rapid growth, challenges and opportunities in vietnam s logistics limited connectivity

Rapid growth,

Challenges and opportunities

in Vietnam’s logistics

limited connectivity

Luis C. Blancas

Transport & Logistics Specialist

The World Bank

Agenda

1. Context

2. Demand-side considerations

3. Supply-side considerations

6. Selected public-sector interventions to improve Vietnam’s logistics performance

4. Vietnam’s logistics costs and performance

5. Most pressing logistics challenges contributing to Vietnam’s logistics costs

1\ When logistics costs are measured at a national (rather than firm- or product-) level, they also include shippers’ internal management costs associated with

logistics activities, such as IT systems and staff time (e.g., traffic management, planning, analysis, senior management). Source: MergeGlobal, World Bank analysis

“Logistics” can be defined as the transport-sensitive portion of a

product’s landed cost

Shipper’s Product-specific Landed Cost

Total Logistics Costs\1

Logistics analysis emphasizes the tradeoff between

transport-related vs. inventory-related costs

(transport cost vs. speed)

Transport-related costs refer to the costs of

operating a private fleet or any charges (e.g., base

rates, fuel surcharges) incurred by a shipper from

transport carriers (asset- and non-asset based)

Inventory costs refer to the cost of keeping goods

on-hand or in-transit; these can be associated with

tied-up resources (i.e., capital costs), shrinkage,

obsolescence, insurance, and warehousing/handling

(including value-added services)

Shippers’ transport and warehousing administration

costs (e.g., IT systems, personnel) may complement

the logistics costs calculation

Key points

Transportation Service

Greater Speed & Reliability

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Un

it C

ost

Per

Kilo

Minimum

TLC

Air

Inventory-Related Cost

Transport-Related Cost

Expedited Standard

Ocean

Key Logistics Costs Tradeoff Concept CONCEPTUAL

Total Logistics

Costs

Manufacturing and

Sourcing Cost

Trade-related Costs

(e.g., tariffs, border

inspection fees, etc.)

= International shipments only

Warehouse

Inventory Cost In-transit

Inventory Cost Transport Cost

The Southeast and Mekong River Delta regions, with metro HCMC as

focal point, comprise the largest (and increasingly best-connected)

economic pole in the country

The Disproportionate Relevance of the Southeast and MRD

Source: General Statistics Office of Vietnam, Vietnam Seaports Association, VietNamNet Bridge, World Bank analysis

Key Points

The Mekong Delta and greater

HCMC area are the primary

source of economic activity in

Vietnam and the country’s most

transport/logistics-intense

region on a per-capita basis

It is therefore sensible to focus

on this region when analyzing

challenges and opportunities for

improving logistics

competitiveness in Vietnam

Region’s share of Vietnam’s total:

36% 42%

46%

Population Enterprises'fixed assetsat year-end

Enterprises Industrialoutput

Seaportcontainer

throughput

62% 71%

Population Enterprises'fixed assetsat year-end

Enterprises Industrialoutput

Seaportcontainer

throughput

23% 27% 30% 25% 24%

Red River Delta

Southeast and

Mekong River Delta

Agenda

1. Context






Vietnam’s 20 years of sustained, rapid economic growth have

generated increasing levels of transport and logistics demand

7.4%

14.7%

27.2%

Vietnam: Average annual growth in economic

activity and transport demand

Long-term: 1990-2010 Recent: 2001-2008

11.3% 11.4%

15.3%

7.7%

Tonnage

3PL industry\1 believed

to have grown at about

20% during this period

1\ Defined as domestic and international transport management, warehousing, and distribution (including value-added services).

