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:
Freudenberg@intracen.org) or Thierry Paulmier (email: paulmier@intracen.org).

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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
Clothing
Important export Footwear
sector Oil
--- Electrical machinery
(more than Fishery
USD 500 million) Furniture
Coffee*
Rubber
Rice Arts and crafts
Stationery, office machine
Fruits and vegetables Coal
Medium exports Bicycles
Household textiles Household utensils
Image and sound
Motor vehicles* Pepper
Cashew nuts*
Plastics
Construction materials
Wires, cables and conductors
Tea
Instruments Toys and games
Few exports Cut flowers*
Electronics Glass
(less than Dairy products*
Hand tools Agricultural machinery
USD 100 million) Jute products*
Industrial machinery* Shipbuilding
Wood*
Comm. and telecomm.*
Packaging materials*
Honey*
* 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 Evaluation Evaluation
each group by by ITC by national Comments Priority actions
export value in (Index)* consultants
2003)
Mineral and mineral products
Biggest export earner for Viet Nam,
High Process crude oil domestically (first
Oil further offshore oilfields still to be
(3.4) refinery to be operational by 2007).
exploited.
High Small but fast growing exporter; strong Exploit new coal reserves, and upgrade
Coal
(3.3) international demand. mining technology and facilities.
Fishery
Important for employment and poverty Develop aquaculture to avoid depletion of
elimination. Viet Nam is among the top stocks; apply appropriate systems to
High ten world exporters of fishery products. assure reliable quality; upgrade products
Fishery (3.2) Strong export performance, despite anti- and processing; develop more varieties of
dumping investigations (catfish and consumer-friendly products; improve
shrimps in the United States). packaging and branding.
Agricultural products
Upgrade quality of green coffee beans
through investments in research, post-
Highly competitive producer, with high
harvest technologies, storage and
High** yields and low production costs. Poor
Coffee High processing. Shift to the Arabica variety
(3.1) post-harvesting technology, storage and
that commands higher prices. Other
processing.
options are niche coffees such as organic
coffee, though quantities are small.
One of the top five world producers.
Though suffering from low yields and Improve efficiency in natural rubber;
High
Rubber High outdated technology, Viet Nam is still cost identify prospects in industrial processing;
(3.2)
effective compared to regional and improve branding.
competitors.

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Industries
(ranked within Evaluation Evaluation
each group by by ITC by national Comments Priority actions
export value in (Index)* consultants
2003)
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
Develop new varieties and upgrade
cost in Mekong river delta.
quality. Improve efficiency of supporting
However, highly fragmented nature and industries.
Low
Rice High small plot size affect negatively
(2.3) Explore opportunities for diversification in
productivity, production costs and
Japan, China, Australia and New
profitability. Inputs, such as seeds,
fertilizers, and pesticides are costly or of Zealand.
poor quality. High post-harvest losses due
to backward harvesting technology, poor
transportation means, and poor
infrastructure. L ow though improving
quality. Tariffs are high and
discriminatory.
Viet Nam is one of the world’s largest Boost production of raw cashew nuts,
Cashew nuts High** exporters, but there is insufficient local improve quality of processed nuts,
High
and other nuts (3.5) supply of raw cashew nuts due to diversify their use, and target consumer-
extensive processing. packed products.
Improve quality of raw materials and
Exports are mainly in processed form, processing; improve supporting
especially canned, which command lower infrastructure such as storage and
Fruits and Low prices. Main problems include poor refrigeration. Register Vietnamese
vegetables (2.2) Medium
quality, small quantities, low yields, partly trademarks abroad.
due to inappropriate cultivation and post- Explore opportunities for diversification in
harvest handling, and high prices. the European Union, the United States
and Canada.
Very export-oriented sector, with exports Upgrade quality and processing; ensure
accounting for about 95% of the plantations receive proper investment;
Pepper and High production. Viet Nam is the world’s largest improve the market profile of Vietnamese
High
other spices (3.1) exporter of black pepper. Weaknesses pepper. Examine opportunities for
include poor processing technologies and diversification, such as spice mixtures,
still low quality. cassia, star aniseed and ginger.
High export growth, but in general yields
and quality are low. Viet Nam mainly Improve quality, yields, cultivation
Medium
Tea Medium exports black tea, and small amounts of techniques and post- harvest
(2.7)
green tea and specialty teas such as technologies. Diversify markets.
Oolong and Suchong.
The world market for wood products has
been characterised by sluggish demand,
Wood and Medium** Not examined in detail here; need for
decreasing prices and oversupply.
wood products (2.7) more analysis.
Viet Nam is a net importer and domestic
demand for wood is considerable.
Small, fast-growing export sector in a
Not examined in detail here; need for
Medium** dynamic world market, despite poor
Honey more analysis. Explore opportunities for
(2.6) market access conditions. The United
diversification in Canada and Australia.
States is the main export destination.
Small, fast-growing export sector in a Not examined in detail here; need for
Low** dynamic world market. Discriminatory more analysis. Explore opportunities for
Cut flowers
(2.3) market access conditions. Japan is by far diversification in the European Union and
the main market. the United States.
Small, declining export sector in a Not examined in detail here; need for
Low** stagnant world market. Exports are more analysis. Indonesia is a growing
Dairy products
(1.1) concentrated in terms of products (bird’s market with high potential as a
eggs in shell) and partners (Hong Kong). diversification market for Viet Nam.
Not examined in detail here; need for
Small, fast-growing export sector in a
Low** more analysis. Explore opportunities for
Jute products declining world market. Viet Nam faces
(2.2) diversification in the United States, Iran
relatively poor market access conditions.
and Hong Kong.

