Spotlight on Vietnam - Report

October 2017

Spotlight on Viet Nam

The leading emerging market

Disclaimer This report includes information obtained or derived from a variety of publicly available sources. PwC has not sought to establish the reliability of these sources or verified such information. The information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. Whilst every care has been taken in preparing this document, PwC makes no guarantee, representation or warranty (expressed or implied) as to its accuracy or completeness, and under no circumstances will PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions or opinion are those of PwC only and are subject to change without notice. This document shall not be copied, reproduced, transmitted or further distributed by any recipient. The materials contained in this document were assembled in July 2017 and were based on information available at the time.

Since the 2000s, Viet Nam’s economy has experienced strong growth, driven by international trade and foreign investment. Coupled with a young, educated workforce of more than 60 million people under the age of 35, Viet Nam has been hailed as one of the new ‘workshops of the world’. It has become a major manufacturing hub for electronics and electrical products, clothing, footwear and furniture.

However, the future of Viet Nam lies beyond manufacturing and labour-intensive industries. People, knowledge and technology are tipped to be the economy's next growth engines as it transitions towards a medium-to-high-income economy by 2050.

Despite recording a GDP per capita of USD2,186 in 2016, Viet Nam boasts impressive scores in education. In OECD’s PISA 2015 results 1 , Viet Nam was ranked 8th among 72 economies, placing it ahead of more developed economies such as Hong Kong, China and South Korea, in terms of performance in mathematics, science and reading among 15-year-old students.

The government is also making an effort to increase education at the tertiary level. Over the past decade, enrolment rates have nearly doubled, from 16% in 2005 to 29% of the total population in 2015 with approximately 2 million students enrolled in institutions of higher learning.

The young Vietnamese demographic is also technologically proficient, embracing the mobile internet economy as a norm in their daily lives. Mobile phones now account for 34% of web traffic, a year-on-year increase of 40% based on data from StatCounter.

This has been contributing to a dynamic digital economy. While there were few information technology (IT) companies 15 years ago, there are now close to 14,000 IT companies. Viet Nam has also overtaken China to become Japan’s second largest software outsourcing partner in 2016.

Viet Nam, stepping ahead into the 21st century

1 Organisation for Economic Co-operation and Development (OECD) Programme for International Student Assessment (PISA)

Foreign companies are increasingly taking note of Viet Nam’s technology aptitude and potential to move up the value chain. Viet Nam now produces half of Samsung’s high-end S8 and S Plus smartphones and 80% of Intel’s personal computer central processing units.

Viet Nam’s investment opportunities extend beyond the manufacturing and technology sectors. Its diversified economy and varied geographical landscape are crucial factors shaping the development of often overlooked industries such as agriculture, tourism and hospitality and renewable energy.

Companies are also tapping into the large local workforce to support business process outsourcing (BPO). In 2016, Viet Nam was recognised as the number one pioneering location for BPO services 2.

These examples provide just a glimpse of some of the business and investment opportunities that Viet Nam has to offer. This publication aims to provide a snapshot of Viet Nam’s future, its industries and what it takes to be successful participating in the economy that has come to be known as Asia’s next rising star.

We invite you to explore Viet Nam’s potential.

Chào mừng đến Việt Nam.

Vu Tien Loc Chair of APEC CEO Summit 2017

Dinh Thi Quynh Van General Director PwC Viet Nam

2 Cushman & Wakefield BPO & Shared Services Locations Index Report 2016

• 1. Viet Nam in

Taking a long-term view

After a year of major political shocks with the Brexit vote and the election of President Trump, it might seem brave to opine on economic prospects for 2018, let alone 2050.

However, it is important to take a longer term view of global economic prospects that looks beyond the short-term ups and downs of the economic and political cycle.

It is crucial to focus on the fundamental drivers of growth: demographics and productivity, which in turn are driven by technological progress and diffused through international trade and investment.

Understanding these fundamentals will help companies identify and build on core capabilities, while remaining flexible enough to ride out short term political and economic storms of the kind we have seen in both advanced and emerging economies in recent years.

Realignment of the global economy

At the macro level, we continue to see the shift in global economic power away from established advanced economies towards emerging economies in Asia and elsewhere.

Based on the findings from PwC’s World in 2050 report, the world economy could double in size by 2042, growing at an annual average real rate of around 2% between 2016 and 2050. This growth will be largely driven by emerging markets and developing economies, where the leading E7 economies could comprise almost 50% of the world’s gross domestic product (GDP) by 2050. Meanwhile, the developed G7 economies’ share would decline to only just over 20%.