Source: IMF, VietNamNet Bridge, Delegation of German Industry and Commerce in Vietnam, VIWA, VINAMARINE, World Bank analysis

Key Points

Vietnam’s long history of fast growth

has led to rapidly increasing levels of

transport demand, which have put a

strain on limited resources

As transport demand has grown, its

composition has also shifted towards

the need to meet increasingly complex

(e.g., time-definite) itineraries

To date, Vietnam’s transport and

logistics system has been able to

accommodate fast growth despite

limited connectivity

But as complexity rises, its ability to

continue to do so will gradually diminish

unless service levels increase: this is

the most pressing challenge facing

Vietnam’s logistics system today

IWT Coastalshipping

Roadtransport

GDPGDP Exportvolume

Seaportcontainers

On a tonnage basis, Vietnam’s freight transport is dominated by

two modes: IWT and the roads sector; coastal shipping is also

important on a ton-km basis

Vietnam: Interprovincial freight transport by mode,

2008 and 2030

Source: VITRANSS-2, World Bank analysis

Key Points

IWT and the roads sector together

account for 90%+ of Vietnam’s current

freight tonnage and 68% of its ton-km; any

attempt at improving logistics

competitiveness must address these

sectors as a priority

Coastal shipping is also important on a

ton-km basis, a metric that better captures

modal transport intensity (since coastal

shipping lengths of haul are much longer

than those of IWT and the roads sector)

Long-term (through 2030), the roads

sector is expected to continue growing

faster than both IWT and coastal shipping

(as it has over the past 8-10 years), and

will therefore continue to gain share in the

freight market

The Mekong River Delta region is more

IWT-intensive than any other Vietnamese

region, which should also guide prioritizing

efforts for that mode

IWT

48% Roads

45%

Coastal 4%

Rail 2% Air 0.02%

IWT

35%

Roads

57%

Coastal 3%

Rail 4% Air 0.03%

2008 2030

On a tonnage basis

IWT

31%

Roads

37%

Coastal

29%

Rail 4% Air 0.1%

IWT

20%

Roads

53%

17%

Rail 10% Air 0.2%

2008 2030

On a ton-km basis

Coastal

78% of Vietnam’s freight flows comprise low-value bulk commodities

whose commercialization is less dependent on reliable, high-

performance logistics services than manufactures and food products

are… but this is quickly changing

1\ This also includes a catch-all “all other” category with anything not falling into the bulk, manufactured goods, fishery, and animal products categories.

2\ Rice, sugarcane/sugar, wood, steel, construction materials, cement, fertilizer, coal, petroleum, and industrial crops. 3\ Including import, export, and domestic flows.

Source: VITRANSS-2, VINAMARINE, VIWA, World Bank analysis

Key Points

The commodity composition of

Vietnam’s freight flows, heavily

concentrated in bulk commodities,

has so far allowed the country to

maintain high economic growth

rates on the back of a transport and

logistics sector that competes on

price rather than service levels (as

bulk commodities are highly

sensitive to transport costs)

This picture is quickly changing

as Vietnam becomes more

manufacturing-intensive and as it

trades in and consumes products

with higher value-added content;

indeed, containerized trade has

been growing faster than bulk

trade for several years

Vietnam’s Interprovincial freight flows by major commodity

type, 2008

78%

22%

Manufactured goods,

fishery and animal

products\1

Bulk commodities\2

Vietnam’s 2001-2008 average annual growth rate for:

Tonnage: allcommodities

Containers

12%

21%

1.7x

Seaport volumes\3 Inter-provincial freight

IWTtonnage

Roadtonnage

11%

15% 1.4x

Agenda

1. Context






On the supply side, both the roads and the IWT sectors appear to be

plagued by overcapacity, while coastal shipping is challenged by limited

competition; in all cases service levels have suffered as a result

Source: VITRANSS, VITRANSS-2, VIWA, Vietnam Register, World Bank analysis

Key Points

Although no definitive fleet growth numbers

exist, a large equitization process has

taken place in Vietnam’s trucking sector

(90%+ of trucks now owned by privately-

run enterprises). Such process is believed

to have led to sizable fleet growth as

barriers to entry have come down, as well

as to a pronounced reduction in the

average fleet size (estimated at 2-5

vehicles). Both of these trends have led

to poor service levels

In IWT, capacity (on a tonnage basis) has

grown faster than demand for a number of

years, and a similar (though not as

pronounced) privatization process as that

of the roads sector has taken place

In coastal shipping, SOE VINALINES

controls 60% of the fleet by tonnage and is

the sole provider of scheduled container

services linking Hanoi and HCMC; this

also impacts rates and service levels

Vietnam: Recent supply indicators for 3 main freight

transport modes

11.3%

22.4%

IWTTonnage

Transported(2001-2008)