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Industries
(ranked within Evaluation Evaluation
each group by by ITC by national Comments Priority actions
export value in (Index)* consultants
2003)
Industrial products
Shift from passive subcontracting CMT
Key source of industrial employment. (currently some 70%) to lower import
Mainly sub-contracted by foreign firms content and a more active role on the
due to very low wages. High import markets. Improve supporting industries,
Clothing and High
High content, w here foreign companies supply enhance design capacity, improve
accessories (3.0) materials and designs, and Vietnamese productivity in garments, upgrade
companies undertake CMT (cut, make, technology in the textile sector, create
trim). links with final buyers, and move up the
quality scale to higher value products.
Growing exports with high quality
products. Tanned leather production has Improve design, diversify production,
increased steeply. Low value-addition, increase productivity and attract
Footwear and High highly import dependent industry that is investment in production of inputs and
Medium
leather (3.2) largely based on sub-contractual accessories. Move from passive
arrangements (leading market players subcontracting with high import content to
supply the industry with designs, more active marketing.
materials and sometimes machinery)
Exceptional growth of a diverse range of
inexpensive furniture produced by low Put in place adequate wood certification
High
Furniture cost, skilled workers. Low value-addition system (e.g. FSC Forest Stewardship
(3.4)
(almost 80% of raw wood is imported, and Council), and improve design capacity.
designs are often from foreign buyers).
Viet Nam is a small, but growing net
importer. Industry does mainly assembly
activities, with high import content. Accelerate development of supporting
Exports of automotive components are industries. Focus on low -cost vehicles.
Low**
Motor vehicles concentrated in terms of products (ignition Explore opportunities for diversification in
(2.5)
wiring sets) and partners (Japan). There the European Union and the United
are virtually no support industries in States.
Viet Nam, but the government has
ambitious plans.
Attract foreign investment to upgrade the
Exports have grown rapidly, though
technology used in processing.
Household Viet Nam is still at an early stage of
High Encourage enterprises to adopt new
utensils and Medium development. Export potential is high
(3.1) technologies to increase efficiency and
appliances mainly because international demand is
reduce production costs. Develop
very dynamic.
supporting industries.
High quality, diversified range of products
Enhance design capacity and continue
Medium with European designs. Labour is low cost
High diversification of products. Improve
Bicycles and highly productive. Anti-dumping
(2.8) access to information on international
investigations in key markets (European
markets.
Union, Canada).
Fast growing export sector with large and
growing international market. The sector Focus on national trade promotion
Medium has reached new markets. Industry program. Identify targets of opportunity for
Plastics Medium consists mainly of small and medium export promotion, and leave other areas
(2.6)
enterprises that cannot create economies either for import substitution or better
of scale, and Viet Nam is dependent on import sourcing.
imported inputs
Reconsider the decision to impose a 5%
High quality products at reasonable
import tax on galvanized steel, a
prices, many of which produced in
Wires, cables, Medium Medium previously untaxed material that cannot
modern and large-scale production lines.
be domestically produced, and which has
and conductors (2.7) (or high) Exports are concentrated on the
forced production costs up. Explore
Japanese market, and have grown
opportunities for diversification in the EU,
significantly in rec ent years.
the USA, Russia and Canada.
Create a national trade promotion
Agricultural High Regional demand is high and products
Medium program. Diversify the product range and
machinery (3.1) have good quality-to-cost ratio.
improve industrial designs.
The industry is becoming a key export
industry. Quality of shipbuilding and Invest in infrastructure, develop
High
Shipbuilding High repairing is considered high. Intense supporting industries; improve design of
(3.1)
foreign and government investment and ship models; and upgrade technologies.
vast quality improvements.

