Vietnam is still a promising destination for foreign investment in 2013, but the Government needs to urgently create a business environment friendly to investors if the country is to continue attracting foreign direct investment.
The year 2013 will see many other countries emerging as competitors in attracting investment, representatives of foreign business associations in Vietnam said.
Urgent need for improvements
Kim Jai Woo, chairman of the Korean Chamber of Commerce in HCMC (KoCham), told the Daily in an interview via email that the global financial crisis had lasted since 2008, but the global economy is expected to recover in 2013.
As China is cutting investment incentives for foreign companies, more Korean investors this year will come to Vietnam in areas of manufacturing and infrastructure, such as ports, bridges, and roads, said the KoCham chairman.
Nevertheless, if Vietnam fails to create an agreeable environment, Korean firms will shift their production to other countries, he added. There’re now about 2,500 Korean businesses operating in Vietnam.
Herb Cochran, executive director of the HCMC Chapter of the American Chamber of Commerce in Vietnam (AmCham), said Vietnam is no longer the top-rated investment destination for U.S. companies, since Indonesia, Malaysia, Bangladesh, and even Myanmar seem to attract more interest these days.
While many U.S. firms are successful in Vietnam, a growing number of AmCham companies are finding it more difficult to conduct business here than in the past years. Recent moves by the Government have caused numerous investors to rethink their business and expansion plans in Vietnam, Cochran said.
“Non-market administrative decisions on which items can be imported, how products can be priced, who can work in Vietnam, which programming can be broadcast on television, who can provide health care, and much more have contributed to a perception that investors are not welcome in Vietnam,” he added.
Given the current state of the economy, Vietnam should make every effort to entice foreign investment and resources. To retain existing and attract new FDI, Vietnam’s Government needs to listen to existing FDI companies, according to the representative of AmCham.
“We meet regularly with the Government in the Vietnam Business Forum and other consultations opportunities to discuss what the Government and businesses could do to attract more U.S. FDI,” said Cochran. “Unfortunately, not many of our recommendations have been accepted in recent years, nor have many recommendations from other foreign business associations or international experts,” he said.
In addition, Kim Jai Woo from KoCham added that the Government needs to pay more attention to decisive factors concerning investment, such as curbing production cost increase.
Dec 4, 2011. Foreign direct investment (FDI) disbursements will reach about $11 billion in 2012, signaling that Vietnam remains a favourite venue for investors despite the country’s economic slowdown.
At the same time, the Ministry of Planning and Investment’s (MPI) Foreign Investment Agency reported that new FDI commitment capital, as opposed to disbursements, this year to date has reached only $12 billion, a 21.4 per cent drop in commitments compared with 2011.
Samsung Electronics last month obtained an investment certificate for its expansion project worth $830 million in northern Bac Ninh province, bringing its total investment in Vietnam to $1.5 billion.
In the year, Vietnam also received investments from transnational companies such as Bridgestone, Nidec Corporation, General Electric, Jabil Corporation and Sumitomo Corporation.
According to a Global Manufacturing Competitiveness Index report released by Deloitte Touche Tohmatsu and the US Council on Competitiveness, Vietnam jumped from its current global ranking of 18th to 10th.
Nov 30, 2012. Vietnam should offer more financial and non-financial incentives to attract more foreign investment into its hi-tech sector, Nguyen Mai, former vice chairman of the State Cooperation and Investment Committee, tells Vietweek.
Vietweek: Vietnam is encouraging investment in the hi-tech sector, but FDI inflow has been limited. Why?
Nguyen Mai: Over the past decade, our policy in FDI attraction has not changed much. In fact, we still place priority on labor intensive projects. Our incentives for hi-tech projects have not met the requirements of investors. In November, the government is expected to consider a report by the Ministry of Planning and Investment on the issue, and make new policies, including offering incentives to investors. Investors in the hi-tech sector will have different requirements compared to those in such fields as textiles and garments and footwear. Most hi-tech investors are from developed economies like the US, EU, and members of the Organization for Economic Cooperation and Development, who have stricter requirements on legal transparency and the guarantee of intellectual property rights.
