Driving the Vietnam growth train — Richard Hartung
MAY 4 — Even amid the recent difficulties in its banking sector and the dive in real estate values, Vietnam’s economy has continued to grow by about 6 per cent a year. In large part, this has been due to manufacturing, which represents a sizeable 41 per cent of the economy.
Foreign investors clearly do see potential in the country. Samsung has said it will invest US$1.5 billion (RM4.5 billion) in an information technology complex that will bring in 30 more related companies. Rival Nokia is investing nearly US$300 million in a plant for mobile phones.
Taiwan, Korea, Singapore, Japan and Malaysia have been the largest sources of foreign direct investment. These countries, whose corporate investors are not beset by the same economic concerns as Europeans or Americans, still seem to see Vietnam as an attractive place in which to build manufacturing plants.
Some observers have expected factories to move from China to Vietnam as operating costs rose. In fact, notes Anthony Tan, deputy general director of Sembcorp’s Vietnam Singapore Industrial Park, companies are operating a satellite factory in Vietnam while maintaining the China operations.
That is, Vietnam is more likely to be the beneficiary of the trend of companies setting up a new plant outside China when they expand.
FROM SHOES TO MEDICAL DRUGS
Last year, along with the production facilities, HP set up its first research and development centre in Southeast Asia in Ho Chi Minh City. Other companies like Samsung and Bosch are following suit as well.
Shifting from products like garments and shoes to higher-end goods can drive revenue faster. While the five largest export categories last year were textiles, oil, mobile phones, shoes and fishery products, there is a consensus among experts that the products Vietnam exports or offers domestically could soon be quite different.
Asked about the up-and-coming industries in Vietnam that may drive growth, Robert Walters country manager Rupali Edekar said healthcare is top of the mind. While it won’t happen overnight, she said, Vietnam is building factories to produce medical equipment and pharmaceuticals, as well as building new hospitals for medical tourism. “Medical equipment is taking off,” she said.
That a big part of the demand for pharmaceuticals is domestic makes the production more attractive. Many Vietnamese go directly to a pharmacy to buy medicine rather than go to a doctor to get a prescription — and more than 88 million people is a “huge market”, said Tan.
RICE, REAL ESTATE AND INTEGRATED RESORTS
Another sector moving up the value chain is agriculture.
Vietnam currently exports raw agricultural goods including rice, coffee and spices. However, productivity and yields are low, and 80 per cent of the products have very low value-add, one industry observer noted. He expects that local and foreign companies, along with taking steps to increase yields, will move to higher-value production such as roasting the coffee or milling the rice.
Keppel Land Vietnam president Linson Lim still sees real estate as a growth sector despite prices languishing in the past two years.
The property market is at a young stage, he said, so troughs and highs are on a shorter cycle. Lim believes that residential real estate will recover when interest rates go down and, with bankers expecting interest rates to drop by the year-end, real estate could soon come back as a growth driver.
Tourism, perhaps surprisingly, is panned as an also-ran sector. Even though Vietnam is safe and there are spectacular sites like Danang with its world-class beaches, one industry expert said tourism isn’t interesting enough to attract repeat travellers and “95 per cent of tourists never come back”.
Even though staff are friendly, service levels are low and resorts don’t have support services, so travellers see little reason to return. Forecasts could change rapidly, though, since Sheldon Adelson of Las Vegas Sands told the Vietnam Investment Review that along with planning an integrated resort in Ho Chi Minh City, he is contemplating constructing a second facility in Hanoi.
Supporting the manufacturing growth is an inexpensive and rapidly-growing labour force. Though the minimum wage increased by over 29 per cent to 2 million dong (RM290) per month last year, wages are still relatively low.
Even the US$400 to US$600 one businessman said his company pays for educated entry-level workers is considered a competitive rate — as is the US$1,000 a month university graduates can earn after four to five years.
And the relatively young population means that more than a million new workers will enter the workforce every year for the next decade.
The challenge that companies face is worker quality and experience. Edekar said skill levels are not on a par with that of neighbouring countries, because universities simply push the students to study for their exams.
Tan added that while Vietnam is trying to tweak the education system, there isn’t enough equipment for students and they don’t have practical skills. As a result, Edekar said, graduates learn on the job and many multinationals have in-house training programmes.
Keppel, for one, sends some of its local management staff to Singapore for training, said Lim, and it recruits Vietnamese students who have graduated from Singapore universities under its management attachment programme. Likewise, Japanese, Malaysian and Taiwanese companies also often send Vietnamese staff for internal training at their plants in their home country, Tan noted.
COMPETITION NEXT DOOR
While it looks like a turnaround for Vietnam’s economy is in store later this year or next, it continues to face risks and hurdles.
Along with regulatory uncertainty and a real estate overhang as well as a weak banking sector and low labour skills, the competition from other countries is growing. “Vietnam needs to be careful,” Edekar said, because “people are looking at Myanmar”.
Singapore Business Group president Benjamin Yap thinks “Cambodia is becoming like Vietnam”, so it too could become an attractive destination as well.
As Edekar said, even though Vietnam wants to be the next Singapore, it still needs to improve its legal processes, the return on investment and investors’ ability to take profits out of the country, if it is to move a level up. It needs to also follow through on proposed improvements to education and governance.
At the end of my visit, heading out to Hanoi’s airport to return to Singapore, I find it easy for optimism to prevail. Traffic is heavy even on a Saturday morning; factories line the road and more development looks to be on the way.
While uncertainties like the troubles in Europe could still send unexpected storm winds Asia’s way, the economic outlook for Vietnam seems inclined toward sunnier days, than the dark clouds that lined last winter’s skies. — Today
* Richard Hartung is a financial services consultant who has lived in Singapore for more than 20 years and who has worked with financial institutions in Vietnam on strategic planning and training. This is the second of a two-part special report; read part one at http://tdy.sg/vietbounce.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.