IWT fleettonnagecapacity

(2000-2010)

IWT: Demand and supply

growth trends

Ownership of road freight

vehicles: 2005

Private

92%

State 4% JV 4%

Coastal shipping tonnage capacity ownership, 2009

60% 40%

All other

carriers

VINALINES

VINALINES only

company offering

regularly scheduled

container services

Little is known for certain about the capacity level, growth trends, and

service quality of Vietnam’s warehousing/distribution industry, but

there appears to be a consensus that more—and more diversified

(e.g., specialized)—services are needed

1\ Vietnam Freight Forwarders Association.

Source: VITRANSS, VITRANSS-2, VIWA, Vietnam Register, World Bank analysis

Selected commentary on warehousing/handling industry from recent reports

Comment Report

“A critical aspect [in lifting logistics competitiveness] is the improvement of

warehouses and warehouse services.”

WB-commissioned

IWT study, 2010

“Warehousing services are usually limited to the provision of simple

storage, and very little short-transit dispatching operation involves

processing, value-adding and piece-picking operations.”

WB Trade and Transport

Facilitation Assessment

(early draft), 2010

“Expansion in supporting infrastructure, mainly ports and highways (as well

as airports and warehousing capacity too) is expected to cope with

[increased] trade flows.”



(early draft), 2010

“Cold chain storage will be increasingly relevant for high-valued agriculture

products, suggesting the need to expand the current capacity of specialized

warehousing facilities.”



(early draft), 2010

“Key logistics [interventions] for 2011-2020 include . . . diversifying the

development of distribution centers in big cities across the country to serve retail

markets and logistics centers near industrial and processing export zones.”

VIFFAS\1 interview to

Vietnam Business

Forum Magazine

More generally, the 3PL industry\1, while growing fast (~20%), appears

to be fragmented; the average provider has remarkably limited

financial resources for expansion and modernization

1\ Defined as domestic and international freight forwarding, warehousing/distribution, cargo handling, and dedicated contract carriage.

Source: Vietnam Freight Forwarders Association, World Bank analysis

Vietnam’s 3PL industry: some data

Active Vietnamese 3PLs (2007):

'94-'97 '97-'00 '00-'03 '03-'07 '07-'10 '11-'13

VIFFAS membership

7 18 41

60

140 160

Historical

Forecast

Average annual

growth rate

21%

80%

20%

Entirely

privately

held

Partially or entirely

publicly held

~1,000 active firms

Average capital of

US$18,750 – US$31,250

[compared to ~US$100,000

for all companies]

Limited staffing

Lack of office presence

outside the country

Vietnam’s 3PL industry is growing fast

(both revenue-wise and in terms of

active firms), particularly in the South

The majority of Vietnamese 3PLs are

small-scale providers

Even though 3PLs (as a class) tend to

be less capital-intensive than asset-

based transport carriers, the IT

systems and carrier relationships

(e.g., minimum volume commitments)