We have not yet fully met the requirements of hi-tech investors, especially the big ones. Thus, the government should reconsider our current policies to meet these requirements.
HCM City, Nov 25, 2012. Despite the difficult domestic and international economic environment, Vietnam – U.S. trade in 2012 continued to grow, but at a slower pace than in previous years. Based on nine months data (Jan-Sep) from the U.S. Department of Commerce, bilateral trade may reach $24.5 billion in 2012, a healthy increase of 12% over 2011, when bilateral trade was $21.8 billion. Most noticeably, U.S. imports of apparel from Vietnam may reach only $ 7.5 billion, an small, single-digit increase over the $ 7.2 billion in 2011, and down sharply from the double-digit growth of 2010 and 2011. On the other hand, Vietnam’s exports of higher-value-added products from “modern manufacturing” FDI are increasing sharply.
Total bilateral trade in 2011 was US$ 21.8 billion, up 17.5% over the previous year, with Vietnam’s exports to the U.S. $ 17.5 billion (up 18%), and imports from the U.S. $ 4.3 billion (up 17%), demonstrating once again that manufacturing foreign direct investment (FDI) and trade are strong and stable factors that support Vietnam’s economic and social development.
In comparison, total bilateral trade in 2012 may reach about US$ 24.5 billion (up 12%), with Vietnam’s exports to the U.S. about $ 19.8 billion (up 13%), and imports from the U.S. about $ 4.8 billion (up 9%).
Growth of Vietnam’s apparel exports to the U.S. is likely to continue to slow because of increasing labour costs, increased competition from countries such as India, Indonesia, Bangladesh, and Mexico, not to mention Cambodia and Myanmar, and reduced demand in the United States. The hope for Vietnam is that exports of “modern manufacturing” and services will take up the slack, both in export revenue and employment.
However, lack of trained workers and increasing wage costs without productivity gains in the factories and efficiencies in the economy (transportation infrastructure, customs, business services) that reduce costs may slow the growth of Vietnam’s exports to the U.S. According to the Asian Development Bank, less than 30% of young workers, who comprise half the workforce, have completed upper secondary education.
As for increasing labour costs, the below chart and table show actual minimum wages in vnd/month 2008-2012, proposed minimum wages in 2013, and projected minimum wages in 2014-2017 based on the Party Central Committee Decision 23-KL/TW, May 29, 2012 to “Adjust the minimum wage more rapidly in the private sector so that by 2015 the minimum will reach the level of the Basic Needs Wage.”
U.S. Textiles and Apparel Imports from “2nd Tier Countries”
Vietnam rapidly achieved the status of 2nd-ranked supplier to the U.S. textiles and apparel import market after entry into effect of the Vietnam-U.S. Bilateral Trade Agreement in December 2001 and Vietnam’s entry into WTO in January 2007, more than doubling its exports from about $3 billion in 2005 to over $7 billion in 2011, taking market share mostly from Mexico, it seems. However, Vietnam’s rapid growth of textile and apparel exports to the U.S. market has slowed since 2010 as other “2nd Tier Countries,” such as Indonesia, Indonesia, and Bangladesh, steadily increase their exports, while Mexico seems to have halted and reversed, since 2010, the sharp fall in its exports to the U.S. between 2005 and 2009. However, according to a number of industry experts, India’s infrastructure for garment manufacturing is still not adequate to match its raw material sources, which may be the core of their exports to the U.S. (cotton fiber, cotton yarn, fabric) and India still has much more to do in order to utilize all of their local raw materials, which may be difficult for them to achieve in the next 5 years. Mexico has NAFTA preferential access to the U.S. market.
