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
For decades, Vietnam has walked a tightrope between East and West, as Communist Party factions jostled over whether to align more with China or more with the US. China’s latest aggression in the East/South China Sea escalates the skill challenge — and may even threaten the survival of Vietnam’s ruling acrobats.
Although Vietnam has an ugly history with both countries, the pro-China faction has generally prevailed in Vietnam’s government. Vietnam has evolved as a Chinese-style state-controlled capitalistic autocracy. China has been allowed to exploit Vietnamese natural resources. China dominates trade between the two countries. And China even gets favorable treatment in Vietnam’s schools that teach about the horrors of the American War but gloss over (or don’t mention) the more recent border war of Chinese aggression.
But there’s evidence this week that the dynamic may be changing. The Chinese embassy in Hanoi was the setting for the largest anti-China protests in recent history, and the Vietnamese government permitted it. Vietnamese officials worldwide have been loudly protesting China’s contention that it owns the South China and all the resources within it — and Vietnam’s diplomats have been working overtime to line up supporters, including the US.
Meanwhile, China may not be the biggest problem the ruling party faces in Vietnam. A bigger problem may be its own citizenry: nearly 100 million mostly young, restless, entrepreneurial people who are increasingly enamored of Western culture, products, and political ideas. Many of them are highly educated, blogging, Facebook-users who are watching closely to see whether their government is capable of handling China.
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.
Says another: “How many more children have to die before you declare an epidemic? If you still have some dignity, please resign and give the position to someone else with better qualifications and more willingness to do the job so that the people will suffer less.”
Other Internet comments suggest health officials are downplaying the crisis because of Vietnam’s commitments to eradicate measles by 2017 — inspiring this caustic Facebook post: “Through this we can see how talented our health minister is—too talented. Her motto is listening to no one, knowing nothing, seeing nothing.”
Criticism escalated when Tien seemed to minimize the undeclared epidemic by contending only 25 deaths were technically attributable to measles, even though scores children have died as a result of measles-related complications such as pneumonia.
The World Health Organization says it is “very concerned” about the outbreak, partly because WHO and UNICEF undertook an apparently less-than-successful vaccination campaign to eliminate measles from Vietnam by 2012.
In the age of the Internet, the message for Vietnam is the same as that for government agencies worldwide: Google knows and Facebook shares.
Vietnam’s newspapers are reporting that the Hong Kong-based Dragon Best International has agreed to a partnership with a Vietnamese company, Ho Tram Tourism JSC, that envisions investing in: a $32 billion real estate development in Ho Chi Minh City, an $18 billion eco-tourism project nearby Ba Ria – Vung Tau Province, and a $50 billion economic zone.
On a global scale, these are huge projects. In Vietnam, they are head-scratching, utopian dreams that make experienced developers and economists skeptical about Vietnam investors’ capacity for realism.
Many international investors believe Vietnam is a promising frontier market, but none of them are going to pour an amount of capital into Vietnam that approaches the country’s annual GDP. Vietnam’s economy cannot absorb $100 billion in capital; moreover, it could not generate a return on the investment any time soon.
For Vietnam, the problem is that this is not the first pie-in-the-sky project that didn’t materialize. Last year Dubai investor Global Sphere announced its plans to spent $30 billion on the Hanoi Wall Street — 70 apartment blocks at heights ranging from 40 to 70 stories and housing up to 400,000 people with a 102 story central tower. Hanoi’s planners hadn’t heard about the project, and it has yet to be registered with the government.
In 2007, the US Eminence Group announced its plan to develop a $30 billion economic zone in Thanh Hoa Province. However, soon after the group made an enthusiastic presentation on the project, the investor vanished.
Ultimately, the investors who will be successful in Vietnam are those patient and disciplined enough to develop realistic, credible plans — not pipe dreams.
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.