Over the past few years, Vietnam has become a rising star in Southeast Asia. The country has undergone a dramatic economic transformation and has become one of the fastest-growing countries in the world.
The favorable economic climate has also fostered the emergence of the digital economy and an expanding startup ecosystem. The recent wave of the pandemic has also solidified digital trends that accelerated Vietnam’s path to the next digital economic powerhouse in Southeast Asia.
Even though its history spans thousands of years, Vietnam has only started to open its economy since 1986, the year when the Doi Moi reforms were announced, and has evolved quickly ever since. According to the World Bank, Vietnam now has over 745 listed companies on the stock exchange which accounted for 68.6% of its Gross Domestic Product (GDP) in 2020. This is a massive leap from merely 24 listed companies in 2004. Below is a snapshot of milestones and significant events that have shaped the Vietnamese economy for the past 35 years.
Current Stable Macro Environment
After 35 years, the Vietnam economy has been thriving and attracting many foreign investors. It has been one of the five fastest-growing countries in the world over the past 30 years, beating its neighbors. From 2009 to 2019, Vietnam’s GDP grew by an average of 7% per annum. In 2020, Vietnam was one of a few countries globally that recorded a GDP growth of 2.9%. Vietnam’s GDP per capita grew to US$2,800 from a mere US$422 in 1986.
Looking further into Vietnam’s GDP growth drivers, Vietnam has been shifting away from agriculture and towards industry and services which currently account for approximately 75% of the country’s GDP. As the rest of East Asia developed that prompted wages to rise, global manufacturers were lured by Vietnam’s low labor costs and stable exchange rate. In addition to that, inflation has always kept below 4% which is the government’s target.
Altogether these factors fuelled an export boom. In the past decade, exports by domestic firms have risen by 137%, while those by foreign-owned companies have surged by 422%.
Another contributor to Vietnam’s economic growth is the golden population structure. Vietnam’s population is approximately 97 million with the working-age population (15-60 years old) accounting for 68.5%. This indicates that for every two or more people working, there is only one dependent.
The country has entered this favorable demographic period since 2009 and is projected to last until 2036. Every year, we expect that more than 1.5 million people will join the labor force. As the economy grows, urbanization also follows as it reaches 37%, forming major cities including Ho Chi Minh, Ha Noi, Da Nang, Hai Phong, Bien Hoa, and Can Tho.
Ultimately, a positive macro environment has made Vietnam an attractive destination for foreign investors. Vietnam was named one of the world’s top 20 host economies for FDI with an inflow of $16 billion, surpassing other peers and trailing Singapore and Indonesia. In 2021, despite severe COVID-19 implications, planned FDI investments in Vietnam resiliently grew 22% Y-O-Y.
Proliferation of The Digital Economy in Vietnam
Moving forward, the digital economy is expected to play an integral role in maintaining the momentum of the country’s growth. Even still in its early stage, the digital economy of Vietnam is demonstrating tremendous potential driven by: government support, the fast-paced digital adoption of the population and ultimately the pandemic which accelerated digital trends.
1. Government’s effort to embrace digital transformation
Acknowledging the importance of the digital economy, the government has made various initiatives to encourage growth in this space. In 2020, Prime Minister Nguyen Xuan Phuc signed Decision No.749/QD-TTg to approve the National Digital Transformation program by 2025 to set out goals for the country until 2030.
This includes improving the internet infrastructure and accessibility to 5G services, digitizing the government, and applying technology to various social-economic sectors. By 2030, the government anticipates that the digital economy will account for 30% of Vietnam’s GDP, an ambitious target considering that the digital economy currently accounts for 8.2% of GDP. Nevertheless, this shows the government’s optimistic view on Vietnam’s digital economy and the willingness to support the digital ecosystem.
2. Tech-savvy population and rising digital trends
Vietnam is among the top 10 countries with the highest number of smartphones with 63.1 million smartphones in use. Nevertheless, digital penetration in Vietnam is trailing behind other peers in the region with 73%.
However, the country is expected to catch up with regional peers because the majority of the population in Vietnam is young and within working age, indicating tech-savvy consumers who will also be more receptive towards switching to online services. Together they shape the digital economy’s growth and direction based on their online behaviors. Here’s a summary of rising trends.
