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|The digital disruption of Industry 4.0 brings plenty of opportunities, but also challenges|
At a recent Industry 4.0 summit in Hanoi, Ousmane Dione, World Bank country director for Vietnam, captivated hundreds of participants by talking about a device – one which is not very special, as it is used by millions of people in the country.
“As you sit in the audience, you may even be looking at it right now. You have probably guessed by now, I am referring to our smartphones,” he said.
Back in 1983, Dione said, one could only make mobile calls with a Motorola DynaTAC 8000x, which had a height of 33 centimetres and weighed 800 grammes. In contrast, the iPhone 6 weighs about 16 per cent of its distant cousin’s weight from 35 years ago, but is exponentially more useful.
For example, he explained, the World Bank is supporting an initiative that allows farmers to use smartphones, paired with an automated sensor in the field, to monitor the level of water in their rice paddies. When the water level gets low, the farmer can use a smartphone to trigger the pumping station. The farmer can monitor multiple plots and sensor stations at once, from a distance. This has implications for agricultural productivity, water conservation, greenhouse gas reduction, and rural development in Vietnam.
“Technological convergence has changed the way we live, work, produce, and consume. Sometimes this change is gradual, but it can also be disruptive. If we can truly predict one thing in this era of rapid and exponential technological change, it will be continued disruption across different dimensions,” Dione said.
High growth potential
Recently, the World Bank issued its latest forecast of Vietnam’s economic growth, which is expected to be 6.8 per cent this year – up from 6.5 per cent in the bank’s previous projection, largely thanks to a recovery in foreign direct investment (FDI) and the performance of domestic private firms, in addition to a cyclical increase in global demand.
US-based Trading Economics, which provides over 20 million economic indicators for 196 countries, forecast Vietnam’s GDP growth rate to reach 8.4 per cent by the end of this quarter, far higher than the government’s expectation of 6.7 per cent. “Looking forward, we estimate the rate to stand at 8.5 per cent in 12 months’ time,” said a bulletin released by the firm two weeks ago.
Moody’s Investors Service also upgraded the Vietnamese government’s long-term issuer and senior unsecured ratings to Ba3 from B1 and changed the outlook to ‘stable’ from ‘positive.’
“The upgrade to Ba3 is underpinned by strong growth potential, supported by increasingly efficient use of labour and capital in the economy,” Moody’s said in a statement released on its website.
Over the past many years, Vietnam has also boosted negotiations and signings of several free trade agreements. To date, the country has joined 16 bilateral and multilateral FTAs. Thus, it is clear that, along with its increased international integration via new FTAs and its improved business climate, skilled workforce, and large consumption market of over 93 million people, Vietnam currently boasts ideal conditions to become a major economic hub in the region.
As of August 20, Vietnam had 26,438 valid FDI projects, registered at $333.84 billion. In this year’s first eight months, total disbursed FDI hit $11.25 billion, up 9.2 per cent on-year.
However, a question has been posed: Amid Industry 4.0’s rise, how can Vietnam leverage its strengths to boost sustainable growth?
The World Economic Forum on ASEAN 2018 (WEF ASEAN 2018), which is themed “ASEAN 4.0: Entrepreneurship and the Fourth Industrial Revolution” and scheduled to take place in Hanoi on September 11-13, will present attendees with new business opportunities in Vietnam.
“The event will provide great lessons and experience for Vietnam to turn itself into a digital economy,” said Vu Tien Loc, chairman of the Vietnam Chamber of Commerce and Industry. “The event will offer opportunities for Vietnam to receive words of wisdom to boost socio-economic development, based on exploiting its great potential in the era of Industry 4.0.”
Justin Wood, head of Asia Pacific and member of the Executive Committee of the WEF, told VIR that Industry 4.0 affects all countries, from the richest and most modern to the poorest and least developed. However, new technologies will bring about different impacts in different countries, which is the subject of study.
“The era of new technologies has posed major policy questions, and the WEF ASEAN will provide an opportunity for Vietnam to discuss and understand better the steps to be taken next,” Wood said.
For the first time in the history of the WEF, a business summit – the Vietnam Business Summit (VBS) – will be organised as an important part of the forum. It is expected that about 1,200 Vietnamese and international delegates will attend the VBS, which is themed “Vietnam: We mean business”.
Notably, the VBS will be chaired by Vietnam’s Prime Minister Nguyen Xuan Phuc and the WEF’s president Borge Brende. The summit’s discussions will focus on the role of Vietnam in regional and global value chains, as well as introduce policies and business and investment opportunities in the country.
“The organisation of the VBS means that Vietnam’s role and position on the international stage have been highly valued,” Loc said. “The country is emerging as a bright spot in the world’s economy, the business and investment climate of which is significantly improving in favour of enterprises and people.”
Harnessing disruption for further development
According to Vietnam’s Ministry of Information and Communications, as of late June 2018, Vietnam had about 136 million mobile phone subscribers. Some 54.2 per cent of the country’s population are using internet. Still, currently, in terms of digital adoption, Vietnam shows strengths and shortcomings. The World Bank’s Development Report 2016 on Digital Dividends ranks Vietnam’s Digital Adoption Index at 0.46 on a 1-point scale. While higher than the average of global lower middle-income countries, it is lower than the regional average.
