SPIRE SIGN IN Register

SpirE-Journal 2012 Q2

Vietnam: Asia’s investment and market hotspot

Reader's Ratings:

Vietnam: Asia’s investment and market hotspot

Investors were rattled by Vietnam’s volatile currency and inflation risks in 2009. But against a backdrop of global economic uncertainty, rising costs in China and the fall-out from the Bangkok floods in 2011, investors are taking a fresh look at Vietnam – and liking what they see. Aside from abundant labor and natural resources, infrastructure is fast improving. Vietnam’s domestic market for goods and services is growing on the back of this inward investment, with opportunities aplenty across many sectors.

Vietnam – Leading the fast emerging economies

Presently, Vietnam is ranked third in the CIVETS grouping. CIVETS is a group of six emerging economies meant to represent the next wave of development after the BRICs. The group also includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. The Asian Development Bank has forecast 6.5% GDP growth for Vietnam in 2012 – a very respectable growth rate at a time when global forecasts have been trimmed substantially.

Since 1990, Vietnam has experienced little in the way of the political crises that affected neighboring countries like Thailand, Myanmar, Indonesia and the Philippines – though it did see its fair share of economic hiccups. Being politically-stable has helped Vietnam thrive. Since the Asian economic crisis of 1997, Vietnam has seen fairly robust growth as it shifted away from central planning towards market mechanisms. Vietnam’s GDP saw robust growth of about 6 per cent from 2008 to 2011. Taking a 20 year view, it is the fastest-growing major ASEAN economy.

2012 appears to be Vietnam’s moment, as it benefits from fresh interest in inward foreign direct investment.

From the Ashes of War

When North and South Vietnam were reunited in 1975, the economy was so severely devastated by three decades of war that thousands of Vietnamese risked their lives trying to flee the country in boats. All this began to change when Vietnam officially reopened its doors to foreign investors in 1986, embarking on the so-called “Doi Moi” program of economic restructuring. This was followed by the lifting of the United States trade embargo in 1994 and its normalization of trade relations with Vietnam in 2000. The U.S trade agreement allowed Vietnam to reduce tariffs by up to 60 per cent, enticing investors from South Korea and Taiwan to flock there. In addition, Vietnam signed free-trade agreements with China, Japan, ASEAN, and gained entry into the World Trade Organization (WTO) in 2007.

This has led to Vietnam becoming a leading global exporter in categories such as rice and coffee. Vietnam is a major exporter of rice, pepper and coffee to China, Malaysia, Indonesia and other ASEAN countries. In the first quarter of 2012, Vietnam exported 679.75 tons of rice worth USD294 million and 13,000 tons of coffee worth USD24 million to China.

Foreign direct investment (FDI) in Vietnam

Vietnam is an attractive country for foreign investors. In 2008, FDI in Vietnam reached USD $9.58 billion or roughly 20% of China’s typical annual level of FDI – increasing fourfold since 2005. In 2011, FDI amounted to USD14.7 billion – decreasing by 26% from 2010 but amounting to an impressive figure nonetheless. Hanoi, Ho Chi Minh City and Ba Ria Vung Tau province are the three main areas that FDI is concentrated in.

Presently, Vietnam remains an attractive investment destination in spite of the current bout of global economic uncertainty caused by events in the European Union. 2010 saw Japan, Korea and Taiwan being major investors in Vietnam, particularly in textiles and heavy industries. Many Japanese automotive and electronics manufacturers are growing their production bases in Vietnam. Canon, for example, has a world-scale production facility in Vietnam for making laser beam printers. Intel has also launched a massive semiconductor facility in the country.

Vietnam’s attractions for investors

Vietnam’s success in FDI can be attributed to a number of factors. Vietnam boasts a good supply of labor and natural resources together with a pro-FDI government. Costs are low as compared to China’s coastal cities which have suffered from wage-price inflation in recent years. Some investors also reacted to the 2011 floods in Bangkok by shifting investment to other countries, or planning to do so. Profits at Japanese carmaker Toyota fell by 18.5% due primarily to supply problems caused by the Thailand floods in the second quarter of 2011.

Potential of the market

Vietnam is a growing market for many industries such as FMCG, education and healthcare. This strengthens the case for inward investment. From 1999 to 2009, Vietnam’s population rose by 9.47 million people. In 2010, the population was 87 million people and 66% were in the labor force. By 2049, it is expected that Vietnam will have a population of 108.7 million people. The Vietnam Government aims to increase GDP growth from 6.0% to 6.5% in 2012.

