Beyond Low-Cost Manufacturing: Vietnam’s Path to Double-Digit Growth

Author John O’Connor CEO

Vietnam is at a crossroads. This week, the Communist Party recently held its 14th Congress and set the national growth target at over 10% annually from 2026 to 2030. Setting the growth target at so far above the trend rate is a highly politicized move. The party has officially declared its goal to turn Vietnam into a “modern civilization” (advanced and new society) and a high-income country by 2045.

This appears to be a lofty ambition that is not entirely unrealistic, but it is also a history that is characterized by the rarity of high growth rates in modern Vietnam. The country’s average annual growth rate over the last 30 years has been in the range of 6.3—6.4 percent. This comes after a period of high growth rates following the adoption of the Đổi mới (renovation) strategy in 1986. The World Bank is forecasting an annual growth rate of 6.5—6.8 percent, while the IMF has it slightly lower at 6.5 percent, mainly due to the tariffs imposed on Vietnam’s major trading partners, as well as possible commodity price volatility in the global market.

The gap between the estimated growth rate and the development target of the country has raised a question whether Vietnam’s economy structure can be changed rapidly enough to support the high growth rate estimated by international organizations.

The answer is not in the current economic framework. The future belongs to a qualitative upward move — to graduate to a higher level in the global economy and to raise productivity in sectors like manufacturing and textiles.

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The Limits of the Traditional Growth Model

Vietnam has been making great strides on the economic development track based on three main pillars including exploitation and utilization of natural resources, low labour costs and heavy reliance on the export of processed and manufacturing products. These factors have proven to be extremely efficient. Many foreign direct investments (FDI) continue to pour into the country, as multinational companies shift their more labour-intensive operations to Vietnam and fully capitalize on the country’s huge integration into the global value chain.

Over the years, Vietnam’s exports in electronics, textiles, footwear, furniture and machinery components have maintained a strong growth rate. Vietnam has become an important part of the global supply chain and has established itself as a manufacturing hub in Southeast Asia.

However, this model is beginning to reveal structural limits.

Wages rising in Vietnam Vietnam is slowly losing its low labour cost advantage as wages are continuing to rise while other major emerging markets such as India and Indonesia are trying to lure more investment into the manufacturing sector. While higher wages are improving the living standards and boosting domestic consumption, they could reduce Vietnam’s competitiveness unless productivity rises to match the higher wages.

Vietnamese companies are still engaged in low value-added domestic activities in the global production network. Foreign firms are in charge of higher value-added activities such as design, technology, high-tech engineering, intellectual property and global brands. Hence, although Vietnam is an important link in the global manufacturing network, the global value chain tends to transfer the profit-creating activities away from the country.

Addressing the Structural Issues for Realizing the ICT Objective This objective will need to address four structural issues: (i) internal supply capacity, which is severely bottlenecked; (ii) low investment in research and development, with little connection to foreign-owned firms and their global networks; and (iii) few linkages with the domestic economy, an important factor that will need to be addressed if Vietnam is to maintain its future ability to achieve high-speed economic growth while advancing to more productivity-driven and technology-based forms of production.

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Global Trade Pressures and Supply Chain Competition

The influence of global events on the economy Vietnam is heavily exposed to a number of global events affecting the economy. The current volatility in the global supply chain is largely attributed to the increasing number of geopolitical events, the shift in the global trade system, and the implementation of new economic development strategies by major economies.

The protectionist trade measures and tariffs imposed by other key trading partners, such as the United States, also pose a challenge for our external trade sector. The very threat of tariffs can deter investments and have an impact on the expansion of our businesses and also the global supply chains.

The global competition for manufacturing investment is intensifying. Countries that are large domestic markets or have a technological advantage in the production chain are increasing their share of global production.

Vietnam will have to navigate a complex set of opportunities and challenges arising from the shift in global supply chains. It has two choices: it can continue to rely on low labour costs, or it can try to move quickly to a higher productivity, more technology-intensive economy and become a higher value added production centre in the new global supply chains.

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The Strategic Role of the Textile Sector

Fast Forward to Next Door The textiles/apparel industry is a major sector in Vietnam’s economy. It is one of the largest labour-intensive employers in the economy and Vietnam’s apparel exports have been a key contributor to the growing presence of Vietnam as a manufacturing hub.

In Vietnam, textile industry has a high dependence on cut-make-trim (CMT) activities and assembled textile products with generally low margin. It is important to enhance the sector’s role in achieving Vietnam’s socio-economic development. Therefore, there is an urgent need to upgrade its activities towards higher value added endeavor’s.

The transformation of the textile industry is taking place through the application of new textile finishing technologies, the development of technical textiles, the manufacture of functional fabrics and sustainability. Increasing the domestic innovation capacity is also important.

Productivity and Export Competitiveness of the Textile Industry in Vietnam Vietnam has a great opportunity to raise its productivity and increase the competitiveness of its textile sector, which is increasingly capable of producing more value added products and services.

