With a growth rate averaging 6% in the last 5 years, Vietnam is a rising star within Southeast Asia. As the country becomes increasingly industrialized and urbanized, the expansion of the middle and affluent classes offer many opportunities to retailers and multinationals hoping to ride the rising wave of consumption in Vietnam. The country’s young demographic (where 45% is under 30 years of age) provides a readily available labour pool for low cost manufacturing in Southeast Asia.
In addition to Vietnam’s strong demographic fundamentals, the government has also been active in driving pro-growth policies. The state’s continued reform efforts and infrastructure drive are expected to improve business conditions and attract more foreign direct investment (FDI). Early this year, the Prime Minister announced plans to ease foreign ownership restrictions in the banking sector to attract more private investment and bolster economic growth. Although the details have yet to be disclosed, the move marks a step in the direction of serious reforms for the financial system and substantial improvements in Vietnam’s business outlook.
Given the potential opportunities and the ongoing reforms, multinationals should consider the following three trends when setting their expectations for the country.
- Domestic consumption is rising rapidly in Vietnam.
Consumer spending in Vietnam has increased significantly over the last decade and is expected to continue to grow as a result of increasing urbanization. By 2025, 10 million households are forecasted to earn at least US$5,000 in annual income, leading to an expansion of the middle and affluent classes. The growing appetite of wealthier consumers offers multinationals significant opportunities, especially in Ho Chi Minh and Hanoi where growth is concentrated. Multinationals should evaluate their marketing strategies to ensure they are positioning themselves well to serve an increasingly urbanized group of consumers and capture opportunity in the growing middle and affluent customer segments.
- Investment reforms and infrastructure policies will be prioritized
Even as Vietnam modernizes and develops, there are still gaps in its business readiness that limit the country from reaching its full potential. These include restrictions on foreign investments and inadequate infrastructure. With the recent US withdrawal from the Trans-Pacific Partnership, Vietnam now has an added impetus to put together a plan to liberalize its economy and boost growth. Recognizing the internal obstacles, the government has outlined a clear plan of reforms to address key challenges. As part of Vietnam’s socio-economic development plan, focus will be given to the development of key economic regions and business clusters. Initiatives to further liberalize the investment environment and financial systems are high on the government’s agenda, while infrastructure projects in transportation and utilities will also be pushed ahead. Multinationals can expect more opportunities and competition as foreign investment rules ease.
- The government will raise revenue by pursuing tax reforms
The state is actively pushing for fiscal consolidation by reducing public debt and ramping up revenue collection. As a result, Vietnamese authorities are pursuing tax reforms that will likely impact the majority of businesses on the ground. New laws for a special consumption tax on sin goods (alcohol, tobacco, and beer) have already been implemented. The new tax hikes on alcoholic beverages will be introduced yearly from 2016-2019 and will negatively impact wine and spirits companies. Higher environmental taxes are also likely to be introduced gradually (see chart below). The proposed environmental tax hikes are expected to impact business operations by raising input and transportation costs across a variety of industries. While tax reforms are likely to increase costs for companies, they will lead to more standardization and a unified tax system. Multinationals should consider how the potential increase in environmental taxes will impact their operating cost structure.
Overall, the above three trends will play an important role in bolstering the long-term prospects of the Vietnamese economy by boosting business confidence. Understanding these trends will help multinationals prioritize opportunities, mitigate risks, and make timely business decisions to gain a foothold in the dynamic business landscape of Vietnam.