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Manufacturers leaving China towards Vietnam as most attractive investor country in ASEAN

Monday - 01/05/2017 13:29
According to the latest report from the United Nations Conference on Trade and Development global investors have their eyes on “emerging Asean countries”, and Vietnam is the favorite.
Manufacturers leaving China towards Vietnam as most attractive investor country in ASEAN
Statistics show that last year emerging economies in the Asian region welcomed US$541 billion in investment. The report said investors have recently started to target Vietnam while many are moving away from China due to more expensive labor costs and geopolitical risks.
Foreign investors have also started to enter Vietnam via mergers and acquisitions.
Official statistics show that foreign investors have become majority shareholders in more than 1,700 local companies in the past year.
These investments, from July 1, 2015 to July 20, 2016, are estimated to have reached US$1.89 billion, according to the Foreign Investment Agency under the Ministry of Planning and Investment. Given the fact that the country has concluded a variety of free trade agreements, it is increasingly easier for foreign investors to enter the Vietnamese market.
The Vietnamese government’s commitment to accelerate share sales in state-owned enterprises will provide more opportunities for foreign investors.
Vietnam last month officially scrapped a long standing 49% foreign-ownership cap in publicly listed companies, allowing foreign investors to own a 100% stake in several listed companies across various industries, including consumer, property, transport, construction, manufacturing, financial services and agriculture.
A 2015 study into inbound greenfield investment in 14 emerging markets showed that Vietnam scored 6.45, which meant the country attracted more than six times the amount of foreign direct investment that might be expected relative to the size of its economy, ranking far ahead of neighboring competitors such as Malaysia (2.86) and Thailand (2.43).
Vietnam has been promised US$10.15 billion of foreign direct investment in the first five months this year, up a staggering 136 percent from a year ago, according to new data. A statement from the Ministry of Investment and Planning said Vietnam licensed 907 new foreign projects worth $7.56 billion. Another $2.59 billion was registered for existing projects.
South Korea remained the top investor among 60 countries and territories by committing another $3.42 billion, or nearly 34 percent of the pledges.
Luxembourg came second with nearly $1.25 billion, followed by Singapore with $907 million.
Manufacturing and processing sectors continued to be the top sector, accounting for 65 percent of the registered funds, followed by information and communication with nearly 13 percent and real estate, 5.3 percent.
Investment worth $5.8 billion was disbursed during the period, which was a 17.2 percent increase from last year.
The FDI sector has been enjoying good business in Vietnam this year. It reported a trade surplus of $9.1 billion in the first five months.
Why Manufacturers leave China
Increasing labor costs have been driving manufacturers away from China to neighboring Asean countries like the Philippines, but the latter is not as attractive in terms of ease of doing business and infrastructure as Vietnam, according to French corporate and investment bank
Also, Natixis cited of the importance of the newly forged Trans-Pacific Partnership (TPP) in sealing manufacturing deals. “In addition to the elimination of import tariffs, TPP encourages mobility of capital and labor, protects intellectual property and data transmission. In other words, Asean countries’ existing trade agreements open doors to markets in both the US and China (in the case of Vietnam and Singapore even Europe). This is of course a structural advantage compared to China.”
Three Asean countries stand to benefit the most from rising labor costs in China: the Philippines, Thailand and Vietnam. In the case of the Philippines, however, the business environment would be “one key issue,” .
“Philippines, Indonesia, Cambodia and Laos underperform China, in terms of ease of doing business and control of corruption. In turn, Malaysia, Brunei, Thailand and Vietnam are doing better than China,” it noted, citing the governance indicators of the latest World Bank Ease of Doing Business rankings.
“The Philippines fares well on some key indicators but not on the business environment, which is of course very important. The fact that the Philippines manufacturing sector (mainly semiconductors) has been losing steam during years, as well as mainly their new dictator goverment” does not bode well for the future. Telecommunication, transport, power and water infrastructure in the Philippines also fell short compared with those in Vietnam.
Such makes Vietnam more attractive relocation sites than the Philippines for China-based manufacturers.
The hub of manufacturing is expected to relocate to Vietnam given its enormous market access, very low wages, relatively good infrastructure and business environment. Thailand could be another important destination, once the tense political situation (resignation of the military government) improves. But until that is expected Cambodia will have risen by much lower site costs.
Vietnam growing more attractive to foreign investment, including tech
„Vietnam has positioned technology at the center of its growth and development goals,“ said Sherry Boger, general manager with Intel Vietnam. „We see our facility and the broader technology ecosystem in Vietnam steadily rising up the value chain.“
Vietnam is one of the 12 countries participating in the Trans-Pacific Partnership, a landmark 12-nation free-trade deal whose negotiations concluded this week. The accord will let Vietnam ship many products tariff-free to countries that constitute two-fifths of the world’s trade.
