Vietnam makes pitch as an investor safe haven in trade war

HANOI (BLOOMBERG) – A red-hot economy, business-friendly policies and a Communist party led by free-traders: that’s the elevator pitch Vietnamese Prime Minister Nguyen Xuan Phuc is delivering to global investors amid the United States-China trade war.

“We are ready to grab the opportunity,” Mr Phuc said in an interview with Bloomberg TV’s Haslinda Amin, a few days before departing this week to the World Economic Forum in Davos, Switzerland.

Vietnam is quietly positioning itself as a safe haven for manufacturers wary of getting caught in the crossfire of the tariff war between the US and China. With a raft of free trade agreements, relatively cheap labour and close proximity to China, Mr Phuc has a good story to tell global executives he’ll meet in Davos.

“We are trying to increase exports in both quantity and quality of our products, especially in which we have advantages, such as seafood, commodities, footwear and electronics,” Mr Phuc said.

“We aim to become an export economy that can grow fast and provide more jobs with higher income for our people.”

Nonetheless, the South-east Asian nation has yet to see a flood of companies moving in from China, he said. And the economy has some serious challenges to overcome: inadequate infrastructure and lack of skilled workers make it difficult to attract manufacturing beyond assembly-line work such as garment stitching.

Global economic conditions are also worsening. The US-China trade war and more subdued world growth is weighing on export demand, a threat to an economy like Vietnam, where trade accounts for about twice the nation’s gross domestic product – more than any country in Asia apart from Singapore. About a quarter of Vietnam’s total trade is with China.

Vietnam’s economy seems to be sheltered for now. Growth quickened to 7.1 per cent in 2018, among the fastest in the world. Mr Phuc said he is confident growth will reach the higher end of the government’s forecast range of 6.6 per cent to 6.8 per cent this year. He also vowed to keep the Vietnamese dong stable in 2019.

“We see growth momentum in different areas and have good foundations to achieve our goals,” he said.

Vietnam, which has completed about 16 free-trade agreements, began tethering itself to global trade after introducing market-oriented “doi moi” reforms in the 1980s. Exports surged to a record US$244 billion (S$332 billion) last year, with US customers accounting for about US$48 billion of that – more than double compared with five years ago. 

SAMSUNG BOOM

Several large manufacturers already operate in Vietnam, the biggest of which is Samsung Electronics, which accounted for about a fifth of the country’s exports last year.

Mr Phuc, concerned about anti-trade sentiments from the Trump administration, is vowing that the country will step up imports from the US, from Boeing aircraft to products from oil companies.

Vietnam faces a possible US$3 billion trade deficit in 2019 amid growing global protectionism, VnExpress news website reported on Sunday, citing Deputy Minister of Industry and Trade Hoang Quoc Vuong. Volatile trade policies in the US and European Union could hurt Vietnam’s exports this year, Mr Vuong was cited as saying.

The South-east Asian country ended 2018 with a US$6.8 billion trade surplus, according to the General Department of Vietnam Customs.

Other factors that could contribute to a trade deficit include any decline in Vietnam’s agricultural exports as other countries ratchet up domestic production to reduce external reliance, and as its growing manufacturing sector imports more materials and machinery, VnExpress reported.

“The challenges this year will include global trade tensions, climate change and insufficient infrastructure,” he said.

As a developing economy, he added, “we have to keep growing to bring more jobs to our people and eliminate poverty. We have to grow at more than 6 per cent annually to boost per capita income and to escape the middle income trap.”

Still, Mr Phuc has a good story to sell to global investors. Vietnam was ranked No. 1 among seven emerging Asian countries as manufacturing destinations by Natixis SA, which looked at demographics, wages and electricity costs, rankings in doing business and logistics, and manufacturing as a share of total foreign direct investment.

“The government has been doing a lot to help foreign investors to grow businesses long-term in Vietnam,” Mr Phuc said.

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The US-China trade war hasn’t benefited Vietnam in a ‘big way’ yet, investor says

As the ongoing U.S.-China trade war threatens to dent exports from the world’s two largest economies, analysts have projected that other countries may see Chinese and American demand diverted their way.

Vietnam — and Southeast Asia as a whole — is one of the places most expected to benefit from trade war-inspired buying. According to one investor, however, the profit so far has been slight.

“It’s a bit early for Vietnam to be benefiting in a big way from trade wars,” Bill Stoops, the chief investment officer of asset management company Dragon Capital, told CNBC on Wednesday.

The Southeast Asian nation has been touted as a possible winner in the U.S.-China trade war because of its low cost of manufacturing. Reports indicate that some companies have begun shifting production out of China to avoid tariffs imposed by America.

Vietnam will likely benefit from those adjusted supply chains for a long time, according to Rob Koepp, network director of the Economist Corporate Network.