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Industries
(ranked within Evaluation Evaluation
each group by by ITC by national Comments Priority actions
export value in (Index)* consultants
2003)
Small, fast-growing export sector, with
Electrical Medium Not examined in detail here; need for
good market access conditions. Modest
machinery (2.8) more analysis.
world import growth.
Stable supply and low cost of labour.
Stationery, Medium Encourage foreign direct investments
Viet Nam has been successful in
office machine (2.9) through favourable policies.
attracting foreign direct investments.
Not examined in detail here; need for
Small export sector with exceptional
Industrial Medium** more analysis. Explore opportunities for
High export growth. Japan is main destination.
machinery (2.9) diversification in the United States, China
Good market access conditions.
and the European Union.
World demand growth has been
Comm. and Medium** considerable. Still a small sector in Not examined in detail here; need for
telecomm. (3.0) Viet Nam, but export growth has been more analysis.
impressive.
Packaging Medium** Small export sector with high export Not examined in detail here; need for
materials (2.9) growth. Dynamic world market. more analysis.

Image and Medium Small, fast-growing export sector in a Not examined in detail here; need for
sound (2.8) dynamic world market. more analysis.
Most inputs are imported, driving up
Develop supporting industries. Diversify
Household Low costs. The import content has not
export markets regionally, for example to
textiles changed significantly over time, reflecting
(2.6) Singapore and Hong Kong who offer
the prolonged sluggishness of the textile
Viet Nam free market access conditions.
sector and other supporting industries.
Toys and High Very strong export performance despite Not examined in detail here; need for
games (3.0) slow global demand growth. more analysis.
Support policy for export. Target
Construction Medium Currently small amount of exports, strong
Medium neighbouring countries as potential
materials (3.0) domestic demand.
markets.
Measuring, Small export sector with exceptional Not examined in detail here; need for
checking and Medium export growth. Japan is main destination. more analysis. Explore opportunities for
precision (2.9) Market access conditions are relatively diversification in the United States, China
instruments good. and the European Union.
High Not examined in detail here; need for
Glass Highly dynamic world market.
(3.1) more analysis.
Fast growing export sector, consisting
mainly of integrated circuits. Foreign
Electronic Attract foreign direct investment; develop
Medium firms, especially Japanese and Korean
equipment and supportive infrastructure and invest in
(2.9) firms, are outsourcing production to
components human resources.
Viet Nam due to low cost and adaptable
workforce.
Medium Small, fast-growing export sector in a Not examined in detail here; need for
Hand tools
(2.7) slow growing world market. more analysis.
Arts and crafts
Socio economic impact is high, in terms of
poverty reduction and rural development.
Affordable and unique crafts, but quality
High can be poor and inconsistent due to Improve access to market information;
Arts and crafts
(3.2) multiple subcontracting to small structures ensure raw material supply.
production that are scattered throughout
the country. Supply of raw materials is
under threat.
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
st
innovative Viet Nam in the 21 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

