Date July 2015
1. Keywords... 2 2. Abstract... 2 3. Introduction... 2 4. Sector Overview... 3 5. Government policy... 7 6. Opportunities for Danish companies... 8 7. Conclusion... 8 Transport, Logistics, Shipping, Infrastructure, road freight, inland waterways, maritime freight, rail freight, air freight, government policy, Vietnam, Embassy of Denmark. The transport and logistics sector in Vietnam is set to become an attractive sector for foreign companies and investors. Obligations under Vietnam s participation in the World Trade Organization (WTO) and its bilateral and multilateral free trade agreements (FTAs) will open the logistics sector further to foreign companies to compete on an equal footing with domestic companies. The Vietnamese government is also considering greater involvement of more private sector companies and investors in the expansion of domestic infrastructure. Interested companies need to have international references and invest time and resources into building local market knowledge over the long term in order to take advantage of the opportunities within the Vietnamese transport and logistics sector. Vietnam s high economic growth over the last decade, which is estimated to be 6.2% in 2015, has led to a considerable growth in trade. Increasing levels of imports and exports have driven growth in Vietnam s transport and logistics sector, a trend which is set to continue. Embassy of Denmark in Vietnam 2 / 10
Upon the accession of the WTO, Vietnam became a favored location towards many foreign investors as a production hub beside China and India. Therefore, foreign logistics companies are confident in the development opportunities in Vietnam market. Vietnam s beneficial marine location has made it the target of high levels of foreign investment into ports, and also gives the country access to the main inter-asian shipping routes. In addition, Vietnam s location in the center of East Asia is a major advantage for the country to develop the land transport links with other countries in the region. Despite the strengths and opportunities, Vietnam still has certain weaknesses and threats such as poor infrastructure, no specific development plan and corruption. Vietnam s transportation and logistics sector has been growing steadily over the last decade. In 2015, it is forecasted that road freight tonnage will increase by 7.75% to 880.14mn tonnes, rail freight tonnage will increase by 3.4% to 7.42mn tonnes and air freight tonnage will increase by 3.4% to 208,700 tonnes 1. Despite the current economic downturn seen globally and the resulting decline in Vietnam s manufacturing and freight industry, the development of the transportation and logistics sector will remain particularly important for Vietnam s economy, enabling Vietnam to have a competitive supply chain and access to foreign markets. According to a World Bank s report in 2014, Vietnam s logistics costs are about on par with China s and below those of Indonesia (where logistics costs are estimated to be around 18 20 % of GDP). This finding is in contrast with the most used figure for Vietnam s logistics costs of 25% of GDP. However, Vietnam s current infrastructure is underdeveloped and requires substantial new investment for its upgrading and modernization. This underdevelopment is also making Vietnam less attractive to investors. Rank (out of 148) Score (1-7) Infrastructure Quality of roads Quality of railroad infrastructure Quality of port infrastructure 81 104 52 88 87 Source: Global Competitiveness Report 2014 2015 (World Economic Forum) Quality of air transport infrastructure 3.74 3.2 3.0 3.7 4.0 1 Business Monitor International Embassy of Denmark in Vietnam 3 / 10
Financing remains one of the main problems faced by the Vietnamese government and private developers of transport infrastructure. Official Development Assistance (ODA) remains very important for financing of infrastructure project in Vietnam. Another major challenge for Vietnam is the synchronization of different infrastructure types (road, rail, port) in order to increase the flow of goods throughout the whole supply chain. According to Vietnam Logistics Business Association, Vietnam has about 1,200 logistics companies, primarily within transport, warehousing, transport agency, etc. Most of these companies are small and medium sized, with paid up capital of around USD 200,000 300,000 and where the employees who have sufficient logistics training only account for 5 7%. Hereby, the 25 foreign multinational logistics companies have achieved to occupy a total market share of 70 80%. Despite the large amounts of foreign invested capital there is a concern about overcapacity in the short term. At the same time, Vietnam s infrastructure is highly underdeveloped hindering the development of the transport and logistics sector. Higher levels of investment continues to be needed in order to improve the synchronization in Vietnam s infrastructure with the aim of improving the flow of goods between ports and the production and consumer centers of Vietnam. Road freight According to CIA's World Fact Book, Vietnam has a national road network of 206,633km. In the near future, Vietnam must still invest substantially as the quality of road infrastructure is very poor, with only 13.5% of the network considered to be in good condition, only 26% of the network has two or more lanes, and only 29% is tarred 2. Investment is currently concentrated on the upgrading of existing roads and the construction of major national expressways. Road freight plays a key role not only in Vietnam's domestic logistics sector but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the key port terminals to handle larger container vessels so that it can ship goods directly to destination markets, and also plays a key role in linking Vietnam with its second-largest export partner China. In 2015, it is forecasted that the annual growth will reach over 7.75%, up on 2014's 6.77%; and over the medium term, the road freight volume growth will reach an average of 7.79% per year by the end of 2019 3. 