Vietnam is becoming an increasingly attractive investment destination thanks to its sturdy GDP growth, strides in its high-tech manufacturing capabilities, and strong US ties.
Vietnam’s resilience shines as its GDP steadily grows despite global challenges. The nation is drawing foreign investment and making strides in high-tech manufacturing, particularly semiconductors, positioning itself in the global supply chain.
With a booming rare earths industry and strong US ties, Vietnam is set to play a pivotal role in various sectors. This blog explores what makes Vietnam an attractive investment destination.
Economic Resilience
Vietnam’s GDP grew by 8.0% in 2022 as the country’s economy benefited from exports of goods during the COVID-19 pandemic. This year Vietnam’s economy has stabilized at a GDP growth of 5.3% year-over-year (YoY) in 3Q 2023.1
The country’s economy has been fairly resilient despite headwinds from higher commodity prices resulting from the Russia-Ukraine war and a slowdown in China, which happens to be one of Vietnam’s largest trading partner.
Climbing the Value Chain Ladder
Vietnam’s trade faced some headwinds this year due to reduced demand from major trade partners. Exports fell 10% YoY2 in the first eight months of 2023 and finally turned positive in September.
Vietnam’s manufacturing sector’s contribution to the economy is growing, but the value it adds has remained relatively flat, despite declining by 0.37% in 2023 compared to 2022.3
This means that although Vietnam is producing more, it’s not capturing more of the value within its borders. This is partly due to fragmented supply chains, revealing Vietnam’s import-dependent status.
Vietnam’s government is keenly aware of this challenge and is actively trying to lure foreign investments in high-tech manufacturing particularly in the semiconductor sector.
The country has signed multiple Free Trade Agreements (FTAs) to encourage foreign cooperation with its local industries. Policy makers are also offering supportive measures such as tax incentives, preferential loan rates, waived import duties and preferential land use fees for high tech factories.
Strong government support appears to be yielding some early results. The country has achieved impressive growth in electronics exports, notably to the United States. From virtually zero, Vietnam now accounts for around 10% of all U.S. electronics imports.4
Sharp rise in electronic, computer, and phone manufacturing has driven Vietnam’s export growth
Source: JP Morgan Research
Strong Foreign Investment in Vietnam Continues
Despite facing a challenging environment characterized by sluggish growth and lackluster export performance throughout the year, Vietnam has managed to attract $15.9 billion in Foreign Direct Investment (FDI) YTD.5
The manufacturing sector maintained its position as the primary attraction for FDI, with investments exceeding $14 billion YTD, reflecting a substantial gain of 15.5% YoY.
This achievement is significant given the prevailing uncertainty, inflationary pressures, and waning confidence in the global economic landscape. Key Apple suppliers such as Foxconn Technology Group (OTCPK:FXCOF), GoerTek Inc., Luxshare Precision Industry Co., and Pegatron Corp. have set up factories in Vietnam; bringing electronics industry share of total exports to 32% in 2022.6
Vitenam: Foreign Direct Investment (Realized Capital) Flows
Disbursed foreign direct investment flows into Vietnam. Graphics by UOB
Strategic Materials, Semiconductors and Friend-shoring
Vietnam has the world’s second largest reserves of rare earths, estimated at 22 million tonnes second only to China.7 Its rare earths industry is booming with 2022 production of 4,300 tonnes up about 11 times relative to its 2021 production of only 400 tonnes.7 The country aims to raise its rare earths production to 2.02 million tonnes a year by 2030.
Foreign companies including Korean and Chinese magnet firms, which include an Apple (AAPL) supplier are set to open factories in Vietnam to diversify supply chains away from China.
China currently holds a dominant position in the production of magnets and the essential rare earth metals used in their manufacturing. These magnets are crucial components in various products, including electric vehicles, wind turbines, weapons, and smartphones, making this sector of significant strategic importance.
Vietnam has begun developing a processing industry in this field and has the potential to emerge as a substantial competitor in the rare earth metals and magnets sector.8
Vietnam has emerged as a beneficiary of U.S.-China decoupling and the U.S. is Vietnam’s largest trading partner accounting for 33% of its exports.9 The U.S. recently signed the U.S.-Vietnam Comprehensive Economic Partnership agreement to enhance cooperation between the two countries in a wide range of industries.
One specific partnership to note is the U.S.-Vietnam pledge to actively support the rapid development of Vietnam’s semiconductor ecosystem. The U.S. is committing seed funding of $2 million to kickstart the semiconductor workforce development initiatives in Vietnam.
Semiconductors are a critical component in various technologies, and this collaboration aims to improve Vietnam’s position in the global supply chain for semiconductors, indicating the significant role Vietnam is poised to play in the industry’s growth.
A bilateral Memorandum of Understanding was also agreed to secure critical mineral supply chains, including technical cooperation to help develop Vietnam’s rare earths industry.
Vietnam’s government has been courting key players in internal circuit design and semiconductor industries in order to encourage more investment into the country.
These firms include industry leaders such as Nvidia (NVDA), Synopsys (SNPS), Qualcomm (QCOM), Marvell (MRVL), and Cadence Design Systems (CDNS). These are all positive developments for Vietnam and speak to the country’s future technological potential.
In conclusion, Vietnam stands at the threshold of an exciting economic transformation. The nation has demonstrated impressive resilience, attracting foreign investments and fostering growth in high-value sectors.
With substantial rare earth reserves and a growing semiconductor sector, Vietnam is poised to become a vital player in global supply chains. The strong partnership between the U.S. and Vietnam further solidifies the nation’s position in the global economic landscape.
Investors looking for growth opportunities should keep an eye on Vietnam as it climbs the value chain and expands its presence in strategic sectors, making it a compelling investment destination.
Broad-based indices have also aptly captured the dynamic changes in Vietnam’s economy. The average weight of materials sector in the MarketVector Vietnam-based indices increased over 70%, while the average weight of industrials sectors increased 20% since the index’s inception in August, 2009.10
The current geopolitical environment could boost growth in Vietnamese companies operating in materials, industrials, and information technology sectors. These favorable trends shaping the Vietnamese economy could likely benefit investors with exposure to Vietnamese equities.
How to Invest
VanEck Vietnam ETF (VNM) provides access to the growth story of Vietnam and could be an appealing investment for investors seeking growth exposure outside of traditional emerging markets. VNM, the largest and most liquid11 U.S. – listed Vietnam ETF provides investors one trade access to the Vietnamese market.
Disclosures
1 Vietnam estimates Q3 GDP growth of 5.33% y/y.
2 Vietnam August exports slide, but factory output improves.
3 Boosting Vietnam’s manufacturing sector: From low cost to high productivity.
4 JP Morgan Research.
5 Data as of 9/30/2023, Source: VNEXPRESS International.
6 Vietnam, Poland, Mexico, Morocco Benefit From US-China Tensions – Bloomberg.
7 Vietnam aims to raise raw rare earths output to 2 million tonnes a year by 2030 | Reuters.
8 Exclusive: Rare earths magnet firms turn to Vietnam in China hedge | Reuters.
9 Data as of 12/31/2022 Macrotrends | The Long Term Perspective on Markets.
10 Factset data as of 10/31/2023, representing Vietnam incorporated companies only.
11 Factset data as of 10/31/2023.
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