These trends are already taking shape, where China has overtaken the US to be the largest economy based on GDP in purchasing power parity (PPP) terms, and could be the largest valued at market exchange rates before 2030. India could overtake the US by 2050 to move into second place.

The impact of this shift will be felt across all areas of the economy, from trade direction, new middle income class to private sector investments. Please refer to Chart 1 for further details.

Shift in global

economic power

Source: Adapted from PwC’s World in 2050 foreword by John Hawksworth, Chief Economist (PwC UK)

G7: World’s seven major fully developed markets, consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. E7: World’s seven major emerging economies, consisting of China, India, Brazil, Mexico, Russia, Indonesia and Turkey.

Source: PwC World in 2050 and analysis

Chart 1: Projected GDP rankings (at PPP) of selected F7 markets by 2050

Viet Nam, world’s fastest growing economy

Rise of Viet Nam – 20th largest economy by 2050

While the E7 economies are expected to dominate the global economy in 2030, they may not necessarily be growing rapidly. Leading the group of fastest growing economies in the world between 2016 and 2050 is Viet Nam, followed by India and Bangladesh.

The average real GDP growth of Viet Nam could reach 5% p. between 2016 and 2050. Its economy will benefit from its youthful and fast growing working-age population, boosting domestic demand and output.

Growth in Viet Nam is driven mainly by growth in real GDP per capita. This suggests that capital investment and technological progress will deliver tangible labour productivity enhancing benefits.

By 2050, we project that Viet Nam could be among the Top 20 economies in the world and Top 10 in Asia. For Viet Nam to realise this potential, growth needs to be supported by sustained economic reforms, the strengthening of macroeconomic fundamentals, public institutions and, crucially, mass education to ensure its rapidly growing working population contributes productively to long-term economic growth.

2050

2016

Viet Nam Philippines Nigeria

up 12 places

up 9 places up 8 places

Average annual GDP growth rate, 2016- 5% 4% 4%

20th

32nd

19th

28th

14th

22nd

Viet Nam, the Philippines and Nigeria could make the greatest moves up the rankings by 2050.

Chart 1: Viet Nam will overtake several more advanced economies by 2050

Chart 1: Top 10 fastest growing economies over the next 35 years

Source: PwC World in 2050

Overtake South Africa

Overtake Netherlands

Overtake Argentina

Overtake Australia

Overtake Malaysia, Spain

Overtake Canada, Italy

GDP in PPP terms (USD trillions)

2016 2020 2025 2030 2035 2040 2045 2050

3

2

1

0

5%

4%

3%

2%

1%

0%

Viet Nam Bangladesh

Nigeria Indonesia

India

Philippines South Africa

Egypt Pakistan Malaysia

Average population growth p (%)

Average real growth per capita p (%)

Average GDP growth p. (in domestic currency)

Average real GDP growth p. (2016-2050)

Young and growing workforce

Viet Nam has a growing educated workforce and is now in a period of golden population structure, where 45% is under 30 years of age.

Competitive economy, beyond low cost

By and large, the labour force in Viet Nam is cost- competitive, educated and increasingly skilled. This offers greater value and serves as an ideal production base for companies thinking of shifting or diversifying out of larger economies such as China.

Government committed to growth

Viet Nam has a stable socio-political environment which promotes predictable policies in business and trade. The government is also committed to creating a fair and attractive business environment for foreign investors.

Chart 1: Viet Nam’s growth engines

The following growth engines are expected to enhance opportunities for investors in Viet Nam going forward:

Chart 1: Viet Nam’s population age distribution, 2016

Source: Economist; National University of Singapore; PwC analysis

Young and growing workforce

More than 1 million people enter the workforce annually While baby boomers in the west reach retirement age, Viet Nam’s baby boomers have only just entered the labour force. With a median age of 30 years, Viet Nam has a relatively young population. In comparison, China has a population with a median age of 36 years.

Viet Nam's population, currently the 14th largest in the world, is also set to swell from 91 million to around 110 million people by 2050.

These factors will help to fuel the labour market. With more than a million people added to the workforce annually, and nearly 70% of the population aged between 15 and 64, Viet Nam has a sustainable workforce.

Urbanisation and a large pool of rural workers Viet Nam’s urban workforce has much scope to grow, with only 34% of people living in urban areas. This is comparable to India but lower than China which is at 56%.

