Asian trade is excited by Vietnam. Finbarr Bermingham finds out why.
There’s a guy in Ho Chi Minh City that they call the Chicken Feet King – renowned throughout the city for supplying that most Asian of culinary delights. Recently, according to local lore, he suffered a blip in trade when cheaper chicken feet hit the town. His confusion turned to bewilderment when he realised that the cut-price feet were coming from the United States, where the taste for poultry doesn’t quite extend beyond the leg. “Surely,” he thought, “US chicken should be more expensive than my own?”
The conversation over US goods on the Vietnamese market has been growing louder, and as the Trans-Pacific Partnership (TPP) gets closer to ratification, the Chicken Feet King may not be alone in his grumbles. “Everybody’s talking about it. Fishmongers will know about it because they’re afraid of getting a fresh influx of competing fish from the US,” says Fred Burke, managing partner at Baker & McKenzie, and owner of the anecdote above.
“But at this point, honestly I think they want the TPP more here than in the US. It just doesn’t matter to most people in the US. It’s a different story here. They’ve seen in the last 20 years what opening markets means to jobs and wealth and they want to continue that integration strategy. There’s a big difference in the mentality,” he says.
Even before the TPP is considered, Vietnam’s transformation over the past two decades has been extraordinary. Even now, as other Southeast Asian nations around it stutter or plateau, it has not slowed down significantly. As the likes of Indonesia, Taiwan, Hong Kong and Singapore struggle with China’s changing economy, Vietnam is one of the places taking advantage, absorbing much of the low-cost manufacturing that’s being pushed down into the Mekong Delta.
A few statistics help illustrate the change the economy has undergone in recent years. In 2010, 20% of the population was living below the poverty line. That figure was 13% in 2014 and is falling annually. Five years ago, inflation was running at 23% compared to 1.33% for the first quarter of 2016 (which in itself was the highest for a few years).Its economy is expected to grow by around 6.5% this year, based on a number of forecasts, while inbound foreign direct investment (FDI) grew by 17.4% in 2015.
Compared to the chaos it is surrounded by (the endless military coups in Thailand, the uncertainty over new President Duterte in the Philippines, the reluctance to allow FDI in Indonesia), Vietnam looks like a model of stability. Undoubtedly, it is flattered by the standard of competition, but to many of those involved in trade in Asia, Vietnam is the silver lining on a bulging grey cloud.
“A familiar blueprint”
It’s not a model we haven’t seen before. Izumi Devalier, an economist at HSBC, says the country’s rise “follows a familiar blueprint blazed by Asia’s early industrialisers”. She continues: “Leverage cheap labour to attract foreign investment and technological know-how to modernise the economy and boost exports. Vietnam’s policymakers deserve a lot of credit in this area. They have moved remarkably swiftly on opening up and trade liberalisation over the last five years. The resilience of the export sector is a key driver of our call that Vietnam will continue to outperform its neighbours.”
The relative political stability of Vietnam, combined with the low cost of production, has attracted some of the world’s biggest technology companies to set up huge manufacturing plants in the country. In 2014, Korean giant Samsung announced a new US$3bn smartphone factory in Vietnam. This was in addition to the US$2bn plant it established back in 2009, as it sought to steal a march on rivals by shifting production away from an increasingly expensive China.
Samsung products now account for around 20% of Vietnam’s total exports, with 40% of all its handsets coming from the country. Others have followed suit: Intel opened a US$1bn microchip factory in the country in 2010 followed by a second in 2014. It was estimated that by late last year, 80% of the world’s computer chips were being made by Intel Vietnam. In March 2015, Microsoft announced the closure of two factories in the Chinese cities of Beijing and Dongguan, with the company shifting handset production to Vietnam.
While it would be far too early to sound the death knell for Chinese manufacturing completely (the southern Chinese province Guangdong, for instance, has a far larger population than all of Vietnam), the trend is clear.
“The importance of Vietnam’s electronics industry has risen dramatically, with its share of total GDP rising from 5.2% in 2010 to 23.4% by 2014,” says Rajiv Biswas, chief economist for Asia Pacific at IHS. “The total value of electronics exports rose from US$6.9bn in 2011 to US$45.8bn in 2015, which has been a key factor supporting the rapid growth in Vietnam’s total exports over the past five years. As a result, the share of electronics in total exports has increased from 5% in 2010 to 28% by 2015.”
