Agricultural Export Model in Tech Era

In Vietnam, approximately 70% of the population resides in rural areas, and nearly 90% of the land area is dedicated to agricultural practices. Despite this, agriculture contributes merely about 20% to the nation’s Gross Domestic Product (GDP). Meanwhile, developed nations such as the UK, France and the US have only about 5% of their population engaged in agriculture, yet it contributes approximately 40% to their GDP. This not only meets their domestic food demand but also facilitates the export of high-value agricultural products. The success of these nations can be attributed significantly to technological advancements underpinned by modern logistics models.

Figure 1: Logistics model 

Three key trends in global trade, particularly in agriculture

According to economists, the market economy of the 21st century features three megatrends in global trade of goods and services in general and agricultural products in particular.

International trade is always important for global prosperity because it increases productivity by expanding the international division of labor. Furthermore, it enables export-led economic growth by facilitating access to foreign markets. Additionally, it strengthens economic security by providing firms and households with valuable outside options when negative shocks occur.

Logistics is the base of the pyramid necessary for all commercial economic activities because the logistics industry is part of supply chain management that deals with the efficient flow of goods, services and relevant information from the point of origin to the point of consumption according to customer needs.

Technology trends are being strongly deployed in logistics with the desire to optimize processes, improve performance and meet the ever-evolving needs of customers. In particular, the six most important technologies being applied in logistics are: Automation and robotics, artificial intelligence (AI), blockchain, internet of things, virtual reality, and digital twins.

With the above three regional and world megatrends, the two biggest focused areas are placed in global trade: Product standards and supply chains. Digital development has made standards and logistics become increasingly closer and play a central role in supply chain management and operations. Logistics not only requires huge investment costs and exerts strong impacts on product prices (about 5% of GDP on average, 20% of the final product price) but also determines the quality of international trade. In fact, regardless of distance, each customer wants their product to be delivered as quickly and perfectly as possible.

Evidently, throughout the length of international trade, the 5-party logistics (5PL) model (Figure 1) starting from the 1st Party Logistics (1PL) has developed into the modern 5th Party Logistics (5PL): Providing fifth-party logistics services or e-commerce market service type that includes both 3PL and 4PL. 5PL manages all stakeholders in the distribution chain on the e-commerce platform.

The important core of 5PL is the order management system (OMS), the warehouse management system (WMS) and the transportation management system (TMS). These systems are closely related to each other in a unified and highly automated information technology system to ensure product standards delivered to consumers.

Currently, in the context of the IT boom, Vietnamese agriculture continues to grow with an inefficient traditional supply chain (mainly using 2PL and 3PL logistics models) with high fragmentation in production and many intermediary stages in the traditional supply chain, resulting in a huge waste and high transaction costs. Traditional intermediate supply chain mechanisms (figure 2) are often suboptimal relative to the overall supply chain and they cause farmers to overproduce or underproduce relative to ideal production - if they were vertically integrated to connect producers with buyers in a coordination center model.

In the context of deep international economic integration and digital economic development, platform economy in general and platform agriculture in particular are commodity business and service models revolving around the creation of digital platforms that connect buyers and sellers, service providers or participants in various transactions. In those new models, electronic coordination centers (Figure 2) have emerged as a purchasing channel in place of traditional intermediaries. Coordination centers are effectively integrated with modern logistics models (4PL and 5PL) in platform agriculture based on the trend of applying the most advanced digital technology in the logistics industry. The presence of electronic intermediaries helps improve farmers' profitability as they help farmers move closer towards ideal production because market power is more important than market access. By ensuring equality and transparency of rights and responsibilities for every partner in the system and by providing a new sales channel for farmers, at least in principle. Electronic intermediaries will reduce some of the main challenges and risks exposed to farmers in the traditional agricultural supply chain.

However, according to economists, the issues to note here are: As the number of farmers increases and competition is like vectors moving after short-term dynamics of the speculative market, the total profit of all farmers will converge to zero in the long run, regardless of the presence of electronic intermediaries. Therefore, a more effective long-term way to improve farmers' livelihoods, referred to experiences in developed economies, is to unify farmers into larger farmer collectives to enhance their market power.

Figure 2: Agricultural product supply chain model 

Four strategies to develop platform agriculture and sustainable agri-product export

The 13th National Party Congress outlined a strategic vision for agricultural development, emphasizing the need to “Persistently and effectively implement the agricultural restructuring policy, foster the growth of the agricultural sector and rural economy in conjunction with new rural development, steering toward ecological agriculture, modern countryside, and enlightened farmers”. To successfully execute this strategy, it is crucial to underscore four effective solutions that can progressively shape platform agriculture and ensure the sustainable export of Vietnam’s strategic agricultural commodities.

Developing Electronic Coordination Centers with important roles in: Classifying products; developing and evaluating according to green agriculture standards; packaging and marketing. During that process, centers can employ advanced technologies to process and upgrade product quality and lifespan. For example, in Dak Lak and Tien Giang provinces, Golden Field Group (based in Lang Son province) successfully used mobile disinfection water separation technology suitable for current intensive farming methods to reduce the moisture content of durian from 72% to 65% and increase the product preservation time to 28 days from over 10 days previously. Indeed, technology helped sharpen durian competitiveness with the region and bring in a record export of over US$2 billion in 2023. Coordination Centers can integrate 5PL and 5PL logistics models to connect and coordinate operations of different modes of transport as a basic prerequisite for ensuring efficient services. This method can solve three strategic matters in agriculture: (1) High inventory, high cost (especially post-harvest preservation cost) and insufficient innovation capacity; (2) Transformation of the previous hierarchy-oriented management mode to a flat management mode driven by orders placed in the platform economy. This platform helps to exchange information and communicate more effectively and the point-to-point information hierarchy towards automation, enabling better production and marketing performance of traditional manufacturing industries; and (3) transforming and upgrading the agricultural industry by using information systems and developing a win-win open supply chain with vendors to become a standards-based value-added shared chain. In addition, coordination centers can also play a role in mobilizing financial and human resources as well as providing financial insurance solutions against risks for agriculture, especially amid global climate change.

Technical infrastructure: Platform agriculture with electronic coordination centers will not be able to maximize effectiveness without national technical infrastructure. This can be considered the key manufactured capital and the backbone of platform agriculture. In addition to basic infrastructure such as irrigation and energy, national water, land and air transportation systems need to be planned and developed to connect coordination centers with the domestic market and with international markets. Supply chain is a global business field and is currently in transition, so there needs to be a policy to promote international cooperation in developing and locating logistics centers, especially in key economic regions across the nation.

International relations institutions: Social capital refers to legal institutions that help maintain and develop resources in partnership with each other. Vietnam has an open economy with an economic diplomacy strategy that states that Vietnam wants to be friends with all countries. We established comprehensive strategic partnerships with seven world-leading economies, laying the groundwork for forming market and consumer connections and developing key partners. Therefore, it is necessary to actively coordinate with international partners to build and develop institutions and organizational structures for active foreign economic cooperation in customs clearance, tariffs, commodity and service standards, technology transfer, investment promotion and financial cooperation to concretize diplomatic efforts into economic efficiency, create new great resources to foster agricultural modernization.

Farm model: The current agricultural sector remains fragmented and lacks competitiveness. Hence, should we reform and develop powerful farm groups to capably cooperate and compete in domestic and international supply chains by adopting large-scale specialized agricultural production to optimize natural capital towards a sustainable platform agriculture, gradually modernize agriculture and increase the high content of Vietnamese agricultural products, not only serving export strategies but also ensuring the country's economic security.

Dr. Doan Duy Khuong

Source: Vietnam Business Forum