Last week’s anti-China riots in Vietnam spooked investors, rattled the stock exchanges, threatened foreign business deals, and ignited conversation about whether that the political and economic risks in that region outweigh the potential rewards. But where some see the unraveling of peaceful co-existence in Southeast Asia, others see a golden opportunity.
Are businesses and investors over-reacting? Consider some of the more encouraging news coming out of Vietnam this month:
- Samsung is going ahead with expansion of manufacturing in the northern provinces of Thai Nguyen and Bac Ninh. As a result, about 50% of its smart phones made globally will be made in Vietnam. Already, Samsung’s factory in Bac Ninh was one of its largest worldwide, and the company accounted for $24 billion in exports from Vietnam. The Thai Nguyen factory opened in March will employ 16,000 workers and produce eight million units per month.
The Saigon port welcomed the largest ship ever docked there, a 54,000 ton vessel able to navigate the river safely thanks to a mammoth dredging project that will allow ships of this size to save $500,000 a year in transit costs. The port projects moving 120-150 million tons by 2025.
The investment ministry unveiled a proposed law that will cut red tape and streamline foreign investment by eliminating certificates for many projects, simplifying procedures, ending favorable treatment of domestic investors, and improving transparency.
Foreign investors have been snapping up stocks that domestic investors are rushing to sell in an over-reaction to last week’s riots. Foreigners are taking advantage of sharp drop in the VN Index, which peaked at 610 points earlier this year and fell below 530 before climbing back to 544 today.
- McKinsey released a study concluding that ASEAN, composed of Vietnam and nine other countries, will be the world’s 4th largest economy in 2050.
Business is getting done in Vietnam. Opportunities abound. The ugly events of last week are not likely to lead to war in the South China Sea. More likely, they will turn out to have been an exchange of moves in a chess game of diplomacy that will help clarify the figurative boundaries between two of the world’s fastest growing economies.
Posted in Vietnam development
Tagged Vietnam business, Vietnam development, Vietnam diplomacy, Vietnam economy, Vietnam exports, Vietnam government, Vietnam infrastructure, Vietnam investing, Vietnam law, Vietnam manufacturing, Vietnam stock market, Vietnam Trade, Vietnam transportation, Vietnam workforce
One of the consequences of today’s crisis in Eastern Europe is the escalation of anxieties elsewhere in the world. The situation in Ukraine has reverberated at least two ways in faraway Vietnam: (1) disrupting economic stability, and (2) raising the spectre of armed conflict in Southeast Asia.
Vietnam’s stock market, world’s best performing in the first part of 2014, has been in a nosedive since the Ukraine crisis. That’s partly because of conflicting views within Vietnam’s ruling party about economic health of the country; but it also reflects concern about both fragile export markets in Europe and the reliability of Russia as a long-time economic and diplomatic ally.
Meanwhile, people who have been watching developments in the South China Sea are wondering if Vietnam is on a path to become China’s Ukraine. That’s not surprising considering the centuries of Chinese aggression toward its southern neighbor.
The latest Chinese assertiveness is its construction of an oil and gas exploration rig near the Vietnamese coast in South China (or East) Sea territory claimed by both nations. State-owned PetroVietnam asked China National Offshore Oil Corp. to remove the rig — situated 120 miles East of the Vietnamese coast and within what Vietnam considers its exclusive economic zone. China responded by repeatedly ramming Vietnamese military boats.
Until now, conflict between China and Vietnam in the sea has been limited mostly to verbal sparring over who owns the Paracel and Spratly Islands, and Chinese harassment of Vietnamese fishing fleets.
The latest dispute highlights the increasing potential for military aggression in Vietnam’s East Sea, as Southeast Asia worries about parallels between Eastern Europe and its own region of 600 million people.
Vietnam is quietly emerging as a center of health-conscious consumption — with surging marketing and manufacture of so-called functional foods: products intended to provide both nutritional and health benefits.
Local media report 1,800 functional food makers and distributors — including American companies Amway, NuSkin, Unicity and Herbalife — are selling 10,000 products in Vietnam, and business is booming.
Herbalife says the Vietnamese market contributed significantly to its $4.8 billion in global sales last year. Unicity reports its success in Vietnam is above expectations. NuSkin reported 30% growth last year in Vietnam and projects 33% this year by conquering the central Danang market.
