Proposed upgrade to container fleet

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  • Vietnam is located on a major shipping route in the East-West hemisphere, accounting for more than 80% of the world’s cargo volume.
  • In 2021, despite the effects of the pandemic, the volume of containerized cargo passing through the country’s seaports reached 24 million TEUs, up 7% year-on-year.
  • Nevertheless, with higher freight rates and supply chain issues, significant investment is needed to expand the country’s shipping fleet and ports.

Vietnam enjoys a long coastline that borders the Gulf of Thailand, the South China Sea and the Gulf of Tonkin. The country has the second largest number of international ports in ASEAN after the Philippines. While the speed of goods in the country’s seaports is generally increasing by 10-15% per year, additional investments are required on average to overcome the difficulties.

There are three main port cities along the Vietnamese coast – Hai Phong in the north, Ho Chi Minh City in the south and Da Nang in the central region. Among major container ports based on cargo capacity in Asia, Ho Chi Minh City Port handles the largest share of cargo in Vietnam.

Meanwhile, Hai Phong North Port is a major port for international container traffic. Hai Phong International Container Terminal (HICT) can accommodate large container ships, reducing the time and cost of shipments to northern Vietnam. With its strategic location, Da Nang Port handles cargo in the central region and connects Vietnam to Myanmar, Thailand and Laos.

As of March 2022, the global container fleet numbered 6,346 vessels with a total capacity of 25.5 million 20-foot equivalent units (TEU) with a total tonnage of 305,902,000 deadweight tonnage (DWT).

Meanwhile, Vietnam’s container fleet has 10 container shipping companies, which own 48 container ships with a total capacity of 39,519 TEUs and a total tonnage of 548,236 DWT.

Currently, Vietnam’s maritime fleet is responsible for transporting about 7% of the market share and operates mainly on domestic routes and short routes in the intra-Asian region; the rest is provided by foreign shipping companies.

Challenges

Major challenges facing Vietnam’s maritime industry include domestic policy and legislation, underdeveloped infrastructure, and low investment accessibility.

Most Vietnamese shipping companies are small businesses and mainly transport goods, but do not provide logistics services, resulting in low efficiency of business activities. Vietnamese shipping companies only have vessels with a capacity of 1,800 TEUs while foreign companies have vessels over 20,000 TEUs.

Compared to other developed countries, shipping time and cost are even higher in Vietnam due to its smaller capacity. Additionally, due to underdeveloped port facilities and a shortage of port operators, several ports are unable to operate at full capacity.

Another challenge that concerns the Vietnamese maritime fleet is the composition of mainly older cargo ships with relatively low tonnage, which makes them less competitive. These vessels do not meet the safety and security requirements to operate in large markets such as Europe and North America.

Another concern is that freight transport in Vietnam and on intercontinental routes is dominated by foreign shipping companies. According to the Ministry of Industry and Trade (MoIT), the percentage of imported and exported goods carried by local shipping companies has halved from 10% in 2015 to 5% in 2020.

This means that foreign shipping companies transported 95% of Vietnam’s import and export goods, and as a result, Vietnam had to spend a significant amount of foreign currency every year.

In addition, trends towards mergers or alliances between major international container shipping companies have made it even more difficult for Vietnamese container shipping companies to compete.

Vietnam’s regional container fleet

So far, Vietnam has 17 ships with a tonnage of 600 TEUs or more, including 14 ships with a tonnage of 1,000 to 1,800 TEUs, which usually operate on Asian routes.

The remaining fleet consists of 13 ships over 25 years old, three ships over 20 years old and 15 ships with a tonnage of 300 to 600 TEU. These ships can only travel within the country, which makes them less competitive

The Vietnam Logistics Business Association (VLA) has proposed a total investment of US$1.5 billion to purchase new vessels as well as lease and purchase containers to expand shipping and solve supply chain issues. supply.

