Category: Blog

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.

This holiday season, parents may want to throw a few extra toys in their carts.

The U.S. government’s recently announced tariffs on Chinese goods spell trouble for the toy business — and shoppers. The industry might be prepared for this coming winter, because products are mostly finished and prices are set, but next year could be more expensive for manufacturers, retailers and consumers, toy industry experts told MarketWatch.

Individual toys are not on the list of products affected by the tariffs President Trump announced Monday, but some raw materials and chemicals are — including lithium batteries and the chemicals that make Silly Putty. As a result, toy prices next holiday season will be higher, said Jackie Breyer, editor-in-chief of the Toy Insider, a toy review site.

“The good news for this holiday season is manufacturers have the parts they need to finalize any products — 2019 is a whole other story,” she said.

On Sept. 24, $200 billion in Chinese imports will face a 10% tariff, and on Jan. 1, 2019, the rate will jump to 25%. President Donald Trump said he will issue a third round of tariffs, which would affect $267 billion of additional imports, if China takes “retaliatory action against our farmers or other industries,” according to a White House statement. The threats are the latest move in an escalating trade war between the U.S. and China.

Another round of tariffs would probably include finished toys, said Richard Gottlieb, chief executive officer of Global Toy Experts, a consultancy for the toy industry.

Other items sold in children’s stores, including furniture and bicycles, are already on the list, said Rebecca Mond, vice president of federal government affairs at the Toy Association. “Overall, these actions have been very harmful for the toy industry,” she said. And even though prices are set for this holiday season, higher costs could get passed onto consumers, Mond added. “It will depend on the company and how they can absorb these costs,” she said. “We are playing the wait and see game.”

High chairs, booster seats, bouncers, infant walkers, cradles and play yards were on an earlier list of items affected by tariffs, but most of those items were exempted from tariffs after manufacturers lobbied the U.S. Trade Representative. “With China supplying the vast majority of these juvenile products and with no alternative manufacturing capacity readily available elsewhere, tariffs on these juvenile products will result in higher prices and fewer choices for U.S. consumers,” wrote Corinne Murat, director of government affairs at toy manufacturer Mattel MAT, -0.07% in a public letter to the Office of the United States Trade Representative (USTR) in late August.

Horizon Group, a company that makes the children’s craft kits “It’s So Me” and “Braid-tastic!” said the tariffs would affect their products as well. “These items, e.g. sand and wooden sticks, represent some of the most basic and essential everyday craft-related items, they are an absolutely non-critical area with regard to manufacturing and intellectual property and relevance to national security concerns, and respectfully they have absolutely no place on the list of proposed tariffs,” Horizon Group’s lawyers wrote in a public letter to the USTR.

Most toys are made in China, and if they aren’t, their parts are, Breyer said. China offers cheap labor and low production costs, and safety isn’t as much of a concern as it is in other countries, like Vietnam, Thailand or India, she said, which makes it cheaper to do business there. Imposing tariffs won’t give U.S. manufacturers an incentive to make more toys in the U.S., because of the increase in production costs and materials prices, Mond added. “The cost of production here in the U.S. is still higher than the costs in China with these tariffs,” she said.

As a parent or a consumer, you may have read or heard reports casting doubt on the safety of soft plastic toys made of polyvinyl chloride (PVC), or vinyl. Claims have been made that when children suck and chew on soft vinyl toys, such as teethers or pacifiers, they are being exposed to “hazardous materials.” International Council of Toy Industries (ICTI), the worldwide association of the toy industry, along with many other organizations and scientific groups, would like to set the record straight.

The toy industry has an absolute commitment to ensure that its products are safe. Along with voluntary standards established by the industry, we conform to stringent government standards for the safety and health of all individuals, especially children. The safety of toys is, without question, the industry’s top priority, and it supports any scientific investigation which can help improve or reinforce the safety of its products.

We have prepared this brochure to explain some of the issues that relate to vinyl toys and assure you – as parents and consumers – that vinyl toys are safe.

Polyvinyl chloride, often referred to as PVC or vinyl, has been around for more thanfifty years, and is one of the world’s most widely used and researched plastics. It is found in every home in a variety of consumer products ranging from water pipes to shower curtains. Its approved use in food packaging as well as its wide spread applications in the health care field demonstrate the safety of PVC. Vinyl is used for the storage of national blood supplies throughout the world as well as in numerous surgical applications.