Trend #1: Social Media
In terms of online activities, the average Vietnamese person spends three hours and 12 minutes daily using the internet. Social media has become the most popular activity with the average daily time spent reaching 2 hours per day. In fact, Vietnam’s social media penetration rate (73.7%) exceeds that of the world’s average (53.6%). The most commonly-used app is Facebook (95% of internet users have Facebook), followed by local player Zalo.
Trend #2: E-Commerce
With various benefits including monthly attractive discounts and deals, as well as convenience and fast delivery, e-commerce has also won the consumer’s heart, proved by its significant growth of 46% from 2019 to 2020. According to the report by Google, Bain & Co., and Temasek, Vietnam’s e-commerce GMV is expected to grow at a 31% CAGR which outperforms other ASEAN countries and will raise its e-commerce GMV to $26 billion in 2025. The regional player Shopee is currently dominating the market share of between 15 to 20%. Tiki, Vietnam’s local e-commerce player, and Lazada, another regional player, are trailing after Shopee and facing stiff competition for second place in terms of the market split. Sendo, another local e-commerce player, is standing in fourth place and focusing on consumers in lower-tier cities.
Trend #3: Cashless Payment Trend
Another trend that emerges among the young population is the cashless payment trend. Recently, a study by Visa shows a significant increase in e-wallet users and payment apps in 2020, indicating that over 85% of consumers have at least one form of cashless payment and 71% of them use it at least once a week. Nevertheless, with the impressive double-digit growth of e-commerce, cash on delivery remains a popular payment method. Nevertheless, with the impressive double-digit growth of e-commerce, the preferred payment method remains cash on delivery.
According to a survey by Statista, 78% of online shoppers still preferred to pay in cash for their online purchases. Thus, there are massive opportunities for growth to fully capture this trend. With over 40 licensed e-wallets operating in Vietnam, the digital payment market is bustling faster than ever, with winners starting to emerge such as Momo, Shopeepay, ZaloPay, Viettel Pay, etc.
3. Pandemic’s Acceleration of Digital Adoption
While existing trends persist, the pandemic has accelerated the adoption rate as social distancing measures unlock new consumer habits. Vietnam has undergone four waves of COVID-19 since 2020 with social distancing measures limiting in-person activities such as going to school/work, shopping, seeking non-COVID medical care, and going to the bank. The 4th wave of COVID-19 has been the most challenging period so far because the two largest cities Ha Noi and Ho Chi Minh City were under full-blown lockdown while the other 25 localities went through strict social distancing.
The silver lining of this wave was that it pushed everyone to go online to seek alternatives, leading to new habits that prioritize online services. Once consumer behavior turns into a habit, it becomes stickier, so even when restrictions are lifted, they will likely continue to use online services for their everyday needs.
Even though the digital economy still has plenty of room for improvement, it has yielded impressive results with GMV in 2020 reaching $14 billion, implying a 30% CAGR rate since 2015. The potential of Vietnam’s digital economy has captured multiple venture capital funds’ attention, resulting in an active investment environment for technology companies over the past few years. From 2018 to 2020, capital invested in Vietnam amounted to US$1.2 billion. In addition, aligning with the overarching trends of the digital economy, investments flow mostly into FinTech (payment), Retail, and Education. The majority of the deals were pre-seed, seed, and Series A.
Venture capital funds continue to show their commitment to the market as Vietnam’s venture capital fund alliance was recently formed with the participation of 17 venture capital funds committing to invest $800 million into startups from 2021 to 2025.
Vietnam is Becoming The Next Startup Hub in SEA
Seizing opportunities in the digital economy, the startup ecosystem in Vietnam is evolving and expanding rapidly, positioning Vietnam to be the next startup hub in Southeast Asia. This could be attributed to the following advantages.
Macro Tailwinds
As previously indicated, the stable macroenvironment in Vietnam is primed to support the development of the digital economy and startup ecosystem. With high GDP growth, Vietnam also has a burgeoning middle class with increasing disposable income which indicates a higher demand for better life quality. This opens up a large target market for startups to tap.
Robust Tech Talent Pool
Vietnam is home to a plethora of innovative tech talents. According to the Global Innovation Index 2021 ranking by World Intellectual Property Organization (WIPO), Vietnam ranks as the most innovative country among the lower-middle-income countries, ranking higher than neighboring countries of Indonesia, Thailand, and the Philippines. The information technology industry is young but developing rapidly with over 440,000 employees in 2013. This could be attributed partially to the rigorous school curriculum that gears towards STEM. According to research conducted by the World Economic Forum, Vietnam is one of the top 10 countries with the most engineering graduates (100,390 in 2015).