Share in Cumulated share
Million USD
total exports (%) (%)
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
th
Report, Viet Nam ranked 77 of 104 countries in terms of the Growth
Competitiveness Index (GCI) in 2004 (compared to rank 60 of 102 countries in 2003),
rd
and 73 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 Ministry of Industry (MOI) Viet Nam Viet Nam Handicraft
and Rural Development Association of Research And
(MARD) Seafood Exporters Promotion Center
and Producers (HRPC)
(VASEP)
In-depth Coffee Oil Fishery Arts and crafts
treatment Rubber Coal Furniture
Rice Clothing
Cashew and other nuts Footwear
Fruits and vegetables Motor vehicles
Pepper Household utensils
Tea Bicycles
Plastics
Wires, cables & conductors
Agricultural machinery
Shipbuilding
Less or not Wood Electrical machinery
examined Honey Stationery, office machine
sectors Cut flowers Industrial machinery
Dairy products Comm. and telecomm.
Jute products 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 diversification 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 Index* 1 Index* 2 Index* 3 Average Evaluation Evaluation by
value Export World Domestic index* by ITC** national
(USD performance markets supply consultants
million) conditions
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 Viet Nam's Relative Export value Index
value, 2003 world market trade balance growth, Current
share 1999-2003 export
(USD Sub- % Sub- % Sub- p.a.% Sub- performance
million) index index index index
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”
Number of Sub-index 1 Sub-index 2 Index
inter- Process and product Supporting industries Domestic
viewed supply

productivity

technology
Production
companies conditions

Linkages
structure
Average

Average
Process
Product

Labour

Labour
quality

Infra--
costs

costs
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 Growth of Viet Nam's access to Index
imports* world imports international markets World
markets
(USD (Value, (Volume, Sub- (-100, Sub-
million) % p.a.) % p.a.) index 100) index
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
World markets

Underperformers in Performers in
attractive markets attractive markets

4.5
Shipbuilding
Glass
Comm. and telecomm.
Coal
Image and sound Household utensils Furniture

4 Agricultural machinery Rubber

Electronics Toys and games Oil
Instruments
Packaging materials
Industrial machinery Cashew nuts
Arts and crafts
Plastics
Wood Stationery, office machine
Hand tools
3.5
Pepper
Construction materials Electrical
Wires, cables, and
conductors Motor vehicles

3 Coffee
Household textiles Tea

Cut flowers Fishery

Footwear

2.5 Clothing
Bicycles

Jute products

Honey

Fruits and vegetables

1.5

Underperformers in Performers in
Dairy products unattractive markets
unattractive markets
Rice

1
1 1.5 2 2.5 3 3.5 4 4.5 5

Current export performance

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 Average Evaluation Evaluation by
(USD million) index* by ITC** 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.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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
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
Opportunities
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
Source: Field work interviews, desk research.
Weaknesses
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
Threats
Global competition is increasing
Seafood prices tend to fall
US anti-dumping cases on Vietnamese catfish (tra or
basa) and shrimps

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.

Current situation and trends in exports

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
Growth rate
Exports in 2004
2003-2004 (%)
Volume Value
Volume Value
(mt) (USD million)

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)

Domestic supply conditions and competitiveness

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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Global demand conditions
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 n i
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 Value
(thousand tons) (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 World Export Export Index* Implicit Long term
value market growth in growth in export export export potential
(USD share value volume potential potential
million) (%) (% p.a.) (% p.a.)

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
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
Weaknesses
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

Opportunities Threats
Recovery of world market Competition from other crops
Export market diversification Competition from other exporters
Development of wet processing technique Over-expansion of Robusta
Government support to develop brand name, trade Inefficient plan for Arabica development
promotion Unstable export prices
Drought
Water resource limitation
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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
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)
Robusta beans
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,
rd
3 quarter 2003).

Global demand conditions

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

US cents per pound
350

Colombian Mild Arabicas Group

300
Brazilian and Other Naturals Group
Other Mild Arabicas Group
250 Robustas Group

200

150

100

50

0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

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

Strengths Weaknesses
Suitable natural conditions for rubber cultivation Production is insufficiently diversified and concentrated
Production areas are concentrated on unprocessed, natural rubber with little value addition
Low production costs Low technology
Low yield
Poor management and poor marketing skills in state-
owned farms
Poor processing
Rubber trees in many plantations are too old
Opportunities Threats
Development of domestic tyre industry High risk of natural disasters in rubber areas (such as
Recovery of world demand, especially in the region Central Viet Nam)
Proximity to major markets, such as China Strong competition from countries in the region
Increase in domestic production (many farmers are Limitation of water and land resources
changing from coffee to rubber because of low coffee
prices)
Price for inputs to synthetic substitutes are high
New production coming on line
Source: Field work interviews, desk research.

