Reaping the benefits of reforms is indispensable for Vietnam’s economy to progress
Vietnam has aggressively engaged in economic reforms and liberalization to prepare for its membership in the Trans-Pacific Partnership and move its economy up the value chain. What new opportunities does that offer Taiwanese businesses?
Taiwanese yarn maker Tainan Spinning Co., Ltd. has a manufacturing facility in the Bien Hoa Industrial Park in Dong Nai province northeast of Ho Chi Minh City. One August morning, everybody in Tainan Spinning’s facility, from top managers to production line workers, was on their best behavior waiting for a very important guest from Hong Kong.
This VIP customer, based in Guangzhou, is one of Asia’s biggest textile vendors with annual sales of US$500 million, and it purchases more than US$5 million of yarn a year from Tainan Spinning. In the facility’s VIP meeting room, this thin CEO with a shiny head of hair appears anxious as he sits across from Tainan Spinning’s general manager in Vietnam, Wang Tun-cheng.
“Vietnam will soon join the TPP, with a bright future lying ahead. Tainan Spinning had the foresight to come here 20 years ago. We have no choice but to do the same now,” the CEO said in Mandarin with a Hong Kong accent. The CEO was in Vietnam representing his conglomerate to study the feasibility of building a plant there. His presence was, in fact, a sign of helplessness. “No matter how much you improve efficiency and automate, it still cannot overcome the power of import duties,” he says with a frown.
Vietnam actually emerged as a key battleground for the global textile industry long ago, and it will likely remain so once the Trans Pacific Partnership (TPP) comes into being.
The Dividends of Signing FTAs
Because of the TPP’s forward” principle, for “yarn textile products to be given preferential tariff treatment within the TPP bloc, vendors will have to complete all of their processes — from procuring the yarn to knitting and dyeing the fabric — in TPP member countries.
Many Taiwanese companies got an early jump on this and are likely to come out winners. The Far Eastern New Century Group announced at the end of June that it would invest NT$10 billion in Binh Duong province north of Ho Chi Minh City in a 100 hectare factory that will do everything from drawing and spinning yarn to weaving and dyeing fabric. Eclat Textile Co. and Makalot Industrial Co. are among other Taiwanese textile vendors who have upped their presences in Vietnam. In the future, the import duties imposed on textiles and clothing made in Vietnam and exported to the United States will gradually fall to zero, while the same items made in non-TPP countries, such as China, will continue to be taxed at a 17 percent rate. This stark reality has textile vendors in China rushing desperately trying to put wings on their factories and fly them to Vietnam.
The intensifying expeditions of foreign investors to Vietnam are not limited to the textile sector.
Many major Taiwanese vendors in several sectors — textiles, petrochemicals, steel and food — that have invested in Southeast Asia have been concentrated in Vietnam.
They originally invested in Vietnam to take advantage of the country’s low production costs but are now picking up double dividends — they have access to an Association of Southeast Asian Nations common market of 600 million people and their exports will get preferential tariff treatment elsewhere through Vietnam’s portfolio of FTAs (free-trade agreements).
“All of Vietnam is pushing for economic growth,” says Taiwan’s representative to Vietnam Huang Chih-peng, who has been stationed in the country for five years after a career with the Taiwan External Trade Development Council.
In an interview with CommonWealth Magazine in his Hanoi office, he described Vietnam’s strengths as “political stability, social stability and calm and collected people.” One reason for the political stability: in Vietnamese elections, the Communist Party picks 99 percent of the candidates. Huang observes that Vietnam is very skilled diplomatically, cleverly balancing the United States, China, Japan and other big countries as they wrestle for influence in Southeast Asia. Like China, Vietnam is governed by the Communist Party, and the two countries have close relations, but they are also often aloof. Hanoi has gotten close to Washington, but not overly so, maintaining an extremely smart two-pronged strategy.
Vietnam’s economic strategy has focused on reforms and liberalization and joining the U.S.-led TPP process, but it has remained patient in pursuing its goals.
The government has moved aggressively to open its economy and attract foreign investment, primarily from South Korea, Japan, Singapore and Taiwan. But because of Vietnam’s geographical proximity to China and its strategic importance, it can effectively play off the U.S., China and Japan to also obtain considerable amounts of aid.
Among the 10 ASEAN members, Vietnam ranks second behind only Singapore in the number of free- trade agree- ments it has signed with eight. If it completes trade pacts with the European Union and the Eurasian Economic Union, and the TPP and China-led Regional Comprehensive Economic Partnership come into being, about 85 percent of Vietnam’s trade will be covered by FTAs, a percentage similar to South Korea.
In addition, Vietnam will be able to grab opportunities as part of the ASEAN Economic Community (AEC). At the beginning of 2016, the import duties on goods traded within ASEAN will fall to zero (except for tariffs on some agricultural products entering Cambodia, Laos, Vietnam and Myanmar), resulting in the free flow of goods across a 10-country common market of 600 million people with a combined GDP of more than US$2 trillion. It will become the world’s seventh largest economic entity, full of new opportunities for explosive growth.
Foreign direct investment (FDI) offers a clear picture of Vietnam’s popularity. In 2014, Vietnam attracted US$20.4 bil- lion in FDI, up 30 percent from the previous year. Vietnam also represents the perfect example of leverage. A report in the Financial Times in mid-July compared inbound investment in new factories and stores (called greenfield FDI) in emerging markets relative to the size of each country’s economy, and Vietnam topped the list by a big margin.
According to the Financial Times, a score of 1 “indicates that a country’s share of global inward greenfield FDI matches its relative share of global gross domestic product.”
Vietnam had a score of 8.14, meaning that it attracted more than eight times the amount of greenfield FDI than might have been expected given the size of its economy.
Romania was far behind in second with a score of 3.91, followed by Hungary (3.80), Malaysia (3.55) and Thailand (2.47).
South Korea, Japan and Singapore are the three biggest sources of inbound investment in Vietnam, with projects in several fields including electronics, financial services, construction and services.
Of that, South Korea’s Sam- sung Electronics has invested US$12 billion in the world’s biggest smartphone manufacturing plant with an annual capacity of 120 million handsets in BacNinh province northeast of Hanoi. It is also planning another facility in Thai Nguyen province directly north of the Vietnamese capital.
Once the biggest source of FDI in Vietnam, Taiwan has now fallen back to fourth.
Another important source of foreign investment is “Official Development Assistance,” under which big companies, with the support of their governments, head to Vietnam to build basic infrastructure. Japan and South Korea have been especially aggressive in this area. The first subway line in Ho Chi Minh City, for example, is being built as an Official Development Assistance project, with the Japanese government investing US$2.3 billion and Sumitomo Corporation serving as the project’s designer and main contractor. China has engaged in similar projects in Vietnam, but they have sparked controversy. Hanoi’s elevated light rail system is being built at a cost of US$8.7 billion by The Sixth Engineering Bureau of China Railway Engineering Corporation and is expected to become operational next year, but it has suffered a spate of accidents during construction, leading to one death and seven people injured.
(Above) A female worker is pictured at a shirts’ production line of a local garment company in Hanoi, Vietnam on Oct. 21, 2008. (Right) Workers put the finishing touches to new Piaggios inside the Binh Xuyen industrial park in Vinh Phuc province, north of Vietnam, June 24, 2009.