Having a fleet of container ships would limit the pressure of foreign shipping companies on freight rates and surcharges. This would also help ensure the country’s economic security and take full advantage of long-term free trade agreements (FTAs).

In accordance with the VLA, the investment plan will be divided into two development phases. Phase 1 will be implemented in approximately three to five years, focusing on investment in vessels capable of operating on intra-Asian routes such as Japan, South Korea, China, India and the Middle East, which account for more than 60% of the total volume of dry goods for imports and exports.

The VLA said that in the first phase, Vietnam should not only purchase new assets, but also cooperate with partners who have major shipping lines to share infrastructure and trade management as well as operating technology.

In the second phase, which could last about five years, after successfully operating in Inner Asia with partners, investments would be needed in large container ships that can operate on major intercontinental routes globally, such as the Asia-America route, Asia-Europe route, East-West route and so on.

According to the VLA, to attract Vietnamese crew members to work on ships, the government should also introduce policies to encourage training and exempt them from personal income tax, while allowing the hiring foreign crew members to work on Vietnamese-flagged vessels.

And finally, to translate the investment into growth, the plan would need the cooperation of different ministries and companies in different sectors to exchange goods in large volumes as well as import and export companies.

The government also reacted by approving a master plan for the development of the Vietnamese port system for the period 2021-2030 with a vision for 2050 with emphasis on encouraging private sources of investment to improve capacity. infrastructures.

Insight into supply chains, rising freight rates and logistics costs

According to the VLA, the transport of import and export of goods by sea faces several challenges, including port congestion and supply chain disruptions, which have caused a shortage of vessels and of containers. This congestion has dramatically increased freight rates, impacting the competitiveness of all businesses.

However, container availability was already a major issue in Vietnam before the pandemic, which created difficulties in locating goods, as well as loading and unloading times.

This led to a cumulative effect. The increase in delays in European and American ports is having an impact on the return of ships to Asian ports, creating an imbalance. The late arrival of ships in Asia significantly increases waiting times in Asian countries, including the Vietnamese port of Vung Tau.

Being a manufacturing center, the situation could get worse if shipping capabilities are not able to keep up. Additionally, once major Chinese cities emerge from lockdown, pent-up demand will likely lead to an increase in cargo piling up in ports waiting to be unloaded.

Additionally, shipping companies have continuously increased surcharges and freight rates during the pandemic, driving up transportation costs. This had a huge impact on Vietnamese businesses, driving up commodity prices.

Due to the pandemic, volume growth in 2020 was 4%, slower than the annual average. The volume of containerized cargo transiting through local seaports was estimated at 22.1 million TEUs, up 13% from 2019.

Potential tax incentives for foreign investment

This year, to improve the growth prospects of the country’s maritime industry, the MoIT has offered several tax incentives to the government to attract more foreign investment.

In particular, the MoIT has proposed the reduction of corporation tax for maritime companies from 20% to 15% in three years and the personal income tax for seafarers by increasing the threshold of wages subject to the ‘tax.

To encourage shipping companies to retire less efficient old vessels, the ministry has proposed exemption or reduction of taxes and charges, such as registration fees and VAT, when constructing or purchasing new vessels. and specialized adapted to transport needs.

He also suggested that the government should have coastal fleet management policies to meet domestic transport demand, promote sea freight and improve the connection between transport modes.

To encourage the development of specialized vessels, the MoIT had asked companies to build or purchase vessels to replace foreign national vessels, as Vietnam would only allow foreign national vessels until the end of 2023 to operate on domestic routes.

Take away food

The shipping industry is expected to continue to grow strongly this year thanks to active import and export activities as the pandemic subsides and Vietnam remains an attractive destination for FDI inflows. Although the lack of proper infrastructure and container capacity remains the main impediment for the country’s maritime industry to meet higher demand, major government investment plans have been introduced to expand its regional fleet of containers.


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Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices around the world, including Hanoi, Ho Chi Minh City and Da Nang. Readers can write to [email protected] for more support on doing business in Vietnam.

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