Current situation and trends in exports

Viet Nam’s growth in exports is particularly 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.

Domestic supply conditions and competitiveness

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).

Global demand conditions

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

Strengths
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
Opportunities
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
Source: Field work interviews, desk research.
Weaknesses
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
Threats
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

Current situation and trends in exports

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
Area and output Exports

Source: GSO for production, MARD for exports.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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

Strengths Weaknesses
Availability of land for increasing cultivation Shortage of raw cashew nuts for further processing
Abundant workforce in rural areas Low yield due to low quality of variety and extensive
Capacity of processing factories farming
Effective cashew nut business association Small and backward processing households
Poor infrastructure
Underdevelopment of storage facilities, marketing
service, trade promotion
Lack of information systems
No brand name
Opportunities Threats
Strong growth in domestic and world market demand Natural disasters (drought, flood, diseases)
High recent world market prices Over-expansion of processing factories
Reduction of production in competitor countries Unstable prices
Yield can be increased due to intensive farming Strong competition from exporters in Asia, Africa, and
South America
Source: Field work interviews, desk research.

Current situation and trends in exports

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

Area and output Exports

Source: MARD.

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 Table 20. Viet Nam’s exports versus world imports of nuts, 2003
Product (HS code) Viet Nam’s exports World imports Viet Nam's
Value Growth in Growth in Value Growth in Growth in market
(USD 1,000) value volume (USD 1,000) value volume share

Fresh or dried cashew nuts, shelled 236,971 40 62 889,809 -1 11 26.6%

(080132)

Shelled ground-nuts, whether or not 26,323 4 10 833,540 0 2 3.2%

broken (120220)

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

Ground-nuts, prepared or preserved 4,496 9 10 475,241 5 10 0.9%

(excl. preserved with sugar) (200811)

Fresh coconuts, whether or not 4,187 31 40 75,104 3 .. 5.6%

shelled or peeled (080119)

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

Ground-nuts in shell, not roasted or 1,648 -14 -3 143,948 4 6 1.1%

otherwise cooked (120210)

Fresh or dried cashew nuts, in shell 1,200 5 21 326,005 3 19 0.4%

(080131)

Mixtures of nuts or dried fruits 380 -6 -1 100,118 17 25 0.4%

(081350)

Fresh or dried walnuts, shelled and 132 .. .. 326,761 11 41 0.0%

peeled (080232)

Fresh or dried walnuts in shell 54 .. .. 156,875 -1 32 0.0%

(080231)

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

Fresh or dried almonds, shelled and 3 .. .. 1,301,126 10 10 0.0%

peeled (080212)

Fresh or dried chestnuts "Castanea 2 .. .. 240,751 4 2 0.0%

spp." (080240)

Fresh or dried hazelnuts or filberts 2 .. .. 50,916 11 16 0.0%

"Corylus spp.", in shell (080221)

Fresh or dried hazelnuts or filberts 0 .. .. 595,844 -4 4 0.0%

"Corylus spp.", shelled and peeled
(080222)
Fresh or dried almonds in shell 0 .. .. 109,688 7 8 0.0%
(080211)

Fresh or dried brazil nuts, shelled 0 .. .. 61,663 4 11 0.0%

(080122)

Fresh or dried brazil nuts, in shell 0 .. .. 11,779 -12 -8 0.0%

(080121)

Note: Growth rates are in% per year from 1998-2003.

Source: ITC’s TradeMap.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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

Strengths
Climate is diverse and suitable for temperate and
tropical fruits and vegetables
Diversified products
Support from Government
Opportunities
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
Source: Field work interviews, desk research.
Weaknesses
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)
Threats
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)

Current situation and trends in exports

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

Area and output Exports

Source: GSO.

Domestic supply conditions and competitiveness

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).