on which many 3PL businesses

depend do require access to capital

and increase the industry’s fixed costs

Lack of access to capital is thus a

major constrain for Vietnam’s 3PL

firms to be able to provide higher-level

services; this is a key reason why

facilitating the entry of global

players (both standalone and on a

JV-basis) is critical

Key Points

As ofyear-end 2008

Confirmed as ofyear-end 2012

Projected as ofyear-end 2015

A wave of deep-water container handling capacity is arriving in South

Vietnam; it will require inland infrastructure to match it—and enough

volume to make projects financially viable

Source: Port websites, trade journals, World Bank analysis and research

Key Points

South Vietnam, the Mekong Delta region, and

beyond (e.g., Cambodia) are set to benefit from

deep-water capacity that is being constructed

for the first time in Vietnam

Delivered and planned capacity additions are

massive: by the end of 2015 South Vietnam’s

container handling capacity will have

quadrupled relative to 2008

From a logistics competitiveness perspective,

the implication is that intercontinental itineraries

can save as much as 5-6 days en-route and as

much as US$240 per TEU in transport and

other charges, on top of commodity-specific

inventory carrying cost savings and expected

lower ocean linehaul transport costs due to the

economies of vessel size

The challenge will be to provide the new

terminals with efficient inland connections

(roads, IW) and cargo and equipment

handling/storage/repair facilities; current lack

of connectivity has contributed to very low

utilization rates (~18% at present)

4.0

11.1

16.0

South Vietnam Seaport Handling Capacity: Historical

and Projected (based on committed plans) Millions of TEU per year

2.8x

4.0x

US$30-60

Sample export transshipment rates per TEU:

HCMC Singapore transport rate

US$160-180 Singapore HCMC transport rate

US$60 Port of Singapore unloading charge

Today

More than half of

Singapore’s 2011

throughput

100% 43%

57%

34%

66%

34%

66% Deep-water

Limited draft

While container terminals serving the Hanoi area in North Vietnam

register much higher utilization levels than those of Southern ports,

over-capacity could be a challenge in the medium term

Source: World Bank analysis based on input from Vietnam Port Association, interviews with port operators, and Liner Research Service.

Key Points

Based on projected annual growth

of eight percent to nine percent in

the 2013-2020 period, the existing

terminal capacity in the northern

region will be insufficient to meet

market demand by 2018

However, new terminal capacity is

planned, which could result in

over-supply

GoV will need to regulate

development of new capacity to

ensure that demand and supply

is properly matched

North Vietnam Seaport Handling Capacity: Historical and

Projected (based on committed plans)

And despite sustained growth, provision of basic infrastructure, such

as roads, remains a challenge in some sectors

Source: MTRR, VIFFAS, VietNamNet, World Bank analysis

Key Points

Low (relative to global benchmarks)

effective truck speeds and low gross

vehicle weight and height limits for

freight vehicles in highways increase

cost-to-serve and lead to myriad delays

The challenge is that many such limits

cannot be relaxed without the

renovation and strict maintenance of

highway, bridge, and road assets

Road traffic regulations may also need

to be updated in order to reduce any

gaps that lead to subjective

interpretation by police officers and

other authorities; a more transparent,

predictable approach to checkups and

inspections would also help

Selected Road Sector Indicators

20-60 km/h Range of effective truck speed in highways

(with average closer to 40-50 km/h)

“Tea money”

Unpredictable roadside inspections are a

common occurrence with little clarity on

rules

40 tons

Maximum gross weight allowed for trucks

in some key roads and bridges, when 80%

of import containerloads weigh 20-30 tons

(bringing total vehicle weight to 36-45

tons). Access to special permits is costly,

and enforcement of this rule has also led to

informal payments by carriers

4.35 m

Maximum freight vehicle height allowed in

some sections (virtually the same as that of

a high-cube container on chassis—lack of

a margin of tolerance leads to inspections

and further delays)

Agenda

1. Context






Although they haven’t been comprehensively measured, Vietnam’s

logistics costs are estimated to be high relative to both developed

economies and key regional peers; this is a direct result of the

demand and supply trends just discussed

Source: CSCMP, Lauri Ojala (2010) “Towards a unified methodology in logistics cost measurement”, World Bank analysis and research

Recent “Estimates” of Vietnam’s Logistics Costs

as a Percentage of GDP

Estimate Source

20%-25% VITRANSS-2

15%-20% Multimodal Transport Regulatory Review

“In the range

of 25%” World Bank Trade and Transport Facilitation

Assessment (Unpublished Draft)

Logistics Costs as a % of GDP

U.S.(avg.

