With the EU-Vietnam Free Trade Agreement to come into effect by 2018 together with other free trade agreement (FTAs) in place or under negotiation, logistics infrastructure is increasingly viewed as a key factor in Vietnam’s global integration, especially regarding its ability to attract foreign direct investment (FDI).
As the World Bank noted in one of its reports, global trade depends on logistics, and how efficiently countries import and export goods will define how they grow and compete in the global economy.
Vietnam’s economic growth is predicted to be 12 per cent in 2020 and trade turnover at that time may reach around $623 billion, according to World Bank forecast, which will maintain expectations of the country continuing to be a destination for international investors.
Domestic infrastructure needs to be improved in the long term and its logistics sector must increase service quality to reinforce the country’s competitive advantages.
Losing at home
Logistics infrastructure is key in promoting international trade. Strategic, network-approach multimodal logistics infrastructure development allows for better utilization of all modes of transport and the implementation of modern logistics practices, according to Mr. Julien Brun, General Director of CEL Consulting Vietnam, a subsidiary of CEL Asia Group, which provides advisory, engineering and training services in the field of supply chains and operations.
Similarly, Mr. Chamnan Wangakarangkul, Deputy CEO of C.P. Vietnam, told VET that logistics infrastructure is a major factor that all foreign-invested enterprises (FIEs) need to consider because logistic costs are a major expense.
From a business perspective, logistics cost is not only monetary but also about time.
Vietnam’s logistics costs, according to the World Bank, account from 20.9 cent to 25 per cent of the country’s GDP every year, which is among the highest in the world.
“The country spends $37 billion to $40 billion on logistics every year,” said Mr. Do Xuan Quang, Vice Chairman of the Vietnam Logistics Association (VLA). The figure in developed countries is 10 per cent and 18 per cent in other developing countries.
Mr. Le Phuoc Vu, Chairman of the Hoa Sen Group, has often raised the issue of cost at logistics conferences.
There are many factors that slow down the development of logistics, eating into the competitive advantage held by Vietnamese enterprises.
These include poor operations at Vietnam’s ports, making costs triple, and a lack of port infrastructure, which drive up international shipping fees.
Mr. Le Duy Hiep, Chairman of the VLA, said that infrastructure plays an important role in cutting logistics costs and indirectly impacts on FDI attraction.
“Domestic infrastructure has a direct effect on our food business, which relies on road transport,” said Mr. Chamnan.
The condition of road networks would have a significant influence on the availability of products from FIEs, he added.
Traffic congestion also makes it difficult to completely avoid delays and late deliveries.
Long delivery lead times and traffic conditions often result in manufacturers requiring more inventory, thus incurring extra cost.
Time and cost of trading across Borders
(Selected ASEAN countries)
Source: Doing Business 2015, World Bank
According to Mr. Brun, logistics infrastructure development is only one part of the answer to high logistics costs for exports.
The next part is government regulations, which remain cumbersome, unclear and inconsistently applied.
“A good example directly affecting international trade would be customs clearance,” he said.
Customs clearance in Vietnam is much more complex than in many neighboring countries, even China.
The amount of specialized knowledge and experience required to effectively complete customs clearance makes it difficult for foreign companies to do on their own, so they need to engage local companies.
Mr. George Berczely, Chairman of the Transportation and Logistics Sector Committee at Eurocham Vietnam, said there have been significant investments in road infrastructure over the last few years but it is important to also invest in other modes of transport, especially ports and airports, and in the crucial connectivity between the different transport modes, like Inland Container Depots.
For example, Tan Son Nhat International Airport in Ho Chi Minh City will probably reach full capacity by 2020 or 2021, while the new Long Thanh International Airport in Dong Nai province will only complete Phase 1 by 2025.
While the government has confirmed it will invest a further $872 million in expansion to handle 25 to 42 million passengers per year, there is no clear plan for cargo.
Domestic infrastructure is also inadequately linked to rural areas, resulting in high costs in serving rural consumers, who account for around 60 per cent of the country’s population.
Roads are in bad shape in many rural areas, making access difficult.
The problem is even more challenging for e-commerce investors. The transport market share by the railway sector has been declining significantly and now accounts for only about 1 per cent in Vietnam and the sector is generally overlooked by investors.
Only 6.7 per cent of Vietnam’s 2,653 km of railway lines meet international standards. Apart from insufficient links between road and railway networks, cargo delivery between the two is slow, according to Mr. Tran Bao Ngoc, Director of the Transportation Department under the Ministry of Transport (MoT).
Measures to success
Despite all these disadvantages, “Vietnam remains an attractive investment destination in the eyes of foreign investors,” Mr. Berczely told VET.
Logistics infrastructure challenges are not a common reason for an investor not to come to Vietnam, but much remains to be done to make the logistics sector more efficient.
This would make foreign manufacturers more competitive, especially within ASEAN, and allow local production, export and GDP growth to develop even faster in the coming years, he added.
Advantages for foreign logistics enterprises do not entirely lie in infrastructure but in their knowledge of best practice, information technology (IT) and people, according to Mr. Brun.
IT is an area of strength for FIEs, as many Vietnamese logistics companies face bottlenecks resulting from inappropriate IT systems or the absence of IT application in managing logistics.
The strategy for infrastructure development need to change to a more holistic network approach.
Moreover, the idea of a holistic network approach is to view infrastructure as an interconnected network and take into account all possible resources that can be developed to optimize the performance of the system as a whole, he said.
Which part of the network is currently under heavy pressure must be understood and changes made to develop other parts to improve the potential and utility of each.
Existing logistics infrastructure development only focuses on land networks (highways, roads, bridges) and sea facilities (deep water ports) while ignoring other resources such as inland waterways and railway networks, he added.
The government has a very good understanding of what remains to be done, Mr. Berczely said.
Resolution No. 19/2017/NQ-CP, on measures for improving the business environment and enhancing national competitiveness in 2017 and towards 2020 is a very clear plan for action.
Furthermore, the master plan for competitiveness enhancement and the development of logistics services to 2025, which was approved by the Prime Minister in mid-February, expresses the interest and effort of the government in improving the country’s logistics system.
Challenges are still ahead, as there are many things to be done by a limited number of qualified and motivated officials, he added.
Vietnam is integrating more deeply into the regional and global economies and becoming party to more agreements.
The government must recognize the importance of logistics for the economy and businesses and direct related ministries to improve the competitiveness and development of local infrastructure.
Logistics infrastructure is a concern for all FDIs, and the government must give due consideration to the state of domestic infrastructure and address any shortcomings.
VN Economic Times