Internet penetration is 54 per cent, and 40 per cent of Vietnam’s population are social media users. These numbers are impressive, according to the World Bank in Vietnam.
Dione said that in order to forge ahead or even leapfrog regional peers, Vietnam must upgrade the way its government functions. “Three types of government relationships are
critical: government-to-government, government-to-business, and government-to-citizens. Technologies can help in many ways if we can embrace them strategically to reverse potential disruptions to these relationships.”
Dione expressed his belief that a three-factor formula, or a tripod, is necessary for Industry 4.0 to really help Vietnam achieve its development aspirations: technologies, institutions, and people. Investing in research and development will be critical for Vietnam in order to join the frontiers of Industry 4.0. “Made in Vietnam” should be replaced with “Researched and developed in Vietnam”, Dione stressed.
“Let’s return to our smartphones. Perhaps you are a public official and you were using your smartphone to look up social assistance coverage of poor and near-poor people in the northern mountainous region? With an integrated national database linked by a unique ID system, you could do this whether you are at your office desk or at the Industry 4.0 Summit. Perhaps you are a business person who needed to bid for government auctions or file taxes on your phone? Or perhaps you were sending instructions to a relative in a remote area who needs to pay her electricity bill by phone? I believe this is the future of Vietnam,” Dione said.
“But whatever you do, let us not undermine the basis. For Industry 4.0 to serve Vietnam, the government must first ensure an enabling environment to accommodate innovation and improve productivity. This includes macro stability and resilience, and the effective and efficient use of fundamental technologies of Industry 3.0.”
He suggested a T.I.P approach to realise this future: leveraging Technologies to capitalise on innovations; putting in place fundamental Institutions; and investing in the People of today and the future.
Ousmane Dione - Country director for Vietnam, World Bank
We note that trade is slowing, which generates greater competition for countries like Vietnam. Vietnam has benefitted from a robust foreign direct investment (FDI) sector that has directly employed about 2.4 million workers. Yet neighbouring countries, such as Cambodia and Myanmar, are emerging as competitors for low-skilled production jobs. In some cases, rapid technological change is even resulting in reshoring of jobs back to the home countries of FDI.
Vietnam can harness the shifting trade patterns to its advantage. For example, there will be increasing demand for manufactured goods from an expanding consumer class in Asia. The share of households with income for extra consumption in developing Asian countries is projected to rise from 20 per cent in 2002 to 80 per cent in 2030. Here in Hanoi, we see shopping malls like AEON, Royal City, and Lotte packed with families on the weekends. Middle-class families now have time and money for shopping and leisure activities, and this will only expand in the coming years.
Nena Stoiljkovic - Vice president for Asia and the Pacific, IFC
Vietnam’s development record over the past 30 years is remarkable. Economic and political reforms under doi moi policy, launched in 1986, have spurred rapid economic growth and development, transforming Vietnam from one of the world’s poorest nations to a lower middle-income country.
Now, with the nation transitioning to a market-based economy, Vietnam needs to ensure sustainable growth by exploiting the scope of the Fourth Industrial Revolution. This is a golden opportunity for the country to harness disruptive technology for development and be on par with technological and economic trends globally.
With 54 per cent of the population using the internet – higher than the global average of 46.46 per cent – Vietnam has been researching and transferring new technologies such as the Internet of Things, big data, and robotics to improve its labour productivity and competitiveness.
As technology becomes pivotal in furthering the nation’s development objectives, it can significantly improve Vietnam’s agricultural productivity, water conservation, and greenhouse gas reduction, among other things. At this juncture, when technology has disrupted every sector including retail, transportation, education, and healthcare, it is important to bring all stakeholders together to facilitate collaboration between the public and private sectors.
It is perhaps also the right time for Vietnam to invest in information infrastructure and a high-quality workforce while continuing with administrative reform and efforts to enhance competitiveness.
Going ahead, the nation can maximise its growth potential by building a legal corridor for the digitalised economy and prepare for the transition to digitalisation – from public governance to business models for a digital economy and society.
Finally, Vietnam should aspire to a business environment that is in sync with the digital age. This will create a superior investment climate, helping the nation to move up the global value chain and sustain its rapid economic development.
Eric Sidgwick - Country director for Vietnam, ADB
Aided by able macro-economic management, economic growth will spurt in 2018, with Vietnam becoming one of the strongest performers in the region. Vietnam’s robust economic growth will be driven by vigorous manufacturing and export expansion, rising domestic consumption, strong investment fuelled by FDI and domestic enterprises, and an improving agriculture sector. A broad-based increase in the government revenue effort in 2017 helped curtail the budget deficit and reduce total public debt to 61.3 per cent of GDP by the end of 2017, from 63.6 per cent a year earlier. This fiscal consolidation combined with moderate inflation should provide for continued macro-economic stability.
