Work patterns and joining the labor cycle at different points

Let’s start with telephones: In many developing countries, it used to take forever to get a telephone line. In India, a customer requested a telephone line in 1965, and by 1983, still had 5 more years to wait! Egypt, where I lived, was similar. It was key to rent a place that actually had a telephone, because there was no way you would get one. After many years, mobile phones arrived, and boom, everyone had one. In 2015, there were just 26 million landlines, compared to 970 mobile phones in India. Basically, India had a sclerotic telephone company that couldn’t service the country (for both economic and regulatory/monopoly reasons), and then mobile phone companies were able to leapfrog the fixed line company very quickly for much less - just a transmission station rather than lines to every home.

Electricity is the new frontier: We are seeing a similar thing with solar electricity generation. It can be very expensive to bring in power lines to remote villages in Africa or India, but a solar panel allows for cell phones to be charged, lights to work at night and water pumps to be electrified.

Vietnam has been a beneficiary of these trends as well. There were only 14m landlines in Vietnam in 2017, but 128m mobile phones (more than the number of people, because some people have more than one). There is even off-grid renewable electricity in Vietnam.

This is a bit of a jump, but another area where we might be seeing some of this leapfrogging is in retail. The formal retail market in Veitnam is growing (as I talked about last week with VinGroup/VinCommerce), where consumers are moving from traditional markets to formal stores like grocery stories, etc. But in the West, we are hearing a lot about the “retail apocalypse,” with a number of stores closing as e-commerce grows.

Now there is a study out by the Institute of International Finance that looks at this through the lens of employment and productivity:

Job losses in US retail have been a persistent feature of the US labor market for many years…The underlying issue is a wide efficiency gap between “brick-and-mortar” retail and e-commerce. We calculate the number of employees needed to generate $1 million in sales per year in different parts of the retail sector. Department stores need 8 employees, while electronic shopping & mail-order houses, the category that captures e-commerce in the establishment survey, need as few as 0.6.

E-COMMERCE SALES. SOURCE: GOOGLE & TEMASEK

Now this doesn’t count all of the people that are involved in delivery the products to the final customer. Right now, getting to the store and picking up product is all from the customer. Going forward, this will be partially taken over by delivery people, who are likely to be paid less (but maybe not too much less) than retail salespeople. So fewer people, paid a bit less.

As e-commerce sales grow, there will be fewer jobs in brick and mortar retail that are unlikely to be replaced by delivery people 1:1. And retail employs a lot of people. In Vietnam, the service sector makes up 34.4% of all employment, and wholesale and retail trade makes up about 20% of all employment, the third largest sector (after agriculture and manufacturing). According to the World Bank (and we have talked about this before), farm workers made up 65% of the labor force in 2000 but that declined to 46% in 2015. That’s a gigantic decline, and those people have to go somewhere! And this is only the start.

Right now, most go into manufacturing, but that will depend on Vietnam continuing to be attractive to manufacturers, and the trade war puts some of that at risk. Other could go into retail stores, which requires not much education (good for rural workers who don’t have as much access to secondary or tertiary education).

ONLINE TRANSPORT & FOOD DELIVERY. SOURCE: GOOGLE & TEMASEK

But Vietnam may find that these retail jobs just aren’t there, because they have been made redundant by e-commerce. This is no idle threat: e-commerce gross merchandise value has grown from $400m in 2015 to $2.8bn in 2018. And it is expected to grow to $15bn in 2025.

This should be helped by a growing delivery market. We can see this in online transport and food delivery, which was $200m in 2015, grew to $500m in 2018 and is forecast to grow to $2bn in 2025. So some jobs will go into delivery, but the live of a delivery person, even if paid as well, is just not as good as a store salesperson.

To counteract this, Vietnam really needs to educate people so that they can find better service jobs and also hopefully higher-end manufacturing. Having local innovation would be a key part of this. But that’s quite up the curve from where the country is now. Korea did it, although had a better head start and an industrial policy that was very smart. I am not sure that I am seeing that in Vietnam. At least not right now.