2, 3 Business Monitor International Embassy of Denmark in Vietnam 4 / 10
Inland Waterways According to CIA's World Fact Book, the total length of Vietnam s inland waterways is 47,130km, ranking 4 th in the world (after China, Russia and Brazil). The country s main inland waterways include the Mekong River in the South and Red River in the North, in which the Mekong River takes up a much larger share because of its freight connections with neighboring countries. Because of its high potential, we can expect much development and investment to come in the future for the inland waterways system. Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the second-largest freight transport mode in the country. Maritime Freight Vietnam is strategically situated along important international marine transit routes and has a coastline that stretches 3,260 km. In 2010 (latest available data), total container throughput at all ports reached 5.98mn TEUs, up 550% from the 919,264 TEUs handled in 1999 5. The network of ports clustered around Ho Chi Minh City is by far the largest and most technologically advanced in Vietnam. In 2015, in the Port of Ho Chi Minh City, it is expected to have tonnage throughput of over 45mn tones (an increase of 7.6%) and container throughput of nearly 5mn TEUs (an increase of 8%) 6. However, in general, Vietnamese ports are small by international standards both in terms of maximum vessel sizes and storage capacity. The opening of the Cai Mep International Terminal in 2011 (APM Terminals joint venture) introduced the country s first deep water port and the largest port in Vietnam, which can service bulk vessels of up to 130,000 DWT and container vessels of up to 11,500 TEU. Most other ports in Vietnam are geared to service bulk vessels below 30,000 DWT and generally lack the requisite facilities to service container vessels. The rapid growth in Vietnam's port volumes has attracted high levels of international investment in its port terminals in recent years. However, there is a concern that port capacity is reaching overcapacity. This is a particular concern for operators at the Port of Cai Mep. Analysts have blamed the lack of landside infrastructure for the underutilization of Cai Mep and others in the Ba Ria- Vung Tau area. Poor infrastructure hinders freight and logistics companies in connecting ports to the production and consumer centers of Vietnam. Embassy of Denmark in Vietnam 5 / 10
Rail Freight According to CIA's World Fact Book, Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. This obviously indicates the poor railroad infrastructure with relatively short railway lines and gauge incompatibility with other countries, leading to under-developed issues of rail freight in Vietnam. In 2013, Vietnam s rail freight volumes only accounted for as small as 6.53mn tonnes, this is seen as another contraction in year-on-year growth decreased by 6.82%. However, in 2014, rail freight volumes have hit a double-digit growth of 10% to 7.18mn tones. In 2015, the industry is not expected to enjoy the same growth level compared to 2014: 3.4% is the forecast 7. Recent changes to develop Vietnam s rail network can be observed, but these have been focused on expanding the country's passenger network, with the plan to upgrade the existing rail lines. According to a plan approved by the Government in early 2015, a plan to build the North-South high-speed railway must be completed before 2020, after the original plan was rejected in 2010 by the National Assembly. Air Freight Vietnam's air freight only accounts for a small percentage of the country's freight transport. Although this situation cannot change dramatically in the future, the government has built up plans to gradually develop and expand the airport infrastructure. These plans are also in line with the government s plan to promote trading of certain goods such as electronic product, pharmaceuticals, cosmetics, foodstuff, etc. In 2014, air freight sector has achieved a remarkable growth of 9.96% to 202,000 tonnes. However, in 2015, it is forecasted that the annual growth will only reach 3.4%, to reach 208,870 tonnes. Over the forecast period to 2019, Vietnam's air freight may grow on average per annum by 3.6% to reach 241,070 tonnes 8. In June 2015, the National Assembly has passed the in-principle approval for the new Long Thanh Airport with expected investment in 03 phases of 16 billion USD. For Phase 1, 5.45 billion USD is expected to be invested to reach the annual capacity of 25 million passengers and 1.2 million tons of cargoes from 2025. Embassy of Denmark in Vietnam 6 / 10