Vietnam has been able to mobilise an abundant supply of young, well-educated workers to attract foreign investment into labour-intensive manufacturing over the last decade. However, a gap between worker qualifications and business needs has emerged and is widening. If not addressed, this skills gap could become a major obstacle to Vietnam’s development aspirations.
Nihad Ahmed - Vietnam senior economist, FocusEconomics
Investors were drawn to Vietnam’s enormous untapped potential promising high returns, along with a low-cost workforce and high endowment of natural resources. A seismic shift in Vietnam’s economic structure from agriculture to industry has spurred a massive movement of workers from one sector to the other, encouraging the emergence of private domestic and foreign firms. Lauded as one of East Asia’s new economic tigers, Vietnam has achieved the second-fastest growth rate per capita worldwide since 1990, behind only China. A surge in government revenues through strong exports and higher average household incomes has enabled transformative social development over the last two decades.
Notably, the proportion of people living below the national poverty line has plummeted, and access to healthcare, education, and infrastructure has significantly improved, drastically reducing mortality rates, advancing learning outcomes, and improving the quality of life.
Vietnam’s business environment has significantly improved, propelling the country to number 68 out of 190 in the World Bank’s 2018 “Ease of Doing Business” report, a major jump up from a ranking of 82 just one year ago.
Raymond Mallon - Senior economic advisor, Australia-Vietnam Economic Reform Programme
I am increasingly optimistic about the short- to medium-term prospects for the Vietnamese economy because of recent improvements in building the foundations for macro-economic stability (including better revenue performance and a declining fiscal deficit), as well as sustained progress in improving the investment climate and in reducing barriers to fair competition.
The Central Institute for Economic Management estimates that the level of domestic private investment grew by 17.5 per cent in the first six months of 2018 compared to 8.5 per cent growth in FDI, and only 3 per cent growth in state investment.
Strong private sector investment is helping generate strong employment and income growth. Despite a difficult and uncertain external environment, Vietnam continues to record strong trade growth and impressive inflows of FDI. While some progress is being made in strengthening vocational and higher education, many Vietnamese families continue to invest considerable resources into sending their children overseas for higher education. And, while progress is being made in addressing key infrastructure bottlenecks, urban congestion remains a problem.
Nevertheless, Vietnam’s competitiveness continues to improve - for example recently jumping 25 places to rank 39th out of 160 countries in terms of the World Bank Logistics Performance Index in 2018.
Despite this general optimism, challenges remain. The efficiency of state expenditure remains a particular concern. More needs to be done to restructure and expose remaining state-owned enterprises to competitive market forces. It is especially important to improve the competitiveness of those underperforming state utilities providing public infrastructure and services.
Accelerated investments are needed to address environmental and urban congestion concerns. More concrete action is needed to ensure more efficient planning and utilisation of public investment.
Education expenditure needs to be better targeted to meet the needs of an increasingly creative and knowledge-based economy. Efforts to strengthen transparency and accountability in the planning and utilisation of state expenditure remain a key issue in terms of improving overall investment efficiency.
And more needs to be done to build on recent efforts to improve public revenue collection efficiency.
Despite these challenges, the prospects for sustained and sustainable economic growth are improving.
Pham Hong Hai - CEO, HSBC Vietnam
Hosting the World Economic Forum (WEF) in Hanoi this September speaks for Vietnam’s strong will to continue integrating into and keeping pace with the world’s economic and social development. The theme this year is “ASEAN 4.0: Entrepreneurship and the Fourth Industrial Revolution”, which is very relevant to the government’s focus on building a national strategy for Industry 4.0. The revolution will start a new era for the country, impacting all aspects of its life, from economic to social development. It’s an opportunity that the country should embark on to pull ourselves into pace with other countries in the region and the world. The Fourth Industrial Revolution technologies including Internet of Things, artificial intelligence, robotics, and additive manufacturing will fundamentally transform global production systems, including ours. With this revolution, we can enhance our technological and manufacturing capability in the global value chain, creating new sustainable business models for startsups, shortening our journey in industrialisation, and critically improving our competitiveness in the future.
The Minister of Planning and Investment once mentioned that Industry 4.0 can help Vietnam’s GDP increase by $8-18 billion per year, a number much worth our consideration. In the WEF’s “Readiness for the Future of Production 2018” report, Vietnam scores 5.0 in terms of production structure, and 4.9 in terms of drivers of production, falling behind Singapore, Malaysia, Indonesia, and Thailand in the ASEAN group.
Being in the nascent group, though we are quite close to high potential, we have to admit that there is still a lot to do if we don’t want to miss the opportunities of this revolution. We have to look at this fact and be determined to make our best efforts to turn the country’s potential into reality.I totally agree with Prime Minister Nguyen Xuan Phuc that the government needs to adapt in order to govern the country in this digital age and, more importantly, to take every opportunity afforded to us. We fortunately have people who are technologically smart and focused, one competitive advantage we cannot overlook. In 2017, 67 per cent of the Vietnamese population had access to the internet, putting Vietnam 13th among the top 20 countries for internet usage. I really hope the government can create a nurturing eco-system for startups, pushing up research and development, applications, and technology transfer, building a healthy co-operating culture to turn research results into real applications.