'00-'10)

Europe(2005-2008)

Mexico(2008)

World(2002)

China(2004)

Vietnam

?

9.2% 12.0%

13.5% 13.8%

21.3% 25%

15%

Other indicators of relative logistics performance

World Bank Logistics Performance Index (LPI): 2010

1 = worst, 5 = best possible

Germany U.S. China(mainland)

Thailand Brazil Vietnam

World Economic Forum Enabling Trade Index: 2009

1 = worst, 7 = best possible

Germany U.S. China(mainland)

Thailand Brazil Vietnam

4.11 3.86

3.49 3.29 3.20

2.96

5.24 5.02

4.19 4.18

3.58 3.54

Recent World Bank research suggests that the transport component

of Vietnam’s logistics costs is competitive—key opportunities for

improvement lie in reducing inventory carrying costs associated with

itineraries in and out of Vietnam

Import and Export Supply Chain Cost Comparison with Peer Asian Countries

Import - Estimated Transport and Documentation Cost per FEU at Origin From Busan, Korea in US$

Country Origin Cost Ocean Freight Total Over/Under Vietnam’s

Landed Cost per FEU

Vietnam $515 $500 $1,015

China $707 $300 $1,007 ($8)

Indonesia $595 $700 $1,295 $280

Estimated Transport and Documentation Cost per FEU in Los Angeles, California in US$

Country Origin Cost Ocean Freight w/

Bunker Total Over/Under Vietnam’s

Landed Cost per FEU

Vietnam $572 $1,960 $2,532

China $774 $1,850 $2,624 $92

Indonesia $637 $2,100 $2,737 $205

Source: World Bank analysis and research

Annual Interest Costs on Extra Inventory due to Import-Export Clearance Delays, as borne by BCOs

Interest Cost on Extra Inventory Due

to Clearance Delays

Amounts in US$ Millions

2012 2015 2020

Imports $47 $58 $87

Exports $50 $63 $95

Total Inventory Carrying Cost $96 $121 $182

Yet, Vietnam’s logistics system is improving, compares well to a

number of peers, and has been able to consistently deliver fast growth,

thus contributing to global manufacturing market share gains…

Source: World Bank analysis and estimates

Vietnam’s LPI Score Improvement: 2007 vs. 2010

2007 2010

2.89

2.96

D = 2.4%

Top 5 LPI scores among “Low-Income Countries”: 2010

Vietnam Senegal Uganda Uzbekistan Benin

2.96

2.86 2.82

2.79 2.79

Notable Regional LPI Benchmarks for Vietnam: 2010

Vietnam Indonesia Lao PDR Cambodia Myanmar

2.96 2.79

2.46 2.37 2.33

Key Points

Looked at from a more global perspective,

Vietnam’s recent logistics performance is

notable:

oThe country improved its LPI score

by 2.4% from 2007 to 2010, at a time

of high unpredictability in freight

markets

o In 2010 it was ranked by the WB LPI

as the top performer among

countries classified as “low income”

oVietnam also LPI-outperforms a

number of Southeast Asia neighbors,

notably Indonesia (by a hefty margin)

These benchmarks reflect the country’s

ability to deliver double-digit (closer to 20%

than to 10%) growth in logistics activity for

many years; they also indirectly reflect

Vietnam’s privileged geographic position

relative to the main regional and

intercontinental shipping lanes, and

attractive labor and energy costs

…as in the case of Vietnamese footwear exports to the U.S., just to

cite one example:

Source: MergeGlobal, UN Comtrade, World Bank analysis

8% Footwear’s share of total

Vietnamese exports in 2008 3rd

Footwear’s rank in Vietnam’s top exports in 2008, after

Petroleum(18%) and textiles/apparel/accessories (17%)

