide a broad, albeit simplistic, picture of reality that can be used to draw the attention of policy makers. The steps to be followed in constructing composite indicators include developing a conceptual framework and defining relevant variables; standardising indicators to allow comparisons, and weighting the indicators to come up with an overall index.

Identifying relevant variables A composite indicator is, above all, a sum of its parts. The strengths and weaknesses of a composite derive largely from the quality of the underlying variables. Ideally, variables should be selected on the basis of their analytical soundness, measurability, relevance to the phenomenon being measured, and relationship to each other. But by their nature, composite indicators can mask data problems rather than present statistical issues transparently. While poor quality indicators can only yield a weak composite, high quality indicators can yield either a weak or strong composite depending on other factors. The greatest problem in constructing a composite indicator is the lack of relevant data. Statistics may be unavailable because certain behaviour cannot be measured or no one has attempted to measure it. The data available may not be comparable across countries or exist only for a few countries. The indicators may be unreliable measures of the behaviour or not match the analytical concepts in question. The construction of composite indicators of country performance generally involves trade-offs between broad country coverage and lower quality data. Due to the expense and time involved in developing internationally comparable performance indicators, composites often rely on data sources of less than desirable quality. In the end, they may measure only the most obvious and easily accessible aspects of performance.

Standardising variables to allow comparisons Variables need to be standardised or normalised before they are aggregated into composite indicators. Variables come in a variety of statistical units and different variable sets have different ranges or scales. Variables need to be put on a common basis to avoid problems in mixing measurement units (e.g. firms, people, money). Several techniques can be used to standardise or normalise variables, with each method having its advantages and disadvantages (EC Joint Research Centre, 2002; Freudenberg, 2003).

The normalisation method used here converts each indicator into a range of 1 (weak performance) and 5 (best performance). It gives 1 point to industries with values below a certain threshold value and 5 points to industries with values above the threshold value. The thresholds are used to avoid having extreme values dominate and also to partially correct for data quality problems, as there is reason to believe that values extremely far from the average or normal range are more likely to reflect poor underlying data.

As a result, the thresholds used here are the values of the third best and third weakest industries. In other words, the three best performing industries have 5 points, the three weakest performers only 1 point. All other industries obtain points between 1 and 5 depending on their relative distance between these two thresholds, according to the following formula:

threshold Lowerthreshold Upper

theshold Lower Value*41−

−+

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If the value of the industry equals the upper limit, the ratio is 1 and the term becomes 1+4*1=5. If the value equals the lower limit, the ratio is 0 and the term becomes 1+4*0=1. Table 44 gives an example on how to standardise the growth of exports in value for two industries.

Table 44: How to standardise Viet Nam’s world market share from 1 (low) to 5 (high)

Clothing Fishery Value for industry (%) 1.71 3.71

Upper threshold (Pepper) 4.92 4.92 Lower threshold (Plastics) 0.04 0.04

Value – lower threshold 1.71 - 0.04 = 1.67 3.71 - 0.04 = 3.67 Upper– lower threshold 4.92 - 0.04 = 4.88 4.92 - 0.04 = 4.88

(Value – lower threshold) / (Upper– lower threshold) 1.67 / 4.88 = 0.34 3.67 / 4.88 = 0.75 1 + 4 [(Value – lower threshold) / (Upper– lower threshold)] 2.36 4.00

Source: Taken from Table 6 on page 35.

Weighting indicators to obtain an aggregate, composite index Normalised indicators that are aggregated into a composite indicator have to be weighted -- all variables may be given equal weights or they may be given differing weights that reflect the significance, reliability or other characteristics of the underlying data. The weights given to different variables heavily influence the outcomes of the composite indicator, and the rank of an industry on a given scale can easily change with alternative weighting systems. For this reason, weights ideally should be selected according to an underlying theoretical framework or conceptual rationale for the composite indicator. A stated method should be used for determining weights and should be explained transparently.

One approach is to give equal weights to all sub-indices or sub-components (which may comprise varying numbers of indicators), which implies that each grouping of indicators has the same impact on the performance being measured. Largely for reasons of simplicity, all indicators are given common weights in the next higher index. For example, “International demand” and “market access conditions” both have a weight of 50% for the index “world markets” (Table 45).