China is clearly a factor in this, but it’s also worth exploring a number of policy measures taken by the Vietnamese government in recent years to see the impact they’ve had on trade.
Frisking the policy
The 4 million registered motorbikes on the roads of Hanoi make for a hell of a racket and a nerve-racking jaunt to the other side, but the horror stories surrounding the country’s traffic pale in comparison with those from Manila, Jakarta or Bangkok. Trade infrastructure, too, is a different story.
While traders in Indonesia despair about the inability to get their cargoes out of the country, there are no such problems in Vietnam, where, if anything, there is far too much capacity. Over the past decade, in a bid to become a regional manufacturing hub, the government convinced investors from around the world to put their money into a host of seaport terminals.
“Fifteen years ago there was a hue and cry from the foreign investors saying there wasn’t enough capacity for the exports of shirts they were making,” says Burke at Baker & McKenzie. “So the government listened and allowed licences for a whole bunch of ports. You have American, British, Hong Kong and other investors into these port projects, getting all this international finance for them and now they don’t have enough business. Even though business is booming, there’s still not enough business. They got 10 years ahead of themselves. They’ve tried price controls and shutting down some ports: they’ve tried everything to match demand with supply. But for manufacturers it’s great news: it’s brought prices down dramatically.”
The main losers in this, it would seem, are investors – and some of them have lost pretty big.
In 2014, Bloomberg reported that port operators in Cai Mep International Terminal in the country’s south-east were losing around US$1.5bn a year. The government too has run up high levels of sovereign debt, which has led to the World Bank strongly discouraging it from issuing any more guarantees for power and transport projects.
The World Bank has also urged the Vietnamese government to focus on its internal freight logistics, saying: “More competitive transport and trade logistics can become a new driver of sustained growth through their positive impact on productivity and their direct influence on business competitiveness.”
The government might be forgiven for feeling caught between a rock and a hard place: on one hand being scolded for being too expansionary, while on the other being told to improve its infrastructure. In a report entitled Bridging the Gap, HSBC spelled out the quandary: “Despite the development of its metro system, reform of the rail system has been slow. One notable example is the bullet train intended to link Hanoi and Ho Chi Minh City by 2035. Proposed in 2009, it has made no material progress due to the high costs and financial risks involved. Costs were initially estimated at US$56bn but were reduced to US$21.4bn in a modified proposal unveiled in August 2012. Even so, this was deemed too high by policymakers: Vietnam’s GDP in 2012 was about US$140bn.”
The government has shown some ambition in this area, but should look for more sensible and pragmatic areas of investment. Yet, its ambitious attitude is further evidenced by its aggressive pursuit of free trade agreements (FTAs).
As a member of the Asean grouping, Vietnam has an FTA with China, which – as we still await the completion of the TPP or the Regional Comprehensive Economic Partnership (RCEP), both of which Vietnam is a member – remains the largest free trade area in the world by population. This agreement is one of the main drivers behind the huge tech investment discussed previously, with the removal of tariffs making it cheap to move components and finished goods over the border between Vietnam and China.
Perhaps even more transformative, however, will be the aforementioned TPP, along with the agreement with the EU that was agreed in principle in September 2015. The US is already Vietnam’s largest export market, with the EU being number two. The EU deal will remove 99% of tariffs on an export route that was worth more than US$30bn to the economy last year.
And while concerns exist over the impact of a future TPP agreement on small businesses, as well as on the country’s agricultural industries, almost all studies have found that Vietnam will be the economy to gain the most in pure GDP terms (in pure revenue terms, the US will be the clear winner).
For manufacturing in Vietnam, this could be huge. Currently there’s an 18% tariff on garments exported to the US, which would be completely eliminated under the TPP.
This in turn will lead to more apparel manufacturers setting up in Vietnam to take advantage of rules of origin requirements in the agreement. Biswas explains: “Due to rules of origin requirements in these new trade agreements, foreign textiles companies are also ramping up their investment in upstream production of yarns and fibres in Vietnam. The combined impact of these two trade deals is expected to underpin strong positive growth in Vietnamese manufacturing exports over the medium term, as well as boosting foreign direct investment into the manufacturing sector.”
Vietnam is far from perfect. Its problems with debt and corruption (it ranks 119 of 175 countries on Transparency International’s Corruption Index) make the term “poster child for Asian trade” that it is often given slightly jarring. But with a young and growing population, steely ambition, and turmoil elsewhere in the region, it is easy to see why people are excited.