Global demand conditions

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

Strengths Weaknesses
Low production cost Growing pepper is very capital-intensive
High yield Fragmented area and limited land
Experience with black pepper production Procurement is not well organized, and there is strong
Large export share and market power competition between processors in procuring materials
from farmers
Emergence of large exporting companies
Poor processing technologies
Quality is still low
Opportunities Threats
Market diversification Disease
Quality improvement Unstable prices
Recovery of pepper price Low investment due to low prices
Development of direct exports to overseas markets Strong international competition
Water resource limitation
Source: Field work interviews, desk research.

Current situation and trends in exports

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

Area and output Exports

Source: GSO.

Domestic supply conditions and competitiveness

Production of black pepper has increased markedly in the past 5 years. Though pepper
th
vines were introduced into Viet Nam at the end of the 19 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).

Global demand conditions

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
Product (HS code) Viet Nam’s exports World imports Viet Nam's
Value Growth in Growth in Value Growth in Growth in market
(USD 1,000) value volume (USD 1,000) value volume share

Pepper of the genus Piper, neither crushed 89,320 -13 17 428,933 -22 3 20.8%
nor ground (090411)
Cinnamon and cinnamon-tree flowers (excl. 4,273 1 12 103,150 -3 2 4.1%
crushed and ground) (090610)
Pepper of the genus Piper, crushed or 3,572 6 31 92,734 -3 30 3.9%
ground (090412)
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 852 2 12 20,168 8 33 4.2%
cinnamon-tree flowers (090620)
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 263 18 33 502,579 7 12 0.1%
genus Pimenta (090420)
Mixtures of different types of spices 208 18 23 130,990 9 6 0.2%
(091091)
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 64 .. .. 113,776 1 -3 0.1%
(090700)
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

Strengths
Suitable natural conditions for tea cultivation
Long experience in tea cultivation
Enhancement of product diversification
Presence of foreign and joint-venture companies
Opportunities
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)
Source: Field work interviews, desk research.
Weaknesses
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
Threats
Unstable export markets
Strong competition among Viet Nam exporters
Competition with other exporters

Current situation and trends in exports

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)
120000 450000 100
Export
AREA (ha) 400000 90
Total output
100000 OUTPUT (fresh tea tons)
350000 80
70
80000 300000
60
250000
60000 50
200000 40
40000 150000 30
100000 20
20000
10
50000
0
0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

Source: Background report by MARD.

Domestic supply conditions and competitiveness

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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Global demand conditions
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 Index* 1 Index* 2 Index* 3 Average Evaluation Evaluation by
(USD million) Export World Domestic supply index* by ITC** national
performance markets conditions 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 Most production is sub-contracted by foreign partners
Protected domestic market Low productivity
High skill labour for hand-made commodities Lack of skilled workers and technicians
(e.g. embroidery) Poor business management skills and no middle-
High quality silk- material management
Poor domestic supporting industries
Higher lead times than some neighbouring competitors
Problem with quota mechanism
About 20% higher transportation cost than China
Opportunities Threats
Access to US market End of ATC
WTO accession Garment industry in China
Small scale of production accords with small contracts of Tougher competition in the domestic market
skilful commodities (niche market)
Source: Fieldwork interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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

Malaysia Indonesia
60 - 90
Thailand Viet Nam

90 - 120 Bangladesh Cambodia

Source: Gherzi Textile Organisation.

Global demand conditions

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

Strengths Weaknesses
Low labour cost Young industry with lack of experience, lack of know -
High quality products how in design and marketing
Relatively efficient and cost effective international High production costs due to imported chemicals,
transport and shipping facilities machinery and components (upper parts, soles)
Increase of tanned leather production since 2004 Poor technical skills

Opportunities Threats
Preferential treatment by EU (GSP) Strong competition from China due to low production
Low tax rates within AFTA market until 2006 cost
Very low tariffs in the United States market due to the
bilateral trade agreement (USBTA)
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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

Strengths
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)
Opportunities
Growing demand for diversified designs
US anti-dumping duties against Chinese producers
opens up opportunities in that market
Supportive government policies
Source: Field work interviews, desk research.
Weaknesses
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
Threats
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.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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
3
quota for logging from natural forests: currently the total quota is 300,000 m . 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
3
of the planted forests (around 300-400,000 m ) 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 The auto industry is engaged mainly in assembly, with
Relatively good infrastructure for manufacturing 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
Opportunities Threats
Supporting policies of the government Competition from existing and emerging producers
Source: Field work interviews, desk research.