Initially, the biggest boost will be for Vietnam’s apparel and footwear exports. But the U.S.-led trade pact should also help Vietnam attract more high-tech investments like Intel’s and push the country up the value chain. Neither China nor Vietnam’s main rivals in Southeast Asia have joined the accord; the Peterson Institute of International Economics forecasts that of all the TPP participants, Vietnam stands to gain the most.
The trade deal is just part of Vietnam’s strategy as it aims to move up the value chain after three decades as a hub for low-cost manufacturing. The country is also easing investment and tax rules, improving infrastructure and pursuing other trade deals as it seeks to position itself ahead of nearby competitors such as Cambodia and Myanmar.
Vietnam opened to investors in 1987, and within a few years became an alternative to China for companies looking to outsource basic factory work. China’s slowing economic growth since 2011 and its strategic shift away from low-value export manufacturing have been raising Vietnam’s competitive edge for making auto parts, furniture and garments.
Investment bank Goldman Sachs predicts that Vietnam’s economy, now the 55th largest in the world, will surge to No. 17 by 2025, with a gross domestic product of $450 billion, up from $186 billion currently.
The nation’s economy grew 6% last year and is forecast to expand at about the same rate this year. Since Vietnam opened its economy to foreign investment, its growth rate has ranged between 5% and 10% annually.
„Vietnam is among the more competitive destinations for foreign direct investment in the region,“ said Sandeep Mahajan, the World Bank’s lead Vietnam economist. „So the question is how do they leverage that to the maximum extent?“ In addition to participating in the trade pact, Vietnam expects to sign a separate free-trade agreement by 2018 with the European Union, a pact that would drop tariffs on many goods to the country’s major export market. And to entice even more overseas investment, Vietnamese officials are finalizing rules to let foreign investors fully own locally listed companies.
Overseas fund managers appear eager; already, half the top 50 Vietnamese companies by market capitalization have reached the old 49% foreign ownership limit. Many foreign investors started taking an interest in 2013, when the Ho Chi Minh City stock exchange rose by 20% over the course of the year. „I’ve talked with a lot of people, and they are optimistic,“ because as soon as foreign investors can buy majority shares, stock goes up and then you can make money on that, so they’re quite excited, said Pham Luu Hung, associate investment advisory director with SSI Research in Hanoi. Hung’s parent company, Saigon Securities, has declared itself formally open to majority foreign investment.
Foreign direct investment — led by Japan, Taiwan and South Korea — accounts for almost a fifth of the Vietnamese GDP.
Taiwanese high-tech fabric maker Singtex is among those putting money into Vietnam. Last November, the company opened a factory near Ho Chi Minh City employing more than 400 workers.
Singtex President Jason Chen said low labor costs factored into the decision, as did the expectation that TPP would offer his company’s products a leg up. Singtex makes high-performance fabrics used by companies including Nike and Timberland.
„TPP is just one reason to go to Vietnam,“ Chen said at his company’s headquarters in New Taipei City recently. „We have very good relationships with the Vietnamese; for the last nine years they have been working in our company here, so they are trained and know the corporate culture. They can return home and manage things and we don’t have to worry too much.“
To help keep Vietnamese exports competitive, Vietnam has let its currency, the dong, weaken three times since January (1% each time), with the latest move in August after China’s move to devalue its renminbi by 3.5%. A weaker currency makes exported goods cheaper overseas.
But production of some basic goods, particularly garments, is already moving from Vietnam to Cambodia, Laos and Myanmar, where labor is even cheaper. So Vietnam is trying to stay ahead of its neighbors and attract more high-tech production by upgrading its transport infrastructure with Japanese development aid.
The assistance has helped fund Vietnam’s first metro line, due to open next year in Ho Chi Minh City, the country’s financial hub. Congestion at the Hanoi airport, a major international gateway, eased this year with the opening of a Japanese-bankrolled $210-million terminal.
In high tech, Samsung Display broke ground last year on a $1-billion screen production plant, after opening a $2.5-billion smartphone assembly center in Bac Ninh province near Hanoi. Taiwan’s Foxconn Technology Group — a key Apple contractor — makes cameras, computers and other electronic devices in the same province.
A lack of skilled workers is Vietnam’s chief shortfall. Vietnam has 93 million people but only 3% are graduates of its 400 colleges and universities. Many of those institutions lack teachers for the subjects that foreign investors want employees to learn, human resource consulting firm ManpowerGroup said in a research report. Universities may feel stuck for lack of autonomy to decide fees and curricula.
Intel helped start a program to improve university-level engineering programs at Vietnamese institutions. And the company has sent 73 of its Vietnamese workers to study for two years at Portland State University in Oregon.