With an annual urban population growth rate of 4%, one of the highest in the region, the supply of rural workers will help lower wage pressures, giving Viet Nam time to build labour-intensive industries.

5 4 3 2 1 0 0 1 2 3 4 5

Male Female

Population (in millions) Age group Population (in millions)

100+ 95- 90- 85- 80- 75- 70- 65- 60- 55- 50- 45- 40- 35- 30- 25- 20- 15- 10- 5- 0-

Rising middle class, rising consumption As Viet Nam's workforce becomes more urbanised, the resulting gain in productivity will translate into rising middle class affluence. This is particularly key as the top 40% of Vietnamese households own 55% of total income based on data from the World Bank.

Assuming 4% annual growth in average consumption, the World Bank projected that more than half (50 million) of the Vietnamese population will join the global middle class by 2035, compared to just 11% today.

In line with an average per capita growth of 5% over the past decade, a typical middle- class Vietnamese will see his or her income rising from just under USD6,000 today to at least USD15,000 by 2035 (in 2011 PPP terms)—comparable to Malaysia in 2001 or Brazil in 2014. By 2050, this figure will double to USD30,000.

A five-fold jump in the Vietnamese household consumption is not just within reach, it is the final demographic dividend that has yet to fully realise.

Chart 1: Rising share of total population with daily consumption of USD15 or more (in 2011 PPP terms)

Source: General Statistics Office of Viet Nam; the World Bank

100

80

60

40

20

0

201520162017201820192020202120222023202420252026202720282029203020312032203320342035

Share of total population (%)

Global middle class (>USD15 PPP/day) Emerging consumer (USD5.51-15 PPP/day) Near poor (USD3.10-5 PPP/day) Global poor (<USD3 PPP/day)

Quality education advantage Viet Nam’s workforce is not just young but well educated. Public spending on education averages 5 - 6% of GDP, about two percentage points more than the average for low- and middle-income economies. Although some governments spend even more, Viet Nam’s expenditure on education have been well- focused, aiming to boost enrolment levels and ensure minimum standards.

This point is proven by student achievements in OECD’s PISA 1 2015 assessment where Viet Nam was ranked 8th out of 72, ahead of more developed economies such as Hong Kong, China and South Korea.

Demographic sweet spot The next three decades present the greatest potential for Viet Nam to use its demographic advantage to boost productivity and achieve outstanding growth. This is to complement current payoff from expansion-driven growth as a result of low-skilled labour projects.

Viet Nam now reaches a pressing decision point: seize this golden opportunity to leapfrog to higher-income status or risk falling into the trap of growing old before getting rich.

Chart 1: Highlight of PISA 2015 mean scores among selected economies

1 PISA - Programme for International Assessment

Economies Science Mathematics Reading

Average score 493 490 493 1 Singapore 556 564 535 2 Japan 538 532 516

3 Estonia 534 520 519 4 Chinese Taipei 532 542 497

5 Finland 531 511 526

6 Macao (China) 529 544 509 7 Canada 528 516 527 8 Viet Nam 525 495 487 9 Hong Kong 523 548 527 10 China 518 531 494

Source: OECD PISA results

Moving up the value chain Viet Nam is transitioning from a low cost to a higher value added economy. In 2016, the World Bank classified Viet Nam as a middle- income economy. Although this was achieved on the back of low-cost manufacturing and improved agriculture productivity, we are seeing Viet Nam make the move up the global value chain.

Making a name in digital

Apart from E&E, Viet Nam is experiencing an IT boom, with a growing number of IT and software companies. While 15 years ago there were few IT companies in Viet Nam, now there are close to 14,000.

In May 2017 VNG Corp, backed by Goldman Sachs and Singapore's sovereign wealth fund, Government

Shifting gear into high technology

Viet Nam has become a fierce competitor to regional neighbours like Thailand, the Philippines, India and Indonesia in high technology investments and outputs. In a span of just five years since 2010 (see Chart 1), Viet Nam has overtaken these economies in terms of high technology exports.

Viet Nam not only serves as a base for the assembly of electrical and electronic (E&E) products for export, but also as one for the production of sophisticated devices. For example, half of Samsung’s high-end S8 and S8 Plus smartphones and 80% of Intel’s personal computer central processing units are currently produced in Viet Nam.

Samsung Electronics is also investing USD300 million in a research and development (R&D) centre in Hanoi. It is going to start operations in 2020, with 4,000 employees.