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VIETNAM and MYANMAR CONTINUE to ADVANCE by Chris Malone, Shu Ling Heng, Tuyet Vu, and Khant Khant Kyaw

VIETNAM and MYANMAR CONTINUE to ADVANCE by Chris Malone, Shu Ling Heng, Tuyet Vu, and Khant Khant Kyaw

VIETNAM AND CONTINUE TO ADVANCE By Chris Malone, Shu Ling Heng, Tuyet Vu, and Khant Khant Kyaw

n the midst of the volatility and Lotus Nation: Sustaining ’s Impressive Iuncertainty surrounding emerging Gains in Well-Being, BCG report, markets, two growth in 2016.) Now, this article provides an update keep showing signs of progress. Vietnam on the state of economic and political de- and Myanmar are very different countries, velopment in these two exciting Asian hot in very different stages of economic and spots. political development, but they share similar forward trajectories. In our view, Vietnam is the important emerging market Vietnam: Approaching Liftoff? to focus on in Asia today, while Myanmar Multiple reasons support the belief that offers companies with a longer-term Vietnam is approaching economic liftoff perspective a big opportunity to establish a and a sustained period of rapid growth. foothold in the growth opportunity of One is that the country has been growing tomorrow. steadily and attractively for two decades— annual real GDP increases have ranged The Boston Consulting Group highlighted from 4.8% to 9.3% during that time—as the the growth prospects of Vietnam and country has moved from a largely agrarian Myanmar in late 2013, and the trends that to one powered by manufactur- we described in that report have only ing. (All GDP figures cited are based on strengthened since then. (See Vietnam and Bank GDP Myanmar: ’s New Growth Fron- data, in constant 2011 international dol- tiers, BCG Focus, 2013.) Earlier lars.) Moreover, while other economies this year, we shone the spotlight on Viet- have faltered in recent years, Vietnam has nam’s impressive progress in turning its continued to grow: it has achieved real emerging wealth into well-being, as mea- rates of 5.2% to 6.0% per year since 2012. sured by our Sustainable Economic Devel- Yet another reason is that per capita GDP opment Assessment methodology. (See in Vietnam has exceeded $5,000—the level

For more on this topic, go to bcgperspectives.com at which growth began to accelerate rapid- of a country, such as , whose ly in in 2005, in Indonesia in 1992, GDP per capita is twice as high. This is a and in in 1988. A fourth reason is clear indicator that Vietnam has success- that the leadership of the ruling Commu- fully harnessed limited resources for the nist Party has just come through a major good of its citizens. The country matches change, which points the country toward up competitively with other top ASEAN continued political stability and economic economies in health, education, and liberalization. economic stability. use is high and rising quickly: some 43% of middle and Three other factors underscore the attrac- affluent class (MAC) consumers use the tiveness of Vietnam right now: the consum- internet, more than in either Thailand er economy, foreign investment and export (41%) or Indonesia (29%), and e-commerce growth, and room for improvement in pro- is gaining a foothold. More than 15% of ductivity. MAC consumers in Vietnam have made online purchases. The Consumer Economy. With a popula- tion of about 90 million, Vietnam is the Foreign Investment and Export Growth. third-largest country in the ASEAN trade Overall economic growth in Vietnam has block. Vietnam’s wealth is increasing been fueled by rapidly rising foreign quickly: we expect the number of middle- investment and exports, both of which are income and affluent consumers to rise at growing significantly faster there than in an annual rate of 13%, increasing from other ASEAN nations. (See Exhibit 1.) Top 12 million in 2012 to about 33 million in export segments resulting from foreign 2020—a figure that represents about direct investment (FDI) include telecom- one-third of the population. More signifi- munications devices and parts, textiles, cant, Vietnam is among the top perform- computers and electronic equipment, and ers globally when it comes to converting footwear. Together these four categories wealth into well-being: it has achieved a made up almost 45% of all exports in 2014. level of well-being that would be expected Total exports in 2014 were approximately

Exhibit 1 | Growth in Vietnam Is Driven Mainly by Investments and Trade

REAL GDP COMPONENTS AND HISTORICAL EXPORTS AND INVESTMENTS IN VIETNAM HAVE BEEN GROWTH RATES1 GROWING FASTER THAN IN OTHER ASEAN COUNTRIES CAGR, CAGR, 1991–2015 1991–2015 $billions (%) (%)2 20 200

15 15 150

10 100 11 15 8 11 50 5 7 8 5 6 5 6 4 0 0 1991 1995 1999 2003 2007 2011 2015 Net Investments Government Private exports spending consumption

Net exports Vietnam Investments Private consumption Other ASEAN countries

Sources: Economist Intelligence Unit; BCG analysis. Note: Excludes imports; all components used are positive drivers of GDP. 1GDP components are in 2005 prices (VND) and at 2005 USD-VND exchange rate where relevant. 2CAGR computations are based on 2005 prices ($).