Moreover, Vietnam’s Program for International Student Assessment (PISA) score is among the world’s highest. According to MOET, Vietnam had 505 scores from reading comprehensive, the 13th highest score out of 79 participating countries and territories. In mathematics, Vietnamese students had 496 scores, the 24th highest score. In science, they had 543 scores, the fourth-highest score. This result is extraordinary given that Vietnam is among the lower per capita income participating countries (US$ 4098 in 2010 PPP dollars).
Another important source that contributes to Vietnam’s talent pool is the return of the Vietnamese diaspora (Viet Kieu) with their enormous investment in education and technical skills. The integrated Vietnamese Diaspora network consists of business contact networks, professional associations, and dedicated independent institutes. Vietnam is also one of the largest recipients of remittances in the world; $17Bn flowed in 2019, equivalent to 6% of GDP.
Government Supportive Policy for Startups
The Vietnamese government is optimistic about the local startup ecosystem. They are expecting that Vietnam will have 8 unicorns by 2030. To facilitate this growth, they have launched multiple initiatives and passed laws that support startups and SMEs and dedicated capital and tax incentives for innovation based on locations.
For instance, VinFast, a domestic electric car manufacturer, benefits from a bevy of tax reductions, including a large cut in corporate taxes for its first 15 years of operations. The government was considering reinstating a 50% reduction in registration fees for locally built cars.
Existing Unicorns and Soonicorns Paving The Way for Others
Vietnam currently has three unicorns, proving that the current digital climate in Vietnam is suitable for startups to thrive in upcoming years.
VNG: Founded in 2004 as Vinagame before changing its name to VNG in 2008, the company has transformed from the first Vietnam online gaming company to one of the leading IT and entertainment services providers in the country. VNG owns a wide range of products from entertainment, social network, to e-commerce and e-payment.
VNPay: Established in 2007, VNPay has spent nearly 14 years of operation in developing electronic payment solutions for Vietnamese and revolutionizing the finance and banking industry. VNPay is currently providing e-payment services to more than 40 banks, 5 telecommunication companies, and more than 20k other corporates.
Sky Mavis (Axie Infinity’s developer): Founded in 2018, Sky Mavis is the fastest company to achieve unicorn status in Vietnam. Axie Infinity introduced a new way for anyone to turn their time into money through Play to Earn, a mechanic that allows gamers to transform their skills and time into earnings and distribution rights for tokenized in-game items.
Momo: Established in 2007, Momo debuted its e-wallet services in 2010 and has gradually expanded and diversified its offerings to be on par with other super-app competitors. Momo has reached more than 25 million users and has over 120,000 MoMo-accepted points across the country. The start-up is expanding its services to become a super-app, including credit scoring, savings, and Buy Now Pay Later. Momo has closed its series D and is becoming the next FinTech unicorn of Vietnam.
Tiki: Taking inspiration from Amazon, Tiki was founded in 2010 and originally only sold books. The company has since grown into a horizontal marketplace for third-party sellers and offered various categories. Tiki has managed to build credibility among consumers when it comes to genuine and good-quality products. Tiki is the first local e-commerce player in Vietnam that is reaching unicorn status in 2021 after securing its series E funding.
KiotViet: Established in 2014, KiotViet started as a cloud-based point-of-sale system developed by Citigo Software. It now provides omnichannel business and affordable management software solutions to digitalize microbusinesses and small and medium-sized enterprises. In the span of seven years, KiotViet has grown to serve more than 110,000 MSMEs across Vietnam today. Having successfully raised for its series B, KiotViet is growing aggressively and expanding its offerings to digital payments and merchant lending, proliferating the prosperity of Vietnam’s MSMEs.
Summary
The digital economy will be one of the main factors driving Vietnam’s economic growth for upcoming years. Backed by a solid macroeconomic foundation, progressive government, and an increasingly tech-savvy and young population, the digital economy offers a lot of potentials for startups to explore and create values. With its current impressive momentum, Vietnam is on track to become the next digital economic powerhouse in Southeast Asia.
By Valerie Vu & Quyen Nguyen
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Valerie Vu is an associate with venture capital firm Venturra. Quyen Nguyen is a business analyst based in Vietnam. The views expressed in this article are those of the authors.