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Table 45: Indicators for the composite index of export potential

Composite index Sub-index Indicator used

Weight in total index

Index 1. Current export performance 1/3 1a. Viet Nam’s exports 1/12 Exports in value in 2003 1/12

1b. Viet Nam’s world market share 1/12 Share of Viet Nam’s exports in world exports in 2003 1/12 1c. Viet Nam’s relative trade balance 1/12 Net trade as a percentage of total trade 1/12

1d. Viet Nam’s export growth 1/12 Growth of exports in value between 1999 and 2003 1/12 Index 1. World markets 1/3 2a. Dynamism of international demand 1/6 Growth of world imports in volume between 1999 and 2003 1/12

Growth of world imports in value between 1999 and 2003 1/12 2b. Viet Nam’s relative market access conditions 1/6 Index of tariff advantages or disadvantages 1/6 Index 3. Domestic supply conditions* 1/3 3a. Product quality and efficiency of production processes 1/6 Labour productivity relative to major world and regional exporters 1/30

Labour cost relative to major world and regional exporters 1/30 State of the process technology 1/30 Technological threats and opportunities 1/30

Quality of exported products 1/30 3b. Importance of backward and forward linkages of supporting industries 1/6 Importance of upstream or downstream inter-industry linkages 1/12 Efficiency of supporting industries 1/12

* Based on questionnaires and interviews with some 80 enterprises.

Limitations It must be noted that indicators only give a partial view of the reality: by nature, they only measure what can be quantified and for which there are data. In addition, the selected indicators are backwards looking (prospects are based on recent trend growth). Though a measure that takes into account the recent past does not necessarily have a strong predictive power of future trends, it gives a good indication of the current situation and it reveals structural shifts in the world economy relative to international demand.

Composite indicators are also sensitive to the choice and weight of the underlying indicators. Some indicators play a more important role than others, but it is difficult to establish a hierarchy due to a lack of clear criteria. Therefore, caution in the interpretation is needed: the indices provide only a crude measure of the performance and potential of individual industries. The model should thus be seen as a think model, rather than one setting once and for all fixed values. Other indicators might have been selected. For example, in order to assess market access conditions, it would have been useful to incorporate not only tariff barriers but also non-tariff measures, but it does not lend itself easily to strict quantitative comparisons. Other dimensions might be included in the interpretation of export potential such as the socio-economic impact in terms of job creation and poverty. They were ruled out because they were not measurable or not comparable for all industries.

Finally, industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. But very low rankings may indicate potential areas for improvement.

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Annex 3. Preferential tariff index

The purpose of this index is to examine whether Viet Nam enjoys preferential tariffs relative to its main competitors.

We calculate the ad valorem equivalent tariff rate faced by enterprises from Viet Nam to the main exporting countries (at least USD 5 million of export or a world market share above 0.5%), for each product (defined at the 6-digit level of the Harmonized System, for example HS 030613: Frozen shrimps and prawns) and for each import market (for example Japan).

We compare the tariffs applied to Viet Nam’s to the tariff of the median country (i.e. the top 50% of the countries, which is rank 50 in this example), the 25% of the countries with the lowest rates (rank 25) and the 5% of the countries with the lowest rates (rank 5).

We then calculate the difference between the tariff applied to each of the three groups (top 50%, top 25%, top 5%) and the rate applied to Viet Nam. A positive difference indicates a preferential treatment for Viet Nam, as the reference group faces higher tariffs than Viet Nam. Countries where the difference is 50% or higher obtain 10 points, those where it is –50% or lower obtain –10 points.

We then calculate an average of the three discrepancies for each product and importer, by weighting twice the discrepancy between Viet Nam and the countries benefiting from the most favourable tariffs in the Japanese market (top 5%). Countries can have up to 40 points (10 from the top 50%, 10 from the top 25% and 20 from the top 5%).

For each product, we then aggregate over all markets, by weighting the preferential margin by the size of each market.

For each industry, we then compute the mean across all products belonging to the industry.

The resulting number for a particular industry has no real meaning. It is only useful when it is compared across industries to identify which ones have high or low indices. To this end, the resulting numbers are standardised again to range between 1 (highest tariffs of all industries) and 5 (lowest tariffs).

