Vietnam has seen rapid growth as a tech hub in recent years, but with that growth come both opportunities and challenges, according to a report from DBS Group Research on Monday. As companies accelerate their diversification strategies amid ongoing US-China geopolitical tensions, Vietnam is expected to remain a top choice for production relocation or co-location.
Despite short-term growth challenges, Vietnam continues to solidify its position as a major player in global manufacturing supply chain shifts. Several factors contribute to the nation’s appeal as a manufacturing destination, such as its extensive free trade agreements, geographical proximity to China, affordable skilled labor, and burgeoning electronics ecosystem.
Manufacturing success has a price
DBS economist Chua Han Teng anticipates that trade ties between Vietnam and China will continue to strengthen, with Vietnam assuming a more prominent role as an alternative manufacturing base to China. This has led to an increase in foreign direct investment (FDI) inflows, particularly in the manufacturing sector.
However, Chua also warns that Vietnam’s growing proficiency in tech manufacturing and exports, combined with its high trade openness, make it susceptible to the volatility of the global tech cycle.
Vietnam’s manufacturing activity contracted by 0.4% YoY in Q1. That’s due to a number of factors, including a decline in electronics exports caused by weakening global demand, post-pandemic demand normalization, and tighter monetary policy shifts in advanced economies.
Vietnam growth forecast revised
As a result, while DBS anticipates a growth rebound in H2 2023, it’s doubtful that Vietnam will achieve its 6.5% growth target for the year. Consequently, DBS has revised its 2023 real GDP growth forecast for Vietnam from 6% to 5.5%.
Despite these challenges, Vietnam’s GDP per capita has increased in terms of purchasing power parity since 2010, supported by the country’s FDI and export-oriented model. Chua predicts that this trend will persist in the coming years, as Vietnam continues to attract foreign manufacturing investments.
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