“It is now set to be kind of a China 2.0, for various reasons, and yeah, it’s going to be benefiting and that’s going to be long term,” he told CNBC on Thursday.

While firms have likely been limited by the logistical constraints of relocating and building new facilities in Vietnam, the country has begun to see new orders “flooding” into its existing industries that have some capacity for increased production, Stoops said.

“We are already starting to see big orders, big export orders flowing, out of nowhere, into the seafood, and the furniture and the garment industry,” Stoops told CNBC’s Street Signs. “I think this is a harbinger of things to come, as people start to divert business away from China.”

“It hasn’t happened yet, but it’s definitely in the works, and we’re starting to see straws in the wind with all these new export orders,” he added.

Investors cannot directly buy into the trade substitution theme because few exporters in the benefiting sectors are listed on Vietnam’s stock exchange, but there is still a “very strong” case for Vietnamese shares, Stoop said.

“For Dragon Capital, it’s still all about playing the domestic economy,” he said.

Vietnam’s companies have good earnings growth and are trading at a price-to-earnings ratio of around 12 times, according to Stoop, who said that’s lower than in neighboring countries.

Corporate governance is improving and the country has political stability, cheap wages and “perfect demographics,” he said.

The “turbulent state” of markets meant that the privatization of state-owned enterprises and the listing of companies came to “a bit of a halt” last year, Stoop said. Still, he projected that investors can look forward to more corporate reform in the second and third quarters of 2019.

Vietnam unseated Singapore as Southeast Asia’s top grossing market for initial public offerings in 2018.

“Remember, the government has a continuous need for money to help fund its budget deficit,” he said. “It has philosophically realized that it is good for the economy to get (state-owned enterprises) off the economy’s back.”

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Supply Chain Shifts from China to Vietnam

Supply chain shifts to Vietnam are gathering momentum, helped by China’s rising labor costs and other factors such as the ongoing US-China trade war.

Businesses with production facilities in China are looking at Vietnam when searching for an alternate manufacturing destination.

Navigating Asia’s geopolitical landscape is difficult for most foreign firms. This is more so when they have to consider moving business activity out of China.

China’s business ecosystem has been unparalleled in Asia due to its mature manufacturing ecosystem, infrastructure capabilities, and an increasingly predictable bureaucratic system.

The reason why Vietnam then features high on the radar for foreign businesses scaling up or choosing alternate sites outside China is its success in creating an adaptable production base – one that is also geared towards higher valued manufacturing.

Every country in Asia has a different set of strengths in so far as the manufacturing process goes, and many factors will be taken into account when rebuilding supply chains outside of China.

In this article, we discuss why Vietnam features prominently as firms worldwide reconsider their overreliance on a single production and sourcing base in China.

Vietnam’s appeal to multinational manufacturing firms

A study conducted by Natixis SA evaluated seven emerging Asian economies as manufacturing alternatives to China, and Vietnam was ranked number one. The study examined demographics, low wages, the World Bank’s Doing Business rankings, and logistics to determine manufacturing options.

The Vietnamese government has strategically transformed the nation into a ‘China plus one’ alternative by engaging in numerous free trade deals such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU Vietnam FTA (EVFTA), while developing its infrastructure to become a source for global export.

Vietnam has received some of China’s labor-intensive manufacturing, and this trend is most likely to continue given the government’s willingness to make progressive economic changes. Over the course of the last few decades, the implementation of market features, such as openness and trade, have become pillars for its economic restructuring. For example, Vietnam joined the World Trade Organization (WTO) in 2007 in a significant step towards merging with the global economy. Since then, several international trade arrangements to create favorable tax and investment terms have followed.

Supply chains shift to Vietnam: Textile and garment

The textile and garment sector are two of Vietnam’s major areas of export. For example, Vietnam is the second largest textile and garment supplier to South Korea after China. Industry observers also anticipate that Vietnam will soon take the top spot.

In recent years, multinational retail giants, such as Nike and Adidas, have broadened their manufacturing bases to Vietnam because of cheaper labor costs. Nike began to manufacture more of its product line in Vietnam than China starting 2009, and Adidas soon followed in 2012.

Both shoe manufacturers shifted their production to Vietnam when wages in China rose to approximately US$400 per month. The current average wage a production worker earns in Vietnam is US$216 per month. However, with wages increasing at a current rate of 7.9 percent, manufacturers will most likely have to shift production again in the foreseeable future.

Maxfield Brown, Business Intelligence Manager at Dezan Shira & Associates said,
“At this current rate, and with the implementation of the CPTPP to lift tariffs on textile and garment items, the textiles industry in Vietnam has a production window of six years before it becomes commercially unviable.”

Supply chains shift to Vietnam: Electronic equipment

Vietnam’s high-tech boom in recent years has paved the way for the country to begin producing more higher-end goods. This is seen in the recent trend of electronics goods factories making the shift to Vietnam.