„We understood from the outset that there would be a need for capacity-building in skills development,“ said Boger, the Intel executive. „Our Vietnam graduate and post-graduate entrants are progressing well.… We are at an early stage in our investment.“
The one party government has driven Vietnam to the most investor friendly country in ASEAN
Vietnam is the most investment worthy place in ASEAN – this is a common response of many foreign investors when being asked about their investment plan in the upcoming years. This is not an exaggeration about Vietnam’s current investment environment as well as its potential but is in fact based on valid and practical grounds, where improved economic diversification, international integration, reformed investment legislation and good economic policy must be counted. Economic recovery and stable development
Vietnam’s regional and international integration
Investors consider that Vietnam’s current efforts to integrate into the world economy by negotiating many Free Trade Agreements (FTAs) also brings them better investment opportunities. In particular, Vietnam, together with other 12 countries, including its major trading partners like Japan and the United States is negotiating the Trans-Pacific Partnership (TPP) with market size of 800 million people (accounting for 38% of global GDP). Vietnam would be the largest beneficiary of this trade pact as a result of its strong trade ties with the United States, and its highly competitive positions in industries such as manufacturing where China is gradually losing its competitive advantage. Statistics shows that by participating in the TPP, Vietnam’s GDP would add an additional increase of 13.6% to the baseline scenario.
Beside the TPP, the EU- Vietnam FTA will also unlock huge opportunities to Vietnam such as tariff reductions, trade facilitation, investment attraction, expansion of markets to 27 EU countries, sustainable development and economic restructuring. 99% of Vietnam’s exports to the EU will be entitled with 0% import duty, leading to an increase of 30-40% in exports and 20%-25% in imports.
Vietnam and nine ASEAN countries established the ASEAN Economic Community (AEC) by end of 2015. This is a potential and dynamic market with over 620 million consumers, 60% of which is under the age of 35. This community, once established, is the 7th largest economy in the world – 4th largest by 2050 if growth trends continue. AEC is an attractive single production hub and facilitate international trade. The aim is to remove barriers to investment and enhance free movement of skilled labours. Investors can have a production base in one country and sell their products across the rest. Many foreign investors have started the trend and relocated their production base from other countries, especially from China, to Vietnam as shown in examples below.
Other FTAs that Vietnam has just concluded are Vietnam – Korea FTA and Vietnam – Eurasian Economic Union. These FTAs open the doors for Vietnam to export its textiles, leather, wood furniture, and agricultural products, etc. These FTAs are driving foreign investors to increase the investment capital and expand their businesses in Vietnam. The FTAs are expected to create a second investment wave in Vietnam after the first wave when Vietnam acceded to the WTO in 2007.
Second investment wave in Vietnam
It is no longer in theory. Vietnam is actually benefitting the most from growing wages in China, with more and more manufacturers shifting their production to Vietnam. foreign investors of a number of high-tech investment projects in Vietnam have decided to increase the investment capital and expand their production activities to timely grab the opportunities that FTAs create when they come into effect.
Recently, Bel Vietnam, a famous producer of French cheese in Vietnam has started constructing a 17,000 m2 new factory in Binh Duong with the total investment capital of US$17 million. The factory is expected to come into operation end of 2016 and full operation will be in 2020 with its capacity to be 9 times as much as the old factory. According to the General Director of Bel Vietnam, the new factory is used as a regional supply centre, focusing on South East Asian market to take advantage of the AEC. The new factory also serves as an R&D centre for products of the group.
LG Group is another case. Its initial investment capital was US$ 300 million to build a factory in Hai Phong. However, it then decided to increase the capital to US$ 1.5 billion. The factory is the largest complex in the region in an area of 800,000 m2, which will manufacture and assemble high tech products such as TVs, mobile phones, vacuum cleaners, etc. for export and domestic consumption.
Samsung in its export-oriented investment strategy announced its increase in investment capital by US$ 3 billion on 10 November 2014. Samsung is currently operating US$ 1 billion, US$ 2 billion and US$ 2.5 billion plants in Thai Nguyen and Bac Ninh Province. The additional US$ 3 billion is used to expand the US$ 2 billion plant to produce handsets. This is another example of production shifting away from China as a result of South Korea’s low exports to this country.
Other investors in textile sector are also preparing their entry into Vietnam’s market to grasp the advantages of the upcoming TPP. Since members of the TPP do not include China, India and Thailand, who are the direct competitors of Vietnam in the textile industry, Vietnam will have price related competitive advantage over these countries due to tax preferential treatment that TPP countries grant to Vietnam. This is critical considering the fact that China and the EU are still studying about the possibility to negotiate an FTA with each other.
WTO Country Limitation of market access
Singapore low
Vietnam low
Laos medium
Indonesia medium
Cambodia medium
China medium
Malaysia medium
Philippines medium
Thailand medium
Brunei high
India high
Myanmar high
Vietnam ties in first place with Singapore, thus it provides highest possible protection for investment
Vietnam is a country of changes and currently offering increasing opportunities for foreign businesses. The underlying strength of the economy is reflected in, among others, controlled macroeconomic indicators, strong productivity gains and extensive integration into regional and global economy. It is now exactly time for foreign investors to start their business plans and grasp the upcoming clear opportunities.

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