Opportunities for foreign investors in Vietnam’s coffee industry

Although Vietnam’s coffee industry has performed well in recent decades, the industry faces a number of challenges that hinder its progress in the value chain.

Vietnam is the second largest coffee exporter after Brazil, with 8.3% of the global coffee share and 16% of the market share in the EU. However, most of the exports concern unprocessed and undervalued cereals.

Despite the pandemic, the Vietnamese coffee industry saw more than $ 3 billion in revenue from coffee exports in 2021, equivalent to 3% of the country’s GDP and 10% of its agricultural exports. At the same time as efforts are being made to strengthen the coffee processing industry, total exports are estimated at $ 6 billion by 2030.

The coffee bean was first brought to Vietnam in 1857 by French colonialists who discovered that the environmental conditions in the country’s central highlands were suitable for the cultivation of many foreign crops. The French originally came with the Arabica variety; In 1908, the high-yielding variety Robusta was introduced and grown.

In 1986, after the reunification of Vietnam, Doi Moi (renewal / new era) reforms of the economy saw a greater privatization of land and raw materials. The government assessed the potential of coffee in terms of commercial cultivation for export and domestic use, introducing state-funded farms and encouraging land-owning families in the central highlands to grow coffee.

As a result of these methods, the Vietnamese coffee industry now faces several problems: the aging of coffee plants, fragmented and small-scale production and the effects of climate change. There are therefore opportunities for investment in the sector, in areas that could make Vietnam rise in the global coffee value chain.

Vietnam’s high – yielding Robusta coffee bean production

About 95 percent of the coffee produced in Vietnam comes from Robusta beans, compared to a modest five percent for Arabica.

When it was introduced in 1908, the Robusta variety thrived in the lowlands and gave a higher yield of beans per hectare. It could grow at altitudes of 200-700 meters above sea level and was less susceptible to disease.

Between 1989 and 1995, the Vietnamese government controlled coffee exports by buying coffee beans from all farmers at fixed prices. Low coffee bean prices have led farmers to grow Robusta as their main commercial crop, making Vietnam the world’s largest producer of Robusta beans. Robusta is currently estimated to yield 2.8 tonnes of coffee beans per hectare.

What are the challenges for the coffee industry in Vietnam?

Although Vietnam’s coffee industry has performed well in recent decades, the industry faces a number of challenges that hinder its progress in the value chain.

Very fragmented industry

The Vietnamese coffee industry is very fragmented – today 95% of the crops are grown by private companies and the remaining 5% are owned by the state. Most of the current private companies are owned by small farmers: about 650,000 families who grow coffee with about one hectare of land each.

Such small-scale production, fragmentation and dependence on peasant families have created differences in investments, harvesting and processing methods among farmers, which has resulted in unreliable production and uneven quality of the products.

Lack of modern infrastructure and equipment

Although Vietnam has invested heavily in its coffee industry – which now includes 160 roasting plants, 11 blending plants and 8 instant coffee processing plants, with a total processing potential of 1.5 million tonnes, the industry lacks adequate modern infrastructure and equipment.

Most coffee roasting systems consist of using tarpaulins to dry the beans. This basic way of roasting / drying coffee beans can lead to a drop in quality, especially during the rainy season. To join the coffee value chain, Vietnam needs to improve its processing infrastructure.

Unsustainable agricultural technology and climate change

Irrigation is crucial for plantations, to get a high harvest and make cultivation profitable. This is especially important in Vietnam during the dry season, between January and April, when growers use groundwater.

This in the long run threatens the sustainability of Vietnam’s coffee industry when groundwater runs out. Wealthy farmers tend to build basalt aquifers made by drilling, which has contributed to groundwater depletion and soil degradation.

In addition, the threat of climate change may exacerbate this problem. Vietnam’s dry months, for example, can be longer, requiring farmers to use more groundwater resources. This could also cause farmers to migrate to higher altitudes to gain access to conditions suitable for growing coffee; But such migration can increase deforestation in areas where forests provide important protection for watersheds.

Aging of coffee plants

More than 30% of Vietnam’s coffee plants are between 20 and 30 years old and above their maximum productive age, which is usually between eight and 15 years. Research indicates that the coffee plant will be economically unprofitable after 22 years.

Farmers would have to uproot old plants and replant new ones – often a significant investment for smallholders, especially as they would have to wait four or five years for the tree to bear fruit.

Up in the coffee supply chain

Vietnam needs to invest in its refined coffee industries to move up the global supply chain and make the industry more sustainable; Refined coffee currently accounts for less than 10% of the country’s total coffee production. This offers great opportunities for foreign companies, especially those with experience in the production of refined coffee products. The Vietnamese coffee industry wants to reach its export target of $ 6 billion by 2030. The industry would also need to increase its coffee bean yield without further deforestation, which improves plantation efficiency and consistency.

Incentives and state aid

The Vietnamese coffee industry requires a link between raw material production areas and processing plants, for a stable supply of goods that can meet market demands. In addition, the government wants Vietnam’s agricultural industry to apply automation, biotechnology and information technology to increase sustainability. For example, companies that invest in scientific research and technology to earn agricultural production and business will receive government support in the form of low-interest loans. Research on coffee bean varieties can lead to coffee that is more resistant to adverse conditions such as drought.

By investing in the coffee processing sector in Vietnam, foreign companies can benefit from the abundant supply of raw materials, a large domestic market and tax breaks thanks to Vietnam’s large number of free trade agreements and state aid.

A growing domestic coffee market

The signing of the EU-Vietnam Free Trade Agreement offers great opportunities for Vietnamese brands to export their refined coffee products to the EU. Establishing local brands will raise the quality standard and allow Vietnamese coffee brands to compete better in international markets.

Despite the covid-19 pandemic, Vietnam has seen an increase in the number of new café chains, which testifies to a growing middle-class population with growing purchasing power. According to Euromonitor International, the country’s specialty coffee and tea shops are worth more than $ 1 billion, with local chains expanding faster and outperforming their international rivals. The local coffee chain The Coffee House already has 125 stores in the country, with ambitious plans to expand to 1,000 units by 2025. Starbucks, which has been in Vietnam since 2013, has only 77 stores across the country.

While foreign brands dominate the high-end segments, local brands dominate the middle- and low-end. Local brands can also adapt more quickly to new trends and their presence in the country is more significant.

By Dezan Shira & Associates

Asia Briefing is produced by Dezan Shira & Associates. With offices in China, Hong Kong, Vietnam, India, Indonesia, Singapore, Germany, Italy, the United States and Russia, Dezan Shira has supported foreign investors in Asia for three decades.

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