According to a survey by PwC, CFOs are searching for new supply chain options due to growing uncertainty on the global economic landscape.
Today, tariffs are stalling the global economy and trade globalisation has slowed significantly. The search for tariff-free productions led many companies to leave Mainland. Meanwhile, Donald Trump is aiming to bring manufacturing home to America.
Thus, the quest to find alternatives in the South East Asian nations may have started.
One of the principal beneficiaries of these developments is Vietnam. The country has already seen rapid development in manufacturing capacity over recent years. Now Vietnam is set to boost economic growth still further because of a new Free Trade deal with the European Union (EU).
Vietnam and the EU Agree on Tariffs to Facilitate Supply Chain
This agreement will take effect in August 2020. Resulting in around 71% of exports from Vietnam to the EU becoming duty-free. Likewise, 65% of EU shipments to Vietnam. Remaining tariffs will be phased out by Hanoi over ten years and by Brussels over seven years.
According to Vietnam official data, trade with the EU will grow from US$40 billion in 2019 to over 60 billion by 2025.
Matching European needs with Vietnam’s most robust production outputs such as apparel, textiles, footwear and electronics. Also, agricultural products such as coffee will be well-matched with consumers from the continent.
In return, Vietnam’s middle class will spend their disposable income on European goods.
Textile and footwear manufacturing are well developed in Vietnam. Sales surpassed USD9 billion in 2018 with a large volume going to the EU. Consequently, there is an opportunity to improve the industry further on the back of the EU deal. Smartphones and electronics is another sector with the potential to grow swiftly. The pharmaceutical industry is likely to see rapid development to meet rising consumer demand across EU markets.
By partnering with the EU, Vietnam is cementing its role as a global manufacturing centre. The high level of efficiency of its factories provides peace of mind for buyers. Vietnam is an alternative source of goods outside mainland China.
Limited access to credit for Vietnamese companies may slow the supply chain development
The country has become an essential centre for production in S.E. Asia. Some of its factories have grown significantly in size. Yet, Small and Medium-size Enterprises (SMEs) still make up 98 per cent of all businesses. Thus, accounting for 50 per cent of employment and 40 per cent of total GDP.
Vietnam’s dependence on SMEs may play a part in restricting economic growth due to the limited access to credit from corporates. Statistics from the Vietnamese Chamber of Commerce and Industry (VCCI), show that 70% of SMEs do not currently have access to bank credit.
Instead, they must use their capital or borrow from other sources which incur on higher costs and greater risk. From 2012 to 2017, the outstanding loans to SMEs only accounted for an average of 22-25% to the whole economy.
One major problem facing SMEs is that banks prefer to lend to more giant corporations. According to financial institutions, the significant reasons for not providing loans to SMEs are:
- Higher default risk
- Lack of financial transparency
- Lack of assets suitable as security against loans
How can Vietnamese corporates and SMEs access credit?
Good news: this kind of service already exists in Vietnam. Vietnamese corporates could investigate different sources of funding.
There are alternative sources of trade finance available in the Vietnamese market already!
Local factories can raise working capital by using Supply Chain Finance via an online platforms. In this way, a manufacturers can access financing in Vietnam.
We settled the operations in Ho Chi Minh five years ago. We built a solid clientele within the international export community. Today, the company has a programming and sales team that is more than fifteen strong.
As Internet commerce expands, an increasing number of Vietnamese manufacturers are selling online. They use eCommerce platforms such as Amazon and eBay to sell to overseas customers.
Since services like Amazon Prime depend on next day delivery, large quantities of stock must be held in a warehouse close to the consumer. Consequently, suppliers need to ship goods well in advance of consumer purchase. Thus, creating significant cash flow difficulties for many manufacturing businesses in Vietnam.
Why not accessing credit from banks or traditional institutions?
There is little interest among traditional banks to finance this new form of online sales. So, Velotrade has developed a funding model for shipments of Vietnamese manufacturers. The model involves tracking stock levels and order patterns. Also, historical pricing and sales volumes to consumers are analysed. Velotrade gets connected to the e-commerce marketplace platform to analyse consumer’s trends. The Velotrade team can assess consumer demand and cash flow requirements for each supplier. Advance payment is then made by Velotrade to each manufacturer to help finance their next order. As a result, there is no need to delay production until all the stock has been sold out. Payments from Amazon’s sales are made directly to Velotrade.
Financial innovation of this type is key to helping upgrade the Vietnamese economy in two ways:
- To improve the diversified range of manufacturing sources available to buyers.
- To address the growing needs of a global e-commerce business model.