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$150 billion, of which $94 billion, or International Group, Coca-Cola, Procter & almost two-thirds, resulted from the FDI Gamble, and ConocoPhillips. During a re- sector. cent visit to Vietnam, President Obama attended a signing ceremony for new US- We believe that the manufacturing econo- Vietnam commercial agreements valued at my is set to undergo a major expansion. more than $16 billion. But the aggregate Vietnam’s labor force is well educated. The amount of US investment in Vietnam re- country’s most recent scores on the Pro- mains small compared with that of US gramme for International Student Assess- companies’ first destination in the ment—which tests proficiency in math, sci- region: . ence, and reading—equaled or surpassed those of Germany. Vietnam also enjoys a Room for Improvement in Productivity. significant cost advantage over other There is ample room in Vietnam for emerging markets. In 2015, the average an- productivity growth, which could have an nual salary for a Vietnamese manufactur- enormous overall impact. Simply raising ing worker was $3,900; for a manager, it productivity to the level of the top ASEAN was $12,900. These salaries compare, re- performers (Indonesia, , the spectively, with $4,300 and $14,800 in In- , and Thailand) in three major donesia; $5,300 and $22,500 in Malaysia; sectors of the economy—manufacturing, and $8,700 and $24,400 in China. wholesale and , and , which together employ some 39 million These factors have been attracting increas- people—would add almost $424 billion to ing levels of foreign investment to Vietnam Vietnam’s 2015 GDP. (See Exhibit 2.) in recent years, with leading the pack until 2014, when it was overtaken by To be sure, Vietnam also has its challenges. . Major companies such as In addition to low productivity, the econo- Bridgestone, Panasonic, Sapporo, Samsung, my is still substantially agrarian, and infra- and LG are investing. Samsung alone has structure development lags that of other pledged more than $12 billion. Two proj- Asian nations. ects in Bac Ninh Province have attracted more than 40 South Korean subcontractors Outlook. It’s hard to see how the country and spare-parts suppliers. LG launched a will not at least sustain the levels of $1.5 billion appliance manufacturing facili- growth that it has produced in recent ty in the Trang Due Industrial Park in Hai years; indeed it is much more likely that Phong; it is the company’s largest manufac- growth will accelerate as Vietnam address- turing base in Southeast Asia. es its challenges and as foreign capital seeks to take advantage of one of the A recent survey by the Korea International world’s highly attractive opportunities. Trade Association involving 540 South Ko- Implementation of the TPP trade pact rean companies found that Vietnam was should provide an additional boost. We the top destination for South Korean inves- expect Vietnam to attract even higher FDI tors. The implementation of the Vietnam- given its position as the lowest-cost manu- Korea Free Trade Agreement in late 2015 is facturing country among current TPP likely to promote further investments. members, and it will benefit from the opening of major markets, such as the US One big question is whether foreign invest- and Japan, for its exports. ment in Vietnam will continue to be driv- en primarily by its Asian neighbors. A de- velopment that may change the game is Myanmar: Tomorrow’s Hot Spot? the Trans-Pacific Partnership (TPP), signed If Vietnam is a story of steady progress in February 2016, which would facilitate over time, Myanmar is a tale of fast-paced more US investment. Many large and di- transformation. This is especially true in verse US companies are operating in Viet- the political sphere, where the country has nam, including Intel, Microsoft, American moved from a highly authoritarian, closed

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Exhibit 2 | Vietnam Will Gain a Significant Economic Boost If It Can Close the Productivity Gap with Four ASEAN Countries Productivity ($thousands per employed person) 100 1.7% of the Vietnamese workforce has high productivity in four sectors: 80 • Mining and quarrying • Real estate • Electricity, gas, steam, and air-conditioning supply 60 • Financial, banking, and insurance

38x 40 46% of the workforce has low productivity in agriculture 20

0 Four high- Manufacturing 25 Admin Agriculture, 50 Workforce productivity forestry, (millions) sectors Education Construc- Wholesale and and fishing tion retail trade1 health Transportation Accommodations and social work and storage and food Information and communication GDP boost ($billions) 98 2 19 18 162 10 12 21 103 3 159