Current situation and trends in exports

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).

Domestic supply conditions and competitiveness

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 Country of origin Design capacity
establishment (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).

Global demand conditions

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

Strengths Weaknesses
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
Opportunities Threats
Increasing regional and worldwide demand for Cheaper imports
household appliances Strong competition in domestic markets
Source: Field work interviews, desk research.

Current situation and trends in exports

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).

Domestic supply conditions and competitiveness

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.

Global demand conditions

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 Lack of market information
Low labour cost
High labour productivity
High quality products
Opportunities Threats
Diversification of products Anti-dumping investigations in the EU and Canada
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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”
Opportunities Threats
Reaching new markets Unstable domestic demand
Investments in raw materials (PVC, PP) over next Unstable prices of raw plastic
5 years Increase in the price of plastic grains because of higher
Growing demand from China oil prices
Strong competition within the region, including China
Source: Field-work interviews, desk research.

Current situation and trends in exports

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)”.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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

Strengths Weaknesses
High quality Imported material
Reasonable price Changes in tax on imported material
Modern and large-scale production lines Higher value added tax (VAT)
High domestic demand
Opportunities Threats
Growing demand from neighbouring countries Lengthy bidding process
Unstable policies of the Government for the industry
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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 Industrial designs and patterns
Low price Product diversification
Good quality-to-cost ratio Small-scale production
High domestic demand
Supporting strategy from the Government including
lower tariffs for imported inputs
Opportunities Threats
High demand from neighbouring countries Lower cost of Chinese products
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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 Poor infrastructure
Low cost, experienced labour force Limited local content (30-35%)
Quality of shipbuilding Weak design of ship models
Quality of repairing Weak flotation and performance tests (which are
Brand name of Vinashin needed to check ships before they are launched)
Advanced technologies in one company (Vinashin) Rudimentary technologies in general

Opportunities Threats
Strong domestic and world demand Strong regional competition
Geographic location in a growing region
Upgrading of human resources with overseas training
Source: Field work interviews, desk research.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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.

Global demand conditions

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 4percentage 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.

Construction materials
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

Strengths Weaknesses
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
Opportunities Threats
US market Deforestation of forests
Expansion of domestic tourism Material lacking (bamboo, rattan, rush and leafs, wood
Craft development specialists and textile)

Source: ITC survey with enterprises in Viet Nam.

Current situation and trends in exports

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.

Domestic supply conditions and competitiveness

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).

Global demand conditions

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)
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
Opportunities (to capture)
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
Source: Field work interviews, desk research.
Weaknesses (to cover)
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
Threats (to defend against)
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
st
innovative Viet Nam in the 21 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 1point. All other industries obtain points between 1 and 5
depending on their relative distance between these two thresholds, according to the
following formula:

Value − Lower theshold

1+ 4 *
Upper threshold − Lower threshold

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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 Weight in
Sub-index total index
Indicator used

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).

Ad valorem tariff equivalent applied to countries

exporting 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

Median (50%)
of countries

Vietnam

Top 25%
of countries
Top 5%
of countries

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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 Upper threshold Formula to derive points
(and points) (and points) for values betw een the
thresholds
Dynamism of import Difference of the growth
markets of import markets and
the growth of world
imports:
In value terms Difference < -15% Difference > +15% Difference /3
(-5 points) (+5 points)
In volume terms Difference < -10% Difference > +10% Difference /2
(-5 points) (+5 points)
Under- Difference of the share Difference < 0% Difference > +10% Difference
representation of of the importing country (0 point) (+10 points)
import markets in in world exports and its
Viet Nam’s exports share in Viet Nam’s
exports
Openness of import Ad valorem equivalent Tariff > 30% 0% (15%-Tariff) /1.5
markets for tariff rate applied to (inverted scale) (+10 points)
products from imports from Viet Nam (-10 points)
Viet Nam
Market Sum of the points for the (-20 points) (+30 points)
attractiveness index three dimensions