Recently, some groups have raised concerns about phthalates, an ingredient that makes vinyl soft and pliable. Critics have taken a potpourri of scientific half-truths and developed a campaign alleging that vinyl products containing phthalates (pronounced th-al-ates) pose a danger, especially when used to make products such as children’s toys. They claim that harmful chemicals migrate from the soft plastic and accumulate in the human body causing serious health threats. These allegations are simply not true and do not stand up to scientific scrutiny.

The toy industry is concerned that parents and consumers are being unfairly targeted and frightened by extremist environmental groups. We would like to take this opportunity to clarify misinformation about vinyl and any potential threats to the health and well-being of children. None of the claims made by critics have been supported by reliable scientific evidence. If there were any truth to these claims, we would be the first to eliminate any hazardous ingredients. We would never compromise children’s safety. After all, we have children too.

• Vinyl is one of the world’s most widely used and most researched plastics with a safety record of more than 50 years. 
  
• Vinyl is a material used in many toys, and, despite sensationalized and irresponsible claims made recently by some groups, toy manufacturers are confident that it is safe. This confidence in vinyl is based on the findings and opinions of national regulatory agencies and some of the most respected scientists in the world. 
  
• Soft vinyl contains a substance called phthalates. Research into the effects of phthalates does not show that phthalates themselves are in any way hazardous to children’s health. In fact, there is no scientific evidence that these chemicals put people of any age at risk. 
  
• While vinyl is the principal component in a wide range of products for consumers, the healthcare industry, and other highly regulated industries, some organizations have targeted products for children due to the high visibility of toys and the opportunities they offer for media coverage. Their research methods are at best questionable and their claims unfounded. The allegations against the safety of vinyl toys cannot be substantiated by scientific fact. They simply are not true. 
  
• Vinyl and phthalates have been used in the manufacture of toys and baby products for 40 years. Generations of children have played with, and sucked on, toys made from pliable vinyl, and there is no evidence of any adverse effects. Indeed, the widespread use of phthalates in a number of non-toy products has led to extensive research verifying its safety.

Is Vietnam the new China in the manufacturing sector?  The short answer is not yet. But it does have potential to get there in the future.

China’s economy is changing. It has been for a while. While that may shuffle the cards in the country’s manufacturing sector a bit, it also opens up opportunities for countries like Vietnam to move into a position of being a low-cost manufacturing hub.

Capabilities and confidence in Vietnam’s manufacturing sector are growing and many companies are already starting or moving their manufacturing operations to the country. Recent events surrounding new tariffs and the potential of a trade war between the U.S. and China could of course shake things up even more and give more reason to drive manufacturing, at least for certain types of goods, out of China and into Vietnam.

However, manufacturing as a workhorse in Vietnam is still young and while there are many positives to Vietnam’s manufacturing sector that will likely continue to grow, for now China still holds a significant competitive advantage.

For a country to be competitive in low-cost manufacturing, there are a few economic areas that are generally needed: low labor costs, young populations, a supportive policy environment, quality infrastructure, minimum level of education for all workers, availability of engineers, economic growth, and a large internal consumer market.

In many of these areas, we feel Vietnam happens to fit the bill well. While the country’s infrastructure is not yet as strong as China’s, we feel it is still more stable than some other low-cost manufacturing leader candidates like Indonesia or India. Vietnam also has a more stable political environment. Because of this, some Chinese companies are moving manufacturing to Vietnam.

Licensing and operating have become much simpler than in China due to the Vietnamese government welcoming most sectors and market entry. However, a downfall that Vietnam has in its pursuit to transform into a low-cost manufacturing leader is the size of the country. A smaller population represents a smaller potential consumer market, which doesn’t help industry growth in becoming sustainable.

Yes, there are some situations where it makes sense to manufacture in Vietnam over China at this moment, but Vietnam is still years behind China. The country has a lot of potential for the future, but it is not for everyone, just yet.

