Vietnam’s Export Rebound: Is This the Beginning of a New Growth Cycle?


Vietnam exports are poised to rebound on the back of reduced inventories and increased foreign direct investment among other things, write Marco Forster and Alberto Vettoretti.

Vietnam, a key player in the global manufacturing landscape, has faced unprecedented challenges in its export sector this year. With a 10 percent year-on-year drop in exports during the first seven months of this year, the manufacturing sector witnessed a 1 percent contraction. This ongoing decline in exports has adversely affected the manufacturing industry and subsequently impacted the country’s GDP growth projections.

There are a few factors responsible for this:

  • High inventory levels among distributors and retailers in Vietnam’s major export destinations, particularly the US, were accumulated during COVID due to supply chain uncertainty;
  • Global demand for key export items like electronics and textiles has been mooted by the war in Ukraine and the economic downturn it has sparked. This includes rising inflation, rising interest rates, and troubling economic headwinds; and
  • A vast swathe of manufacturing capacity in Vietnam is still under construction, particularly by the most recent wave of investors.
    The good news is we might expect better economic data coming soon.

With the normalization of inventories in the United States, the increasing volume of manufacturing capacity to Vietnam by multinational companies, and a surge of FDI interest in the Southeast Asian nation, the stage is set for a remarkable turnaround.

Vietnam exports to rebound as US inventories normalize
In an op-ed for The Investor, Michael Kokalari, Chief Economist at VinaCapital, said inventories in the US were ‘bottoming out’ and that a recovery should be expected in Vietnam in the fourth quarter of this year.

He points out that the US faced an inventory cycle disruption due to over-ordering and the redirection of consumer spending towards services post-COVID. This resulted in bloated inventories for major retailers and a subsequent reduction in orders from Vietnamese (and global) factories. As a consequence, Vietnam’s exports to the US plummeted by more than 20 percent year-on-year during the initial seven months of 2023.

He also said that aggressive destocking efforts of companies like Walmart and Target are bearing fruit, with significant reductions in their inventories. This reduction has paved the way for a recovery in Vietnam’s exports, leading to a nearly 7 percent month-on-month increase in exports to the US in July. As a result, the year-on-year decline in exports to the US improved from a staggering 26 percent drop in June to a more manageable 14 percent decline in July. Consequently, the overall year-on-year export decline for Vietnam lessened from 12 percent in the first half of 2023 to a more moderate 2 percent in July.

If we look at the economic and political situation in the US with mild to low-inflation projections, relatively low unemployment, delays on possible new interest rate hikes, and the usual, self-generated, positive economic upswing and feel-good factor accompanying any election campaign, there is something to be optimistic about.

‘China Plus’ manufacturing likely to continue but with risks
Vietnam’s export recovery is not solely driven by inventory adjustments and an increased appetite for made-in-Vietnam products.

As global firms diversify their supply chains, Vietnam’s strategic position offers an attractive alternative to China. This is true among our clients with many of them restructuring their supply chains to now operate under a China Plus (China-plus-one or China-plus-many) scheme.

While we do not see this changing anytime soon (over the next few years), we do see potential factors that might hamper this new export growth cycle.

  • A substantial manufacturing capacity is being shifted and deployed back into the US, Mexico (primarily), and Europe as part of a nearshoring strategy. This could mean a reduced appetite for manufacturing in Asia is on the horizon.
  • Several countries, like India for example, have protectionist policies, including high customs duties on imports to protect their own manufacturing industries. This may mean additional manufacturing capacity will have to be built in these markets to get around these duties, to the detriment of ASEAN nations.
  • Vietnam is not only demographically, but also geographically a tiny country compared to China, India, and Indonesia. The country’s infrastructure is already struggling to cope with the current demand for air, sea, and road freight, notwithstanding the additional human movement that comes with it. Major infrastructure projects, such as new airports or a proposed high speed railway are behind schedule, further exacerbating the problem.
  • Policies like the Global Minimum Tax (read more: How will GMT affect FDI in Vietnam?) and ESG requirements may impact the country’s attractiveness as a manufacturing base.
  • The competitiveness of other Asian countries, such as Indonesia, Thailand, and Malaysia, and the incentives they might offer to woo multinationals on the lookout for new manufacturing bases.
    Sustainable growth and export diversification
    The optimism surrounding Vietnam’s export rebound is grounded in several reliable leading indicators. The balance between import and export growth has started to equalize, a trend that is expected to continue throughout 2023.