42% Share of Nike’s global production located in Vietnam

Agenda

1. Context






The World Bank recently conducted in-depth interviews with 73

logistics stakeholders (shippers and service providers), industry

groups, and public officials in Vietnam to better understand their views

on what drives logistics costs and trade competitiveness

Source: World Bank

25 international beneficial cargo owners (BCOs)

2 domestic BCOs

4 Vietnamese apparel and footwear factories

11 international Logistics Service Providers (LSPs)

4 container shipping carriers

15 Marine Terminal Operators (MTOs)

4 Vietnamese trucking companies

4 trade associations

4 GoV agencies

Results revealed that the five most pressing challenges to increase

logistics competitiveness, from the perspective of the stakeholders

interviewed, are the following:

Source: World Bank analysis

Government regulations are cumbersome and not easily understood; and there is inconsistent

interpretation, implementation, and enforcement of government regulations across provinces and among

government officials. This results in import and export customs clearance taking longer than in peer

countries, redundant inventory in BCO supply chains, and higher administrative costs for BCOs and LSPs.

1

Facilitation payments (“tea” money) to Customs and police officials are needed to keep imported and

exported components, raw materials and finished goods moving through supply chains with minimal delays.

This inflates logistics costs for customs clearance, customs brokerage, cargo inspections, and trucking. 2

Transportation infrastructure projects are planned and executed without employing a strategic, multimodal

corridor approach. This has led to: 3

a. The port and marine terminal system is highly fragmented quantity has been emphasized over quality;

b. Completion dates for highway projects needed to support port developments are often delayed, which is a major

contributor to highway congestion;

c. Connector roads between highways and ports and Inland Container Depots (ICDs) are inadequate, which is also a

prime contributor to highway congestion; and

d. Rail is not a meaningful mode of transport for freight.

A fragmented trucking industry delivers sub-standard service to BCOs relative to peer countries. 4

New deep water marine terminals at Cai Mep-Thi Vai are under-utilized and lack critical mass to serve as

transshipment centers, and the containerized ocean carriers serving them need continued GoV support

and fee discounts.

5

Agenda

1. Context






Over the past 10-15 years Vietnamese logistics have delivered fast

growth with reliability limitations; these are selected public-sector

interventions that can enhance reliability in a higher-value-added

trade environment\1:

1\ List is by no means exhaustive and is only provided for the purposes of discussion.

Source: MTRR, World Bank analysis

Sector Intervention

Intermodal Define strategic “logistics corridors” in the North and South where infrastructure quality and

regulatory provisions (e.g., vehicle weight, speed, and dimensions limits) are such that high-

cube containers can flow with minimal unnecessary delays

Deep-water ports Improve hinterland connections with better and higher-capacity road and IWT access in the

short term (road access should also be extended to Distribution Centers added or relocated

to the Cai Mep and Haiphong/Lach Huyen areas); consider the possibility of rail links and on-

dock rail facilities in the long term

Logistics

management

Devise ways for the public and private sectors to collaborate in two key aspects of logistics

management: (1) the formulation of public policies for the sector and (2) generating better

awareness, among private- and state-owned firms alike, of the benefit-cost tradeoffs

associated with modal and supply chain design choices

3PLs Further liberalize the market to facilitate (1) entrance of international players, (2)

collaboration and knowledge transfer between international and domestic players, and (3)

ease of doing business for existing or prospective providers that want to engage shippers

across a wide variety of modes and service types

Trucking Promote a more sustainable supply-demand balance by introducing a safety and overloading

compliance-rating system for carriers and by providing better access to credit for fleet

expansion/modernization; truck emissions regulation should also be gradually phased in

Customs Re-double efforts to fully automate the e-commerce system by 2014 as planned. Extend

paperless customs to all BCOs, when currently only selected BCOs may have access to this

Q&A Thank you

rapid growth, challenges and opportunities in vietnam s logistics limited connectivity

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