Analysis and recommendations for investment in Vietnam market

(1) Continuous influx of investments from abroad, but the local supply chain is  still in need of improvements

In the first half year of 2014, Vietnam attracted a total of USD68.5 billion in foreign direct investment (both new and additional investments), representing an increase of 64.7% compared to the corresponding period of the previous year. In terms of the overall investment environment, Vietnam still possesses attractive manufacturing advantages. Japanese and South Korean manufacturers see Vietnam as an important development base. Samsung’s largest mobile phone factory is located in Vietnam, and the firm continues to increase its manufacturing capacity mainly in Vietnam this year. In terms of industry value chain analysis, majority of the brands with a presence in Vietnam are often aimed at taking advantage of cheap local labor. Vietnam has a population of 91 million with an average population age of 27.8. Wage is relatively cheap in Vietnam, and among Southeast Asian countries the Vietnamese labor is well known for hard-working. Vietnam is also the third largest market in ASEAN (the largest is Indonesia and the second largest is the Philippines). Vietnam’s strategic geographical characteristics are also apparent. Apart from the long narrow coastline of more than 3,000km, there are also a number of deep-water ports with depths of above 20 meters located from north to south of the country, and this provides a unique advantage for logistics. Large Taiwanese textile and footwear firms have made Vietnam their main production bases, while Japanese and South Korean firms are increasing their investments and have shifted the investment focus of their automotive, machinery and supporting industries to Vietnam. Looking at the international situation, Japanese Prime Minister Shinzo Abe made Vietnam his first overseas trip after he took office, South Korean President Park Geun-hye also visited Vietnam last October as well as Chinese Premier Li Keqiang, these demonstrate the significance of the market to them.

(2) Gradual growth of foreign trade

According to statistics from the Vietnamese General Department of Customs, Vietnam’s export value reached USD70.9 billion in the first six months of 2014, representing an increase of 14.9% compared to the corresponding period of the previous year; the share of domestic investment increased by 11.5% to USD23.1 billion and the share of foreign investment (including crude oil) increased by 16.6% to USD47.8 billion. On the other hand, import value reached USD69.6 billion, representing an increase of 11% compared to the corresponding period of the previous year; the share of domestic investment increased by 10.3% to USD30.3 billion and the share of foreign investment increased by 11.6% to USD39.3 billion.

The data above shows that the Vietnamese manufacturing industry has been mainly driven by foreign investment in the recent years. The Vietnamese banking sector was severely hit by the Global Financial Crisis in 2008, as a result the exchange rate and the interest rate declined. Many Vietnamese small- and medium-sized firms did not survive, and this in turn led to low domestic demand. Both the exchange rate and interest rate have been stabilized, but market sentiment remains weak. Regardless of whether it is Japanese or South Korean firms from advanced industries, or Malaysian or Thai firms from less advanced industries, one of the key factors for setting up production and processing in Vietnam has been the favorable tariffs abroad on Vietnamese exports.

(3) High citizen consciousness, and Vietnam is actively lessening its economic dependence on China

Taking textile, which is a pillar industry in Vietnam, as an example, 50% of raw material supplied to export-oriented firms comes from Mainland China. Currently, Mainland China, South Korea and our country are the main suppliers of raw materials to Vietnam; Mainland China accounts for USD1.36 billion (an increase of 29.4% compared to the corresponding period of the previous year), South Korea accounts for USD601 million (an increase of 17.4% compared to the corresponding period of the previous year), and Taiwan accounts for USD502 million (an increase of 10.5% compared to the corresponding period of the previous year). The Vietnamese textile and clothing industries are heavily relying on cheap raw materials imported from Mainland China. The local Vietnamese suppliers of raw materials are unable to compete with foreign competitors, thereby leading to local textile and clothing firms are only able to supply relatively low-end products. In order to enhance the supply of local raw materials, experts have been calling the Vietnamese government to encourage foreign firms to invest in the production of raw materials in Vietnam, and to encourage domestic suppliers of raw materials to improve their infrastructures and to adopt new technologies, thereby promoting diversification of the supply sources of raw materials and creating a compete supply chain of materials for production of high-quality products. With regards to materials that cannot be “localized” within a short term, the Vietnamese government and the private sector should increase their procurements from supply sources outside of Mainland China, thereby diversifying risk of overreliance on China.

Conclusion

Vietnam has a population of 91 million and may reach a peak of 102 million in the future. Its population is young, the median age is 27.8, and so the demographic dividend will remain for the foreseeable future. Despite the current weak domestic demand, the Japanese retailer AEON and the South Korean firm Lotte have been increasing their investments, and they are the leaders in expanding the supply chain for Japanese and South Korean consumer goods. At the same time, South Korean Samsung will be building its third factory in Vietnam with an investment capital of USD1 billion. Japan has also been promoting the concept of “Supporting Industry” in Vietnam, and intends to help Vietnam to increase its domestic production. Therefore, regardless of factors such as investment, trade or ethnic as explained above, there is still new room for growth in trade between Taiwan and Vietnam.