Vietnam Average of the ASEAN four

Sources: Malaysia Treasury; Statistics Indonesia; Philippines National Statistical Coordination Board; the National Economic and Social Development Board of Thailand; Vietnam General Statistics Office. Note: The four ASEAN countries are Indonesia, Malaysia, the Philippines, and Thailand. Value changes to constant 2005 . Some sectors are not displayed in the exhibit. 1Includes the repair of motor vehicles and motorcycles.

regime to a largely open, mostly democrat- available. The main limiting factor is the ic system of government in just a few fledgling government’s capacity to handle years. After five decades of military rule, the help it is being offered. After years of many are optimistic about the future, but economic stagnation, Myanmar saw a plenty of questions remain. One is wheth- strong upturn that supported economic er the political changes will be allowed to growth (albeit from a relatively small take root and flourish; Myanmar has little base) at an average annual rate of more experience with democracy and few of the than 5% over the past 20 years. And its requisite institutions of representative gov- growth has continued in recent years at ernment. Another is how fast economic re- rates of 7.5% to almost 9.0% while other form and growth can follow the political Asian and emerging economies have liberalization. Today much of the econom- slowed down. The country’s MAC popula- ic activity in the country remains con- tion is expected to increase by 8.5% per trolled by a small number of organiza- year between 2012 and 2020, growing tions, and financial inclusion lags the from 5.3 million to 10.3 million. extraordinary improvements in political liberalization. Myanmar represents a longer-term bet than Vietnam. Myanmar is still very much But there are good reasons for optimism. an agrarian nation, with two-thirds of the After shunning Myanmar for decades, the population working in agriculture. Produc- outside world is now pulling hard for its tivity is poor, making the sector a big op- success, and assistance—economic, finan- portunity for high-impact growth and cial, technical, and political—is readily transformation.

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That said, the changes taking place in the tions accelerate their investments. For in- nation of 50 million people have caught stance, Vietnam-based plans to in- the attention and interest of many multina- vest $1.5 billion in Myanmar to develop the tional companies. FDI is climbing. So far, telecom sector, and the company recently is the primary focus—two- won its fourth telecom license. thirds of the foreign funds invested or pledged (more than $40 billion) have gone Regardless of how foreign investment plays to oil and gas and power. Manufacturing out, we expect the next five years in Myan- has attracted about $6.6 billion, and tour- mar to be characterized by volatility, with ism has brought in $2.4 billion. progress determined to a significant degree by how quickly the government can ex- As is true in Vietnam, the big investors in pand its capacity to handle the aid and in- Myanmar so far—China is the largest— vestment on offer. There will likely be surg- have been mainly Asian, although we ex- es in opportunity, such as those now in the pect the investor mix to evolve in the com- travel and tourism sector, mixed with peri- ing years as more domestic markets open ods of uncertainty, especially in the politi- up. In one possible scenario, similar to the cal realm. Companies that want to play a pattern that took place in Vietnam, some long-term role need to start now, establish- countries—Japan and Korea, perhaps fol- ing a presence, building relationships, and lowed by the US—start to increase invest- developing trust. ment. The Thilawa Special Economic Zone, for example, has been constructed with They might, however, encounter a crowded support from the Japanese government playing field. Two-thirds of Japanese com- and Japanese companies, including Mitsub- panies, for example, say that they plan to ishi Motors, Marubeni, and Sumitomo, as expand their presence in Myanmar in the well as the Japan International Coopera- next one to two years. Foreign companies tion Agency. Built at a cost of $1.5 billion, that try to wait out the inevitable growing the special zone is expected to host 100 pains and swoop in later to cherry pick the factories employing some 40,000 workers rewards may find themselves on the out- when it becomes fully operational in 2017. side looking in.

In another possible scenario, Southeast Asian regional partners that are familiar with navigating the local rules and regula-

About the Authors Chris Malone is a partner and managing director in the office of The Boston Consult- ing Group. He is also associated with the firm’s Singapore office. You may contact him by e-mail at [email protected].

Shu Ling Heng is a lead knowledge analyst in the firm’s Singapore office. You may contact her by e-mail at [email protected].

Tuyet Vu is a consultant in BCG’s Ho Chi Minh City office. You may contact her by e-mail at vu.tuyet @bcg.com.

Khant Khant Kyaw is a consultant in the firm’s office. You may contact her by e-mail at [email protected].

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advi- sor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep in­sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients

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achieve sustainable compet­itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com.

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