The sectors leading this export recovery are consumer electronics, smartphones, and garments. Consumer electronics, which has experienced a sharp decline, showed signs of improvement, with a notable increase of 28 percent year-on-year in July. The smartphone sector, a vital component of Vietnam’s exports, is also poised for a resurgence as new phone models are introduced. Growth in the garment and footwear sector, while lagging, is expected to rebound next year as destocking efforts take hold.

Importantly, the decline in export orders has moderated, and firms’ inventories of raw materials have increased, signaling a readiness to ramp up production.

A positive market outlook
Beyond the aforementioned factors, numerous other developments contribute to Vietnam’s positive market outlook:

  • A commitment to economic reform from the government. Recent years have seen the Vietnamese government’s unwavering commitment to economic reform, fostering a more favorable business environment.
  • A comparatively open regulatory environment with respect to FDI. Vietnam has a relatively favorable regulatory environment and is open to foreign direct investment (FDI) in many sectors with low registered capital requirements. This makes it an attractive destination for businesses looking to expand into Southeast Asia. Other sectors, such as real estate, are expected to be further opened in the near future.
  • Political stability. Not only have economic reforms paved the way for Vietnam’s recent success, but the government is also committed to stamping out corruption, supporting the stability of its currency (we have seen many Asian currencies fluctuating this year), and bolstering the local private sector, which is now under a lot more competition on its own turf.
  • An expanding middle class. The rapid expansion of Vietnam’s middle class is generating heightened demand for a broad range of products and services.
  • A youthful population. Vietnam’s youthful demographic serves as a significant asset for driving economic growth.

    These positive trends position Vietnam’s market favorably for long-term expansion. Nonetheless, potential risks linger:
  • Continuing US-China trade tensions: Ongoing trade disputes between the US and China could adversely affect Vietnam’s exports. We already have clients that are experiencing tighter scrutiny on ‘Made in Vietnam’ products that source raw materials and parts from China.
  • A global economic downturn: A worldwide economic slowdown could similarly impact Vietnam’s export performance.
  • Instability: Despite its relative stability and commitment to growth, Vietnam remains susceptible to potential economic divides between those reaping the benefits of this increased wealth being generated and those who might not be able to grab the increased opportunities.
  • Infrastructure and training: Investments will have to be made in both in order to sustain economic growth in the years ahead.

    Despite these challenges, the Vietnam market presents enticing investment prospects over the long haul. We believe the country’s favorable economic factors far outweigh the potential risks in the years ahead.

With an imminent rebound in exports driven by normalized inventories and the relocation of manufacturing activities, the path is set for Vietnam’s economic growth to recover to pre-pandemic levels.

Vietnam stands at a pivotal juncture in its economic journey, with the recent challenges in its export sector sparking a period of introspection and adaptation. As the nation navigates through the complexities posed by high inventory levels, global demand fluctuations, and geopolitical uncertainties, the signs of a remarkable recovery are becoming increasingly evident.

The strategic recalibration of inventory cycles in the United States and the ongoing migration of manufacturing to Vietnam has laid the foundation for growth. Yet, this recovery should not be seen in isolation; it is part of a larger narrative of transformation and diversification that Vietnam is embracing.

While risks remain, including the evolving global trade landscape and the need for robust infrastructure, Vietnam’s resilience, commitment to reform, burgeoning middle class, and youthful population position it favorably for sustainable growth. As the country balances on the cusp of this new growth cycle, its trajectory appears poised for upward momentum, painting a promising picture for Vietnam’s economic landscape in the years ahead.