Amway’s second factory in Vietnam is expected to produce 24,000 products valued at $200 million starting early next year. The company began cultivating the Vietnam market in 2008 and last year generated $90 million in revenue, a one-year increase of 14%.
Vietnam is a lucrative and growing market for functional food because its consumers tend to be educated, health conscious, and concerned about obesity, cardiovascular health and physical beauty. The Vietnam Supplement Food Association reports 56% of Hanoi residents and 48% in Ho Chi Minh City use functional food.
Even more important to American companies, the ASEAN free trade agreement that takes effect next year will facilitate the export of products they make in Vietnam to Southeast Asia’s 600 million consumers.
Vietnam isn’t being very hospitable to two of its most prominent American multi-nationals. Starting next July, the finance ministry wants to impose a 10% tax on carbonated soft drinks — which is to say Coke and Pepsi.
The rationale is these beverages are harmful to public health, just like other products consumers want — but which health officials don’t want them to have — like cigarettes and alcohol.
The new tax is getting criticism from foreigners who are thinking more about profits than health. A consultancy that focuses on global interests in Vietnam says the tax will hurt consumers and the local sugar industry, retail distribution system and retailers.
The American Chamber of Commerce, whose members include Coke, Pepsi, Miller beer, Philip Morris tobacco, Dow chemical and other companies that give Vietnamese health officials pause, calls the proposed tax unfair to consumers.
Meanwhile, Vietnamese officials aren’t in agreement with each other. The Viet Nam Tax Consultancy Association favors the tax, but the Central Institute for Economic Management suggests it would be counterproductive — bringing in $8.4 million tax revenue but costing the beverage industry $41 million and Vietnam’s economy $12 million because demand for soft drinks would decline 28%.
The proposed tax is testing Vietnam’s Communist Party ideal of creating an enduring socially responsible free enterprise economy. That won’t be easy to do as the country opens its door ever wider to the global marketplace.
Japanese economist Kenishi Ohno says Vietnam has fallen into the feared middle income trap — perpetual stagnation after stalling on the past to prosperity.
He says the country faces a social crisis because it failed to heed warnings six years ago. Vietnam now faces:
- Slowing economic growth
- Low investment efficiency
- Rising production costs
- Little improvement in competitiveness
Ohno says productivity has grown 3% annually while wages rose 26%. Competitiveness has dropped at an annual rate of 23%.
Vietnamese economist Nguyen Minh Phong says it’s too soon to conclude his country has fallen into the middle income trap. He contends the government deliberately slowed Vietnam’s growth to enable economic restructuring to take place.
To stay out of the middle income trap, Phong says Vietnam needs to:
- Prioritize development of information technology
- Reduce exports of natural-resources
- Support enterprises with market research
- Explore niche markets
- Help small enterprises get loans
- Expand bilateral trade agreements
- Reform education and training
Vietnam also needs to follow the examples of Japan, Taiwan, Singapore, and South Korea — all of which cultivated the private sector on their way to full economic development.
For several years, it has become increasingly obvious that Vietnam’s escape from economic mediocrity depends on the capacity of its own government to surrender control and permit the private sector to flourish.
Vietnamese authorities are disappointed by the results of this year’s initial public offerings of state-owned enterprises. The companies were able to sell only 27% (84 million) of the more than 300 million shares offered –and foreigners bought only 10 million. Proceeds totaled $49 million.
The lack of enthusiasm among investors is being attributed to the offerings being mostly companies doing public works business in the property sector that has experienced falling prices. Also, Vietnam’s economic recovery has been relatively weak so far, and the government is not expected to boost public works spending.
But that doesn’t explain why investors are repelled by Vietnam’s state-owned companies at the same time they have driven up Vietnam’s stock prices by nearly 20%.
The explanation may be simpler: The companies are pricing their shares higher than the market wants to pay for them.
Vietnam’s government will have more success privatizing their businesses once it fully accepts the way capitalism works. In capital markets, the government doesn’t get to decide how much a company is worth; the market does.
When Vietnam lowers its expectations in pricing its IPOs, the country will successfully sell shares in the 432 state-owned enterprises scheduled to be privatized by 2015.
Vietnam’s economy has grown 5% this quarter, slightly faster than the first quarter in 2012 and 2013, with a $1 billion trade surplus and growth especially robust in the Saigon region. But the striking economic news in a country that was experiencing runaway inflation in recent years: Vietnam’s consumer price index declined in 0.4% in March and now is below an annual rate of 5%.
