Vietnam inching up the value chain

Vietnam Electronics Exports 2013-04-21Enlarge GraphVietnam sees improvement in electronics exports over 2012

For emerging markets, exports to developed markets often represent their greatest source of GDP and income. Over time, emerging markets generally transition from lower value added manufacturing and natural resource exports to more sophisticated manufacturing and design. Gauging where on the value chain a market lies is important to help investors understand what kind of returns they can expect. Higher value added goods such as electronics and textiles are preferable to raw material and agricultural products.

Vietnam represents an exported oriented economy; however, recent manufacturing margins have begun to be squeezed. The most recent April reports of March export data suggests that Vietnamese manufacturers are combating this by moving up the value chain into higher margin items, such as electronics and textiles. January saw a 118% increase in the value of its electronics exports compared to the same time last year, while March saw a 44.4% increase.

For investors, this is a positive long term development. It is unlikely that Vietnamese manufacturers will be able to extract greater margins for lower-end labor-intensive services while the global economy is not experiencing strong growth. Manufacturers, instead producing more profitable items, provide an opportunity to return profitability to the country’s manufacturing and export sector over the medium and long-term. Current investors in Market Vectors Vietnam (VNM) stand to benefit, as do investors in iShares All Country Asia ex Japan Index (AAXJ), Vanguard MSCI Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index ETF (EEM) as South East Asian countries cater to rises in consumption in China and domestically.