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.
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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.
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.
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 science ministry reports four technology exchanges accounted for 5,482 service and equipment transactions worth $129 million last year — 34% more than a previous year, and far exceeding expectations.
In Haiphong alone, 40,000 people exchanged scientific views and searched for technologies. The Danang exchange has recorded 5,321 domestic businesses and 153 foreign companies registering 7,754 technology transactions over the past five years.
These are signs that Vietnam is serious about being a global technology leader and consumer. The government projects a 15% annual increase in technological product and service sales through 2020 as exchange projects expand countrywide and universities grow the country’s tech expertise.
These developments have generated a growing awareness among global technology leaders about Vietnam’s potential. This week’s examples:
- On Thursday the Vietnamese and Finnish governments signed a $14 million agreement to implement the second phase of their joint innovation partnership to enhance the capacity of Vietnam’s information technology system and increase activities in scientific research and technology development.
- On Friday Microsoft formally agreed to a long-term partnership with Vietnam to focus on four technologies (1) IT infrastructure, (2) cyber security, (3) cloud apps development and (4) IT human resources.
The race is on to capitalize on hi tech hunger in a promising frontier market of nearly 100 million people.