Currently, Vietnam is better suited for larger companies who have more capability to overcome challenges the country still holds and capitalize on lower labor costs. The manufacturing industry here is fragmented, making it more difficult to navigate and find suitable suppliers and workers with the necessary skill sets. The trail has been blazed in China over the years making the path much clearer there. China’s strong infrastructure, that includes well-paved roads and some of the world’s busiest shipping ports, make it easy to find a handful of options for just about anything you need and not too far away from where you need them.

During China’s rapid economic growth a handful of decades ago, the country experienced a job boom. Even though there is a lot of potential for growth in other areas in Vietnam, it may not experience the same increase in jobs due to the rise of robots and automation. Times are different, but that won’t necessarily make it a less viable option for manufacturing though.

As China’s economy slows and it begins to shift more of its focus to medium and high-tech manufacturing, Vietnam is overall in a great position to secure its already proven capability in low-cost, labor intensive commodity type products like apparel, toys, textiles, shoes, and basic consumer electronics.

For businesses, that means they will eventually have even more options and opportunities to keep our products thriving.

Rising costs throughout the Asian region and in China particularly, are driving businesses to look elsewhere for sourcing partners. Vietnam has emerged as a prime area for the relocation of foreign companies’ sourcing operations.

The country stands out as a prime location for sourcing for a number of reasons. Key among these are Vietnam’s plentiful supply of cheap labor, low business expenses, political stability, and growing domestic consumer market.  The country also has substantial tariff, tax, and quota advantages for a number of products due to its inclusion in numerous free trade agreements.

The government is currently pouring money into strengthening the country’s infrastructure and is well on its way to creating an efficient national network of roads, railways, ports, and airports coupled with an integrated logistics system. Vietnam also has a number of strategically located industrial parks that investors can take advantage.

In fact, the economy of Vietnam has been described as a “sourcing economy” since so many companies are now choosing to source their products within the country. A prime example can be seen with regards to the textiles market – 70 percent of the garment industry in Vietnam is dedicated to sourcing.

Overall, Vietnam posted a $13.6 billion trade surplus during 2017, up by 750.8% from the $1.6 billion in black ink for 2016. The following types of Vietnamese product shipments represent positive net exports or a trade balance surplus.

1. Electrical machinery, equipment: US$33.2 billion (Up by 251.1% since 2016)

2. Footwear: $18.3 billion (Up by 43.4%)

3. Knit or crochet clothing, accessories: $11.8 billion (Up by 12.2%)

4. Clothing, accessories (not knit or crochet): $11.6 billion (Up by 2.3%)

5. Furniture, bedding, lighting, signs, prefab buildings: $7.6 billion (Up by 44.9%)

6. Coffee, tea, spices: $3.9 billion (Down by -15.7%)

7. Leather/animal gut articles: $3.5 billion (Up by 21.7%)

8. Rubber, rubber articles: $2 billion (Up by 84.1%)

9. Meat/seafood preparations: $1.8 billion (Down by -0.8%)

10. Wood: $1.5 billion (Up by 191.6%)

There are a number of key advantages that make Vietnam stand out from the rest of Asia. Unlike many other countries in the region, Vietnam’s government is very stable and committed to seeing the country grow.  Consumer confidence is strong and improving.  Additionally, domestic consumption is predicted to increase 20 percent per year, thus creating a strong local market for foreign products.

Labor costs are currently 50 percent those of China and around 40 percent of those reported in Thailand and the Philippines. The country’s workforce is seeing an annual increase of 1.5 million people, and its workers are young and, increasingly, highly skilled.

The country also has improving infrastructure and remains a low cost manufacturing hub that provides good financial incentives to foreign companies. An abundance of natural resources is also helping to fuel the manufacturing boom in the country.  Additionally, general costs of doing business, such as rent and utilities, are among the lowest in Southeast Asia.

According to the Grant Thornton survey (Report 04/2018), Vietnam is the most attractive country in ASEAN in terms of investment.

Importantly, Vietnam is a member of ASEAN, the Association of Southeast Asian Nations, which is an incredibly significant market with a combined population of over 600 million people and a combined GDP of about US$2.1 trillion. According to the survey, Vietnam is the most attractive country in ASEAN in terms of investment

Finally, with its strong connections both in the Asia region and in the West, Vietnam is well positioned for any company pursuing a China +1 strategy.