Labor

Vietnam is considered to be the lowest-cost center for Asian manufacturing. The average wage in Vietnam is highly competitive compared to other countries. For example, the minimum wage in its two main cities, Hanoi and Ho Chi Minh City, is about USD75 per month. By contrast, labor costs in factories in China’s coastal provinces have recently doubled.

Vietnam is considered to be the lowest-cost center for Asian manufacturing.

Geography

Vietnam’s 3,260 km long coastline straddles key international sea lanes. Sharing a border with countries like China, Cambodia and Laos allows it to position itself as an Indo-china logistics hub, able to export to and import from key markets with ease.

Improving InfrastructureThe quality of both technology and infrastructure have a strong influence on inbound FDI. In a government survey in 2009, 291 companies felt that the inadequate infrastructure in Vietnam posed a continuing problem. Both foreign and local firms expressed the same view. As such, Vietnam plans to upgrade the quality of its infrastructure to 2020, with assistance from the World Bank and Asian Development Bank.

The Ministry of Transportation has prepared 107 investment projects to upgrade and renovate highways, as well as replace bridges, at a total cost of VND 163,833 billion, or around USD 8 billion at current exchange rates. One such infrastructure project is a 2,400 km national highway system which would replace 407 bridges on the major highway routers. This project is expected to cost VND316,400 billion in total, or over USD 15 billion. The Ministry of Transport would also be completing the expansion of the iconic National Highway No.1 from Hanoi to Can Tho by year 2016. The 1,050km highway would be expanded to four lanes for motor vehicles and two lanes for motorbikes.

In addition, the latest project from the Planning and Investment Department of Vietnam – a six-lane highway from Dau Giay to Phan Thiet that measures over 97km – has attracted many Hong Kong investors. It was forecast that this project would need VND117.138 billion (close to USD 6 billion) in funding.

Policy reform

Prior to WTO accession, Vietnam was only allowed to export rice to Asian countries and Russia. Now, the list has expanded to 148 countries, and Vietnam can export rice to these countries at low tariff rates. Vietnam is one of the largest rice exporters in the world today. In addition, being bound by the WTO’s rulings means that Vietnam is now in a better position to assure foreign investors of the predictability of Vietnam’s investment climate – a factor that will spur inbound FDI.

Sector Opportunities in Vietnam

What are the vertical opportunities facing marketers in Vietnam today?

Industries with high market and investment potential

LogisticsThe World Bank ranks Vietnam’s logistics industry 53rd out of 155 countries on the Logistics Performance Index (LPI), underlining the room for growth but also the fact that the status quo is not as bad as some might imagine. Vietnam officially added logistics services to its Commercial Law in 2005. This law will remove most impediments to foreign logistics firms by 2014.

Vietnam’s logistics development is still in its infancy compared to developed economies. 90% of logistics firms are small and medium-sized companies with limited professional capabilities – for instance family businesses offering haulage or freight forwarding. As such, experienced foreign companies have a huge competitive advantage.

Factors such as laws, regulations, policies, administrative procedures, customs and tax procedures tend to be inconsistent, unclear and costly; posing barriers for logistics companies. This has created attractive sales and investment opportunities in the area of information and telecommunications systems supporting logistics, where the customers would be the larger logistics firms as well as regulatory agencies.

HealthcareThe SpirE-Journal has long predicted privatized education and healthcare to be growth engines for Asia and global Emerging Markets in the decade of 2011-2020.

As at April 2012, Vietnam has attracted 76 FDI projects worth USD1.1 billion in the healthcare services industry. The investments were mainly in hospital construction, pharmaceutical R&D and production, as well as medical device production. This is because deficits in healthcare technology and service standards have led to over 30,000 Vietnamese traveling abroad annually to seek treatment in foreign hospitals, causing an outflow of more than USD1 billion.

Moreover, as most domestic pharmaceutical factories are unable to produce many active ingredients and other high-value-added products, they are only able to satisfy 50 per cent of domestic demand. Consequently, Vietnam has had to spend over USD1 billion annually to import medical supplies, vaccines and active ingredients from countries, such as France, India, South Korea, Singapore, New Zealand and Australia. Vietnam spent USD1.17 billion on importing pharmaceutical products in 2009, up 26.8% over 2008. This clearly indicates the huge potential in this industry. Aside from drugs, 90 per cent of the medical equipment in Vietnam is currently imported.

