The Institute for Energy Economics and Financial Analysis has released a report titled “Vietnam’s Renewable Energy Strategy Can Make or Break Economy’s Manufacturing Future” in May 2022. REGlobal provides a brief extract from the report…
No country in developing Asia has benefitted from the growth of the global consumer market as much as Vietnam. Since it acceded to the World Trade Organization in 2007, Vietnam’s merchandise exports, which include anything from seafood to sneakers and smartphones, have been steadily and resiliently rising, fuelling economic growth. By 2020, at USD282 billion in turnover, a six-fold increase from 2007, Vietnam’s exports were the highest in developing Southeast Asia.
Relative to the size of the economy, the sector also stands out from the crowd. Countries such as India, Bangladesh and Indonesia are also part of the global supply chain, but none of their economies are as fully exposed to external demand as Vietnam. At a ratio of 104%, Vietnam’s merchandise export revenue has grown to be larger than the country’s gross domestic output. It remains on an upward trajectory despite successive global geopolitical and health crises.
The composition and ownership of these export-linked industries have shaped the structure of the Vietnamese economy. They benefit some parts of the economy but also introduce some risks.
Nearly 60% of the country’s exports are manufactured goods, not commodities, with most of them coming from factories belonging to foreign investors. Big corporations such as Samsung and Intel set up shop in Vietnam almost two decades ago, gradually turning local industrial parks into their global production base. Others, such as Apple or Nike, in the meantime, have been sourcing from a network of local suppliers, typically also foreign-owned, that assemble products shipped to consumers worldwide.
Official government data shows that by the end of 2021, as much as USD242 billion, or 59% of Vietnam’s total foreign direct investment accumulated to date, was committed for the manufacturing and processing industries.
Vietnam’s growth engine—its manufacturing industries—has been standing on the shoulders of the multinationals. Some have grown to play an outsized role in the economy, employing large workforces and generating hefty tax revenues and hard currency income.
Samsung’s output in Vietnam was estimated in some years as equivalent to a quarter of its host’s gross domestic output, while Taiwan’s Pou Chen, the world’s largest shoemaker that is a top-tier outsourced supplier for the big brands, is the biggest private employer in Vietnam. Shifts in the business strategies and preferences of global brands and their key suppliers could therefore reverberate across the wider economy.
When this group of global corporations began to ask the government for a liberalized power procurement mechanism that would facilitate clean electricity access to their premises, the call to action was hard to ignore.
For these corporates, access to clean energy is less about immediate cost savings—Vietnam already offers one of the most competitive industrial electricity tariffs in the region—but is instead part of a wider, more pressing carbon footprint reduction effort without which their bottom lines, ability to access lower-cost capital, and reputation can be put at risk. Supply chain dynamics are increasingly sensitive to public pressure on climate-responsible behaviour and the ESG-focused investment appetite of institutional investors. This is increasing the pressure on Vietnam’s foreign manufacturers to demonstrate their ability to align with the Paris Agreement’s 1.5 degrees pathway by developing the concrete timelines and credible action plans that have become essential in the global corporate world.
IEEFA estimates that global corporations responsible for up to USD150 billion of Vietnam’s export revenues have made specific commitments to carbon neutrality or decarbonization of varying scope and timelines. Some are bold enough to target a 100% renewable energy consumption profile as early as 2025. The numbers of businesses and pledges can only go up from here and include owners of big apparel, footwear, electronics, and consumer brands, with a direct manufacturing presence or supplier clusters in the country.
Their pledges often extend to cover Scope 3 emissions, which are emissions occurring in the value chain, such as from outsourced cut-and-sew factories or chip assembly plants based in Vietnam, suggesting that more operational adjustments should be expected. With supply chains’ emissions accounting for 70-90% of the total emissions owned by these companies, tackling them is front and center of their decarbonization strategy.
Given the interdependency, these brands’ journey toward sustainability progress is one which Vietnam can hardly afford to ignore or miss out on. This is especially true because investment and sourcing decisions now reflect the ability of top-tier suppliers to capture improvements in production costs and sustainability variables in the countries where they hope to increase production.
According to a 2021 study by Standard Chartered of 400 multinational corporations, 78% of the companies believed they would start removing slow-to-transition suppliers by 2025, with expectations that a third of the current partners would not make the cut. By contrast, early movers that can adapt to energy transition could gain access to over USD1.6 trillion in export opportunities.
The Vietnamese government has a role to play in making this transition happen, starting with expedited reforms in its power sector. As brand owners have found, switching to renewable energy usage helps to reduce Scope 3 emissions significantly. Weaning factories off a coal-heavy grid and pivoting toward clean energy is now a key factor in driving the foreign direct investment that policymakers must prioritize to support Vietnam’s growth potential.
This context is critical to understand the drivers behind Vietnam’s renewable energy strategy and could inform market watchers of likely longer-term outcomes.
Senior officials have spent the past decade working out ways to make the country more investment-worthy, broadening the export horizons and market access benefits for investors who choose the country as a production base. It would therefore be wrong to assume that the brands’ call for clean energy access is taken lightly.
Nevertheless, ironing out regulatory and technical details to facilitate the process is no easy feat, given the complex legal architecture and risk-averse political climate. The good news is that these efforts have a better chance to earn the backing of Vietnamese leaders, who are realizing the long-term economic dividend of supporting the decarbonization agenda of their business partners. By contrast, renewables skeptics will now need to answer tough questions about a business-as-usual power development plan that continues to feed the grid and climate-conscious industrial offtakers with polluting electricity.
Vietnam’s C&I solar market
Several high-profile investors have entered Vietnam’s C&I market. The French utility group EDF and its local partner, investment fund VinaCapital, have committed USD100 million over the next three years for a pipeline of 200 MWp of C&I rooftop solar power systems. South Korean conglomerate SK Group has pledged USD200 million and a 250 MWp installation target in the next few years, with local partner Nami Energy.
Another emerging trend is how local industrial parks have become developers themselves, proactively exploring clean energy solutions within their grid to lure in ESG-conscious tenants. Eco-industrial parks are gaining traction and could be fertile ground for microgrid development in the very near future. Deep C’s Hai Phong I is targeting over 20 MWp of new rooftop solar installation between 2022-2023, which will be distributed to its clients’ factories and machineries via the internal grid, as well as onsite windmills, solar farms, and battery storage further down the line. More recently, Sembcorp-backed Vietnam Singapore Industrial Park’s expansion in Binh Duong province announced it would develop an onsite solar farm to help large tenants, such as the upcoming Lego factory, meet its 100% renewable energy usage target.
The full report can be read here