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VIETNAM’S PERFECT PLACEMENT

08 June 2016

I​ts cheap labour and proximity to China are already luring major investors, including South Korean conglomerate Samsung, into Vietnam. Jacopo Dettoni reports on how recently signed trade agreements look set to further consolidate the country's position as a major FDI player in Southeast Asia​

There is little trace left of Bac Ninh's agricultural past at the gates of the Yen Phong Industrial Park as a bus filled with workers roars by a billboard stating: "The pro- ject attracted [the] highest FDI in Vietnam". One of 10 active industrial parks in Vietnam's Bac Ninh province, some 30 kilometres north of capital city Hanoi, the Yen Phong Industrial Park secured a major coup in 2009, when it con- vinced a rising South Korean conglomerate to set up operations within its gates.

 "It's impossible to talk about FDI in Vietnam without using the word 'Samsung'," says Adam Sitkoff, a long-time expat and exec- utive director of the American Chamber of Commerce in Hanoi.


Dialling up interest

Lured by Vietnam's large, cheap workforce, as well as its proximity to China, Samsung invested about $2.5bn in Yen Phong to establish "the biggest mobile [phone] factory in the world", as is proudly stated along one of the fac- tory's walls. Today, the facility employs more than 20,000 people and has ramped up produc- tion to meet demand for the new Galaxy S7 mobile phone model. Another 20,000 employ- ees will soon join its ranks, as the company is carrying out a multi-billion-dollar upgrade of an adjacent display production facility.

Overall, the South Korean company has invested about $6.5bn in Yen Phong since 2009, and a total of $15bn across the whole of Vietnam, where it employs 110,000 people. Dozens of electronics producers and suppliers have followed suit and commenced operations in Bac Ninh, including Japan-based Canon, Taiwan-based Foxconn and US-based Microsoft.

Bac Ninh's achievements mirror the quick rise of Vietnam as a major FDI location in south- east Asia. Licensed FDI projects across the country reached a record level in 2015 through to December 15, with its investments – numbering 2013 – representing a 26.8% increase year on year, and realised FDI increased by 17.4% year on year to $14.5bn in the period, according to figures from country's General Statistics Office (GSO). This investment boom, combined with growing internal demand, is driving economic growth, with GDP growth at 6.7% in 2015, up from 6% in 2014, GSO figures show. The government aims to achieve 7% growth in 2017.

The State Bank of Vietnam, the country's central bank, also managed to minimise monetary risks throughout 2015, a remarkable achievement for a country that has historically suffered from high levels of inflation and currency depreciation.


Competitive streak

Its abundant, young and cheap pool of labour is a key reason for Vietnam's FDI boom. "At some point we were employing more than 2000 [new] people every week, which in a month makes about 10,000 locals," says the senior executive of a major South Korean investor, who spoke on the condition of anonymity. "It would take us more than six months to hire only 1000 work- ers back in South Korea," he adds.

Vietnam's workforce is made up of 54 million people, most of them young and relatively well educated. "[Vietnamese workers] are clever and hard working, and the quality of their work is excellent," says the South Korean executive. That is before wage costs have been taken into account.

"Vietnam's labour is quite competitive when compared with other countries in the region," says Antonio Sequeros of Tractus Asia, a management consulting company. "Today, the only country in the region that can compete with Vietnam in terms of labour costs is Myanmar."

The basic monthly salary of a factory worker in Hanoi or Bac Ninh ranges between $150 and $200, compared with $450 in Guangzhou, China; $380 in Bangkok, Thailand; $320 in Manila, Philippines; and $255 in Jakarta, Indonesia, according to figures produced by VSIP, a Vietnamese-Singaporean developer with seven industrial parks across Vietnam.

Its proximity to China further increases Vietnam's investment appeal, as it allows com- panies seeking cost savings to partly relocate production out of China even in the absence of a fully developed local supply chain. Samsung still sources about 65% of the components it needs for its smartphones in southern China, about 30 hours away by truck from its facilities in Bac Ninh or the nearby province of Thai Nguyen.

"The availability of qualified companies is really limited, just a few of them are able to become suppliers of these manufacturing giants," says Mr Sequeros. "The government is now trying to promote the availability of local suppliers."


TTP, wait and see

As it urges local suppliers to catch up, Vietnam's long-standing communist government is also being very active in strengthening the country's position in the global trade arena. A free- trade agreement (FTA) with South Korea came into force in December 2015, and just a few weeks later, the Asean Economic Community came into being and a new FTA with the EU was signed. The icing on the cake came in February, however, when Vietnam featured among the signatory countries of the US-sponsored Trans- Pacific Partnership (TPP) aimed at easing trade barriers between 12 countries on both sides of the Pacific Ocean.

Certain sectors are expected to thrive under the new rules introduced by the TPP. The out- put of Vietnamese apparel and textile production alone is estimated to increase by, respectively, 44.6% and 34% from current levels by 2025, with most of the increased output absorbed by the US market, according to figures provided by VSIP.

"To be part of the TPP, [Vietnam] agreed on changing many laws and standards," says Mr Sitkoff. "A signatory country will not get the benefits until it proves it has carried out the reforms it is supposed to carry out. The TPP is supposed to raise the bar and, ultimately, make Vietnam a more attractive place to do business."

Although it has not been fully ratified yet, the TPP is already giving Vietnam a competitive edge over some of its neighbours in the region that are not part of the agreement, such as Thailand. All eyes are now on the US, where the TPP awaits one of its most troublesome ratification processes as Congress questions the White House on the trade agreement's potential benefits for the country. If it eventually gains approval, the TPP should further consolidate Vietnam's position as a major FDI destination in the region.

The Financial Times Limited, 2015. All Rights Reserved


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