Consumers driving Vietnam into "golden age"

HANOI (Reuters) - Coffee, tea or me?

Customers leave a Saigon Coop supermarket in Hanoi May 5, 2010. REUTERS/Kham

Vietnam’s major exports include its famed coffee beans and minor ones like tea, but from scooter maker Piaggio to prominent local businessmen, investors are making their biggest bets on the Vietnamese consumer.

At the heart of this gamble is a demographic shift in Vietnam that could mirror the economic transformation of mid-sized countries such as South Korea, driven by both rapid industrialisation and new entrants into the work force who will help power output as well as consumption.

Of Vietnam’s population of around 87 million people, nearly half is in the labour force. The median age of 28.5 years makes it a young crowd, and one that is increasingly moving from rural areas to bustling cities such as Ho Chi Minh City as part of government plans to turn Vietnam into a middle income country.

The demographic trend is not lost on investors.

“We saw the opportunity to come here to build the premium market,” said Costantino Sambuy, president and general director at Piaggio, the Italian maker of the Vespa scooter that has established its Asian headquarters in Vietnam.

“It can only grow right now, looking out of the window and seeing how Vietnam is growing and the way it is developing,” Sambuy said, speaking in a showroom with a line-up of gleaming new scooters in a nation known for its millions of bicycles.

Chris Freund, managing partner of Mekong Capital, a Vietnam-focussed private equity firm, has companies in his portfolio that target the 15-25 year old bulge. Those include Digi World, a distributor of consumer electronics and digital products, and cell phone retailer Mobile World.

In stock markets, consumer-related stocks have been among the top recent performers. As of last week, Vietnam Dairy Products, or Vinamilk, was up 16.6 percent since the end of 2008, compared to a 3.5 percent loss in the Ho Chi Minh index during the same period.

That is not to say Vietnam is a haven.

The country, wracked by war in the 1960s and 1970s, is starting from a low base and the economy is heavily driven by a government perceived as lacking transparency.

GDP per capita at $1,052 this year makes it the lowest among a group of six countries to which Vietnam is compared to in a recent study from Credit Suisse.

That’s well below the $1,721 for the Philippines -- the second lowest in that Credit Suisse group of six -- and a third of China’s.

The economy faces steep challenges, including woeful infrastructure. In the short-term, rising inflation and the government’s struggle to tackle trade and budget deficits pose risks as well.

But to many executives and investors in Vietnam, the game changer was Vietnam’s entry into the World Trade Organisation in 2007, bringing with it trade liberalization and increased security for companies such as Starbucks that have announced plans to enter the country.

A study by the United Nations Population Fund said Vietnam is entering a “demographic dividend,” with two or more persons of working age for every person of dependent age (under 15 or 60 and over) -- a situation that it sees lasting until 2040.

“The ‘demographic bonus’ is a period of time in any country’s development that typically happens once in its history,” said Bruce Campbell, the UNFPA representative in Vietnam.

Vietnam’s young population is also an increasingly technologically savvy one, like other youth worldwide, as signalled by the stir created when a local web site posted pictures of the yet to be released iPhone from Apple.

“That’s new people beginning to earn money, and it also speaks to the generation that’s getting wise to Facebook, mobile telephony, the Internet,” said Dominic Scriven, the CEO of local-based fund Dragon Capital.

“That promotes an enormous amount of change,” he added.

According to the Credit Suisse study, Vietnam’s urban population has risen from below 20 percent of the total population to 28 percent over the past 15 years, a pace akin to China’s.

That will invariably have a major impact on domestic consumption, where real private spending already grew 12 percent last year.

In its report, the UNFPA is seeing in Vietnam some parallels to “East Asia miracles” such as South Korea.

“The ‘demographic dividend’ offers Viet Nam a ‘golden opportunity’ to use this abundant and young labour force for the next phase of economic growth,” Campbell at the UN agency said.

(Additional reporting by Deborah Kan)

Editing by Raju Gopalakrishnan