Manufacturers in China are adding manufacturing capacity in Hanoi and Ho
Chi Minh City for export back to China and beyond
Dec. 3 – Over the past few months
as I’ve been speaking at events across the United States, many questions have
been raised about all sorts of subjects – from the differences in tax rates and
legal structures within individual countries, such as China or India, to the
primary differences between entire countries. Concerning the latter, the
country-to-country comparison that gets raised most often is between China and
Vietnam.
It’s a timely comparison to
examine, not least because Vietnam is one of Asia’s “Tiger Economies” and due
to the fact that, although it has suffered over the past three years like
everyone else in the wake of the Global Financial Crisis, the country has
proven remarkably resilient. Vietnam as an investment play, though, is
inherently linked to two distinct entities. One is China – its massive neighbor
to the north, with which it shares an 840-mile border that was fought over
briefly during the Sino-Vietnamese War in 1979. The other is ASEAN – the
10-member Southeast Asian trade bloc that has introduced the free trade of most
goods among member nations, and is set to expand that in 2015 to include
agreements with China and India. That has huge ramifications for the region,
and will likely mean that ASEAN, with Vietnam as a core member, will become
China’s largest trade partner that same year, with total trade worth some
US$500 billion. To contrast the enormity of this figure, the entire United States
sold just one-fifth of that in exports to China last year.
Vietnam’s relationship with China
is both economic and political. Although that may seem obvious, it is the
manner in which these play out that will provide clues as to the true nature of
the stresses and opportunities within the trade gap. Despite both countries
being officially communist regimes, Vietnam has offered a cool hand to China,
wary of getting too close due to the 1979 war and ongoing territorial disputes
still fresh in many people’s minds.
While other Asian nations –
including nearby Myanmar and Cambodia – have fully embraced China in the past
in terms of economic assistance, Vietnam has remained aloof – and continues to
do so. That’s not to say bilateral trade between Vietnam and China isn’t
booming – because it is, reaching US$35.7 billion last year. Yet Vietnam
remains politically cautious towards China. Ongoing territorial disputes
between the two in the South China Sea certainly aren’t helping the situation,
and Vietnam has recently refused to endorse the new Chinese passports which
depict the entirety of the contested territory as Chinese. This lack of trust
over longer-term Chinese intentions has steered Vietnam to look in multiple
directions – north and east towards China, but also to the south and west
towards Asia. It is worth noting that Vietnam’s trade with fellow ASEAN member
countries is currently some US$27 billion; while the country has been active in
using ASEAN free trade agreements with other countries such as India, Japan and
Australia to widen its economic base and lessen dependence upon trade with
China – in contrast to countries such as Cambodia.
Of the ASEAN members, Singapore,
Thailand and Malaysia are Vietnam’s largest partners, while outside of the
group trade is also growing significantly with India and Japan. The reason
behind Vietnam spreading its trade wings further afield is at least partly due
to the belief that China has not always proven particularly sensitive to other
nations within the region. Vietnam has past experience of being treated as a de
facto vassal state, and until recently even Myanmar was subjected to this
through China’s support of their military regime for many years. Yet even the
hard-line Burmese generals began to feel enough was enough and have
subsequently adopted America as a mentor.
Additionally, Vietnam, while
communist, is still largely Buddhist in its beliefs, and quietly, the Dalai
Lama is a respected figure among many Vietnamese. The typical Chinese rhetoric
towards the Buddhist leader makes many Vietnamese uncomfortable. Meanwhile,
while Cambodia is still close to China, it too is being wooed by President
Obama – who visited shortly after his reelection. Such American moves fit in
with Vietnam’s China policy – trade is healthy, but Vietnam remains cautious in
terms of the political ramifications of an over reliance on China’s economy.
It’s a fact of political life with a powerful neighbor well-observed in Hanoi.
Vietnam’s policy of enlarging its
multilateral trade space is also about to pay dividends. With the 2015 ASEAN
free trade agreements with China, India, Japan, South Korea and Australiasia
coming into effect, the country is poised to offer a manufacturing base for
many companies wishing to sell to the entire region. It is this point that is
key to understanding the opportunities that Vietnam now offers.
Wage increases in China are a
matter of national policy, and although this is creating a much-needed and
fast-growing consumer market, it is also having the effect of raising salary
levels at an average rate of some 22 percent per year. While prices in Vietnam
have also risen – and its economy is not immune to inflationary shocks –
Vietnamese wages are about one-third of those seen in South China.
This means that Vietnam is
developing as an export-driven manufacturing base – just as China was in the
late 1990s to mid-2000s. The free trade agreements coming into force mean that
Vietnamese-made products (or those from anywhere else in ASEAN) will, for the
most part, be able to be sold to the China market at zero tariffs. Add to that
an array of free trade and bonded zones (just like China used to have) that
minimize taxes on products assembled and then exported, plus commitments –
already underway – to improve the nation’s ports (especially those at Haiphong
and HCMC), the tax and operational infrastructure to push Vietnam forward as a
credible manufacturing destination for China consumption is already taking
place.
This trend has been duly noted,
not least by American companies already extant in Vietnam. As Christopher
Towmey, current Chairman of the American Chamber of Commerce in Hanoi has
recently mentioned in the Chamber’s annual Vietnam Business Forum address:
“AmCham cooperation with and
support of Vietnam’s government and business has led to a substantial increase
in bilateral trade over the last twelve years: from only $1.5 billion in 2001
when the BTA went into effect (December 2001); to $9.7 billion in 2006 when
Vietnam achieved WTO Accession and Permanent Normal Trade Relations with the
U.S. (December 2006); to more than $22 billion in 2011. Based on trade data for
the first nine months of 2012, we expect that Vietnam-U.S. bilateral trade will
be $24.5 billion this year, and will reach nearly $50 billion by 2020, if
present trends continue.”
The message is simple – while
China evolves to a consumer economy, the choice of locations to service that
from the manufacturing perspective do not necessarily have to be based in
China. Vietnam offers one option well-worth consideration.
Chris Devonshire-Ellis
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Health care and Life Science with expertise in ASEAN 's area. We are currently changing the platform of www.yourvietnamexpert.com, if any request, please, contact directly Dr Christian SIODMAK, business strategist, owner and CEO of SBC at christian.siodmak@gmail.com. Many thanks.
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