Median (50%)of countries

Top 25%of countries

Top 5%of countries

Ad valorem tariff equivalent applied to countriesexporting a given product (e.g. HS 030613 Frozen shrimps and prawns)to a given market (e.g Japan)

Exporting countries are ranked in decreasing order of the ad valorem tariff equivalent

Vietnam

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Annex 4. Market attractiveness index

The market attractiveness index is a summary measure of the attractiveness of importing markets for products exported by Viet Nam. Contrasting with the other summary measures in this report (which are used to identify industries with the highest export potential), the market attractiveness index allows identification of those countries in which enterprises in Viet Nam have the potential of to export more.

The market attractiveness index compares, for each product, the relative standing of importing countries in three areas:

− The dynamism of import markets, as measured by the difference of the growth of import markets and the growth of world imports for the same product. The presence in fast growing countries may positively impact on Viet Nam’s exports.

− The under-representation of import markets in Viet Nam’s exports, as measured by the difference of the share of the importing country in Viet Nam’s exports and its share in world exports. Strong under-representation, especially in large markets, suggests that enterprises in Viet Nam have a potential to export more.

− The openness of import markets for products from Viet Nam, as measured by the ad valorem equivalent tariffs they apply to imports from Viet Nam. All things being equal, it is easier for enterprises in Viet Nam to export to open markets than to relatively closed markets.

All three dimensions are important, hence combining them into a single summary measure allows identifying those import markets that are dynamic and open and where Viet Nam is currently under-represent ed. In order to render comparable these dimensions that are expressed in different units, an index needs to be created for each underlying indicator. The approach chosen here translates the values of the indicators into a point system. It gives the least points to those countries with values below a certain threshold value, and the most points to those countries with values above a certain threshold value. For all values in between the two thresholds, the formula applied is shown in Table 46.

The market attractiveness for an entire industry is the weighted average of the values of the underlying products, the weights being the import values of the importing country.

Table 46. Market attractiveness index: Underlying indicators and thresholds

Dimension Indicator Lower threshold (and points)

Upper threshold (and points)

Formula to derive points for values betw een the

thresholds Dynamism of import markets

Difference of the growth of import markets and the growth of world imports:

In value terms Difference < -15% (-5 points)

Difference > +15% (+5 points)

Difference /3

In volume terms Difference < -10% (-5 points)


Difference /2

Under-representation of import markets in Viet Nam’s exports

Difference of the share of the importing country in world exports and its share in Viet Nam’s exports

Difference < 0% (0 point)


Difference

Openness of import markets for products from Viet Nam

Ad valorem equivalent tariff rate applied to imports from Viet Nam

Tariff > 30% (inverted scale)

(-10 points)

0% (+10 points)

(15%-Tariff) /1.5

Market attractiveness index

Sum of the points for the three dimensions

(-20 points) (+30 points)

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Annex 5. Investment conditions in Viet Nam, Thailand and China: A comparison

Table 47. Investment conditions in Viet Nam, Thailand and China

Factor Viet Nam Thailand –Zone 3 China Difference Land Cost Generally USD35/sq mtr USD 30/sq mtr USD 30/sq mtr China -50 yr lease Land Ownership Land Lease Fee Simple – Total

ownership 50 Year Lease Thailand - Full

Ownership is definite advantage. China longer lease than VN so is second place.

Plot Coverage Varies widely by IZ in Viet Nam

About 85% 50-60% Thailand allows more building for same amt of land

Land Administration fee

Less than one hectare: USD 0.9/m2/yr More than one hectare USD 0.8/m2/yr Above subject to VAT of 10%

$20/Rai/Month Required in some zones/not all

Viet Nam slightly higher. China and Thailand about the same

Building Cost For similar structure - $24/sq ft.

