Playing to industrial strengths to lead green supply chain

Vietnam’s rise to middle-income country status has been almost singular in its pace, typified by three-fold growth in per-capita GDP over the past 20 years and an 11 per cent decline in the poverty rate in the last decade alone. 

Vietnam’s highly trade-oriented development – which last year grew nearly four times the middle-income country average – has been increasingly driven by energy-intensive manufactured goods and industrial products. 

Industrial transformation is a critical imperative for Vietnam’s long-term economic viability and competitiveness. The world has started its clean industrial transformation and Vietnam has the potential to be at the forefront. Southeast Asia’s comparative advantages, such as abundant renewable resources, a growing manufacturing base, and increasingly skilled workforce, can make it an attractive destination for clean technology and clean supply chain investments. 

Manufacturers are switching to cleaner, more efficient processes such as electrification of industrial heat production and hydrogen-based steel production. Doing this in Vietnam requires a comprehensive and agile approach that leverages strong, multifaceted collaboration among stakeholders at all levels.

Global decarbonisation efforts are underway, exemplified by the European Union’s Carbon Border Adjustment Mechanism, requiring Vietnamese companies to change their approach to measure, report and manage their carbon footprints to be part of the supply chain. This provides incentives for Vietnamese companies to adapt and design policies to remain competitive in a decarbonised future and, at the same time, continue to attract foreign investment. 

Vietnam is among Southeast Asia’s largest economies and well-placed to take advantage of anticipated growth demand for green industries and products. We witnessed this first-hand during our co-hosted Australia-Vietnam Green Economy Program and capstone Summit in Ho Chi Minh City earlier this year. The summit brought together more than 150 business leaders and experts from Australia and Vietnam to explore opportunities to tap into green economy investment and trade.

Transforming facilities

Establishing Net Zero Industrial Precincts (NZIPs) is imperative for Vietnam’s industrial sector to maintain its competitive edge and catalyse further growth. This can be done by embedding net zero into its existing 400 industrial zones (IZs) and future projects across the country. 

Transforming these IZs can help engage new industries, stimulate green exports, build enabling infrastructure, increase skills development, and decarbonise emission-intensive industries with a place-based investment approach. 

Existing initiatives in Vietnam around eco-IZs or green industrial zones mostly focus on the circular economy or waste management aspects. 

In September, Climateworks Centre and the Ho Chi Minh City Institute for Development Studies signed an MoU at the fifth Ho Chi Minh City Economic Forum, aiming to support the Vietnam business and financial centre to develop a roadmap to transform its IZs aligning with net-zero targets. 

Vietnamese exports have grown to 93 per cent of GDP, largely driven by energy-intensive manufactured goods and industrial products. Manufacturing these goods and products using clean energy sources will be key to keeping the country’s crucial export industry competitive into the future. 

Foreign investment is also key. Related reforms have anchored a strong enabling environment conducive to international investment. However, Vietnam is currently at risk of losing its competitiveness to pull in foreign investment if it fails to transition alongside the rest of the world.

Transforming Vietnam’s growing industrial production is required to attract increasing green foreign investment to the region. Vietnamese export companies need to comply with emerging green standards and regulations to meet the requirements from their buyers, especially from the EU market. 

There is also increasing pressure on multinational companies and foreign investors to decarbonise their supply chains, especially for those that are part of the RE100 group. Helping these companies  comply with their supply chain targets will strengthen their confidence to invest and expand in Vietnam.

Clean manufacturing powerhouse

Southeast Asia is an attractive destination for clean technology investments, with the Asian Development Bank pointing out that the region could generate as much as $100 billion in revenue and six million jobs by 2050 if these advantages are to be realised.

Vietnam has the potential to attract significant foreign investment in sectors like renewable energy, energy storage, semiconductors, and hydrogen. By leveraging its existing manufacturing capabilities and investing in new technologies, the country can position itself as a key supplier of green products and components to the global market. Vietnam’s strengths in solar photovoltaic (PV) manufacturing and critical mineral reserves also provide a solid foundation for its green economy ambitions. 

In its latest power development plan, Vietnam considers solar PV a key technology for the country to achieve its 2050 net zero target, with solar set to become the dominant energy source. Vietnam’s export competitiveness in the solar energy sector is also rapidly growing, reflected in production capacity growth over recent years as well as the export volume of solar panels and related components. Vietnam is now among the United States’ top 10 solar PV suppliers. 

A favourable labour market and lower cost of energy – compared to the ASEAN average – makes Vietnam attractive for foreign investment. As of 2021, the overall emissions intensity of producing all the major solar PV segments in Vietnam is less than what it would be in countries such as Indonesia and India. This is due to Vietnam’s higher share of renewable energy in its electricity mix. 

The global supply chain for the offshore wind industry is highly complex, however, transferable skills and existing manufacturing capabilities and production hubs that support other industries in Vietnam could help establish a strong local supply chain. Vietnam is already among the top suppliers of onshore wind components to the United States.

The country also manufactures the rare earth-based permanent magnets required for wind turbines, which are preferred for the offshore industry due to their lightweight and efficient characteristics, in addition to lower maintenance costs. 

Importance of policy signals

Clean industrial transformation is a complex endeavour that necessitates strong coordination among governments, businesses, and investors. While it presents some challenges, they are not unique to Vietnam. Experiences from Australia and Indonesia highlight that financing and energy demand are critical and interconnected issues.

Clear policy signals are essential for driving market interest. For instance, Ho Chi Minh City has outlined plans to convert existing export processing zones and IZs into high-tech, ecological industrial zones or logistics centres. 

The City is currently conducting pilot programs for transitional plans in five designated export processing zones and IZs. Following the successful implementation of these pilot programs, the remaining IZs will undergo a similar transition.

This proactive approach aims to align these zones with net zero targets, thereby attracting investors and enabling stakeholders, including IZ owners and companies, to participate more actively in the market.

To secure financing and enhance the bankability of transition projects, a multifaceted approach is necessary. This includes developing clear policy roadmaps for transition plans, garnering international support, and collaborating with investors and multinational companies committed to sustainability. By working together, these entities can effectively navigate the complexities of industrial transformation and drive meaningful change in the supply chain.

Vietnam’s green economy future is promising. To achieve its supply chain and industrial ambitions, the country has the opportunity to thrive with the right policies, investments and skilled workforce. This is where regional cooperation is useful to share knowledge, resources, and best practices, reduce costs, and enhance the region’s competitiveness.

The end destination is a Vietnam that is manufacturing, building, and supplying the key clean ingredients the world needs to hit net zero emissions.

This article has been republished with permission from the Vietnam Investment Review.

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