Most notably, China’s Goertek – the assembler for AirPods, Apple’s wireless headphones – has confirmed plans to shift production into Vietnam. Amid global tensions due to the uncertain outcome of the US-China trade war, in addition to the hefty tariffs placed on high technology, Vietnam has become a leading alternate manufacturing choice.

Major electronics firms – such as Cheng Uei, a Taiwanese firm that specializes in manufacturing equipment for iPhones and Petragon, an assembler of iPhone equipment – are also scaling their options outside of China, with Vietnam as one of the leading alternate countries.

Future supply chain shifts to Vietnam

As technology evolves, automation is most likely to replace low-cost factory production. This will create a greater demand for workers in the field of component manufacturing and assembly of electronics – like electronic components on printed circuit boards.

Vietnam’s proximity to China, its growing skilled workforce, competitive labor costs, and political stability make it an ideal manufacturing destination. Especially as component manufacturing is a complex process – one that needs to allow room for trial and error.

Why relocate to Vietnam?

The current US-China trade war truce offers temporary relief to manufacturers who were looking at a 25 percent hike on tariffs. Regardless of the outcome, business leaders will continue to assess the positives amid the trade war heat or seriously consider relocation. Companies that are over-reliant on China as a primary source of manufacturing will continuously battle unstable regulations on trade, rising labor costs, and stricter operational oversight.

Relocation is, however, a highly expensive process. It includes converting and transferring industrial plants into appropriate regions, transferring production lines, and sending qualified workers into a new country, such as Vietnam.

Multinational firms that want to shift production need to resolve new logistics in a new country, which can be expensive and take years to complete. For foreign firms that want to relocate to Vietnam, it would be advisable to partner with experienced contractors that have the right connections and local knowledge to facilitate an efficient integration.

The desirability of Vietnam as a China plus one destination is generating competition from international firms. Production costs to rent industrial land and source materials are increasing in competitive areas – this shows Vietnam’s resources are in-demand

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Vietnam is coming out on top in the US-China trade war

Vietnam’s PM is taking advantage of trade tensions to boost the nation’s profile as a manufacturing and export powerhouse.

In the race to lure companies looking for alternative sites amid the US-China trade war, Vietnam wields a slew of advantages over its rivals.

Vietnam was ranked No. 1 among seven emerging Asian countries as manufacturing destinations by Natixis SA, which looked at demographics, wages and electricity costs, rankings in doing business and logistics, and manufacturing as a share of total foreign direct investment.

“Vietnam is poised to capture some of China’s global market share in labor-intensive manufacturing,” said  Trinh Nguyen, a senior economist at Natixis in Hong Kong. “It’s the clear winner from the trade war.”

Here’s a look at what makes Vietnam attractive to foreign investors:

Cheap

Production workers in Vietnam are paid an average of $216 a month, less than half what their peers get in China. Thanks to government subsidies, electricity is also cheaper at 7 US cents per kilowatt hour compared with 10 cents for Indonesia and 19 cents for the Philippines, according to GlobalPetrolPrices.com’s June data.

Vietnam also has one of the largest labor forces in Southeast Asia, at 57.5 million. That compared with 15.4 million for Malaysia and 44.6 million for the Philippines, according to the World Bank.

Deals, investment

Vietnam’s communist leaders have pursued free trade deals with South Korea and Europe and joined 10 other nations in March in signing a Trans-Pacific trade pact.

Officials completed a trade deal with the EU in June that will eliminate almost all tariffs. In Southeast Asia, only Singapore has a similar agreement with the EU.

The government is also making it easier for foreign investors to do business with a proposed securities law that would allow 100% foreign ownership of public companies, except those in restricted sectors like banking and telecommunication.

Foreign direct investment is surging, with the government expecting disbursed FDI to rise to a record $18 billion this year.

Geography

Vietnam’s proximity to China also adds to its appeal. The two share a land border, compared with countries like Indonesia, Philippines and Malaysia which are all much farther away.

Chinese companies that need raw materials or product components from the US will find it easier to source these goods via Vietnam. Vietnam is China’s largest trading partner in Southeast Asia as the two nations become more central in each other’s production chains.

Stability

Vietnam boasts one of the world’s fastest-growing economies, forecast to expand at about 7% this year. The dong has been relatively stable in 2018, compared with other currencies in Asia like the rupee and rupiah which suffered large declines.

“Strong economic growth and political stability are very important to investors,” said Tony Foster, the Hanoi-based managing partner in Vietnam for law firm Freshfields Bruckhaus Deringer.

The dong will remain fairly stable in the near-term, Fitch Solutions Macro Research, a unit of Fitch Group, said in October, citing support from strong FDI inflows and manufacturing.

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