Domestic market 'the savior' of Vietnam companies amid US tariff turmoil

The decline in the Chinese economy will have a strong impact on Vietnam's domestic market, production, employment, and people's income, especially amid U.S. tariff turmoil. In the short term, it is a risk for Vietnam, says Assoc. Prof. Tran Dinh Thien, former director of the Vietnam Institute of Economics. Thai Ha reports.

While many companies in Vietnam are very anxious about the upcoming U.S. imposition of tariffs, Vinamilk and Sabeco are expected to be safe and sound amid the "storm".

Out of Vinamilk’s $2.5-2.6 billion in revenue in 2024, its U.S. plant contributed around $120 million, or only 5%. Meanwhile, export currently accounts for only 1% of Sabeco's revenue.

Vinamilk is a top dairy products maker in Vietnam, while Sabeco is a top beer producer. The domestic market, with an over 100-million population, is the savior for them amid severe global uncertanties.

Domestic consumption as GDP growth driver

Vietnam's export of goods in 2024 reached $405.53 billion. The country's GDP in the same year was $476.3 billion. While export is a major driver of the economy, it is now subject to enormous pressure from upcoming U.S. imposition of tariffs, the Southeast Asian country's biggest importer.

There are also worries over the inundation of goods from China and other countries as they would find it much harder to access the U.S. market due to higher tariffs.

The Vietnamese government, therefore, is promoting public investment, especially in infrastructure development, and domestic consumption as the other major driving forces of GDP growth this year, as it aims for an economic expansion of at least 8%.

Vietnam is one of the 14 countries with a population of over 100 millon people, and its middle class is rapidly expanding with rising disposable income.

Why are so many Vietnamese companies trying to penetrate or expand overseas markets while "ignoring" a strong domestic market?

Assoc. Prof. Tran Dinh Thien, former director of the Vietnam Institute of Economics, raised the question at a seminar on solutions to strengthen and develop the domestic market, hosted by The Investor on Friday.

Domestic market structure with many bottlenecks

Thien noted that domestic demand is currently weak and export may face difficulties, while investment prospects are unclear.

"President Trump's tariff policy forces Vietnam to review its development model. A better model is one with domestic market as the core," he told the workshop.

Data shows that the private domestic sector accounts for 51% of the country's output, while the FDI sector 20-22%. Exports by domestic companies account for only 25-27%, while the figure for the FDI sector is more than 70%. Export turnover is equivalent to Vietnam's GDP.

"That means domestic enterprises mainly serve the domestic market, and the future of the domestic economic sector is the domestic market," Thien highlighted.

"The domestic private sector accounts for 84% of jobs created. If the domestic private sector is not stable, growth momentum will not be guaranteed. This is the root issue that must be paid attention to," he added.

President Trump's tariffs will impact China's export, while this powerhouse's domestic consumer market remains very weak. But China cannot change its development model quickly, Thien argued.

The decline in the Chinese economy will have a strong impact on Vietnam's domestic market, production, employment, and income of Vietnamese workers. In the short term, the decline in the Chinese market is a risk for Vietnam, he stressed.

"Given the obvious risk of a global recession, Vietnam needs to pump money to "unleash" investment and increase the flow of money. These are basic ways to unblock the large capital market," Thien added.

Vietnamese businesses need equal incentives

Prof Nguyen Mai, former chairman of the Vietnam's Association of Foreign Invested Enterprises (VAFIE), noted that in Japan, the best products are those consumed by Japanese people (better than the quality of exports), so companies try to produce better products for the domestic market.

"We should change our approach, prioritizing Vietnamese products by encouraging production for Vietnamese people to use high-quality products at reasonable prices," he told the seminar.

Second, Mai noted, Vietnam is a country with an upper-middle income and is moving towards high income. But if the country does not synchronously solve the problem of transport infrastructure, it can hardly stimulate demand.

"Third, Vietnamese enterprises are now capable of replacing foreign enterprises in areas like manufacturing cars and motorbikes, construction, and hotel development. They are capable of doing, even doing better, with better quality and faster speed. If we want to accelerate the stimulation of domestic demand and consumption, we must help them grow stronger."

Mai stressed that while many foreign investors receive corporate income tax of 5% or 10%, compared to the common 20%, Vietnamese companies do not have such an incentive, so they can hardly be strong right in their home market.

Bui Nguyen Anh Tuan, deputy director of the Department of Domestic Market Management and Development, under the Ministry of Industry and Trade, said that domestic consumption, export and public investment are the three driving forces of GDP growth this year.

"To achieve a GDP growth of 8%, the total growth rate of retail sales of goods and consumer service revenue must reach 12%. This is a very challenging number as statistics show that no year saw a growth exceeding 9% in the past 10 years."

Tran Anh Thang, a board member at Eximbank, commented that the new U.S. tariffs would affect domestic consumption in many ways.

In terms of prices, the new US tariffs can indirectly put pressure on the prices of consumer goods. The high tariffs on Chinese goods can cause the prices of imports from China to increase.

Many Chinese materials and components are used in the production of consumer goods in Vietnam. The tariffs on China might also cause input costs to increase, affecting domestic retail prices.

For product groups associated with global supply chains like electronics, electrical appliances, and vehicles, prices may be pushed up, thereby affecting domestic purchasing power.

"Psychologically, concerns about inflation returning and commodity prices "not increasing today but rising in the next few months" make people cautious about spending, especially on large amounts.

"Expectations of exchange rate fluctuations due to global trade turmoil will affect imported goods and high-end consumption," Thang added.

U.S. tariffs to create opportunities for Vietnamese goods

However, according to Thang, U.S. tariffs may create opportunities for Vietnamese goods to replace imports, bringing domestic consumption to the forefront.

Specifically, when imported goods are more expensive, Vietnamese goods may be given priority, thereby promoting domestic consumption if supply and quality are guaranteed.

“This is a golden time to stimulate domestic demand, through promoting consumption of Vietnamese goods,” he said, adding that banks are offering preferential interest rates for consumer loans. There need to be more tax policies to support domestic production."

Vietnam's economy is too dependent on investment and exports while lacking stable domestic demand, therefore, it is vulnerable to global shocks. These shocks are also reflected in the capital market and domestic consumer market, he added.

Trade diversion effect when Chinese goods blocked from entering U.S.

Dau Anh Tuan, deputy secretary general of the Vietnam Chamber of Commerce and Industry (VCCI) and head of the chamber's legal department, raised concerns about trade diversion effects when Chinese goods is blocked from entering the U.S.

"If other countries, including China, encounter difficulties in exporting to the U.S., they might increase their exports to Vietnam, causing domestic enterprises to face stronger competition," he told the seminar.

Vietnam has signed 17 free trade agreements (FTAs) with more than 60 countries, so promoting the exploitation of those FTAs is a way out for Vietnamese goods. In addition, the Vietnamese consumer market has many advantages, he argued.

"Currently, there are only 14 countries in the world with a domestic market of over 100 million people. In the eyes of businesses, Vietnam is a very potential market, and at the same time it has connections with other markets. Vietnam is the second country in ASEAN to have an FTA with the EU, after Singapore."

Tuan, however, highlighted an issue of survival for Vietnamese enterprises: "Many foreign enterprises now own and control distribution systems, making it difficult for Vietnamese businesses to bring goods into these distribution systems, like supermarkets.

"Therefore, there needs to be support from the government regarding distribution chains, so Vietnamese goods can easily come to Vietnamese consumers," he added.