The government of Vietnam plans to invest heavily in upgrading infrastructure to accommodate the continuously rising levels of trade and is looking for ways to have a higher involvement of private sector actors in the sector. Investment will include expanding the road network, upgrading rail lines, developing deep water ports to facilitate direct transportation to destinations, and constructing and expanding airports. The transport sector will take up the biggest shares in the total infrastructure investment pipeline in Vietnam in the next 10 years, expected to account for 60-65% in 2022. Therefore, it is expected that the transport infrastructure industry value will grow by an average of 4.5% year-on-year between 2014 and 2017 9. According to a World Bank s report in September 2013, it was estimated in 2009 that Vietnam will need USD 25 billion a year for infrastructure investment, while the available financial resource from the public and private sector combined is only USD 16 billion. The gap of USD 9 billion had been rapidly increased from USD 2.1 billion in 1999. Therefore, in the future, the government must put utmost effort to utilize the state budget and finance support like ODA, also the government must encourage the private sector, both domestic and foreign, to invest into infrastructure projects. Vietnam s commitments under the WTO accession also require it to gradually open up its domestic logistics market. Foreign investors could set up joint venture logistics companies from 2007; then in 2012 100% foreign invested enterprises were allowed for supply of international maritime transport services and courier services; and from 2014, 100% foreign invested enterprises are allowed for container station and depot services, storage and warehouse services, freight transport agency services. This will significantly increase competition between existing and new companies, between domestic and foreign owned companies; but this also put the pressure on the government to develop the infrastructure and the existing companies to improve their competence. In practice, at the period of this report (July 2015), licensing authorities in Ho Chi Minh City only allow joint-ventures in logistics sector, while licensing authorities in other cities/provinces have accepted 100% foreign invested logistics companies in accordance with the market access schedule as mentioned above. This inconsistent licensing practice has been a hot topic without any foreseeable solution in the near future. Embassy of Denmark in Vietnam 7 / 10
To ensure adequate financing and requisite technology and know-how, Vietnam will be reliant to a large extent on foreign partners. The Vietnamese government may undertake public-private partnerships to develop new large ports and terminals. This constitutes a great opportunity for Danish companies to get involved in the sector s development. However, Danish companies should be prepared that the Vietnamese business environment is complex and bureaucratic, especially for large infrastructure projects, in order to best plan for the future investment into the country. Furthermore, Danish companies should also need to foresee the increased international competition, especially from Japan and China. Official negotiations on a free trade agreement (FTA) between the EU and Vietnam were initiated in July 2012 and are expected to be completed in 2015, which will further boost trade amongst the two partners. EU companies will face more favorable trade and business conditions, once the agreement has been finalized and implemented. In addition, the Trans-Pacific Partnership ( TPP ) is also expected to be completed in 2015 and thereby boosting the trade activities among the participating countries, which then bring vast potential for Vietnam s logistics industry growth. Any interested Danish companies in the fields of engineering, consulting, equipment or construction will need to invest time, have international references, and build local knowledge and resources to set the appropriate strategy for successful entrance into the market. Attention should be paid to the push for public-private partnership and the expected increase in private sector involvement in the market. The country s need for investment to accommodate the rising volumes of trade has led the government to encourage more private companies and investors to take part in expanding and improving the infrastructure network. With heavy investment in infrastructure planned for the short- and medium-term, there exist ample opportunities for Danish companies within engineering, consulting, equipment and construction to take part in the promising growth rates expected within the transport and logistics sector of Vietnam. Moreover, commitments under the WTO s accession, as well as the negotiation of a free trade agreement between Vietnam and the EU, the negotiation on the TPP is bound to make the transport and logistics sector more attractive for Embassy of Denmark in Vietnam 8 / 10
foreign investors willing to invest the time and resources into establishing or expanding the presence in the Vietnamese market. Embassy of Denmark in Vietnam 9 / 10
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