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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 50 Year Lease Thailand - Full
ownership Ownership is definite
advantage.
China longer lease
than VN so is second
place.
Plot Coverage Varies widely by IZ in About 85% 50-60% Thailand allows more
Viet Nam building for same amt
of land
Land Administration Less than one hectare: $20/Rai/Month Required in some Viet Nam slightly
fee USD 0.9/m2/yr zones/not all higher. China and
More than one hectare Thailand about the
same
USD 0.8/m2/yr
Above subject to VAT of
10%
Building Cost For similar structure - For Western high quality For similar structure Slight difference in
$24/sq ft. factory $22/sq ft $25/sq ft favour of Thailand
Utilities More Costly Similar Similar No major difference in
Thailand and China –
VN more expensive
Taxes 1. For EPZ -10% tax Thailand offers 8 yr 2 yr exempt – 3 yrs at Thailand clearly better
rate – eight yr exemption for BOI 50%
exemption. approved projects plus 5
2. In IP and 80% additional years at 50%.
exported – 10% tax rate Further deductions for
-2 year exemption – 2 transportation, electricity,
more years at 50% water for 10 years plus
other deductions
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%
Import Tax on Raw Must pay and then claim 5 year exemption, 75% No Customs Duty if for Slightly more
Materials exemption at export exemption of imports export only generous for Thailand
exempt on domestic
sales
Value Added Tax 0-20% - Exports are 7% 17% Thailand less tax,
exempted, but easier on refund for
procedure is not as exports
simple as advertised
Convertibility of Not Convertible Fully Convertible Not Convertible Clear Advantage to
Currency Thailand
Tax on Funds Up to 10% depending 10% on Dividends Profits Exempt from tax Advantage to China
Remitted on size of investment –
due each time money is
remitted abroad
Cost of Fees These can be high and Thailand slightly more China slightly cheaper Thailand and
unpredictable – expensive Viet Nam need to
Viet Nam needs to give reduce these fees –
more attention here 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 Thai Zone 3 minimum China cost of unskilled China looks cheaper
HCMC, $35-40 in other wage about $70/month worker $60/month but required benefits
cities. 15% add’l actually make China
required to pay to Social more expensive
Security
Skilled Labor Can be difficult to find Thailand competitive China about the same Thailand more
qualified managers, through the middle cost through the middle expensive for high
financial staff and some positions because of levels, but cheaper at level management,
engineers – Skilled labor addition of VN and China the top end engineers, etc but
about $150 per month – required benefits which availability of
office staff about them make salaries more managers and
same or slightly less comparative accountants better
than VN. China has
the net advantage
because of lower
prices for technical
and management and
good availability.
Supporting Viet Nam does not yet Thailand has a wide China has a wide China and Thailand
Industries possess a wide range of range of supporting source of supporting have an advantage
supporting industries to industries to source industries in major areas here over Viet Nam.
provide raw materials, supplies, services, etc. along the coast and
sub-assemblies, etc. major cities.
Import of most raw
materials and pre-
cursors is required
Cost of Shipping a Slightly over $2,500 Slightly over $2,000 About under $2,000 Slight benefit to China
40 foot Container
Additional Shipping More expensive than Thailand Cheaper China more Costly Slight advantage to
Fees Thailand or China Thailand
Protection of Weak but improving Thailand Stronger China Weak Thailand clearly
Intellectual Property stronger
Rule of Law Weak but improving Thailand is Strong in this Strengthening but still Thailand stronger but
area some areas to be China closing
improved
Predictability of LawCan be Unpredictable Predictable Predictable China and Thailand
and Government are equivalent.
Policy Viet Nam still needs to
improve in this area.
Size of Domestic VN larger than Thailand Thailand’s increasing China clearly larger Advantage to China
Market but lower GDP. VN not with AFTA and possible
as large as China. Also FTA with China
smaller middle class
Quality of Life for VN Improving in Hanoi Thailand Offers more China improving Thailand provides
Expatriate Staff and HCMC amenities except when more extensive
compared to maybe activities
Shanghai
Cost of Supporting Housing more Relatively cheaper More expensive Thailand cheaper
Expatriate Staff expensive than housing, food and other Housing, Food and
Thailand. costs other expenses
Food, Maid, etc. in
Thailand and VN
cheaper than China.
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.”

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