Source: Chart created by author, based on data from US Department of Commerce Apparel Imports Data
U.S. Textile and Apparel Imports from China, “2nd Tier Countries,” and “Other Countries”
The below chart shows that a “new normal” may have been achieved after the removal of U.S. apparel import quotas for WTO members in 2005. U.S. apparel imports from “Other Countries” dropped by more than one-third, from $46.5 billion to $30.5 billion between 2005 and 2010; U.S. apparel imports from China nearly doubled from $22.4 billion in 2005 to $40.7 billion; and U.S. apparel imports from “2nd Tier Countries” increased by 37% from $20.3 billion to $27.9 billion in 2011. Since 2010~2011, it seems that a new equilibrium has been reached, with the outlook for China’s apparel exports to the U.S. to decrease slowly over time, as more companies join the “leaving China” movement, while exports from the “2nd Tier Countries” and “Other Countries” increase slowly. Indonesia, where FDI doubled to $20 billion in 2011, Bangladesh, which recently hosted an AmCham Hong Kong apparel sourcing delegation accounting for $5.8 billion/yr, and Myanmar are seen as the most promising FDI destinations for those “leaving China.”
Source: Chart created by author, based on data from US Department of Commerce Apparel Imports Data
Vietnam’s Higher Value-added Exports from “Modern Manufacturing” FDI
A recent phenomenon in 2012 is the sharp growth in Vietnam’s higher value-added exports from “modern manufacturing” FDI such as the Intel $1 billion assembly and test facility in Saigon Hi-Tech Park, and also FDI by Jabil Circuit, Korea’s Samsung Electronics Co., and Japan’s Nidec, etc. Based on this FDI, Vietnam has increased high-tech exports amid a global slowdown that has damped demand for goods from other Asian nations. Shipments of mobile phones and other electronics from Vietnam surged 91 percent in the first 10 months of the year to $16 billion. Vietnam’s shipments of electrical machinery to the U.S. climbed 58% in the first eight months of 2012, while China’s sales to the U.S. in the category rose 11 percent, Malaysia’s grew 4 percent, Thailand’s slid 5 percent and Indonesia’s fell 16 percent in the period.
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Source of data
|US Department of Commerce Trade Data|
|US Department of Commerce Apparel Imports Date|
|Vietnam Trade Data: General Statistics Office of Vietnam|
One of the most important points in the strategy is reducing labour-intensive FDI projects with low technology, while increasing FDI in low-carbon sectors, R&D projects, agriculture and service sectors. More importantly, foreign invested enterprises must have linkage with domestic suppliers to boost local industrial manufacturing.
“We have to limit FDI in labour and energy intensive sectors and FDI projects with low technology,” said Do Nhat Hoang, director of the MPI’s Foreign Investment Agency. But this is the first time this FDI strategy has been prepared with specific and comprehensive targets and measures.
Hoang said the new strategy could lead a decline in FDI commitments to Vietnam in the short-term because many foreign investors would relocate their labour and energy intensive projects to other countries like Cambodia and Myanmar.
Vietnam’s textiles and apparel sector is seeing a decline in foreign direct investment (FDI) during the past several years, and the sector is being held back by its reliance on imports of raw materials, according to the Viet Nam Textile and Apparel Association.
FDI in the sector has fallen from an annual average of US$ 460 million during the peak period of 2000-08, and the number of FDI projects has also decreased during the past three years.
Total registered capital from foreign investors in the sector for 2009 and 2010 was at $185 million and $169 million respectively.
Foreign investors also focused heavily on garment making that required low investment capital. They paid less attention to the production of raw materials and accessories such as fabrics and processing such as dyeing, that required high investment capital and high technologies and no promise of a quick return on investment, said the association.
Le Quoc An, former chairman of the association, attributed the situation to the fact that Viet Nam still lacked industrial zones specialising in fibre, textile and dyeing on large enough scale to attract major overseas companies.
Viet Nam earned $ 14 billion from textile and apparel exports last year, but it had to spend up to $ 9 billion on imports of raw materials and accessories.
An said the reliance on imports was the Vietnamese clothing industry’s greatest weakness. However, he said it was also a good opportunity for the sector to organize its investment priorities and plan for solid growth in the future.
“Once the sector does this, giant foreign investors will enter Viet Nam,” An said.