Vietnam's Manufacturing Sector: Navigating Tariffs and Contraction for Selective Opportunities

The Vietnamese manufacturing sector, a cornerstone of Southeast Asia's export-driven economy, faces mounting headwinds as contractionary pressures intensify. With the May 2025 Manufacturing Purchasing Managers' Index (PMI) dipping to 49.8—and a further decline to 48.9 in June—the sector is now in its third consecutive month of contraction. While US tariffs on Vietnamese exports have exacerbated the downturn, companies are adapting through strategic diversification and operational efficiency. For investors, this presents a nuanced landscape of risks and opportunities.

The Contraction: Tariffs, Trade Tensions, and Cost Pressures

The PMI decline reflects a sharp slowdown in new orders, particularly export demand. US tariffs—peaking at 46% on certain goods—have directly impacted sectors like apparel, footwear, wood products, and seafood, which accounted for over 30% of Vietnam's $71 billion in 2024 exports. New export orders fell at the **fastest pace since September .

The tariff shock has also distorted cost structures. Input costs dropped for the first time in two years due to weaker demand, while output prices fell for the fifth consecutive month as firms cut prices to stimulate demand. However, employment levels continue to decline, with companies trimming staff to match reduced orders.

Resilience Through Diversification and Efficiency

Despite the contraction, certain sectors and firms are demonstrating remarkable resilience:

1. Market Diversification:
2. 41% of manufacturers are expanding into the EU, ASEAN, and Japan, leveraging free trade agreements like the EU-Vietnam Free Trade Agreement (EVFTA), which has boosted tariff-free exports for 61% of surveyed companies.
3. PouYuen Vietnam, a major footwear exporter, is accelerating shipments to the EU and ASEAN to offset US demand losses.

1. Operational Efficiency:
2. 40% of businesses are automating production lines and adopting lean manufacturing, reducing waste and labor costs. For example, textile firms like Tan Dai Viet Textile JSC are investing in AI-driven quality control systems.

3. Input costs fell by 2.1% in May 2025, easing pressure on margins.

4. Cost Control and Strategic Pricing:

5. 25% of companies are renegotiating contracts with buyers to share tariff burdens. Apparel exporters like Thanh Cong Textile are securing agreements to split costs with US retailers.

Investment Considerations: Risks vs. Opportunities

Risks to Avoid:
- Overexposure to US Markets: Firms reliant on US demand (e.g., footwear exporters) face margin pressure if tariffs escalate.
- Labor and Supply Chain Volatility: Delays in administrative processes, such as Certificate of Origin (C/O) issuance, could disrupt exports.

Opportunities to Pursue:
- Diversified Exporters: Companies expanding into the EU and ASEAN, such as PouYuen Vietnam, offer safer exposure.
- Automation Leaders: Firms investing in AI-driven production, like Tan Dai Viet, are well-positioned to sustain margins.
- Sector ETFs: Consider Vietnam's manufacturing ETFs (e.g., VNM, tracking broader equities) for diversified exposure, but monitor tariff-related volatility.

The Path to Recovery: Trade Tensions and Domestic Demand

A rebound hinges on two factors:
1. Trade Policy Resolution: Ongoing Vietnam-U.S. negotiations aim to lower tariffs, with the June 2025 talks showing 72% of European businesses still recommending Vietnam as an investment destination.
2. Domestic Consumption Growth: Vietnam's 5.8% GDP growth in 2024 suggests a stabilizing domestic market, though reliance on exports remains high.

Final Take: Selective Exposure, Strategic Patience

Investors should prioritize firms with geographic diversification and automation capabilities, while avoiding pure-play U.S. exporters. Monitor the PMI closely—a sustained rise above 50 would signal stabilization. For now, the sector's resilience and long-term fundamentals justify cautious optimism, but tariffs remain a wildcard.

Actionable Advice:
- Buy: Diversified exporters and automation-focused manufacturers.
- Avoid: Firms with >60% revenue exposure to the U.S.
- Watch: The July PMI release for signs of stabilization.

In a world of trade uncertainty, Vietnam's adaptive manufacturing sector offers a compelling story—but success demands selective, informed bets.