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Productivity and Technological Upgrading

Will anyone ever again be able to look back on years of economic history without feeling a sense of chaos, without having to explain why everything was all right for so long and what then happened? That, at any rate, is the question that preoccupies me, and at least as far as countries such as South Korea, Taiwan and Singapore are concerned the answer must be: no.

None of these dynamic little economies have ever experienced even a couple of years of slowing down that might be attributed to lack of productivity. What has happened in countries such as South Korea during the past fifty years? Well, half a century ago the economy was still that of a poor agricultural country in which production was barely increasing, people were relatively unskilled and innovations few and far between. Within ten years, however, all these things began to change dramatically. Industry was being modernised at breakneck speed, workers were increasingly attending schools and universities and acquiring new skills, new technologies were being developed, older ones abandoned, costs cut and outputs and productivity rapidly increasing – and so on,

Similar challenges are arising in Vietnam as they did in China. Vietnam is unlikely to sustain high growth rates based on labor and capital accumulation alone, and growth will need to increasingly come from higher productivity, technology and structural change and industrial upgrading.

Small improvements in textiles can have a disproportionate impact on the textile industry. Many textile products are inexpensive to make and the improvements are a cost reduction with corresponding benefits to quality and competitiveness.

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Innovation in Textile Dyeing and Finishing

Biodegradable plastics, and sustainable aviation biofuels are a long way off before they become part of our everyday lives, however, in the textiles industry, new innovation that is applied at an early stage in the production process can deliver significant environmental benefits in the near future. One area where innovation can deliver an immediate payback in terms of resource reduction is in textile dyeing and finishing. These are two of the most resource-intensive stages in textile production.

For years Vat dyeing has been the dye process of choice for dyeing cotton towels and hospitality textiles. Although Vat dyeing produces a product with long durability and excellent fastness properties the need for cost competitive products in this category has driven manufacturers to look at alternative dye processes that will yield a product with equivalent performance and value. The fact that hospitality textiles are subjected to high frequency washing with very harsh detergents and often high temperatures in laundries such as hotels, hospitals and large institutional laundries means very little compromise in performance is acceptable.

Compared with the traditional vat dyeing, vat dyeing has several drawbacks, such as high production cost, large heat consumption, limited color options, and serious environmental pollution.

The tremendous progress made in the new chemistry of dyes ensures that there is no sacrifice in the quality of the towel. High performance reactive dyes can be used to achieve the desired level of durability. By judicious selection of dyes and improvement in fixation methods it is possible to have similar wash and light fastness on cotton towels as achieved on vat-dyed products, retaining the numerous advantages.

We are the largest producer of Reactive Dyes in the world. Our technologies offer lower consumption of chemicals and energy, lower production costs and more vibrant and consistent shades. Our antibacterial textiles help to eliminate odour, curb mould growth and provide a safer and healthier environment. Such is particularly important for the hospitality and healthcare industry.

Such innovations demonstrate how technological improvements can enhance both competitiveness and sustainability.

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Opportunities in Technical Textiles

Except for clothing textiles, the industrial development of technical textiles has a huge development space. The textiles used for clothing design are mainly based on the aesthetic and comfort principles, while the technical textiles are designed and developed on the basis of functional principle and are used to meet the needs of various fields of production.

Certain materials and textiles are more appropriate for the production of non-apparel goods such as: Aerospace and Defense Materials, Automotive Fabrics, Industrial Filters, Sports and Outdoor Equipment, Medical Textiles. The non-apparel goods industry requires a higher level of manufacturing quality and, more frequently than with apparel, commands higher profit margins and has more stable demand patterns.

With careful policymaking, Vietnam has a great opportunity to move to higher value-added industries and move to new sectors such as electric vehicles, robotics, biotechnology and nanotechnology. These are global trends and all Vietnam’s competitors are looking for opportunities and partners in these areas. Vietnam already has most of the inputs needed to supply these emerging markets: a skilled workforce, an adaptable and modern industry, and a good export logistics system. With the right technology partnerships and skills Vietnam can develop new sources of competitiveness in these fast-growing global markets.

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A Defining Moment for Vietnam’s Economic Future

Vietnam is setting its sights on achieving 10% annual economic growth between 2026 and 2030 – an ambitious goal, to say the least. Now the question is whether the needed structural reforms will be put in place to support it.

As the economy of Vietnam is shifting from a low-cost labor-based economy to a technology-based, productivity-oriented, high-value economy, Textiles – one of the strategic sectors for sustainable development in Vietnam – will find an easy transition to achieve the targets of sustainable development.

Through investment in research and development, enhance domestic capabilities and develop the value chain of the industry, Vietnam has the capability of transforming into an innovative and sustainable development growth model.

The task ahead is formidable. But so too are the opportunities. By navigating a successful transition away from low-cost manufacturing and on to a path of innovation and technology, Vietnam could finally be on the road to sustainable growth.