The Vietnam government is also aggressively promoting investment in medical R&D. Oxford University’s Clinical Research Unit in Ho Chi Minh City focuses on infectious tropical diseases.

Deficits in healthcare technology and service standards have led to over 30,000 Vietnamese traveling abroad annually to seek treatment in foreign hospitals, causing an outflow of more than USD1 billion.

Agri-food

According to government reports, agriculture and rural development have contributed 25% of Vietnam’s GDP, 30% of its total export earnings, and 73% of its rural workforce. The main agri-food categories produced in Vietnam are rice, coffee, meat, fruit, seafood and vegetables. The government has set some targets for the agri-food industry for 2020.

Rice
Vietnam targets to increase domestic production and improve rice quality for export; resulting in a need for advanced driers and large complex mills with graders. In 2010, rice output reached 32 million MT and is expected to increase to 39 million MT in 2020.

Coffee
Vietnam is on track to realize its industrialization and modernization goals for the coffee industry; resulting in the need to import modern processing technologies.

Meat
Vietnam is expected to produce 6 million MT of raw pork and 5 million MT of processed food products in 2020; with more than 1.55 million MT to be exported. However, Vietnam needs to first improve its processing equipment and technology, transport and storage facilities, training in quality management and hygiene control. One area where Vietnam will see robust demand is cold chains – technology for keeping primary produce chilled from the point of production to consumption.

Food retail

The main component in the food retail sector in Vietnam is the traditional wet market; accounting for more than 88% of retail markets in 2007. However modern retail channels such as supermarkets, hypermarkets, cash and carry wholesale centers and minimarts have been growing tremendously in the last eight years. Vietnam’s urban economy has begun a steady transition away from the traditional retail trade to the modern one, resulting in about 531 supermarkets and 89 trade centers having been established by end-2011. This has been driven by rising living standards fuelling demand for better standards of hygiene and comfort.

Education

Vietnam’s education industry presents many opportunities for foreign investment and partnerships. Vietnam’s Ministry of Education and Training has set aside a budget of USD1.2 billion for the education industry from the years 2009 to 2014. The aim for this was to have at least one Vietnamese university ranked as one of the world’s top 200 universities by year 2020.

Foreign private education institutions such as Australia’s RMIT have set up off-shore campuses in Vietnam. Many other foreign universities offer trans-national programs via local universities in Vietnam. These efforts have attracted many local students and international students from Laos, Cambodia and Korea.

Life insurance

Vietnam, like many emerging economies, is severely under-insured due to low penetration. Yet the market is not inconsiderable. The Vietnamese insurance market was valued at USD249 million in 2010, growing by a healthy 14% over 2009. It is expected to hit USD3 billion by 2014.

There are over 50 insurances companies in Vietnam, with most being multinational companies. The three largest insurance companies are Prudential, Bao Viet and Manulife. The insurance industry is expected to grow and generate significant profits in the short term, making Vietnam one of the most interesting global markets for insurers in the next decade.

Manufacturing plant and equipment

Vietnam’s business environment has improved after WTO accession. Foreign investors now find it easier to obtain licenses and establish new factories. Nokia is one such company that is capitalizing on these advantages. It will be building a major factory in Vietnam this year. Many international manufacturers have set up production in Vietnam – from giants like Honda, Intel and Canon to mid-sized firms like US-based printer cartridge remanufacturer Clovertech.

Conclusion

Vietnam has achieved much since it opened its door to foreign investors, first through the Doi Moi restructuring of the 1980s and then through WTO accession. Not only has its economy grown at among the fastest rates in the world for an emerging economy. The government is also noted for having executed world-class social programs for poverty alleviation, which could perhaps help explain Vietnam’s relative political stability as compared to other countries in the region.

Vietnam is benefitting from many of the recent adverse developments in the region – rising wage costs in coastal China, fears about flooding in Thailand and concerns about the stagnation of economic reforms in India. It also benefits from having a bureaucracy which is seen as being more efficient and responsive to the needs of international companies than that of some other countries – Myanmar and Indonesia for example. Only in the services field does Vietnam’s lack of a large English-speaking workforce place it at a disadvantage versus India and the Philippines.

Many international manufacturers are seeking a “China plus one” strategy. At the same time the Vietnamese government has shown the political will and financial muscle to invest in social and economic infrastructure ahead of demand. In such a climate, the sectors of greatest interest to marketers in Vietnam will be industrial equipment, infrastructure, automotive, healthcare, education and financial services.

Back to Top

Back to Home
BTBTBTBTBTBT