The data suggest Vietnam is on an economic path toward reaching its long-term potential. But what is its potential? Some economists think Vietnam is headed toward the middle-income trap that stalls many developing countries, such as the Philippines, Indonesia, and Thailand. Others see Vietnam as the Japan (or South Korea) of the 21st Century.
The latter viewpoint got a boost in a forum in Hanoi this week that featured Harvard’s Robert Lawrence, who forecast 13.5% economic growth for Vietnam in 2025. That’s assuming implementation of the Trans-Pacific Partnership (TPP) agreement that is expected to dramatically increase Vietnam’s global trade.
Lawrence projected many other TPP partners (the US, Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Malaysia, Brunei, and Japan) would experience significantly slower growth. His numbers suggested Vietnam’s exports would increase 37%, compared to 14% for Japan and 12% for Malaysia, and 4% for the US.
The TPP has yet to be completed, so Vietnamese officials were quick to point out their country would not necessarily benefit the most from it — because its economy is starting far behind the other partners.
Vietnam’s statistics office and the World Bank shed new light on income in the country — and quantify the rural-urban gap. They say the typical city dweller earns $142 a month compared to $76 for rural residents. Average earnings for Vietnam’s poorest citizens are estimated to be $24 per month, a 39% increase over the highly inflationary period between 2010 and 2013.
This helps explain two things: (1) why the world’s multi-national manufacturers are flocking to Vietnam to source their products, and (2) why entrepreneurial dreams are flourishing in the world’s 13th most populous country.
Vietnam has a young, educated, eager — and, most important, plugged-in — workforce accustomed to wages far behind its peers in China and elsewhere in Southeast Asia. Even citizens who earn $1 a day tend to be literate and have someone in the family who is connected to the Internet.
And despite urban migration that is spurring explosive growth in Hanoi, Saigon and other cities, Vietnam’s population remains mostly rural and the employment mostly agriculture. In this sector, $1 dollar a day remains the standard wage — and a job offer from a Japanese or German widget-maker looks like an attractive stepping stone to the entrepreneurial dreamland that is the World Wide Web.
This is shaping up to be a break-out year for Ho Chi Minh City (Saigon), Vietnam’s business and financial center, and its most populous city — 9 million headed toward 14 million by 2025.
Sales and services revenue is up 12% this year and approaching $5 billion. February exports are up 15% to $1.8 billion. Agricultural production is up 6%. The city hosted nearly 400,000 tourists in February, a 10% increase, and licensed 2,700 new businesses accounting for 25,000 new jobs.
And all of this precedes the conclusion of Trans-Pacific Partnership (TPP) negotiations that are expected to boost trade further between HCM City and the US, Australia, Malaysia, and Singapore, among others.
Perhaps the strongest sign of robust economic conditions in HCM City is the rise in foreign direct investment (FDI). The city says it granted 12% more investment licenses so far this year than at this time last year (46) — with an aggregate of $164 million capital, up 267%.
This suggests the year of the horse will be powerful for the former Saigon — and as goes Saigon so goes all of Vietnam.
The year 2014 — the year of the horse — has greeted investors with disappointing results worldwide so far. Today the Global Dow is down 1% (3% in Asia) amid anxiety about the collapse of emerging markets. But in Vietnam the surge continues.
Investors are placing bets on frontier markets — about 30 countries with relatively low capitalization and liquidity that are not yet considered emerging markets. The best performers among frontier markets (and also among all markets) are Argentina and Vietnam.
The VN Index is up 14% so far this year (as is Argentina’s primary index) on top of a 22% gain last year. After several years of economic turmoil, Vietnam has begun the year of the horse with a stronger economic footing that will help support high corporate dividends — for many companies in the range of 12% and above.
Vietnam, and the people who invest in Vietnam, are counting on the country’s continued development as a major exporter of raw materials as well as agricultural and consumer products. Vietnam achieved a favorable trade balance last year, and the surge in foreign investment that began in 2014 appears to be continuing.
Is there more room for growth in a frontier market that already increased 22% last year and another 14% in the first six weeks of 2014? The answer would be “Yes” if you consider the fact that the VN Index was 574 at today’s close; that’s 49% of Vietnam’s market high of 1174 established early in 2008.