For Western high quality factory $22/sq ft

For similar structure $25/sq ft

Slight difference in favour of Thailand

Utilities More Costly Similar Similar No major difference in Thailand and China – VN more expensive

Taxes 1. For EPZ -10% tax rate – eight yr exemption. 2. In IP and 80% exported – 10% tax rate -2 year exemption – 2 more years at 50% 3. 50-80% exported -15% tax rate -2 yr tax exemption, 2 add’l at 50% 4. Less than 50% export – 15%tax rate -2 yr exemption – 2 add’l years at 50%

Thailand offers 8 yr exemption for BOI approved projects plus 5 additional years at 50%. Further deductions for transportation, electricity, water for 10 years plus other deductions

2 yr exempt – 3 yrs at 50%

Thailand clearly better

Import Tax on Raw Materials

Must pay and then claim exemption at export

5 year exemption, 75% exemption of imports exempt on domestic sales

No Customs Duty if for export only

Slightly more generous for Thailand

Value Added Tax 0-20% - Exports are exempted, but procedure is not as simple as advertised

7% 17% Thailand less tax, easier on refund for exports

Convertibility of Currency

Not Convertible Fully Convertible Not Convertible Clear Advantage to Thailand

Tax on Funds Remitted

Up to 10% depending on size of investment –due each time money is remitted abroad

10% on Dividends Profits Exempt from tax Advantage to China

Cost of Fees These can be high and unpredictable – Viet Nam needs to give more attention here

Thailand slightly more expensive

China slightly cheaper Thailand and Viet Nam need to reduce these fees – Viet Nam needs to give them more

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Factor Viet Nam Thailand –Zone 3 China Difference predictability

Unskilled Labor US$45 in Hanoi and HCMC, $35-40 in other cities. 15% add’l required to pay to Social Security

Thai Zone 3 minimum wage about $70/month

China cost of unskilled worker $60/month

China looks cheaper but required benefits actually make China more expensive

Skilled Labor Can be difficult to find qualified managers, financial staff and some engineers – Skilled labor about $150 per month – office staff about them same or slightly less

Thailand competitive through the middle positions because of addition of VN and China required benefits which make salaries more comparative

China about the same cost through the middle levels, but cheaper at the top end

Thailand more expensive for high level management, engineers, etc but availability of managers and accountants better than VN. China has the net advantage because of lower prices for technical and management and good availability.

Supporting Industries

Viet Nam does not yet possess a wide range of supporting industries to provide raw materials, sub-assemblies, etc. Import of most raw materials and pre-cursors is required

Thailand has a wide range of supporting industries to source supplies, services, etc.

China has a wide source of supporting industries in major areas along the coast and major cities.

China and Thailand have an advantage here over Viet Nam.

Cost of Shipping a 40 foot Container

Slightly over $2,500 Slightly over $2,000 About under $2,000 Slight benefit to China

Additional Shipping Fees

More expensive than Thailand or China

Thailand Cheaper China more Costly Slight advantage to Thailand

Protection of Intellectual Property

Weak but improving Thailand Stronger China Weak Thailand clearly stronger

Rule of Law Weak but improving Thailand is Strong in this area

Strengthening but still some areas to be improved

Thailand stronger but China closing

Predictability of Law and Government Policy

Can be Unpredictable Predictable Predictable China and Thailand are equivalent. Viet Nam still needs to improve in this area.

Size of Domestic Market

VN larger than Thailand but lower GDP. VN not as large as China. Also smaller middle class

Thailand’s increasing with AFTA and possible FTA with China

China clearly larger Advantage to China

Quality of Life for Expatriate Staff

VN Improving in Hanoi and HCMC

Thailand Offers more amenities except when compared to maybe Shanghai

China improving Thailand provides more extensive activities

Cost of Supporting Expatriate Staff

Housing more expensive than Thailand. Food, Maid, etc. in Thailand and VN cheaper than China.

Relatively cheaper housing, food and other costs

More expensive Housing, Food and other expenses

Thailand cheaper

Christopher W. Runckel, “Viet Nam – Open for Business?” 2003 (www.business-in-asia.com/vn_industrial.html). “As investors looking for a site to locate their investment often look at Viet Nam, Thailand and China in making a decision, we have listed all three countries below with our view of each country’s relative strengths and weaknesses as a site to locate a factory or to start and open a new business. For Thailand, we have used Thailand’s Board of Investment, Zone 3, specifically the area around Rayong and the Eastern Seaboard. Bangkok and its suburbs are usually not as cost competitive unless an operation requires highly technical or artistic skills which tend to be found more abundantly in Bangkok and the area immediately around the city because of Thailand’s relatively longer experience with foreign investment.”

Documents

Vietnam -- Export Potential Assessment (2005)